Rexahn Pharmaceuticals, Inc.
REXAHN PHARMACEUTICALS, INC. (Form: 10-Q, Received: 05/09/2013 16:12:18)


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 March 31, 2013

OR

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 No.:001-34079
Rexahn Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
11-3516358
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

15245 Shady Grove Road, Suite 455
Rockville, MD 20850
(Address of principal executive offices, including zip code)

Telephone: (240) 268-5300
(Registrant’s telephone number, including area code)

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its 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 period that the registrant was required to submit and post such files). Yes þ No ¨

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
¨
Accelerated Filer
¨
Non-Accelerated Filer
¨
Smaller reporting company
þ
(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 119,428,989 shares of common stock outstanding as of May 9, 2013.
 


 
 

 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
TABLE OF CONTENTS

 
Page
   
PART I
FINANCIAL INFORMATION
 
     
Item 1
 3
     
 
1)
3
       
 
2)
4
       
 
3)
5
       
 
5)
7
       
Item 2
38
     
Item 3
46
     
Item 4
46
     
PART II
OTHER INFORMATION
 
     
Item 1
47
   
 
Item 1A
47
     
Item 2
47
     
Item 3
47
     
Item 4
47
     
Item 5
47
     
Item 6
48
   
49

 
 

 
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Balance Sheet

   
March 31, 2013
(unaudited)
   
December 31, 2012
 
ASSETS
 
Current Assets:
           
Cash and cash equivalents
  $ 12,069,028     $ 13,486,543  
Marketable securities (note 3)
    100,000       100,000  
Prepaid expenses and other current assets (note 4)
    183,320       188,808  
Total Current Assets
    12,352,348       13,775,351  
Restricted Cash Equivalents (note 16)
    957,180       1,091,801  
Equipment, Net (note 6)
    43,449       52,156  
Total Assets
  $ 13,352,977     $ 14,919,308  
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current Liabilities:
               
Accounts payable and accrued expenses (note 7)
  $ 976,166     $ 851,837  
                 
Deferred Research and Development Arrangements (note 8)
    1,472,629       1,626,000  
                 
Other Liabilities (note 9)
    55,184       65,417  
                 
Warrant Liabilities (note 13)
    2,473,163       2,842,065  
                 
Total Liabilities
    4,977,142       5,385,319  
Commitments and Contingencies (note 16)
               
Stockholders’ Equity (note 11):
               
Preferred stock, par value $0.0001, 100,000,000 authorized shares, none issued and outstanding
    -       -  
Common stock, par value $0.0001, 500,000,000 authorized shares, 119,443,194 issued and 119,428,989 outstanding
    11,944       11,944  
Additional paid-in capital
    73,233,689       72,861,738  
Accumulated deficit during the development stage
    (64,841,388 )     (63,311,283 )
Treasury stock, 14,205 shares, at cost
    (28,410 )     (28,410 )
                 
Total Stockholders’ Equity
    8,375,835       9,533,989  
                 
Total Liabilities and Stockholders’ Equity
  $ 13,352,977     $ 14,919,308  
 
(See accompanying notes to the condensed financial statements)
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Statement of Operations
(Unaudited)

               
Cumulative
 
               
from March 19,
 
               
2001
 
   
For the Three Months Ended March 31,
   
(Inception) to
March 31,
 
   
2013
   
2012
   
2013
 
Revenues:
                 
Research
  $ -     $ -     $ -  
                         
Expenses:
                       
General and administrative
    1,210,752       728,172       31,270,896  
Research and development
    552,466       1,042,700       35,830,965  
Patent fees
    136,491       102,589       2,668,595  
Depreciation and amortization
    9,316       10,721       692,239  
                         
Total Expenses
    1,909,025       1,884,182       70,462,695  
                         
Loss from Operations
    (1,909,025 )     (1,884,182 )     (70,462,695 )
                         
Other Income (Expense)
                       
Realized loss on marketable securities          .
    -       -       (13,301 )
Interest income
    10,018       6,249       1,452,417  
Interest expense
    -       -       (301,147 )
Other income
    -       -       56,047  
Unrealized gain (loss) on fair value of warrants
    368,902       (261,861 )     4,708,883  
Unrealized gain on fair value of put feature on common stock
    -       -       2,315,539  
Financing expense
    -       -       (972,131 )
Beneficial conversion feature
    -       -       (1,625,000 )
Total Other Income (Expense)
    378,920       (255,612 )     5,621,307  
                         
Net Loss Before Provision for Income Taxes
    (1,530,105 )     (2,139,794 )     (64,841,388 )
Provision for income taxes
    -       -       -  
Net Loss
  $ (1,530,105 )   $ (2,139,794 )   $ (64,841,388 )
                         
Net loss per share, basic and diluted
  $ (0.01 )   $ (0.02 )        
                         
Weighted average number of shares outstanding, basic and diluted
    119,428,989       95,345,656          

(See accompanying notes to the condensed financial statements)
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Statement of Cash Flows
(Unaudited)

               
Cumulative
 
               
From March 19, 2001
 
   
For the Three Months Ended
   
(Inception) to
 
   
March 31,
   
March 31,
 
   
2013
   
2012
   
2013
 
Cash Flows from Operating Activities:
                 
Net loss
  $ (1,530,105 )   $ (2,139,794 )   $ (64,841,388 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Beneficial conversion feature
    -       -       1,625,000  
Compensatory stock
    -       -       2,129,877  
Depreciation and amortization
    9,316       10,721       692,239  
Stock-based compensation
    371,951       91,174       6,180,567  
Amortization of deferred research and development arrangements
    (153,371 )     (18,750 )     (953,371 )
Note receivable (Note 5)
    -       7,006       -  
Realized losses on marketable securities
    -       -       13,301  
Unrealized (gain)/loss on fair value of warrants
    (368,902 )     261,861       (4,708,883 )
Unrealized gain on fair value of put feature on common stock
    -       -       (2,315,539 )
Financing expense
    -       -       972,131  
Amortization of deferred lease incentive
    (5,000 )     (5,000 )     (75,000 )
Deferred lease expenses
    (5,233 )     (4,253 )     30,184  
Loss on impairment of intangible assets
    -       -       286,132  
Changes in assets and liabilities:
                       
Prepaid expenses and other current assets
    5,488       45,919       (183,320 )
Accounts payable and accrued expenses
    124,329       (165,394 )     976,166  
Net Cash Used in Operating Activities
    (1,551,527 )     (1,916,510 )     (60,171,904 )
Cash Flows from Investing Activities:
                       
Restricted cash equivalents
    134,621       156,134       (957,180 )
Purchase of equipment
    (609 )     -       (565,604 )
Purchase of marketable securities
    -       -       (21,123,960 )
Proceeds from sales of marketable securities
    -       -       21,010,659  
Payment of licensing fees
    -       -       (356,216 )
Net Cash Provided by (Used In) Investing Activities
    134,012       156,134       (1,992,301 )
Cash Flows from Financing Activities:
                       
Issuance of common stock and units, net of issuance costs
    -       -       62,934,224  
Proceeds from exercise of stock options
    -       -       170,082  
Proceeds from exercise of stock warrants
    -       -       3,581,337  
Proceeds from long-term debt
    -       -       5,150,000  
Proceeds from research and development arrangements
    -       -       2,426,000  
Purchase of treasury stock
    -       -       (28,410 )
Net Cash Provided by Financing Activities
    -       -       74,233,233  
Net (Decrease) Increase in Cash and Cash Equivalents
    (1,417,515 )     (1,760,376 )     12,069,028  
Cash and Cash Equivalents – beginning of period
    13,486,543       9,861,488       -  
Cash and Cash Equivalents - end of period
  $ 12,069,028     $ 8,101,112     $ 12,069,028  

(See accompanying notes to the condensed financial statements)
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Statement of Cash Flows (continued)
(Unaudited)
 
           
Cumulative
 
           
From March 19, 2001
 
     
For the Three Months Ended
   
(Inception) to
 
     
March 31,
   
March 31,
 
     
2013
     
2012
   
2013
 
Supplemental Cash Flow Information
                       
Interest paid
  $ -     $ -     $ 301,147  
Non-cash financing and investing activities:
                       
Warrants issued
  $ -     $ -     $ 13,691,643  
Put feature on common stock issued
  $ -     $ -     $ 4,954,738  
Dilutive issuances of common stock
  $ -     $ -     $ 2,639,199  
Warrant liability extinguishment from exercise of warrants
  $ -     $ -     $ 6,180,660  
Leasehold improvement incentive
  $ -     $ -     $ 100,000  
Settlement of lawsuit
  $ -     $ -     $ 43,953  
 
(See accompanying notes to the condensed financial statements)
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)

1.
Operations and Organization
 
Operations
 
Rexahn Pharmaceuticals, Inc. (the “Company”, “Rexahn Pharmaceuticals”), a Delaware corporation, is a development stage biopharmaceutical company dedicated to the discovery, development and commercialization of innovative treatments for cancer and other medical needs.  The Company had an accumulated deficit of $64,841,388 at March 31, 2013 and anticipates incurring losses through the remainder of fiscal 2013 and beyond.  The Company has not yet generated commercial sales revenue and has been able to fund its operating losses to date through the sale of its common stock, warrants exercisable for common stock, issuance of long-term debt, and proceeds from reimbursed research and development costs.  The Company believes that its existing cash, cash equivalents, and marketable securities will be sufficient to cover its cash flow requirements into 2014.  Management has the capability of managing the Company’s operations within existing cash available by focusing on select research and development activities, selecting projects in conjunction with potential financings and milestones, and efficient management of its general and administrative affairs.
 
Basis of Presentation
 
The accompanying unaudited condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of March 31, 2013 and December 31, 2012 and the results of operations, and cash flows for the three months ended March 31, 2013 and 2012 have been included.  Operating results for the three months ended March 31, 2013 are not necessarily indicative of results that may be expected for any other interim period or the full fiscal year ending December 31, 2013. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”).  Information included in the condensed balance sheet as of December 31, 2012 has been derived from the Company’s audited financial statements for the year ended December 31, 2012 included in the 2012 Form 10-K.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.  These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future.  Actual results may ultimately differ from those estimates.  These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become available.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)

2.
Recent Accounting Pronouncement Affecting the Company

Comprehensive Income

In February, 2013 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-02, “ Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” to improve the transparency of reporting reclassifications from comprehensive income to net income.  The new amendments require that a company must present the effects on line items of net income of significant amounts reclassified out of accumulated other comprehensive income, and additional referencing and disclosure regarding these items.  The guidance is effective for the Company for fiscal years and interim periods beginning on or after December 15, 2012.  The Company adopted this guidance during the quarter ended March 31, 2013.  There was no material impact on the Company’s financial statements due to the adoption of this guidance.
 
3.
Marketable Securities
 
Cost and fair value of the Company’s marketable securities are as follows:
 
   
Cost
   
Gross Unrealized
   
Fair
 
Securities available-for-sale
 
Basis
   
Gains/(Losses)
   
Value
 
March 31, 2013:
                 
State and municipal obligations
  $ 100,000     $ -     $ 100,000  
                         
December 31, 2012:
                       
State and municipal obligations
  $ 100,000     $ -     $ 100,000  
 
Amortized cost and fair value at March 31, 2013 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because the Company may redeem certain securities at par.
 
   
Cost
 
Fair
Maturity
 
Basis
 
Value
10 years or more
  $ 100,000     $ 100,000  
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)

4.
Prepaid Expenses and Other Current Assets
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
Deposits on contracts
  $ 13,142     $ 12,818  
Other assets
    170,178       175,990  
                 
    $ 183,320     $ 188,808  
 
Deposits on contracts consist of deposits on research and development contracts for services that had not been incurred as of the balance sheet date.  Other assets include prepaid general and administrative expenses, such as insurance and rent.
 
5.
Note Receivable

On June 16, 2010, Amarex, LLC (“Amarex”) executed a note payable to the Company in settlement of a contract dispute.  The Company settled the case with Amarex for $100,000 less a balance owed of $43,953.  The principal sum of the note was $56,047, and is included in other income in the Company’s cumulative statement of operations.  Monthly payments of $2,335 began on September 1, 2010 and continued until August 1, 2012 at which time the balance was paid in full.  The note did not bear interest.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
6.
Equipment, Net

   
March 31,
   
December 31,
 
   
2013
   
2012
 
             
Furniture and fixtures
  $ 34,200     $ 34,200  
Office equipment
    81,683       81,074  
Lab and computer equipment
    430,261       430,261  
Leasehold improvements
    119,841       119,841  
                 
Total fixed assets
    665,985       665,376  
Less: Accumulated depreciation
    (622,536 )     (613,220 )
                 
Net carrying amount
  $ 43,449     $ 52,156  
 
Depreciation expense was $9,316 and $10,721 for the three months ended March 31, 2013 and 2012, respectively.
 
7.
Accounts Payable and Accrued Expenses
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
             
Trade payables
  $ 345,281     $ 250,682  
Accrued expenses
    79,358       76,289  
Accrued research and development contract costs
    409,518       452,577  
Payroll liabilities
    142,009       72,289  
                 
    $ 976,166     $ 851,837  
 

REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
8. 
Deferred Research and Development Arrangements
 
Rexgene Biotech Co., Ltd.
 
In 2003, the Company entered into a collaborative research agreement with Rexgene Biotech Co., Ltd. (“Rexgene”), a shareholder.  Rexgene is engaged in the development of pharmaceutical products in Asia and has agreed to assist the Company with the research, development and clinical trials necessary for registration of the Company’s drug candidate, Archexin, in Asia.  This agreement provides Rexgene with exclusive rights to license, sublicense, make, have made, use, sell and import Archexin in Asia.  In accordance with the agreement, Rexgene paid the Company a one-time fee of $1,500,000 in 2003.  The agreement terminates at the later of 20 years or the term of the patent.  The amortization reduces research and development expenses for the periods presented.
 
The Company is using 20 years as its basis for recognition and accordingly $18,750 reduced research and development expenses for the three months ended March 31, 2013 and 2012, respectively.  The remaining $731,250 and $750,000 at March 31, 2013 and December 31, 2012, respectively, is reflected as in deferred research and development arrangements on the balance sheet.  The contribution is being used in the cooperative funding of the costs of development of Archexin. Royalties of 3% of net sales of licensed products will become payable to the Company on a quarterly basis once commercial sales of Archexin begin in Asia.  The product is still under development and commercial sales in Asia are not expected to begin until at least 2014.  Under the terms of the agreement, Rexgene does not   receive royalties on Company net sales outside of Asia.
 
Teva Pharmaceutical Industries, Ltd.
 
On September 21, 2009, the Company closed on a securities purchase agreement with Teva Pharmaceutical Industries Limited (“Teva”), under which Teva purchased 3,102,837 shares of our common stock for $3.5 million. Contemporaneous with the execution and delivery of this agreement, the parties executed a research and exclusive license option agreement (“RELO”) pursuant to which the Company agreed to use $2,000,000 from the gross proceeds of the issuance and sale of shares to Teva to fund a research and development program for the pre-clinical development of RX-3117.  On January 19, 2011, the Company entered into a second amendment to the securities purchase agreement in which Teva purchased 2,334,515 shares of the common stock of the company for gross proceeds of $3.95 million.  On November 27, 2012, the Company and Teva entered into a second amendment to the RELO agreement, in which Teva has provided the Company with an additional $926,000 of research funding for the development of RX-3117, which was recorded as restricted cash on the Company’s balance sheet.  The contribution from the second amendment was recorded in deferred research and development arrangements on the balance sheet, and costs incurred for the development of RX-3117 are paid from restricted cash, and reduce the deferred research and development arrangement and therefore, are not an expense in the Company’s statement of operations.  As of March 31, 2013 and December 31, 2012, the Company had proceeds remaining of $741,379, and $876,000, respectively, which is included in deferred research and development arrangements on the balance sheet.  During the quarter ended March 31, 2013, $134,621 was reduced from the deferred research and development arrangement for costs incurred for the development of RX-3117.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
9.
Other Liabilities
 
Deferred Lease Incentive

On June 29, 2009, the Company entered into a five year office lease agreement as disclosed in Note 16.  The lessor agreed to grant a leasehold improvement allowance of $100,000 to the Company to be used for the construction cost of improvements to the leased property, which included architectural and engineering fees, government agency plan check, permit and other fees, sales and use taxes, testing and inspection costs, and telephone and data cabling and wiring in the premises.  The Company accounts for the benefit of the leasehold improvement allowance as a reduction of rental expense over the five-year term of the office lease.
 
The following table sets forth the deferred lease incentive:
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
             
Deferred lease incentive
  $ 100,000     $ 100,000  
Less accumulated amortization
    (75,000 )     (70,000 )
                 
Balance
  $ 25,000     $ 30,000  
 
Deferred Office Lease Expense
 
The office lease agreement, disclosed above, requires an initial annual base rent with annual increases over the next five years.  The Company recognizes rental expense on a straight-line basis over the term of the lease, which resulted in a deferred rent liability of $30,184 and $35,417 as of March 31, 2013 and December 31 2012, respectively.
 
10.
Net Loss per Common Share
 
Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period.  Diluted loss per common share is also computed by dividing net loss by the weighted average number of common shares outstanding, but also reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that would then share in earnings, and such calculation excludes common shares in treasury.   As of March 31, 2013 and December 31, 2012, there were stock options and warrants to acquire 31,147,937 and 29,397,937 shares of our common stock, respectively, which are the potentially dilutive securities of the Company .
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
11.
Common Stock
 
The following transactions occurred from March 19, 2001 (inception) to March 31, 2013:
 
 
a)
On May 10, 2001, the Company issued 3,600,000 shares of common stock to the Company’s founders for cash of $1.
 
 
b)
On August 10, 2001, the Company issued:
 
 
i)
1,208,332 shares of common stock to the directors of the Company for cash of $1,450,000.

 
ii)
958,334 shares of common stock to Rexgene for cash of $550,000.

 
iii) 
360,000 shares of common stock in a private placement to individual investors for cash of $1,080,000.
 
These share purchases were negotiated by the parties at various dates prior to the August 10, 2001 share issuance date.
 
 
c)
On October 10, 2001, the Company issued 400,000 shares of common stock to Chong Kun Dang Pharmaceutical Corp. (“CKD”) for cash of $479,991 and 400,000 shares of common stock to an individual investor for cash of $479,991.
 
 
d)
On October 10, 2001, the Company issued 200,000 shares of common stock to CKD for cash of $479,985.
 
 
e)
Since inception, the Company’s founders have transferred 800,000 shares of the common stock described in a) to officers and directors of the Company.
 
 
f)
In July 2003, the stockholders described in b) (iii) and e) transferred an aggregate of 1,268,332 shares of common stock to a voting trust.  The trust allows for the unified voting of the stock by the trustees.
 
The appointed trustees are senior management of the Company who, together with their existing shares, control a majority of the voting power of the Company.
 
 
g)
On August 20, 2003, the Company issued 500,000 shares of common stock to KT&G Corporation for cash consideration of $2,000,000.
 
 
h)
On October 29, 2004, an option holder exercised options to purchase shares of common stock for cash of $1,800 and the Company issued an aggregate of 1,500 shares.
 
 
i)
Pursuant to the agreement and plan of merger which occurred on May 13, 2005, (i) each share of the issued and outstanding common stock of Rexahn, Corp (“Rexahn”) (other than dissenting shares) was converted into the right to receive five shares of Rexahn Pharmaceuticals common stock; (ii) each issued, outstanding and unexercised option to purchase a share of Rexahn common stock was converted into an option to purchase five shares of Rexahn Pharmaceuticals’ common stock and (iii) the par value of Rexahn’s common stock was adjusted to reflect the par value of Corporate Road Show Com Inc. (“CRS”) common stock. In the acquisition merger, 289,780,000 CRS pre-reverse stock split shares were converted into 2,897,802 post-reverse stock split Rexahn Pharmaceuticals shares, and an additional 500,000 post-reverse stock split Rexahn Pharmaceuticals shares were issued to a former executive of CRS.  All shares and earnings per share information have been retroactively restated in these financial statements.
 
 
j)
On August 8, 2005, the Company issued, in a transaction exempt from registration under the Securities Act of 1993, as amended, 4,175,000 shares of common stock at a purchase price of $2.00 per share.
 
 
k)
On October 3, 2005, the Company issued 7,000 shares of common stock for $21,877 and $7,500 cash in exchange for legal services from W. Rosenstadt and Steve Sanders.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
 
l)
On December 2, 2005, the holders of a convertible note that was issued on August 8, 2005 and, represented $1,300,000 aggregate principal amount, exercised their option to convert the entire principal amount of the note into the Company’s common stock.  Based on a $2.00 per share conversion price, the holders received an aggregate of 650,000 shares.
 
 
m)
On December 27, 2005, option holders exercised options to purchase shares of the Company’s common stock for cash of $9,600 and the Company issued an aggregate of 40,000 shares.
 
 
n)
On February 22, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $1,200 and the Company issued an aggregate of 5,000 shares.
 
 
o)
On April 12, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $3,409 and the Company issued an aggregate of 14,205 shares.  On the same date, the Company agreed to repurchase common stock from the option holder based on the then market price for treasury in exchange for the aggregate purchase price of $28,410 in cash.
 
 
p)
On May 13, 2006, holders of the $3,850,000 convertible notes issued on February 28, 2005, exercised their rights to convert the entire principal amount of the notes into shares of the Company’s common stock.    Based on a $1.00 per share conversion price, the Company issued 3,850,000 shares of common stock in connection with the conversion.
 
 
q)
On October 9, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $2,400 and the Company issued an aggregate of 10,000 shares.
 
 
r)
On November 19, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $1,800 and the Company issued an aggregate of 7,500 shares.
 
 
s)
On December 19, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $6,000 and the Company issued an aggregate of 25,000 shares.
 
 
t)
On April 18, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $14,400 and the Company issued an aggregate of 18,000 shares.
 
 
u)
On July 23, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued an aggregate of 15,000 shares.
 
 
v)
On September 27, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $15,600 and the Company issued an aggregate of 19,500 shares.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
 
w)
On December 18, 2007, the Company issued 4,857,159 units at a price $1.40 per share for total gross proceeds of $6,800,023.  Investors also were issued one warrant for every five shares purchased.  One warrant will entitle the holder to purchase an additional share of common stock at a purchase price of $1.80 at any time over a period of three years from the date of the closing. The Company has recorded the warrants as liabilities at fair value as disclosed in Note 13.  Private placement closing costs of $139,675 were recorded as a reduction of the issuance proceeds.  Private placements costs also consist of 107,144 warrants, valued at $138,326, and were recorded as a financing expense. The Company extended anti-dilutive protection to the investors. The anti-dilution protection provision is structured in a way that is designed to protect a holder’s position from being diluted and contains a price protection based on a mathematical calculation, and is recorded as a liability at fair value, as disclosed in Note 14.   The Company revalues these liabilities each reporting period, with the unrealized gain (loss) recorded as other income (expense).
 
A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:
  $ 6,800,023  
         
Allocated to liabilities:
       
Warrant liabilities
    1,392,476  
Less: Warrants allocated to placement agent
    (138,326 )
Put feature on common stock
    4,401,169  
Total allocated to liabilities
    5,655,319  
         
Allocated to equity:
       
Common stock and additional paid-in capital
    1,144,704  
         
         
Total allocated gross proceeds:
  $ 6,800,023  
 
 
x)
On December 27, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $18,000 and the Company issued an aggregate of 75,000 shares.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
 
y)
On March 20, 2008, the Company issued 642,858 units consisting of one share of the Company’s common stock and one warrant for every five common shares purchased in a private placement at a price of $1.40 per unit for total gross proceeds of $900,001.  One warrant will entitle the holder to purchase an additional share of common stock at a price of $1.80 at any time over a period of three years from the date of the private placement, and is recorded as a liability at fair value.  The Company extended anti-dilution protection to investors, and the provision is structured in a way that is designed to protect the holder’s position from being diluted and contains a price based on a mathematical computation.
 
A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:
  $ 900,001  
         
Allocated to liabilities:
       
Warrant liabilities
    190,917  
Put feature on common stock
    553,569  
Total allocated to liabilities
    744,486  
         
Allocated to common stock and additional paid-in capital
    155,515  
         
Total allocated gross proceeds:
  $ 900,001  
 
 
z)
On May 30, 2008, an option holder exercised options to purchase shares of the Company’s common stock for cash of $7,200 and the Company issued an aggregate of 30,000 shares.
 
 
aa)
On June 2, 2008, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued an aggregate of 50,000 shares.
 
 
ab)
On June 30, 2008, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued an aggregate of 10,000 shares.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
 
ac)
On June 5, 2009 the Company closed on a purchase agreement to issue 2,857,143 shares of common stock at a price of $1.05 per share to an institutional investor for total gross proceeds of $3,000,000 and incurred $289,090 of stock issuance costs.  The investor was also issued:
 
 
1)
Series I warrants to purchase 2,222,222 shares of common stock at a purchase price of $1.05 per share at any time before September 3, 2009;

 
2)
Series II warrants to purchase 1,866,666 shares of common stock at a purchase price of $1.25 per share at any time from December 3, 2009 to June 5, 2012; and

 
3)
Series III warrants to purchase 1,555,555 shares of common stock at a purchase price of $1.50 per share at any time from December 3, 2009 to June 5, 2014.
 
The closing costs included 142,857 warrants valued at $122,257 and were recorded as a financing expense. All warrants issued from this purchase agreement are recorded as liabilities at fair value.
 
The Company incurred a derivative loss upon issuance of these warrants, as the fair value of the warrants at inception was greater than the proceeds received from the investor.  The derivative loss was combined with unrealized gains (losses) for the year ended December 31, 2009.
 
A summary of the allocation of the proceeds of the offering is shown below:
 
Gross Proceeds:
  $ 3,000,000  
         
Allocated to liabilities:
       
Warrant liabilities
    3,451,194  
Less: Warrants allocated to placement agent
    (122,257 )
Total allocated to liabilities
    3,328,937  
         
Allocated to equity:
       
Common stock and additional paid-in capital
    -  
         
Allocated to expense:
       
Derivative loss at inception
    (328,937 )
         
Total allocated gross proceeds:
  $ 3,000,000  
 
 
ad)
On June 9, 2009, the Company issued 1,833,341 shares of common stock and 862,246 warrants to purchase common stock at a purchase price of $1.05 per share to existing stockholders pursuant to the anti-dilution protection provisions of the private placements transacted on December 18, 2007 and March 20, 2008.  The fair value of the additional warrants issued was approximately $422,300.  
 
 
ae)
On September 4, 2009, an option holder exercised options to purchase shares of the Company’s common stock for cash of $3,600 and the Company issued an aggregate of 15,000 shares.
 
 
af)
On September 21, 2009, the Company issued 3,102,837 shares of common stock at a purchase price of $1.13 per share to an institutional investor for net proceeds of $3,371,340, which includes $128,659 of stock issuance costs
 
 
 
ag)
On October 23, 2009, the Company closed on a purchase agreement to issue 6,072,383 shares of common stock at a price of $0.82 per share to five institutional investors for gross proceeds of $5,000,000, which includes $351,928 of stock issuance costs.  The investors were also issued warrants to purchase 2,125,334 shares of common stock at a purchase price of $1.00 per share, exercisable on or after the date of delivery until the five-year anniversary, and were recorded as liabilities at fair value. The closing costs included 245,932 warrants valued at $101,693 and were recorded as a financing expense.
 
A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:
  $ 5,000,000  
         
Allocated to liabilities:
       
Warrant liabilities
    1,114,627  
Less: Warrants allocated to placement agent
    (101,693 )
Total allocated to liabilities
    1,012,934  
         
Allocated to equity:
       
Common stock and additional paid-in capital
    3,987,066  
         
         
Total allocated gross proceeds:
  $ 5,000,000  

 
ah)
On October 23, 2009, the Company issued 2,018,143 shares of common stock and 569,502 warrants to purchase common stock at a purchase price of $0.82 per share to existing stockholders pursuant to anti-dilution protection provisions of the private placements transacted on December 24, 2007 and March 20, 2008. The fair value of the additional warrants issued was approximately $476,200.
 
 
ai)
On February 12, 2010, the Company entered into two consulting agreements pursuant to which the Company issued 300,000 shares of common stock upon the execution of the agreements.  Upon the extension of the term, 200,000 shares of common stock for each month will be issued until the termination of services.
 
The following table lists the issuances of shares by the Company under the consulting agreement:
 
Date of Issuance
 
Number of Shares Issued
   
Market Value Per Share
   
Total Market Value
of Share Issuance
 
February 12, 2010
    300,000     $ 1.22     $ 366,000  
May 24, 2010
    200,000       1.40       280,000  
June 15, 2010
    200,000       1.15       230,000  
August 2, 2010
    400,000       1.37       548,000  
September 21, 2010
    200,000       1.20       240,000  
October 21, 2010
    200,000       1.16       232,000  
November 11, 2010
    200,000       1.06       212,000  
                         
Total
    1,700,000             $ 2,108,000  

The market value of these shares was recorded as an expense and is reflected in general and administrative expenses in the Company’s statement of operations.  The agreements were terminated by the Company on November 11, 2010.
 
 
 
aj)
In March 2010, warrant holders exercised their warrants to purchase shares of the Company’s common stock for cash of $1,297,001 and the Company issued an aggregate of 1,197,001 shares.
 
 
ak)
In March 2010, option holders exercised options to purchase shares of the Company’s common stock for cash of $21,240 and the Company issued an aggregate of 48,000 shares.
 
 
al)
In April 2010, warrant holders exercised their warrants to purchase shares of the Company’s common stock for cash of $1,966,375 and the Company issued an aggregate of 1,595,825 shares.
 
 
am)
On April 20, 2010, an option holder exercised options to purchase shares of the Company’s common stock for cash of $86,000 and the Company issued an aggregate of 107,500 shares.
 
 
an)
In May 2010, warrant holders exercised 890,051 cashless warrants to obtain shares of the Company’s common stock and the Company issued an aggregate of 547,674 shares.
 
 
ao)
On June 30, 2010, the Company entered into a purchase agreement to issue 6,666,667 shares of common stock at a price of $1.50 per share to investors for gross proceeds of $10,000,000, which includes $681,773 of stock issuance costs.  The investors were also issued warrants to purchase 2,000,000 shares of common stock at an exercise price of $1.90 per share.  The warrants became immediately exercisable on the date of delivery until the four-year anniversary of the date of issuance.  These warrants were valued at $1,800,800 and recorded as warrant liabilities.  The closing costs included 200,000 warrants valued at $180,080 and were recorded as a financing expense.
 
Gross Proceeds:
  $ 10,000,000  
         
Allocated to liabilities:
       
Warrant liabilities
    1,980,880  
Less: Warrants allocated to placement agent
    (180,080 )
Total allocated to liabilities
    1,800,800  
         
Allocated to equity:
       
Common stock and additional paid-in capital
    8,199,200  
         
Total allocated gross proceeds:
  $ 10,000,000  
 
 
ap) 
In November 2010, warrant holders exercised 936,883 cashless warrants to obtain shares of the Company’s common stock and the Company issued an aggregate of 247,491 shares.
 
 
aq)
In December 2010, warrant holders exercised 530,900 cashless warrants to obtain shares of the Company’s common stock and the Company issued an aggregate of 126,195 shares.
 
 
ar)
On January 19, 2011, the Company issued 2,334,515 shares of common stock at a purchase price of $1.69 per share to an institutional investor for net proceeds of $3,926,397, which includes $23,603 of stock issuance costs.
 
 
as)
On February 15, 2011, a warrant holder exercised warrants to purchase shares of the Company’s common stock for cash of $215,104 and the Company issued 209,042 shares.
 
 
at)
On February 28, 2011, an option holder exercised options to purchase shares of the Company’s common stock for cash of $6,000 and the Company issued 25,000 shares.
 
 
au)
On March 11, 2011, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued 50,000 shares.
 
 
 
av)
On March 28, 2011, warrant holders exercised their warrants to purchase shares of the Company’s common stock for cash of $102,857 and the Company issued 124,917 shares.
 
 
aw)
On March 31, 2011, the Company closed on a purchase agreement to issue 8,333,333 shares of common stock at a price of $1.20 per share to five institutional investors for gross proceeds of $10,000,000, which includes $706,124 of cash stock issuance costs.  The investors were also issued warrants to purchase 3,333,333 shares of common stock at a purchase price of $1.50 per share, exercisable on or after six months after the closing date until the five-year anniversary of the initial exercise date.  These warrants were recorded as liabilities with a fair value of $2,826,666. The closing costs included 208,333 warrants valued at $97,667 and were recorded as a financing expense.
 
A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:
  $ 10,000,000  
         
Allocated to liabilities:
       
Warrant liabilities
    2,924,333  
Less: Warrants allocated to placement agent
    (97,667 )
Total allocated to liabilities
    2,826,666  
         
Allocated to equity:
       
Common stock and additional paid-in capital
    7,173,334  
         
Total allocated gross proceeds:
  $ 10,000,000  
 
 
ax)
In September 2011, an option holder exercised options to purchase shares of the Company’s common stock for cash of $22,040 and the Company issued 28,000 shares.
 
 
ay)
In October 2011, an option holder exercised options to purchase shares of the Company’s common stock for cash of $19,200 and the Company issued 80,000 shares.
 
 
 
az) 
On December 4, 2012 the Company closed on an underwritten public offering to issue and sell 19,130,435 shares of common stock and common stock purchase warrants to purchase up to 10,521,739 shares of common stock.  The common stock and warrants were sold in units, consisting of common stock and a warrant to purchase 0.55 shares of common stock, at a price of $0.33 per share, and the warrants have an exercise price of $0.472 per share.  Pursuant to the underwriting agreement, the Company granted the Underwriters a 45-day option to purchase an additional 2,869,565 shares of Common Stock and warrants to purchase 1,578,261 shares of Common Stock.  On December 4, 2012, the underwriters partially exercised this option, and 869,565 units, consisting of 869,565 shares and 478,261 warrants were issued.  On December 10, 2012, the underwriters exercised the remaining overallotment option, and the Company issued 2,000,000 units, consisting of 2,000,000 shares and 1,100,000 warrants.  The total gross proceeds of the offering was $7,260,000.  The warrants issued are exercisable on the closing date until the five-year anniversary of the closing date, and were recorded as liabilities at fair value.
 
The closing costs of $977,434 included 880,000 warrants valued at $163,096, and $814,338 for underwriter’s discounts and professional and other fees.   Based upon the estimated fair value of the stock and warrants in the units, the Company allocated $332,108 to financing expense, and $645,326 as stock issuance costs.
 
A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:
  $ 7,260,000  
         
Allocated to liabilities:
       
Warrant liabilities
    2,637,216  
Less: Warrants allocated to placement agent
    (163,096 )
Total allocated to liabilities
    2,474,120  
         
         
Allocated to equity:
       
Common stock and additional paid-in capital
    4,785,880  
         
Total allocated gross proceeds:
  $ 7,260,000  
 
 
ba) 
On December 7, 2012, the Company issued 2,083,333, shares of common stock at a purchase price of $0.36 per share to an institutional investor for gross proceeds of $750,000. The total stock issuance costs were $63,658.
 
 
12.
Stock-Based Compensation
 
On August 5, 2003, the Company established a stock option plan (the “Plan”).  Under the Plan, the Company grants stock options to key employees, directors and consultants of the Company.  For all grants prior to September 12, 2005 and the majority of grants to employees of the Company after September 12, 2005, the vesting period is 30% on the first anniversary of the grant date, an additional 30% on the second anniversary and the remaining 40% on the third anniversary.  Options expire between five and ten years from the date of grant.
 
For grants to non-employee consultants of the Company after September 12, 2005, the vesting period is between one to three years, subject to the fulfillment of certain conditions in the individual stock option grant agreements, or 100% upon the occurrence of certain events specified in the individual stock option grant agreements.  Options authorized for issuance under the Plan total 17,000,000 after giving effect to an amendment to the Plan approved at the Annual Meeting of the Stockholders of the Company on June 2, 2006.  At March 31, 2013, 6,828,000 shares of common stock were available for issuance.
 
Prior to adoption of the Plan, the Company made restricted stock grants.  During 2003 all existing restricted stock grants were converted to stock options.  The converted options maintained the same full vesting period as the original restricted stock grants.
 
Accounting for Employee Awards
 
The Company’s results of operations for the three months ended March 31, 2013 and 2012 include share-based employee compensation expense totaling $366,111 and $59,815 respectively.   Such amounts have been included in the statement of operations in general and administrative and research and development expenses.  No income tax benefit has been recognized in the statement of operations for share-based compensation arrangements as the Company has provided for a 100% valuation allowance on its deferred tax assets.
 
Employee stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite vesting service period for the entire portion of the award.
 
Accounting for Non-Employee Awards
 
Stock compensation expenses related to non-employee options were $5,840 and $31,359 for the three months ended March 31, 2013 and 2012, respectively.  Such amounts have been included in the statement of operations in general and administrative and research and development expenses.
 
 
Summary of Stock Compensation Expense Recognized
 
Total stock-based compensation recognized by the Company in the three months ended March 31, 2013 and 2012, and the period from inception (March 19, 2001) to March 31, 2013 is as follows:
 
               
Cumulative from
 
   
Three Months Ended March 31,
   
March 19, 2001
(Inception) to
 
   
2013
   
2012
   
March 31, 2013
 
Statement of operations line item:
                 
General and administrative:
                 
Payroll
  $ 350,379     $ 39,317     $ 2,971,808  
Consulting and other professional fees
    3,893       23,222       814,348  
Research and development:
                       
Payroll
    15,732       20,498       1,063,789  
Consulting and other professional fees
    1,947       8,137       1,330,622  
                         
Total
  $ 371,951     $ 91,174     $ 6,180,567  
 
Summary of Stock Option Transactions
 
There were 1,200,000 stock options granted at an exercise price of $0.37 with a fair value of $320,465 and 550,000 stock options granted at an exercise price of $0.31 with a fair value of $122,497 during the three months ended March 31, 2013.  The 1,200,000 options granted at an exercise price of $0.37 were awarded to our new Chief Executive Officer, who joined the Company in February 2013.  Per that employment agreement, these options vested immediately, and therefore, the entire fair value of those options were expensed upon grant. There were 75,000 stock options granted at an exercise price of $0.48 and a fair value of $26,835 during the three months ended March 31, 2012.
 
The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model.  The Company took into consideration guidance under ASC 718, “Compensation-Stock Compensation” and SAB 107 when reviewing and updating assumptions.  The expected volatility is based upon historical volatility of the Company’s stock.  The expected term is based upon the simplified method as allowed under SAB 107.
 
 
The assumptions made in calculating the fair values of options are as follows:

   
Three Ended March 31,
   
2013
 
2012
Black-Scholes weighted average assumptions
           
Expected dividend yield
    0 %     0 %
Expected volatility
    95-96 %     101 %
Risk free interest rate
    0.75-0.85 %     0.89 %
Expected term (in years)
 
5 years
   
5 years
 
 
The following table summarizes the employee and non-employee share-based transactions:
 
   
2013
   
2012
 
   
Number of
Options
   
Weighted
Average Exercise
Price
   
Number of
Options
   
Weighted
Average Exercise
Price
 
Outstanding at
                       
January 1
    7,741,795     $ 1.03       7,646,795     $ 1.05  
Granted
    1,750,000       0.35       75,000       0.48  
Exercised
    -       -       -       -  
Cancelled
    -       -       (41,000 )     1.54  
                                 
Outstanding at March 31
    9,491,795     $ 0.90       7,680,795     $ 1.04  

The following table summarizes information about stock options outstanding as of March 31, 2013 and December 31, 2012.

   
Number of
Options
   
Weighted
Average Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term
   
Aggregate
Intrinsic Value
 
Outstanding at
                       
March 31, 2013
    9,491,795     $ 0.90    
4.8 years
    $ 41,706  
                               
Exercisable at
                             
March 31, 2013
    8,569,295     $ 0.95    
4.3 years
    $ 41,706  
                               
Outstanding at
                             
December 31, 2012
    7,741,795     $ 1.03    
3.9 years
    $ 41,706  
                               
Exercisable at
                             
December 31, 2012
    7,176,795     $ 1.04    
3.5 years
    $ 41,706  
 
There were no options exercised during the three months ended March 31, 2013 and 2012.  The weighted average fair value of the options vested was $0.35 and $0.95 for the three months ended March 31, 2013 and 2012, respectively.
 
 
A summary of the Company’s unvested shares as of March 31, 2013 and changes during the three months ended March 31, 2013 is presented below:

   
2013
 
   
Number of Options
 
Weighted Average Fair Value at
Grant Date
 
Unvested at January 1, 2013
    565,000     $ 0.66  
Granted
    1,750,000     $ 0.25  
Vested
    (1,392,500 )   $ 0.35  
Cancelled
    -     $ -  
                 
Unvested at March 31, 2013
    922,500     $ 0.36  
 
As of March 31, 2013 and December 31, 2012, there was $248,350 and $172,532 of total unrecognized compensation cost, respectively, related to all unvested stock options, which is expected to be recognized over a weighted average vesting period of 2.1 years and 1.0 years, respectively.
 
13.
Warrants
 
As of March 31, 2013, warrants to purchase 21,656,142 shares were outstanding, having exercise prices ranging from $0.41 to $1.90 and expiration dates ranging from August 8, 2013 to December 4, 2017.
 
   
2013
   
2012
 
   
Number of
warrants
 
Weighted average
exercise price
   
Number of
warrants
 
Weighted average
exercise price
 
Balance, January 1
    21,656,142     $ 0.89       8,676,142     $ 1.53  
Issued during the period
    -       -       -     $ -  
Exercised during the period
    -       -       -     $ -  
Expired during the period
    -       -       -     $ -  
                                 
Balance, March 31
    21,656,142     $ 0.89       8,676,142     $ 1.53  
 
At March 31, 2013 and December 31, 2012, the average remaining contractual life of the outstanding warrants was 3.6 and 3.8 years, respectively.

The warrants, which were issued to investors in the December 2007, March 2008, May 2009, October 2009, June 2010, March 2011 and December 2012 offerings, contain a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer, or share exchange).   If a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a non-public company, then the warrant holder has the option to receive cash, equal to the fair value of the remaining unexercised portion of the warrant.  Due to this contingent redemption provision, the warrants require liability classification in accordance with ASC 480 and are recorded at fair value.  In addition, the warrants issued in the May 2009, October 2009, June 2010, March, 2011 and December 2012 offerings contain a cashless exercise provision that is exercisable only in the event that a registration statement is not effective, which provision may not be operative if an effective registration statement is not available because of an exemption under the U.S. Securities laws may not be available to issue unregistered shares.  As a result, net cash settlement may be required.

ASC 820 provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition.  Fair values for warrants are determined using the Binomial Lattice (“Lattice”) valuation technique. The Lattice model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to maturity. Accordingly, within the contractual term, the Company provided multiple date intervals over which multiple volatilities and risk free interest rates were used. These intervals allow the Lattice model to project outcomes along specific paths which consider volatilities and risk free rates that would be more likely in an early exercise scenario.
 
 
Significant assumptions are determined as follows:
Trading market values —published trading market values;
Exercise price —Stated exercise price;
Term —remaining contractual term of the warrant;
Volatility —Historical trading volatility for periods consistent with the remaining terms;
Risk-free rate —Yields on zero coupon government securities with remaining terms consistent with the remaining terms of the warrants.

Due to the fundamental transaction provision, which could provide for early redemption of the warrants, the model also considered the probability the Company would enter into a fundamental transaction during the remaining term of the warrant. Since the Company is still in its development stage and is not yet achieving positive cash flow, management believes the probability of a fundamental transaction occurring over the term of the warrant is unlikely and therefore estimates the probability of entering into a fundamental transaction to be 5%.  For valuation purposes, the Company also assumed that if such a transaction did occur, it was more likely to occur towards the end of the term of the warrants.

The warrants issued in December 2007 and March 2008 were not only subject to traditional anti-dilution protection, such as stock splits and dividends, but they were also subject to down-round anti-dilution protection. Accordingly, if the Company sold common stock or common stock indexed financial instruments below the stated exercise price, the exercise price related to these warrants will adjust to that lower amount.  The Lattice model used to value the warrants with down-round anti-dilution protection provides for multiple, probability-weighted scenarios at the stated exercise price and at five additional decrements/scenarios on each valuation date in order to encompass the value of the anti-dilution provisions in the estimate of fair value of the warrants. Calculations were performed at the stated exercise price and at five additional decrements/scenarios on each valuation date. The calculations provided for multiple, probability-weighted scenarios reflecting decrements that result from declines in the market prices. Decrements are predicated on the trading market prices in decreasing ranges below the contractual exercise price. For each valuation date, multiple Binomial Lattice calculations were performed which were probability weighted by considering both the Company’s (i) historical market pricing trends, and (ii) an outlook for whether or not the Company may need to issue equity or equity-indexed instruments in the future with a price less than the current exercise price.

The significant unobservable inputs used in the fair value measurement of the warrants include management’s estimate of the probability that a fundamental transaction may occur in the future.  Significant increases (decreases) in the probability of occurrence would result in a significantly higher (lower) fair value measurement.
 
 
The following table summarizes the fair value of the warrants as of the respective balance sheet or transaction dates:

   
Fair Value as of:
 
Warrant Issuance:
 
March 31, 2013
   
December 31, 2012
   
Transaction Date
 
December 18, 2007 financing
  $ -     $ -     $ 1,392,476  
March 20, 2008 financing
    -       -       190,917  
June 5, 2009 financing:
                       
Series I warrants
    -       -       707,111  
Series II warrants
    -       -       1,315,626  
Series III warrants
    5,289       35,311       1,306,200  
Warrants to placement agent
    634       3,489       122,257  
October 23, 2009 financing:
                       
Warrants to institutional investors
    32,059       73,454       1,012,934  
Warrants to placement agent
    -       41       101,693  
June 30, 2010 financing
                       
Warrants to institutional investors
    3,400       12,200       1,800,800  
Warrants to placement agent
    -       20       180,080  
March 31, 2011 financing:
                       
Warrants to institutional investors
    209,667       306,333       2,826,666  
Warrants to placement agent
    -       83       97,667  
December 4, 2012 financing:
                       
Warrants to institutional investors
    2,096,930       2,263,910       2,474,120  
Warrants to placement agent
    125,184       147,224       163,096  
Total:
  $ 2,473,163     $ 2,842,065     $ 13,691,643  
 
 
The following table summarizes the number of shares indexed to the warrants as of the respective balance sheet or transaction dates:

   
Number of Shares indexed as of:
 
Warrant Issuance
 
March 31, 2013
   
December 31, 2012
   
Transaction Date
 
December 18, 2007 financing
    -       -       1,078,579  
March 20, 2008 financing
    -       -       128,572  
June 5, 2009 financing:
                       
Series I warrants
    -       -       2,222,222  
Series II warrants
    -       -       1,866,666  
Series III warrants
    1,555,555       1,555,555       1,555,555  
Warrants to placement agent
    132,143       132,143       142,857  
October 23, 2009 financing:
                       
Warrants to institutional investors
    1,228,333       1,228,333       2,125,334  
Warrants to placement agent
    18,445       18,445       245,932  
June 30, 2010 financing
                       
Warrants to institutional investors
    2,000,000       2,000,000       2,000,000  
Warrants to placement agent
    200,000       200,000       200,000  
March 31, 2011 financing:
                       
Warrants to institutional investors
    3,333,333       3,333,333       3,333,333  
Warrants to placement agent
    208,333       208,333       208,333  
December 4, 2012 financing:
                       
Warrants to institutional investors
    12,100,000       12,100,000       12,100,000  
Warrants to placement agent
    880,000       880,000       880,000  
Total:
    21,656,142       21,656,142       28,087,383  
 
The assumptions used in calculating the fair values of the warrants are as follows:

December 18, 2007 financing:
 
March 31, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
  $ -     $ -     $ 1.75  
Estimated future volatility
    -       -       143 %
Dividend
    -       -       -  
Estimated future risk-free rate
    -       -       3.27 %
Equivalent volatility
    -       -       106 %
Equivalent risk-free rate
    -       -       3.26 %
Estimated additional shares to be issued upon dilutive event
    -       -       98,838  
 
 
March 20, 2008 financing:
 
March 31, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
  $ -     $ -     $ 2.14  
Estimated future volatility
    -       -       142 %
Dividend
    -       -       -  
Estimated future risk-free rate
    -       -       1.95 %
Equivalent volatility
    -       -       97 %
Equivalent risk-free rate
    -       -       1.31 %
Estimated additional shares to be issued upon dilutive event
    -       -       7,479  
 
June 5, 2009 financing:
 
March 31, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
  $ 0.31     $ 0.31     $ 1.14  
Estimated future volatility
    100 %     100 %     100 %
Dividend
    -       -       -  
Estimated future risk-free rate
    0.14 %     0.16 %     0.63-4.31 %
Equivalent volatility
    70 %     92 %     103-117 %
Equivalent risk-free rate
    0.10 %     0.11 %     0.20-1.44 %
 
October 23, 2009 financing:
 
March 31, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
  $ 0.31     $ 0.31     $ 0.69  
Estimated future volatility
    100 %     100 %     100 %
Dividend
    -       -       -  
Estimated future risk-free rate
    0.14-0.36 %     0.16-0.34 %     2.63-3.80 %
Equivalent volatility
    44-76 %     74-93 %     98-99 %
Equivalent risk-free rate
    0.06-0.11 %     0.06-0.13 %     0.93-1.16 %
 
June 30, 2010 financing:
 
March 31, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
  $ 0.31     $ 0.31     $ 1.43  
Estimated future volatility
    100 %     100 %     100 %
Dividend
    -       -       -  
Estimated future risk-free rate
    0.14 %     0.16-0.34 %     1.78 %
Equivalent volatility
    44-69 %     74-75 %     98 %
Equivalent risk-free rate
    0.06-0.10 %     0.06 %     0.59 %
 
March 31, 2011 financing:
 
March 31, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
  $ 0.31     $ 0.31     $ 1.18  
Estimated future volatility
    87-100 %     93-100 %     100 %
Dividend
    -       -       -  
Estimated future risk-free rate
    0.14-0.58 %     0.16-0.58 %     1.32-3.64 %
Equivalent volatility
    44-79 %     74-89 %     79-96 %
Equivalent risk-free rate
    0.06-0.21 %     0.06-0.23 %     0.39-1.09 %
 
December 4, 2012 financing:
 
March 31, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
  $ 0.31     $ 0.31     $ 0.30-0.33  
Estimated future volatility
    88-100 %     85-100 %     100 %
Dividend
    -       -       -  
Estimated future risk-free rate
    0.58-1.39 %     0.58-1.26 %     0.52-1.065 %
Equivalent volatility
    79-84 %     88 %     88-90 %
Equivalent risk-free rate
    0.20-0.29 %     0.21-0.32 %     0.22-0.31 %
 
 
Changes in the fair value of the warrant liabilities, carried at fair value, as reported as “unrealized gain (loss) on fair value of warrants” in the statement of operations:
 
   
Three Months
Ended 
March 31, 2013
   
Three Months
 Ended 
March 31, 2012
   
Cumulative from
March 19, 2001
(Inception) to 
March 31, 2013
 
December 18, 2007 financing
  $ -     $ -     $ 50,722  
March 20, 2008 financing
    -       -       160,063