Rexahn Pharmaceuticals, Inc.
REXAHN PHARMACEUTICALS, INC. (Form: 10-Q, Received: 11/13/2013 16:16:21)

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 September 30, 2013

OR

¨ 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: 1 46,717,795 shares of common stock outstanding as of November 13, 2013.
 


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

 
Page
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1
Financial Statements
 3
 
 
 
 
1)
3
 
 
 
 
 
2)
4
 
 
 
 
 
3)
5
 
 
 
 
 
4)
7
 
 
 
 
Item 2
41
 
 
 
Item 3
50
 
 
 
Item 4
50
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1
51
 
 
 
Item 1A
51
 
 
 
Item 2
51
 
 
 
Item 3
51
 
 
 
Item 4
51
 
 
 
Item 5
52
 
 
 
Item 6
52
 
 
53

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

 
 
September 30, 2013
(unaudited)
   
December 31, 2012
 
ASSETS
 
Current Assets:
 
   
 
Cash and cash equivalents
 
$
14,871,000
   
$
13,486,543
 
Marketable securities (note 3)
   
100,000
     
100,000
 
Prepaid expenses and other current assets (note 4)
   
523,117
     
188,808
 
Total Current Assets
   
15,494,117
     
13,775,351
 
Restricted Cash Equivalents (note 16)
   
509,179
     
1,091,801
 
Equipment, Net (note 6)
   
70,419
     
52,156
 
Total Assets
 
$
16,073,715
   
$
14,919,308
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current Liabilities:
               
Accounts payable and accrued expenses (note 7)
 
$
750,242
   
$
851,837
 
 
               
Deferred Research and Development Arrangements (note 8)
   
1,165,429
     
1,626,000
 
 
               
Other Liabilities (note 9)
   
114,588
     
65,417
 
 
               
Warrant Liabilities (note 13)
   
4,192,216
     
2,842,065
 
 
               
Total Liabilities
   
6,222,475
     
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, 134,457,144 and 119,443,194 issued and 134,442,939 and 119,428,989 outstanding
   
13,446
     
11,944
 
Additional paid-in capital
   
79,957,246
     
72,861,738
 
Accumulated deficit during the development stage
   
(70,091,042
)
   
(63,311,283
)
Treasury stock, 14,205 shares, at cost
   
(28,410
)
   
(28,410
)
 
               
Total Stockholders’ Equity
   
9,851,240
     
9,533,989
 
 
               
Total Liabilities and Stockholders’ Equity
 
$
16,073,715
   
$
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
September 30,
   
For the Nine Months Ended
September 30,
   
(Inception) to
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
   
2013
 
Revenues:
 
   
   
   
   
 
Research
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
 
                                       
Expenses:
                                       
General and administrative
   
932,762
     
600,242
     
3,001,460
     
2,071,008
     
33,061,604
 
Research and development
   
781,281
     
1,066,245
     
2,258,877
     
3,127,201
     
37,537,376
 
Patent fees
   
100,199
     
122,571
     
357,906
     
302,533
     
2,890,010
 
Depreciation and amortization
   
9,645
     
10,721
     
28,196
     
32,163
     
711,119
 
 
                                       
Total Expenses
   
1,823,887
     
1,799,779
     
5,646,439
     
5,532,905
     
74,200,109
 
 
                                       
Loss from Operations
   
(1,823,887
)
   
(1,799,779
)
   
(5,646,439
)
   
(5,532,905
)
   
(74,200,109
)
 
                                       
Other Income (Expense)
                                       
Realized loss on marketable securities .
   
-
     
-
     
-
     
-
     
(13,301
)
Interest income
   
13,293
     
6,641
     
34,744
     
17,184
     
1,477,143
 
Interest expense
   
-
     
-
     
-
     
-
     
(301,147
)
Other income
   
-
     
-
     
-
     
-
     
56,047
 
Unrealized (loss)/gain on fair value of warrants
   
(217,751
)
   
(1,195,932
)
   
(1,055,505
)
   
(655,545
)
   
3,284,476
 
Unrealized gain on fair value of put feature on common stock
   
-
     
-
     
-
     
-
     
2,315,539
 
Financing expense
   
(112,559
)
   
-
     
(112,559
)
   
-
     
(1,084,690
)
Beneficial conversion feature
   
-
     
-
     
-
     
-
     
(1,625,000
)
Total Other Income (Expense)
   
(317,017
)
   
(1,189,291
)
   
(1,133,320
)
   
(638,361
)
   
4,109,067
 
 
                                       
Loss Before Provision for Income Taxes
   
(2,140,904
)
   
(2,989,070
)
   
(6,779,759
)
   
(6,171,266
)
   
(70,091,042
)
Provision for income taxes
   
-
     
-
     
-
     
-
     
-
 
Net Loss
 
$
(2,140,904
)
 
$
(2,989,070
)
 
$
(6,779,759
)
 
$
(6,171,266
)
 
$
(70,091,042
)
 
                                       
Net loss per share, basic and diluted
 
$
(0.02
)
 
$
(0.03
)
 
$
(0.06
)
 
$
(0.06
)
       
 
                                       
Weighted average number of shares outstanding, basic and diluted
   
130,466,114
     
95,345,656
     
123,188,044
     
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 Nine Months Ended
   
(Inception) to
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
 
Cash Flows from Operating Activities:
 
   
   
 
Net loss
 
$
(6,779,759
)
 
$
(6,171,266
)
 
$
(70,091,042
)
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Beneficial conversion feature
   
-
     
-
     
1,625,000
 
Compensatory stock
   
200,800
     
-
     
2,330,677
 
Depreciation and amortization
   
28,196
     
32,163
     
711,119
 
Stock-based compensation
   
494,037
     
202,537
     
6,302,653
 
Amortization of deferred research and development arrangements
   
(460,571
)
   
(56,250
)
   
(1,260,571
)
Note receivable (Note 5)
   
-
     
18,682
     
-
 
Realized losses on marketable securities
   
-
     
-
     
13,301
 
Unrealized loss/(gain) on fair value of warrants
   
1,055,505
     
655,545
     
(3,284,476
)
Unrealized gain on fair value of put feature on common stock
   
-
     
-
     
(2,315,539
)
Financing expense
   
112,559
     
-
     
1,084,690
 
Amortization of deferred lease incentive
   
(13,111
)
   
(15,000
)
   
(83,111
)
Deferred lease expenses
   
7,622
     
(13,739
)
   
43,039
 
Loss on impairment of intangible assets
   
-
     
-
     
286,132
 
Changes in assets and liabilities:
                       
Prepaid expenses and other current assets
   
(279,649
)
   
115,145
     
(468,457
)
Accounts payable and accrued expenses
   
(101,595
)
   
(313,898
)
   
750,242
 
Net Cash Used in Operating Activities
   
(5,735,966
)
   
(5,546,081
)
   
(64,356,343
)
Cash Flows from Investing Activities:
                       
Restricted cash equivalents
   
582,622
     
1,214,592
     
(509,179
)
Purchase of equipment
   
(46,459
)
   
-
     
(611,454
)
Purchase of marketable securities
   
-
     
-
     
(21,123,960
)
Proceeds from sales of marketable securities
   
-
     
1,850,000
     
21,010,659
 
Payment of licensing fees
   
-
     
-
     
(356,216
)
Net Cash Provided by (Used In) Investing Activities
   
536,163
     
3,064,592
     
(1,590,150
)
Cash Flows from Financing Activities:
                       
Issuance of common stock and units, net of issuance costs
   
5,173,155
     
-
     
68,107,379
 
Proceeds from exercise of stock options
   
90,000
     
-
     
260,082
 
Proceeds from exercise of stock warrants
   
1,321,105
     
-
     
4,902,442
 
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
   
6,584,260
     
-
     
80,817,493
 
Net Increase (Decrease)in Cash and Cash Equivalents
   
1,384,457
     
(2,481,489
)
   
14,871,000
 
Cash and Cash Equivalents – beginning of period
   
13,486,543
     
9,861,488
     
-
 
Cash and Cash Equivalents - end of period
 
$
14,871,000
   
$
7,379,999
   
$
14,871,000
 
 
(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 Nine Months Ended
 
(Inception) to
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
Supplemental Cash Flow Information
 
   
   
 
Interest paid
 
$
-
   
$
-
   
$
301,147
 
Non-cash financing and investing activities:
                       
Warrants issued
 
$
1,406,441
   
$
-
   
$
15,098,084
 
Put feature on common stock issued
 
$
-
   
$
-
   
$
4,954,738
 
Dilutive issuances of common stock
 
$
-
   
$
-
   
$
2,639,199
 
Warrant liability extinguishment from exercise of warrants
 
$
1,111,795
   
$
-
   
$
7,292,455
 
Leasehold improvement incentive
 
$
54,660
   
$
-
   
$
154,660
 
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”, or “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 $70, 091,042 at September 30, 2013 and anticipates incurring losses through the remainder of fiscal year 2013 and beyond.  The Company has not yet generated commercial sales revenue and has funded its operating losses to date through the sale of shares of its common stock and warrants to purchase shares of its common stock, convertible debt, financings, interest income from cash and cash equivalents, and proceeds from reimbursed research and development costs.  The Company believes that its cash, cash equivalents, and marketable securities, including the proceeds received from the registered direct offering as described in Note 18, will be sufficient to cover its cash flow requirements for approximately the next 24 months.  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 efficiently managing 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 September 30, 2013 and December 31, 2012, the results of operations for the three and nine months ended September 30, 2013 and 2012, and cash flows for the nine months ended September 30, 2013 and 2012 have been included.  Operating results for the three and nine months ended September 30, 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 these 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 guidance requires that a company 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
 
September 30, 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 September 30, 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
 
 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
   
 
Deposits on contracts
 
$
35,490
   
$
12,818
 
Other assets
   
487,627
     
175,990
 
 
               
 
 
$
523,117
   
$
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 dispute 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
 
 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
   
 
Furniture and fixtures
 
$
58,171
   
$
34,200
 
Office equipment
   
39,024
     
81,074
 
Lab and computer equipment
   
425,195
     
430,261
 
Leasehold improvements
   
119,841
     
119,841
 
 
               
Total fixed assets
   
642,231
     
665,376
 
Less: Accumulated depreciation
   
(571,812
)
   
(613,220
)
 
               
Net carrying amount
 
$
70,419
   
$
52,156
 

Depreciation expense was $9,645 and $10,721 for the three months ended September 30, 2013 and 2012, respectively, and $28,196 and $ 32,163 for the nine months ended September 30, 2013 and 2012, respectively.

7.
Accounts Payable and Accrued Expenses
 
 
 
   
 
 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
   
 
Trade payables
 
$
267,362
   
$
250,682
 
Accrued expenses
   
21,693
     
76,289
 
Accrued research and development contract costs
   
290,002
     
452,577
 
Payroll liabilities
   
171,185
     
72,289
 
 
               
 
 
$
750,242
   
$
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, research and development expenses were reduced by $18,750 and $56,250 for the three and nine months ended September 30, 2013 and 2012, respectively.  The remaining $693,750 and $750,000 to be amortized at September 30, 2013 and December 31, 2012, respectively, are reflected as deferred research and development arrangements on the balance sheet.  The payment from Rexgene 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 2015.  Under the terms of the agreement, Rexgene does not   receive royalties on the Company’s net sales outside of Asia.
 
Teva Pharmaceutical Industries, Ltd.
 
On September 21, 2009, the Company closed on a securities purchase agreement (the “Purchase Agreement”) with Teva Pharmaceutical Industries Limited (“Teva”), and contemporaneous with the execution and delivery of this agreement, the parties executed a research and exclusive license option agreement (the “RELO Agreement”) pursuant to which the Company agreed to use proceeds from the issuance and sale of shares to Teva to fund a research and development program for the pre-clinical development of RX-3117.  On November 27, 2012, the Company and Teva entered into a second amendment to the RELO Agreement, pursuant to which Teva 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.  Costs incurred for the development of RX-3117 are paid from restricted cash, reduce the deferred research and development arrangement and therefore, are not an expense in the Company’s statement of operations.  As of September 30, 2013 and December 31, 2012, the Company had proceeds remaining of $471,679 and $876,000, respectively, which are included in deferred research and development arrangements on the balance sheet.  During the three and nine months ended September 30, 2013, $59,700 and $ 404,321 were reduced from the deferred research and development arrangement for costs incurred for the development of RX-3117, respectively.  On August 28, 2013, the Company announced that Teva had decided not to exercise its option to license RX-3117, and as a result, the RELO Agreement was terminated.  The proceeds remaining from the restricted cash either will be used to pay for unbilled expenses or will be returned to Teva.
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 (the “Original Lease”) 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 accounted for the benefit of the leasehold improvement allowance as a reduction of rental expense over the five-year term of the office lease.

On June 7, 2013, the Company entered into the first amendment to the lease agreement, also disclosed in Note 16. According to the terms of the amendment, the Company extended the lease term until June 30, 2019, and the amendment term began on July 1, 2013.  The lessor agreed to grant an additional leasehold improvement allowance of $54,660 to the Company to be used for the further construction to the leased property and furniture and equipment.  The Company accounts for this benefit, including the unamortized portion from the Original Lease, as a reduction of rental expense over the six-year amended term of the lease.
 
The following table sets forth the cumulative deferred lease incentive:
 
 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
   
 
Deferred lease incentive
 
$
154,660
   
$
100,000
 
Less accumulated amortization
   
(83,111
)
   
(70,000
)
 
               
Balance
 
$
71,549
   
$
30,000
 

Deferred Office Lease Expense

The original and amended lease agreements, disclosed above, require an initial annual base rent with annual increases over the next six 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 $43,039 and $35,417 as of September 30, 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 shares of common stock outstanding for the period.  Diluted loss per common share is also computed by dividing net loss by the weighted average number of shares of common stock 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 that would then share in earnings, and such calculation excludes common shares in treasury.   As of September 30, 2013 and December 31, 2012, there were stock options and warrants to acquire 3 2,358,209 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 September 30, 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 that 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 pre‑reverse stock split CRS 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 paid $7,500 in 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 an aggregate principal amount of $1,300,000, 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 of 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 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 $6,800,023.  One warrant will entitle the holder to purchase an additional share of common stock at an exercise 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.  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-dilution protection to investors. The anti-dilution protection provision is structured to protect a holder’s position from being diluted, contains a price protection based on a mathematical calculation, and is recorded as a liability at fair value.  The Company revalues these liabilities each reporting period, with the unrealized (loss) gain 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 an exercise 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.  The Company extended anti-dilution protection to investors.   The anti-dilution protection provision is structured to protect a holder’s position from being diluted, contains a price protection based on a mathematical calculation, and is recorded as a liability at fair value.  The Company revalues these liabilities each reporting period, with the unrealized (loss)/gain recorded as other income (expense).
 
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 an exercise 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 closed on 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, exercisable from date of delivery until the four-year anniversary of that date.  These warrants were valued at $1,800,800 and recorded as liabilities at fair value.  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 an exercise 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 valued at $2,826,666 and recorded a t fair value.   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 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 were $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 as 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.
 
 
bb)
On May 10, 2013, the Company issued 120,000 shares of stock to a vendor in exchange for investor relations services.  The market value of the stock issued was $0.31, and the total market value of the issuance was $37,200.
 
 
bc)
On June 10, 2013, the Company issued 200,000 shares of stock to a vendor in exchange for investor relations services.  The market value of the stock issued was $0.50, and the total market value of the issuance was $100,000.
 
 
bd)
On June 21, 2013, a warrant holder exercised warrants to purchase shares of the Company’s common stock for cash of $26,739, and the Company issued 56,650 shares.
 
 
be)
In July, 2013 option holders exercised options to purchase shares of the Company’s common stock for cash of $36,000, and the Company issued 150,000 shares.

 
bf)
On July 26, 2013 the Company closed on a registered direct public offering to issue and sell 11,400,000 shares of common stock and warrants to purchase up to 3,990,000 shares of common stock.  The common stock and warrants were sold in units, consisting of common stock and a warrant to purchase 0.35 shares of common stock, at a price of $0.50 per share, and the warrants have an exercise price of $0.59 per share.  The total gross proceeds of the offering were $5,700,000.  The warrants issued are exercisable beginning six months after the closing date until the five-year anniversary of the closing date, and were recorded as liabilities at fair value.
 
The closing costs of $637,334 included 456,000 warrants valued at $110,489, and $526,845 for placement agent and other fees.  Based upon the estimated fair value of the stock and warrants in the units, the Company allocated $112,559 to financing expense and $524,775 as stock issuance costs.
 
A summary of the allocation of the proceeds of the offering is shown below:
 
Gross Proceeds:
 
$
5,700,000
 
 
       
Allocated to liabilities:
       
Warrant liabilities
   
1,406,441
 
Less: Warrants allocated to placement agent
   
(110,489
)
Total allocated to liabilities
   
1,295,952
 
 
       
 
       
Allocated to equity:
       
Common stock and additional paid-in capital
   
4,404,048
 
 
       
Total allocated gross proceeds:
 
$
5,700,000
 


 
bg)
In July 2013 warrant holders exercised warrants to purchase shares of the Company’s common stock for cash of $1,199,966 and the Company issued 2,542,300 shares.
 
 
bh)
On August 1, 2013, the Company issued 120,000 shares of stock to a vendor in exchange for investor relations services.  The market value of the stock issued was $0.53, and the total market value of the issuance was $63,600.
 
 
bi)
In August, 2013 warrant holders exercised warrants to purchase shares of the Company’s common stock for cash of $94,400, and the Company issued 200,000 shares.
 
 
bj)
In September, 2013 option holders exercised options to purchase shares of the Company’s common stock for cash of $54,000, and the Company issued 225,000 shares.
12.
Stock-Based Compensation
 
At the Company’s Annual Meeting of the Stockholders held on June 10, 2013, the Company’s stockholders voted to approve the Rexahn Pharmaceuticals, Inc. 2013 Stock Option Plan (the “2013 Plan”).  Under the 2013 Plan, the Company grants stock options to key employees, directors and consultants of the Company.  A total of 17,000,000 shares of common stock have been reserved for issuance pursuant to the 2013 Plan.  As of September 30, 2013, there were 425,000 options outstanding, and 16, 575,000 shares were available for issuance from the 2013 Plan.
 
On August 5, 2003, the Company established a stock option plan (the “2003 Plan”).  Under the 2003 Plan, the Company granted stock options to key employees, directors and consultants of the Company.  With the adoption of the 2013 Plan, no new stock options may be issued under the 2003 Plan, however, previously issued options under the 2003 Plan remain outstanding until their expiration.  As of September 30, 2013, there were 9, 056,795 outstanding options under the 2003 Plan.
 
For the majority of the grants to employees, the vesting period is 30% on the first anniversary of the grant date, an additional 30% on the second anniversary of the grant date, 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, the vesting period is between one and three years, subject to the fulfillment of certain conditions in the individual stock agreements, or 100% upon the occurrence of certain events specified in the individual stock agreements.
 
Accounting for Employee Awards
 
The Company’s results of operations for the three months ended September 30, 2013 and 2012 include share-based employee compensation expense totaling $65,502 and $44,905 respectively.  The Company’s results of operations for the nine months ended September 30, 2013 and 2012 include share based compensation expense totaling $4 85,984 and $1 60,037 , 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 $2,213 and $15,706 for the three months ended September 30, 2013 and 2012, respectively.  Stock compensation expenses related to non-employee options was $ 8,053 and $42,500 for the nine months ended September 30, 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 and nine months ended September 30, 2013 and 2012, and the period from inception (March 19, 2001) to September 30, 2013 is as follows:

 
 
   
   
   
   
Cumulative from
 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
   
March 19, 2001
(Inception) to
 
 
 
2013
   
2012
   
2013
   
2012
   
September 30, 2013
 
Statement of operations line item:
 
   
   
   
   
 
General and administrative:
 
   
   
   
   
 
Payroll
 
$
53,459
   
$
25,932
   
$
444,373
   
$
100,097
     
3,065,802
 
Consulting and other professional fees
   
-
     
10,470
     
3,893
     
32,965
     
814,348
 
Research and development:
                                       
Payroll
   
12,043
     
18,973
     
41,611
     
59,940
     
1,089,668
 
Consulting and other professional fees
   
2,213
     
5,236
     
4,160
     
9,535
     
1,332,835
 
 
                                       
Total
 
$
67,715
   
$
60,611
   
$
494,037
   
$
202,537
     
6,302,653
 

Summary of Stock Option Transactions
 
There were 1,200,000 stock options granted at an exercise price of $0.3 7 with a fair value of $320,46 5, 550,000 stock options granted at an exercise price of $0. 31 with a fair value of $122,497, 250,000 stock options granted at an exercise price of $0.39 and a fair value of $69,529, 300,000 stock options granted at an exercise price of $0.50 and a fair value of $107,086, and 125,000 stock options granted at an exercise price of $0.61 and a fair value of $54,819   during the nine months ended September 30, 2013.  The 1,200,000 options granted at an exercise price of $0.37 were awarded pursuant to an employment agreement with 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 and 170,000 stock options granted at an exercise price of $0.38 and a fair value of $47,589 during the nine months ended September 30, 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:
 
 
 
Nine Months Ended September 30,
 
 
 
2013
   
2012
 
Black-Scholes weighted average assumptions
 
   
 
Expected dividend yield
   
0
%
   
0
%
Expected volatility
   
94-96
%
   
99-101
%
Risk free interest rate
   
0.75-1.39
%
   
0.62-0.89
%
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
   
2,425,000
     
0.39
     
245,000
     
0.41
 
Exercised
   
(375,000
)
   
0.24
     
-
     
-
 
Expired
   
(225,000
)
   
0.34
     
-
     
-
 
Cancelled
   
(85,000
)
   
0.80
     
(150,000
)
   
1.15
 
 
                               
Outstanding at September 30
   
9,481,795
   
$
0.92
     
7,741,795
   
$
1.03
 

The following table summarizes information about stock options outstanding as of September 30, 2013 and December 31, 2012.
 
 
 
Number of
Options
   
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
 
Outstanding at
 
   
 
 
 
 
September 30, 2013
   
9,481,795
   
$
0.92
 
4.9 years
 
$
209,717
 
 
               
 
       
Exercisable at
               
 
       
September 30, 2013
   
8,106,795
   
$
0.99
 
4.1 years
 
$
115,267
 
 
               
 
       
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
 

The total intrinsic value of the options exercised was $91,300 for the three and nine months ended September 30, 2013.  There were no options exercised during the three and nine months ended September 30, 2012.  The weighted average fair value of the options vested was $0. 36 and $0. 92 for the nine months ended September 30, 2013 and 2012, respectively.

A summary of the Company’s unvested shares as of September 30, 2013 and changes during the nine months ended September 30, 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
   
2,425,000
   
$
0.28
 
Vested
   
(1,597,500
)
 
$
0.36
 
Cancelled
   
(17,500
)
 
$
0.36
 
 
               
Unvested at September 30, 2013
   
1,375,000
   
$
0.34
 
 
As of September 30, 2013 and December 31, 2012, there was $3 42,322 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 1.9 years and 1. 0 years, respectively.
 
13.
Warrants
 
As of September 30, 2013, warrants to purchase 2 2,876,414 shares were outstanding, having exercise prices ranging from $0.41   to $1.90 and expiration dates ranging from May 19, 2014 to July 26, 2018.

 
 
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
   
4,446,000
     
0.59
     
-
   
$
-
 
Exercised during the period
   
(2,798,950
)
   
0.47
     
-
   
$
-
 
Expired during the period
   
(426,778
)
   
1.67
     
-
   
$
-
 
 
                               
Balance, September 30
   
22,876,414
   
$
0.87
     
8,676,142
   
$
1.53
 
 
At September 30, 2013 and December 31, 2012, the average remaining contractual life of the outstanding warrants was 3. 3 and 3. 8 years, respectively.
The warrants 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.  The warrants issued to investors in the July 2013 offering contain a fundamental transaction provision, but the warrant holders only have an option as to the type of consideration received if the holders of common stock receive an option as to their consideration. In addition, the warrants issued in the May 2009, October 2009, June 2010, March, 2011, December 2012, and July, 2013 offerings contain a cashless exercise provision that is exercisable only in the event that a registration statement is not effective. That provision may not be operative if an effective registration statement is not available because an exemption under the U.S. securities laws is not available to issue unregistered shares.  As a result, net cash settlement may be required, and the warrants require liability classification.
 
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. Because 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 for stock splits and dividends, but also were 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:
 
September 30, 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
   
10,578
     
35,311
     
1,306,200
 
Warrants to placement agent
   
1,097
     
3,489
     
122,257
 
October 23, 2009 financing:
                       
Warrants to institutional investors
   
44,834
     
73,454
     
1,012,934
 
Warrants to placement agent
   
-
     
41
     
101,693
 
June 30, 2010 financing
                       
Warrants to institutional investors
   
7,800
     
12,200
     
1,800,800
 
Warrants to placement agent
   
-
     
20
     
180,080
 
March 31, 2011 financing:
                       
Warrants to institutional investors
   
359,667
     
306,333
     
2,826,666
 
Warrants to placement agent
   
-
     
83
     
97,667
 
December 4, 2012 financing:
                       
Warrants to institutional investors
   
2,453,617
     
2,263,910
     
2,474,120
 
Warrants to placement agent
   
207,592
     
147,224
     
163,096
 
July 26, 2013 financing:
                       
Warrants to institutional investors
   
1,023,036
     
-
     
1,295,952
 
Warrants to placement agent
   
83,995
     
-
     
110,489
 
Total:
 
$
4,192,216
   
$
2,842,065
   
$
15,098,084
 
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
 
September 30, 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
     
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
 
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
 
December 4, 2012 financing:
                       
Warrants to institutional investors
   
9,301,050
     
12,100,000
     
12,100,000
 
Warrants to placement agent
   
880,000
     
880,000
     
880,000
 
July 26, 2013 financing:
                       
Warrants to institutional investors
   
3,990,000
     
-
     
3,990,000
 
Warrants to placement agent
   
456,000
     
-
     
456,000
 
Total:
   
22,876,414
     
21,656,142
     
32,533,383
 
 
The assumptions used in calculating the fair values of the warrants are as follows:
 
December 18, 2007 financing:
 
September 30, 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:
 
September 30, 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:
 
September 30, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
 
$
0.45
   
$
0.31
   
$
1.14
 
Estimated future volatility
   
100
%
   
100
%
   
100
%
Dividend
   
-
     
-
     
-
 
Estimated future risk-free rate
   
0.10
%
   
0.16
%
   
0.63-4.31
%
Equivalent volatility
   
79
%
   
92
%
   
103-117
%
Equivalent risk-free rate
   
0.03
%
   
0.11
%
   
0.20-1.44
%
 
October 23, 2009 financing:
 
September 30, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
 
$
0.45
   
$
0.31
   
$
0.69
 
Estimated future volatility
   
100
%
   
100
%
   
100
%
Dividend
   
-
     
-
     
-
 
Estimated future risk-free rate
   
0.10
%
   
0.16-0.34
%
   
2.63-3.80
%
Equivalent volatility
   
73
%
   
74-93
%
   
98-99
%
Equivalent risk-free rate
   
0.05
%
   
0.06-0.13
%
   
0.93-1.16
%
 
June 30, 2010 financing:
 
September 30, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
 
$
0.45
   
$
0.31
   
$
1.43
 
Estimated future volatility
   
100
%
   
100
%
   
100
%
Dividend
   
-
     
-
     
-
 
Estimated future risk-free rate
   
0.10
%
   
0.16-0.34
%
   
1.78
%
Equivalent volatility
   
73
%
   
74-75
%
   
98
%
Equivalent risk-free rate
   
0.05
%
   
0.06
%
   
0.59
%

March 31, 2011 financing:
 
September 30, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
 
$
0.45
   
$
0.31
   
$
1.18
 
Estimated future volatility
   
100
%
   
93-100
%
   
100
%
Dividend
   
-
     
-
     
-
 
Estimated future risk-free rate
   
1.23
%
   
0.16-0.58
%
   
1.32-3.64
%
Equivalent volatility
   
80
%
   
74-89
%
   
79-96
%
Equivalent risk-free rate
   
0.25
%
   
0.06-0.23
%
   
0.39-1.09
%

December 4, 2012 financing:
 
September 30, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
 
$
0.45
   
$
0.31
   
$
0.30-0.33
 
Estimated future volatility
   
71-100
%
   
85-100
%
   
100
%
Dividend
   
-
     
-
     
-
 
Estimated future risk-free rate
   
1.23-2.53
%
   
0.58-1.26
%
   
0.52-1.065
%
Equivalent volatility
   
80-81
%
   
88
%
   
88-90
%
Equivalent risk-free rate
   
0.20-0.32
%
   
0.21-0.32
%
   
0.22-0.31
%
 
July 26, 2013 financing:
 
September 30, 2013
   
December 31, 2012
   
Transaction Date
 
Trading market prices
 
$
0.45
     
-
   
$
0.53
 
Dividend
   
-
     
-
     
-
 
Equivalent volatility
   
80
%
   
-
     
78-80
%
Equivalent risk-free rate
   
0.23-0.50
%
   
-
     
0.20-0.48
%

Changes in the fair value of the warrant liabilities, carried at fair value, as reported as “unrealized (loss) gain on fair value of warrants” in the statement of operations:
 
 
 
Three Months Ended
September 30, 2013
   
Three Months Ended
September 30, 2012
 
December 18, 2007 financing
 
$
-
   
$
-
 
March 20, 2008 financing
   
-
     
-
 
June 5, 2009 financing:
               
Series I warrants
   
-
     
-
 
Series II warrants
   
-
     
-
 
Series III warrants
   
(5,336
)
   
(172,355
)
Warrants to placement agent
   
(410
)
   
(16,121
)
October 23, 2009 financing:
   
-
         
Warrants to institutional investors
   
2,580
     
(176,511
)
Warrants to placement agent
   
-
     
(1,586
)
June 30, 2010 financing
               
Warrants to institutional investors
   
(4,600
)
   
(187,200
)
Warrants to placement agent
   
-
     
(7,200
)
March 31, 2011 financing:
               
Warrants to institutional investors
   
(33,334
)
   
(624,000
)
Warrants to placement agent
   
-
     
(10,959
)
December 4, 2012 financing:
               
Warrants to institutional investors
   
(464,181
)
   
-
 
Warrants to placement agent
   
(11,880
)
   
-
 
July 26, 2013 financing:
               
Warrants to institutional investors
   
272,916
     
-
 
Warrants to placement agent
   
26,494
     
-
 
Total:
 
$
(217,751
)
 
$
(1,195,932
)

 
 
Nine Months Ended
September 30, 2013
   
Nine Months Ended
September 30, 2012
   
Cumulative from
March 19, 2001
(Inception) to
September 30, 2013
 
December 18, 2007 financing
 
$
-
   
$
-
   
$
50,722
 
March 20, 2008 financing
   
-
     
-
     
160,063
 
June 5, 2009 financing:
                       
Series I warrants
   
-
     
-
     
707,111
 
Series II warrants
   
-
     
-
     
(2,191,175
)
Series III warrants
   
24,733
     
(101,266
)
   
1,295,622
 
Warrants to placement agent
   
2,392
     
(9,118
)
   
106,780
 
Derivative loss at inception
   
-
     
-
     
(328,937
)
October 23, 2009 financing:
                       
Warrants to institutional investors
   
28,620
     
(89,422
)
   
(81,140
)
Warrants to placement agent
   
41