Rexahn Pharmaceuticals, Inc.
REXAHN PHARMACEUTICALS, INC. (Form: 10-Q, Received: 08/04/2017 16:19:01)

UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
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 No.)

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 ☑  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 ☑ No ☐

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

Large accelerated filer         
 
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)  
Smaller reporting company
     
Emerging growth company        

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐  No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2 8,459,805 shares as of August 4, 2017.
 


REXAHN PHARMACEUTICALS, INC.
TABLE OF CONTENTS
 
 
Page
   
PART I
1
Item 1
1
 
1)
1
 
2)
2
 
3)
3
 
4)
4
 
5)
5
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3
33
Item 4
33
     
PART II
34
Item 1A
34
Item 2
34
Item 5
34
Item 6
34
     
 
35
 
PART I. Financial Information
Item 1. Financial Statements

REXAHN PHARMACEUTICALS, INC.
Condensed Balance Sheet
(Unaudited)
 
   
June 30, 2017
   
December 31, 2016
 
ASSETS
 
Current Assets:
           
Cash and cash equivalents
 
$
8,790,519
   
$
11,578,473
 
Marketable securities
   
17,986,160
     
8,737,107
 
Prepaid expenses and other current assets
   
1,199,641
     
608,517
 
Total Current Assets
   
27,976,320
     
20,924,097
 
Security Deposits
   
30,785
     
30,785
 
Equipment, Net
   
86,610
     
88,650
 
Total Assets
 
$
28,093,715
   
$
21,043,532
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current Liabilities:
               
Accounts payable and accrued expenses
 
$
1,917,739
   
$
1,882,500
 
                 
Deferred Research and Development Arrangement
   
412,500
     
450,000
 
                 
Other Liabilities
   
65,812
     
79,204
 
                 
Warrant Liabilities
   
9,796,591
     
1,573,366
 
                 
Total Liabilities
   
12,192,642
     
3,985,070
 
Commitments and Contingencies (note 14)
               
Stockholders’ Equity:
               
Preferred stock, par value $0.0001, 10,000,000 authorized shares, none issued and outstanding
   
-
     
-
 
Common stock, par value $0.0001, 50,000,000 authorized shares, 28,452,305 and 23,736,878 issued and outstanding
   
2,845
     
2,374
 
Additional paid-in capital
   
151,612,110
     
132,086,419
 
Accumulated other comprehensive loss
   
(25,705
)
   
(6,122
)
Accumulated deficit
   
(135,688,177
)
   
(115,024,209
)
                 
Total Stockholders’ Equity
   
15,901,073
     
17,058,462
 
                 
Total Liabilities and Stockholders’ Equity
 
$
28,093,715
   
$
21,043,532
 
 
(See accompanying notes to the condensed financial statements)
 
REXAHN PHARMACEUTICALS, INC.
Condensed Statement of Operations
(Unaudited)

   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Revenues:
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
Expenses:
                               
General and administrative
   
1,739,663
     
1,675,749
     
3,430,509
     
3,071,155
 
Research and development
   
2,544,262
     
2,237,033
     
4,806,657
     
5,705,607
 
                                 
Total Expenses
   
4,283,925
     
3,912,782
     
8,237,166
     
8,776,762
 
                                 
Loss from Operations
   
(4,283,925
)
   
(3,912,782
)
   
(8,237,166
)
   
(8,776,762
)
                                 
Other Income (Expense)
                               
Interest income
   
42,782
     
28,868
     
74,579
     
57,738
 
Unrealized gain (loss) on fair value of warrants
   
5,521,249
     
2,118,090
     
(12,168,331
)
   
2,974,045
 
Financing expense
   
(333,050
)
   
-
     
(333,050
)
   
(169,887
)
Total Other Income (Expense)
   
5,230,981
     
2,146,958
     
(12,426,802
)
   
2,861,896
 
                                 
Net Income (Loss) Before Provision for Income Taxes
   
947,056
     
(1,765,824
)
   
(20,663,968
)
   
(5,914,866
)
Provision for income taxes
   
-
     
-
     
-
     
-
 
Net Income (Loss)
 
$
947,056
   
$
(1,765,824
)
 
$
(20,663,968
)
 
$
(5,914,866
)
                                 
Net income (loss) per share, basic
 
$
0.04
   
$
(0.08
)
 
$
(0.83
)
 
$
(0.28
)
Net income (loss) per share, diluted
 
$
0.03
   
$
(0.08
)
 
$
(0.83
)
 
$
(0.28
)
                                 
Weighted average number of shares outstanding, basic
   
26,001,797
     
21,318,433
     
24,932,705
     
20,788,557
 
Weighted average number of shares outstanding, diluted
   
28,265,440
     
21,318,433
     
24,932,705
     
20,788,557
 
 
(See accompanying notes to the condensed financial statements)
 
REXAHN PHARMACEUTICALS, INC.
Condensed Statement of Comprehensive Income (Loss)
(Unaudited)
 
   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Net Income (Loss)
 
$
947,056
   
$
(1,765,824
)
 
$
(20,663,968
)
 
$
(5,914,866
)
                                 
Unrealized (loss) gain on available-for-sale securities
   
(19,379
)
   
3,733
     
(19,583
)
   
20,368
 
                                 
Comprehensive Income (Loss)
 
$
927,677
   
$
(1,762,091
)
 
$
(20,683,551
)
 
$
(5,894,498
)
 
(See accompanying notes to the condensed financial statements)
 
REXAHN PHARMACEUTICALS, INC.
Condensed Statement of Cash Flows
(Unaudited)

   
For the Six Months Ended June 30,
 
   
2017
   
2016
 
Cash Flows from Operating Activities:
           
Net loss
 
$
(20,663,968
)
 
$
(5,914,866
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Compensatory stock
   
12,750
     
64,949
 
Depreciation and amortization
   
19,950
     
15,053
 
Amortization of premiums and discounts on marketable securities, net
   
20,024
     
22,315
 
Stock-based compensation
   
562,392
     
694,187
 
Amortization of deferred research and development arrangement
   
(37,500
)
   
(37,500
)
Unrealized loss (gain) on fair value of warrants
   
12,168,331
     
(2,974,045
)
Financing expense
   
333,050
     
169,887
 
Amortization of deferred lease incentive
   
(6,222
)
   
(6,222
)
Deferred lease expenses
   
(7,170
)
   
(5,203
)
Changes in assets and liabilities:
               
Prepaid expenses and other assets
   
(591,124
)
   
225,735
 
Accounts payable and accrued expenses
   
(78,492
)
   
(866,651
)
Net Cash Used in Operating Activities
   
(8,267,979
)
   
(8,612,361
)
Cash Flows from Investing Activities:
               
Purchase of equipment
   
(17,910
)
   
(7,511
)
Purchase of marketable securities
   
(15,008,660
)
   
(1,721,760
)
Redemption of marketable securities
   
5,720,000
     
3,440,000
 
Net Cash (Used in) Provided by  Investing Activities
   
(9,306,570
)
   
1,710,729
 
Cash Flows from Financing Activities:
               
Issuance of common stock and units, net of issuance costs
   
9,355,002
     
4,580,187
 
Proceeds from exercise of stock warrants
   
5,354,093
     
-
 
Proceeds from exercise of stock options
   
77,500
     
-
 
Net Cash Provided by Financing Activities
   
14,786,595
     
4,580,187
 
Net Decrease in Cash and Cash Equivalents
   
(2,787,954
)
   
(2,321,445
)
Cash and Cash Equivalents – beginning of period
   
11,578,473
     
10,199,440
 
Cash and Cash Equivalents – end of period
 
$
8,790,519
   
$
7,877,995
 
Supplemental Cash Flow Information
               
Non-cash financing and investing activities:
               
Warrants issued
 
$
4,107,488
   
$
2,575,860
 
Warrant liability extinguishment from exercise of warrants
 
$
8,052,594
   
$
-
 
Offering costs included in accounts payable and accrued expenses
 
$
113,731
   
$
-
 
 
(See accompanying notes to the condensed financial statements)
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
 
1.
Operations and Organization
 
Operations
Rexahn Pharmaceuticals, Inc. (the “Company”), a Delaware corporation, is a biopharmaceutical company whose principal operations are the discovery, development and commercialization of innovative treatments for cancer.  The Company had an accumulated deficit of $ 135,688,177 at June 30, 2017 and anticipates incurring losses through fiscal year 2017 and beyond.  The Company has not yet generated commercial revenues 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, interest income from cash, cash equivalents and marketable securities, and proceeds from reimbursed research and development costs.  The Company believes that its cash, cash equivalents, and marketable securities will be sufficient to cover its cash flow requirements for its current activities for at least the next 12 months from the date these financial statements were issued.  Management believes it 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 the Company’s 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 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 (“U.S. GAAP”) 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 June 30, 2017 and December 31, 2016 and of the results of operations and comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016 and cash flows for the six months ended June 30, 2017 and 2016 have been included.  Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of results that may be expected for any other interim period or the full fiscal year ending December 31, 2017. The accompanying unaudited condensed 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, 2016 (the “2016 Form 10-K”).  Information included in the condensed balance sheet as of December 31, 2016 has been derived from the Company’s audited financial statements for the year ended December 31, 2016 included in the 2016 Form 10-K.

Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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.
Notes to Condensed Financial Statements
(Unaudited)
 
2.
Recent Accounting Pronouncements Affecting the Company

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle is that a company should recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services, and provides a revenue recognition framework in accordance with this principle.  On August 12, 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year to December 15, 2017 for annual reporting periods beginning after that date and interim periods therein.  Early adoption of the standard is permitted.  The Company is currently evaluating the impact that the adoption of this guidance will have on its financial statements and future operating results.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires an entity to recognize assets and liabilities arising from leases on the balance sheet and to provide additional disclosures about leasing arrangements.  ASU 2016-02 will be effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact the adoption of this guidance will have on its financial statements.

Compensation-Stock Compensation

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share Based Payment Accounting,” which includes multiple provisions intended to simplify various aspects of accounting for share-based payments.  The guidance is effective for reporting periods beginning after December 15, 2016, with early adoption permitted.  The Company adopted this guidance for the three months ended March 31, 2017.  This pronouncement did not have a material impact on the financial statements.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
 
3.
Marketable Securities

Marketable securities are considered “available-for-sale” in accordance with FASB Accounting Standards Codification (“ASC”) 320, “Debt and Equity Securities,” and thus are reported at fair value in the Company’s accompanying balance sheet, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity.  Amounts reclassified out of accumulated other comprehensive income (loss) into realized gains and losses are accounted for on the basis of specific identification and are included in other income or expense in the statement of operations.  The Company classifies such investments as current on the balance sheet as the investments are readily marketable and available for use in current operations.

The following table shows the Company’s marketable securities’ adjusted cost, gross unrealized gains and losses, and fair value by significant investment category as of June 30, 2017 and December 31, 2016:

   
June 30, 2017
 
   
Cost
Basis
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Commercial Paper
 
$
3,220,126
   
$
-
   
$
(4,796
)
 
$
3,215,330
 
Corporate Bonds
   
14,791,739
     
-
     
(20,909
)
   
14,770,830
 
Total Marketable Securities
 
$
18,011,865
   
$
-
   
$
(25,705
)
 
$
17,986,160
 

   
December 31, 2016
 
   
Cost
Basis
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Certificates of Deposit
 
$
720,000
   
$
197
   
$
-
   
$
720,197
 
Commercial Paper
   
3,987,424
     
-
     
(1,684
)
   
3,985,740
 
Corporate Bonds
   
4,035,805
     
-
     
(4,635
)
   
4,031,170
 
Total Marketable Securities
 
$
8,743,229
   
$
197
   
$
(6,319
)
 
$
8,737,107
 

The Company typically invests in highly-rated securities, with the primary objective of minimizing the potential risk of principal loss.  As of June 30, 2017, the Company had three investments of commercial paper with an aggregate fair value of $3,215,330 and unrealized losses of $4,796, and 14 corporate bonds with an aggregate fair value of $13,770,830 and unrealized losses of $20,909, all of which have been unrealized losses for less than 12 months.  The Company does not intend to sell its marketable securities in an unrealized loss position.  Based upon these securities’ fair value relative to the cost, high ratings, and volatility of fair value, the Company considers the declines in market value of its marketable securities to be temporary in nature, does not consider any of its investments other-than-temporarily impaired, and anticipates that it will recover the entire amortized cost basis.

The amortized cost basis and fair value of marketable securities by contractual maturity are:

Maturity
 
Cost Basis
 
Fair Value
 
Less than 1 year
 
$
12,274,138
   
$
12,257,650
 
1 to 5 years
   
5,737,727
     
5,728,510
 
Total Marketable Securities
 
$
18,011,865
   
$
17,986,160
 
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

4.
Prepaid Expenses and Other Current Assets

   
June 30,
2017
   
December 31,
2016
 
             
Deposits on contracts
 
$
532,602
   
$
179,476
 
Prepaid expenses and other current assets
   
667,039
     
429,041
 
                 
   
$
1,199,641
   
$
608,517
 

Deposits on contracts consist of deposits on research and development contracts for services that had not been incurred as of the balance sheet date.  Prepaid expenses and other assets include prepaid general and administrative expenses, such as insurance, rent, investor relations fees and compensatory stock issued for services not yet incurred as of the balance sheet date.

5.
Equipment, Net

   
June 30,
2017
   
December 31,
2016
 
             
Furniture and fixtures
 
$
78,794
   
$
78,794
 
Office and computer equipment
   
118,358
     
113,932
 
Lab equipment
   
445,134
     
431,650
 
Leasehold improvements
   
133,762
     
133,762
 
                 
Total equipment
   
776,048
     
758,138
 
Less: Accumulated depreciation and amortization
   
(689,438
)
   
(669,488
)
                 
Net carrying amount
 
$
86,610
   
$
88,650
 
 
6.
Accounts Payable and Accrued Expenses
 
   
June 30,
2017
   
December 31,
2016
 
             
Trade payables
 
$
509,085
   
$
430,013
 
Accrued expenses
   
167,297
     
141,190
 
Accrued research and development contract costs
   
715,065
     
499,889
 
Payroll liabilities
   
526,292
     
811,408
 
                 
   
$
1,917,739
   
$
1,882,500
 
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

7.
Deferred Research and Development Arrangement
 
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 $37,500 for the three and six months ended June 30, 2017 and 2016, respectively.  The remaining $4 12,500 and $450,000 to be amortized at June 30, 2017 and December 31, 2016, respectively, is reflected as a deferred research and development arrangement 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 by Rexgene 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 2018.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

8.
Other Liabilities

Deferred Lease Incentive

In accordance with the Company’s office lease agreement, as amended and further discussed in Note 14, the Company has been granted leasehold improvement allowances from the lessor 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 term of the office lease.
 
The following table sets forth the cumulative deferred lease incentive:

   
June 30,
2017
   
December 31,
2016
 
             
Deferred lease incentive
 
$
154,660
   
$
154,660
 
Less accumulated amortization
   
(129,773
)
   
(123,551
)
                 
Balance
 
$
24,887
   
$
31,109
 

Deferred Office Lease Expense

The lease agreement, as amended, provided for an initial annual base rent with annual increases over the lease term.  The Company recognizes rental expense on a straight-line basis over the term of the lease, which resulted in a deferred rent liability of $40,925 and $48,095 as of June 30, 2017 and December 31, 2016, respectively.
 
9.
Net Income (Loss) per Common Share
 
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period.  Diluted loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding, plus the number of common share equivalents that would be dilutive.  As of June 30, 2017 and December 31, 2016, there were stock options, restricted stock units and warrants to acquire, in the aggregate, 7,280,637 and 7 ,142,728 shares of the Company’s common stock, respectively, that are potentially dilutive. However, with the exception of the three months ended June 30, 2017, diluted loss per share is the same as basic loss per share for all periods presented because the inclusion of common share equivalents would be anti-dilutive.  For the three months ended June 30, 2017, the dilutive effect of stock warrants, stock options and restricted stock units is 1,177,987, 1,031,356 and 54,300, respectively.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

10.
Common Stock
 
The following transactions occurred since December 31, 2016:
 
Reverse Stock Split
 
On May 5, 2017 the Company effected a one-for- ten reverse stock split of the outstanding shares of the Company’s common stock, together with a corresponding proportional reduction in the number of authorized shares of the Company’s capital stock.  Each ten shares of the Company’s common stock, par value $0.0001 per share, issued and outstanding at the effective time of the reverse stock split were reclassified and combined into one share of common stock par value $0.0001 per share. The number of shares of common stock and preferred stock the Company is authorized to issue was reduced to 50 million and 10 million, respectively.  All share and per share amounts of common stock, stock options, stock warrants and restricted stock units have been restated for all periods to give retroactive effect to the reverse stock split.  Accordingly, an amount equal to the par value of the decreased shares resulting from the reverse stock split was reclassified from “Common stock” to “Additional paid-in capital.”

Warrant Exercises
 
During the six months ended June 30, 2017, warrant holders exercised warrants to purchase shares of the Company’s common stock for cash of $ 5,354,093 and the Company issued 1,652,623 shares.

Stock Option Exercises
 
During the six months ended June 30, 2017, a stock option holder exercised options to purchase shares of the Company’s common stock for cash of $ 77,500 and the Company issued 25,000 shares.

Compensatory Shares
 
During the six months ended June 30, 2017, the Company issued 7,500 shares to a privately held investor relations firm in exchange for investor relations services.  The aggregate market value of the stock issued was $ 12,750 .
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
 
Registered Direct Offering
 
On June 12, 2017 the Company closed a registered direct public offering of 3,030,304 shares of common stock and warrants to purchase up to 1,515,152 shares of common stock.  The common stock and warrants were sold in units, consisting of a share of common stock and a warrant to purchase 0.5 shares of common stock, at a price of $3.30 per unit, with an exercise price for the warrants of $4.00 per share .  The total gross proceeds of the offering were $10,000,003.  The warrants issued will become exercisable beginning six months after the closing date, and will remain exercisable until the five-year anniversary of the initial exercise date, and were recorded as liabilities at fair value.
 
A summary of the allocation of the proceeds of the offering is shown below:
 
Gross Proceeds:
 
$
10,000,003
 
         
Allocated to warrant liabilities
   
3,673,168
 
Allocated to common stock and additional paid-in capital
   
6,326,835
 
         
Total allocated gross proceeds:
 
$
10,000,003
 
 
The Company also issued warrants to purchase up to an aggregate 181,818 shares of common stock to the placement agent in the offering.  The closing costs for the offering of $1,193,052   included $434,320 for the placement agent warrants and $758,732 for placement agent and other fees.  Based on the estimated fair value of the stock and warrants in the units, the Company allocated $333,050 to financing expense for the warrants and $860,002 as stock issuance costs.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

11.
Stock-Based Compensation
 
As of June 30, 2017, the Company had 1 ,937,871 options to purchase common stock and 54,300 restricted stock units (“RSUs”) outstanding.
 
At the Company’s Annual Meeting of Shareholders held on June 10, 2013, the Company’s shareholders voted to approve the Rexahn Pharmaceuticals, Inc. 2013 Stock Option Plan (the “2013 Plan”).  Under the 2013 Plan, the Company grants equity awards to key employees, directors and consultants of the Company.  The Company initially reserved 1,700,000 shares of common stock for issuance pursuant to the 2013 Plan, and on April 11, 2017, the Company’s shareholders approved an increase of 1,700,000 shares of common stock reserved for issuance pursuant to the 2013 Plan. As of June 30, 2017, there were 1 ,540,871 options and 54,300 RSUs outstanding under the 2013 Plan, and 1, 804,079 shares were available for issuance.
 
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, but previously issued options under the 2003 Plan remain outstanding until their expiration.  As of June 30, 2017, there were 385,000 options outstanding under the 2003 Plan.
 
In March 2016, the Company granted to a third party an option to purchase up to 12,000 shares of the Company’s common stock.  These were the only Company stock options outstanding as of June 30, 2017, that were not issued pursuant to the 2013 Plan or the 2003 Plan.
 
Accounting for Awards
 
Stock-based compensation expense is the estimated fair value of options and RSUs granted amortized on a straight-line basis over the requisite vesting service period for the entire portion of the award. Total stock-based compensation recognized by the Company for the three and six months ended June 30, 2017 and 2016 is as follows:

   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Statement of operations line item:
                       
General and administrative
 
$
207,587
   
$
224,786
   
$
395,898
   
$
440,113
 
Research and development
   
80,478
     
126,390
     
166,494
     
254,074
 
                                 
Total
 
$
288,065
   
$
351,176
   
$
562,392
   
$
694,187
 
 
No income tax benefit has been recognized in the statement of operations for stock-based compensation arrangements as the Company has provided for a 100% valuation allowance on its deferred tax assets.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

Summary of Stock Option Transactions
 
There were 3 93,260 stock options granted at exercise prices ranging from $1. 84 to $6. 18 with an aggregate fair value of $620,185 during the six months ended June 30, 2017.  There were 4 48,707 stock options granted at exercise prices ranging from $2. 70 to $3. 70 with an aggregate fair value of $ 927,644 during the six months ended June 30, 2016.
 
The majority of the option grants to employees vest over a four-year period from the grant date. The vesting period is either (i) 30% , 30% and 40% on the first, second and third anniversaries of the grant date, respectively, or (ii) 25% each on the first four anniversaries of the grant date.  With the exception of the options granted in March 2016, which have a three-year term, options generally expire ten years from the date of grant. For the majority of 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.
 
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 Staff Accounting Bulletin No. 107 (“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:

   
Six Months Ended June 30,
 
   
2017
   
2016
 
Black-Scholes assumptions
           
Expected dividend yield
   
0
%
   
0
%
Expected volatility
   
69-79
%
   
32-75
%
Risk free interest rate
   
1.8-2.0
%
   
0.6-1.4
%
Expected term (in years)
 
5.5-6 years
   
2-6 years
 
 
A summary of stock option activity for the six months ended June 30, 2017 is as follows:

   
Number of
Options
   
Weighted
Average
Exercise
Price
 
Weighted Average Remaining
Contractual Term
 
Aggregate
Intrinsic
Value
 
Outstanding, January 1, 2017
   
1,690,037
   
$
6.20
 
7.3 years
 
$
-
 
Granted
   
393,260
     
2.46
           
Exercised
   
(25,000
)
   
3.10
           
Expired
   
(15,000
)
   
16.07
           
Cancelled
   
(105,426
)
   
3.77
           
                           
Outstanding, June 30, 2017
   
1,937,871
   
$
5.54
 
7.4 years
 
$
342,455
 
Exercisable, June 30, 2017
   
1,120,784
   
$
6.73
 
6.3 years
 
$
6,858
 
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
 
The total intrinsic value of options exercised was $97,872 for the three and six months ended June 30, 2017.  There were no stock options exercised during the three and six months ended June 30, 2016.  The weighted average fair value of the options granted was $1.58 and $2.06 for the six months ended June 30, 2017 and 2016, respectively.
 
A summary of the Company’s unvested options as of June 30, 2017 and changes during the six months ended June 30, 2017 is presented below:

   
2017
 
   
Number of Options
   
Weighted Average Fair
Value at Grant Date
 
Unvested at January 1, 2017
   
897,123
   
$
3.21
 
Granted
   
393,260
   
$
1.58
 
Vested
   
(378,594
)
 
$
3.06
 
Cancelled
   
(94,702
)
 
$
2.15
 
                 
Unvested at June 30, 2017
   
817,087
   
$
2.63
 
 
As of June 30, 2017 there was $ 1,749,516 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average vesting period of 2. 6 years.
 
Summary of Restricted Stock Unit Transactions
 
The Company began granting RSUs to employees in 2017.  There were 62,300 RSUs granted with an aggregate fair value of $114,632 during the six months ended June 30, 2017.   The fair value of an RSU award is the closing price of the Company’s common stock on the date of grant.
 
A summary of RSU activity for the six months ended June 30, 2017 is as follows:

   
Number of RSUs
   
Weighted
Average Grant
Date Fair Value
 
Outstanding, January 1, 2017
   
-
   
$
-
 
Granted
   
62,300
     
1.84
 
Vested and Released
   
-
     
-
 
Cancelled
   
(8,000
)
   
1.84
 
                 
Outstanding, June 30, 2017
   
54,300
   
$
1.84
 
 
As of June 30, 2017, there was $ 89,717 of total unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average vesting period of 3. 7 years.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

12.
Warrants
 
As of June 30, 2017, warrants to purchase up to 5,288,466 shares were outstanding, having exercise prices ranging from $3.00   to $12. 80 and expiration dates ranging from December 4, 2017 to December 12, 20 22 .

   
2017
   
2016
 
   
Number of
warrants
   
Weighted
average exercise
price
   
Number of
warrants
   
Weighted average
exercise price
 
Balance, January 1
   
5,452,691
   
$
4.92
     
2,649,199
   
$
7.97
 
Issued during the period
   
1,696,970
   
$
4.01
     
1,250,000
   
$
4.20
 
Exercised during the period
   
(1,861,195
)
 
$
3.51
     
-
   
$
-
 
Expired during the period
   
-
   
$
-
     
-
   
$
-
 
                                 
Balance, June 30
   
5,288,466
   
$
5.13
     
3,899,199
   
$
6.76
 
 
At June 30, 2017 the weighted average remaining contractual life of the outstanding warrants was 4. 1 years.

The warrants issued to investors in the December 2012, November 2015, March 2016 and September 2016 offerings contain a provision for net cash settlement in the event of a fundamental transaction (contractually defined to include a merger, sale of substantially all assets, tender offer or share exchange).  Pursuant to the November 2015, March 2016, and September 2016 warrants, if fundamental transaction occurs, then the warrant holder has the option to receive cash, equal to the fair value of the remaining unexercised portion of the warrant.  The option is available to holders of the December 2012 warrants only if the consideration issued in the fundamental transaction consists of cash or stock in a non-public company.  Due to these contingent redemption provisions, the warrants require liability classification in accordance with ASC 480 and are recorded at fair value.   Holders of the June 2017 warrants contain a provision that allows the holder to opt for cash settlement in a fundamental transaction that was approved by, or required to be approved by, the board of directors of the Company. All of the Company’s outstanding warrants provide the holder the option as to the type of consideration received if the holders of common stock receive an option as to their consideration. In addition, all of the Company’s outstanding warrants 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 may not be 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 were 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 that consider volatilities and risk free rates that would be more likely in an early exercise scenario.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

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; and
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 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 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 dates:

   
Fair Value as of:
 
Warrant Issuance:
 
June 30, 2017
   
December 31, 2016
 
December 2012 Investor Warrants
 
$
7,316
   
$
49
 
July 2013 Investor Warrants
   
183,108
     
2,060
 
October 2013 Investor Warrants
   
241,999
     
3,708
 
January 2014 Investor Warrants
   
303,762
     
714
 
November 2015 Investor Warrants
   
2,362,538
     
260,500
 
November 2015 Placement Agent Warrants
   
5,573
     
13,542
 
March 2016 Investor Warrants
   
1,219,172
     
358,945
 
March 2016 Placement Agent Warrants
   
-
     
21,320
 
September 2016 Investor Warrants
   
1,795,810
     
854,640
 
September 2016 Placement Agent Warrants
   
-
     
57,888
 
June 2017 Investor Warrants
   
3,289,759
     
-
 
June 2017 Placement Agent Warrants
   
387,554
     
-
 
Total:
 
$
9,796,591
   
$
1,573,366
 
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

The following table summarizes the number of shares indexed to the warrants as of the respective balance sheet dates:

   
Number of Shares indexed as of:
 
Warrant Issuance
 
June 30, 2017
   
December 31, 2016
 
December 2012 Investor Warrants
   
17,430
     
17,430
 
July 2013 Investor Warrants
   
200,000
     
200,000
 
October 2013 Investor Warrants
   
231,732
     
231,732
 
January 2014 Investor Warrants
   
476,193
     
476,193
 
November 2015 Investor Warrants
   
1,250,001
     
1,250,001
 
November 2015 Placement Agent Warrants
   
3,334
     
83,335
 
March 2016 Investor Warrants
   
607,806
     
1,171,875
 
March 2016 Placement Agent Warrants
   
-
     
78,125
 
September 2016 Investor Warrants
   
805,000
     
1,800,000
 
September 2016 Placement Agent Warrants
   
-
     
144,000
 
June 2017 Investor Warrants
   
1,515,152
     
-
 
June 2017 Placement Agent Warrants
   
181,818
     
-
 
Total:
   
5,288,466
     
5,452,691
 
 
The assumptions used in calculating the fair values of the warrants are as follows:

   
June 30, 2017
   
December 31, 2016
 
Trading market prices
 
$
2.86
   
$
1.40
 
Estimated future volatility
   
104
%
   
104
%
Dividend
   
-
     
-
 
Estimated future risk-free rate
   
1.23-2.31
%
   
1.06-2.44
%
Equivalent volatility
   
106-129
%
   
51-60
%
Equivalent risk-free rate
   
0.87-1.48
%
   
0.59-1.25
%
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

Changes in the fair value of the warrant liabilities, carried at fair value, reported as “unrealized gain (loss) on fair value of warrants” in the statement of operations:
 
   
For the Three Months Ended
 June 30,
   
For the Six Months Ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Expired Warrants
 
$
-
   
$
771
   
$
-
   
$
2,590
 
December 2012 Investor Warrants
   
35,454
     
5,911
     
(7,267
)
   
7,278
 
July 2013 Investor Warrants
   
368,332
     
63,246
     
(181,048
)
   
93,900
 
October 2013 Investor Warrants
   
438,919
     
103,166
     
(238,291
)
   
129,607
 
January 2014 Investor Warrants
   
778,762
     
92,428
     
(303,048
)
   
117,714
 
November 2015 Investor Warrants
   
2,017,712
     
875,913
     
(2,102,038
)
   
1,204,626
 
November 2015 Placement Agent Warrants
   
(96,560
)
   
58,276
     
(368,385
)
   
80,160
 
March 2016 Investor Warrants
   
702,730
     
860,121
     
(3,229,781
)
   
1,252,266
 
March 2016 Placement Agent Warrants
   
(82,867
)
   
58,258
     
(351,899
)
   
85,904
 
September 2016 Investor Warrants
   
928,592
     
-
     
(5,313,599
)
   
-
 
September 2016 Placement Agent Warrants
   
-
     
-
     
(503,150
)
   
-
 
June 2017 Investor Warrants
   
383,409
     
-
     
383,409
     
-
 
June 2017 Placement Agent Warrants
   
46,766
     
-
     
46,766
     
-
 
Total:
 
$
5,521,249
   
$
2,118,090
   
$
(12,168,331
)
 
$
2,974,045
 
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

13.
Income Taxes
 
No provision for federal and state income taxes was required for the three and six months ended June 30, 2017 and 2016 due to the Company’s operating losses and increased deferred tax asset valuation allowance.  At June 30, 2017 and December 31, 2016, the Company had unused net operating loss carry-forwards of approximately $119,618,000 and $ 111,605 ,000 respectively, which expire at various dates through 203 7 .  Some of this amount may be subject to annual limitations under certain provisions of the Internal Revenue Code related to “changes in ownership.”
 
As of June 30, 2017 and December 31, 2016, the deferred tax assets related to the aforementioned carry-forwards have been fully offset by valuation allowances, because significant utilization of such amounts is not presently expected in the foreseeable future.
 
Deferred tax assets and valuation allowances consist of:

   
June 30,
2017
   
December 31,
2016
 
             
Net Operating Loss Carryforwards
 
$
46,651,000
   
$
43,526,000
 
Stock Compensation Expense
   
2,109,000
     
1,968,000
 
Book tax differences on assets and liabilities
   
410,000
     
547,000
 
Valuation Allowance
   
(49,170,000
)
   
(46,041,000
)
                 
Net Deferred Tax Assets
 
$
-
   
$
-
 

The Company files income tax returns in the U.S. federal and Maryland state jurisdictions.  Tax years for fiscal 2013 through 2016 are open and potentially subject to examination by the federal and Maryland state taxing authorities.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

14.
Commitments and Contingencies
 
 
a)
The Company has contracted with various vendors for research and development services, with terms that require payments over the terms of the agreements, usually ranging from two to 36 months. The costs to be incurred are estimated and are subject to revision. As of June 30, 2017, the total estimated cost to complete these agreements was approximately $8,500,000.  All of these agreements may be terminated by either party upon appropriate notice as stipulated in the respective agreements.
 
b)
On June 22, 2009, the Company entered into a License Agreement with Korea Research Institute of Chemical Technology (“KRICT”) to acquire the rights to all intellectual property related to quinoxaline-piperazine derivatives that were synthesized under a Joint Research Agreement.  The initial license fee was $100,000, all of which was paid as of December 31, 2009.  The agreement with KRICT calls for a one-time milestone payment of $1,000,000 within 30 days after the first achievement of marketing approval of the first commercial product arising out of or in connection with the use of KRICT’s intellectual property.  As of June 30, 2017, the milestone has not occurred.
 
c)
Office Space Lease
 
On June 5, 2009, the Company entered into a commercial lease agreement for 5,466 square feet of office space in Rockville, Maryland.  The lease was amended on June 7, 2013 to extend the term until June 30, 2019.
 
On July 26, 2014 the lease was amended to add 1,727 square feet of office space for a term beginning on September 1, 2014 and ending on August 31, 2015, which was subsequently renewed for additional one-year terms, beginning on September 1, 2015 and 2016, and a 22-month term beginning September 1, 2017 and expiring on June 30, 2019. Under the lease agreement, the Company pays its allocable portion of real estate taxes and common area operating charges.
 
Rent paid under the Company’s lease during the three months ended June 30, 2017 and 2016 was $ 50,898 and $51, 301 , respectively, and rent paid during the six months ended June 30, 2017 and 2016 was $101,79 6 and $102,603, respectively.
 
Laboratory Lease
 
On April 20, 2015, the Company signed a five-year lease agreement for 2,552 square feet of laboratory space commencing on July 1, 2015 and ending on June 30, 2020.  Under the lease agreement, the Company pays its allocable portion of real estate taxes and common area operating charges. Rent paid under this lease during the three months ended June 30, 2017 and 2016 was $ 15,771 and $ 15,312, respectively , and rent paid during the six months ended June 30, 2017 was $31,543 and $30,624.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

Future rental payments over the next five years for all leases are as follows:
 
For the remaining six months ending December 31:
2017
 
$
137,360
 
For the year ending December 31:
2018
   
279,274
 
2019 
   
176,080
 
2020 
   
34,468
 
           
Total 
 
$
627,182
 
 
d)
The Company has established a 401(k) plan for its employees.  The Company has elected to match 100% of the first 3% of an employee’s compensation plus 50% of an additional 2% of the employee’s deferral. Expense related to this matching contribution aggregated to $ 34,606 and $ 31,587 for the three months ended June 30, 2017 and 2016, respectively, and $71,083 and $63,089 for the six months ended June 30, 2017 and 2016, respectively.
 
e)
In July 2013, the Company entered into an exclusive license agreement with the University of Maryland, Baltimore for a novel drug delivery platform, Nano-Polymer Drug Conjugate Systems.  RX-21101 is the Company’s first drug candidate utilizing this platform.  The agreement requires the Company to make payments to the University of Maryland if RX-21101 or any products from the licensed delivery platform achieve development milestones.  As of June 30, 2017, no development milestones have occurred.
 
f)
In October 2013, the Company signed an exclusive license agreement with the Ohio State Innovation Foundation, for a novel oligonucleotide drug delivery platform, Lipid-Coated Albumin Nanoparticle.  The agreement requires the Company to make payments to the Ohio State Innovation Foundation if any products from the licensed delivery platform achieve development milestones.  As of June 30, 2017, no development milestones have occurred.
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

15.
Fair Value Measurements
 
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs.  ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels are described below:
 
Level 1 Inputs
Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company;
     
Level 2 Inputs
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
     
Level 3 Inputs
Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.
 
The following tables present assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.  There have been no changes in the methodologies used at June 30, 2017 and December 31, 2016.
 
                          
Fair Value Measurements at June 30, 2017
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Commercial Paper
   
3,215,330
     
-
     
3,215,330
     
-
 
Corporate Bonds
   
14,770,830
     
-
     
14,770,830
     
-
 
Total Assets:
 
$
17,986,160
   
$
-
   
$
17,986,160
   
$
-
 
                                 
Liabilities:
                               
Warrant Liabilities
 
$
9,796,591
   
$
-
   
$
-
   
$
9,796,591
 
 
                      
Fair Value Measurements at December 31, 2016
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Certificates of Deposit
 
$
720,197
   
$
-
   
$
720,197
   
$
-
 
Commercial Paper
   
3,985,740
     
-
     
3,985,740
     
-
 
Corporate Bonds
   
4,031,170
     
-
     
4,031,170
     
-
 
Total Assets:
 
$
8,737,107
   
$
-
   
$
8,737,107
   
$
-
 
                                 
Liabilities:
                               
Warrant Liabilities
 
$
1,573,366
   
$
-
   
$
-
   
$
1,573,366
 
 
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)

The fair value of the Company’s Level 2 marketable securities is determined by using quoted prices from independent pricing services that use market data for comparable securities in active or inactive markets.  A variety of data inputs, including benchmark yields, interest rates, known historical trades and broker dealer quotes are used with pricing models to determine the quoted prices.

The fair value methodology for the warrant liabilities is disclosed in Note 12.

The carrying amounts reported in the financial statements for cash and cash equivalents (Level 1), approximate fair value because of the short term maturity of these financial instruments.

The following table sets forth a reconciliation of changes for the six months ended June 30, 2017 and 2016 in the fair value of the liabilities classified as Level 3 in the fair value hierarchy:
 
   
Warrant Liabilities
 
Balance at January 1, 2017
 
$
1,573,366
 
Additions
   
4,107,488
 
Unrealized losses, net
   
12,168,331
 
Transfers out of level 3
   
(8,052,594
)
Balance at June 30, 2017
 
$
9,796,591
 
 
   
Warrant Liabilities
 
Balance at January 1, 2016
 
$
2,739,163
 
Additions
   
2,575,860
 
Unrealized gains, net
   
(2,974,045
)
Transfers out of level 3
   
-
 
Balance at June 30, 2016
 
$
2,340,978
 

Additions consist of the fair value of warrant liabilities upon issuance.  Transfers out of Level 3 for warrant liabilities consist of warrant exercises, where the liability is converted to additional paid-in capital upon exercise.  The Company’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstance that caused the transfer.  
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

The following discussion should be read in conjunction with the unaudited condensed financial statements and notes thereto set forth in Item 1 of this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties.  We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.  In this Quarterly Report on Form 10-Q, words such as “believe”, “estimate”, “expect”, “anticipate”, “will”, “may”, “intend” and other similar expressions, are intended to identify forward-looking statements.  We caution that forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors that are, in many instances, beyond our control.  Actual results, performance or achievements may differ materially from those contemplated, expressed or implied by the forward-looking statements.

Although we believe that the expectations reflected in our forward-looking statements are reasonable as of the date we make them, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to:

·
our understandings and beliefs regarding the role of certain biological mechanisms and processes in cancer;

·
our drug candidates being in early stages of development, including in pre-clinical development;

·
our ability to initially develop drug candidates for orphan indications to reduce the time-to-market and take advantage of certain incentives provided by the U.S. Food and Drug Administration;

·
our ability to transition from our initial focus on developing drug candidates for orphan indications to candidates for more highly prevalent indications;

·
our ability to successfully and timely complete clinical trials for our drug candidates in clinical development;

·
uncertainties related to the timing, results and analyses related to our drug candidates in pre-clinical development;

·
our ability to obtain the necessary U.S. and international regulatory approvals for our drug candidates;

·
our reliance on third-party contract research organizations and other investigators and collaborators for certain research and development services;

·
our ability to maintain or engage third-party manufacturers to manufacture, supply, store and distribute supplies of our drug candidates for our clinical trials;
 
·
our ability to form strategic alliances and partnerships with pharmaceutical companies and other partners for sales and marketing of certain of our product candidates;

·
demand for and market acceptance of our drug candidates;

·
the scope and validity of our intellectual property protection for our drug candidates and our ability to develop our candidates without infringing the intellectual property rights of others;

·
our lack of profitability and the need for additional capital to operate our business; and

·
other risks and uncertainties, including those set forth herein and in our Annual Report on Form 10-K for the year ended December 31, 2016 under the caption “Risk Factors” and those detailed from time to time in our filings with the Securities and Exchange Commission.

These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

We are a clinical stage biopharmaceutical company dedicated to the discovery, development and commercialization of innovative treatments for cancer. Our mission is to improve the lives of cancer patients by developing next-generation cancer therapies that are designed to maximize efficacy while minimizing the toxicity and side effects traditionally associated with cancer treatment. Our clinical pipeline features three oncology product candidates in Phase II clinical development and additional compounds in pre-clinical development. Our strategy is to continue building a significant pipeline of innovative oncology product candidates that we intend to commercialize with partners. Our three clinical stage drug candidates in active development are RX-3117, Supinoxin TM (RX-5902) and Archexin®.

·
RX-3117 is a small molecule nucleoside compound that we believe has therapeutic potential in a broad range of cancers, including pancreatic, bladder, colon, and lung cancer. RX-3117 is initially being evaluated as monotherapy in a multi-center Phase IIa clinical trial in metastatic pancreatic cancer in patients who are refractory to, or have relapsed after, multiple prior rounds of chemotherapy.  We are also planning to evaluate RX-3117 in combination with Abraxane® (nab-paclitaxel) as first line treatment in patients who are newly-diagnosed with metastatic pancreatic cancer and have not had prior cytotoxic treatment.  In 2016, we also commenced enrollment in a Phase IIa trial in patients with locally advanced or metastatic bladder cancer.  This Phase IIa clinical trial is a multi-center open label, single agent study of RX-3117 being conducted at 12 clinical centers in the United States.  RX-3117 has received orphan drug designation from the U.S. Food and Drug Administration (the “FDA”) for pancreatic cancer.  Orphan drug designation provides tax incentives for clinical research and a waiver from user fees under certain circumstances. In addition, an orphan drug generally receives seven years of exclusivity after approval for a designated use, during which period the FDA generally cannot approve another product with the same active moiety for the same indication.
 
·
Supinoxin , or RX-5902, is a potential first-in-class small molecule inhibitor of phosphorylated-p68, a protein that we believe plays a key role in cancer cell growth, progression and metastasis through its interaction with beta-catenin. In February, 2017 we initiated a Phase IIa clinical study of Supinoxin in patients with metastatic triple negative breast cancer (“TNBC”).
 
·
Archexin is a potential best-in-class, potent inhibitor of the protein kinase Akt-1, which we believe plays a critical role in cancer cell proliferation, survival, angiogenesis, metastasis and drug resistance. Archexin has received orphan drug designation from the FDA for renal cell carcinoma (“RCC”), glioblastoma, ovarian cancer, stomach cancer and pancreatic cancer. We are currently conducting a Phase IIa proof-of-concept clinical trial of Archexin in patients with metastatic renal cell carcinoma to evaluate its safety and efficacy in combination with AFINITOR® (everolimus).

Since our inception, our efforts and resources have been focused primarily on developing our pharmaceutical technologies, raising capital and recruiting personnel.  We have no product sales to date, and we will not generate any product sales until we receive approval from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates.  Our major sources of working capital have been proceeds from various private and public financings, and licensing and collaboration agreements with our strategic investors and partners.

On May 5, 2017 the Company effected a one-for-ten reverse stock split of the outstanding shares of the Company’s common stock, together with a corresponding proportional reduction in the number of authorized shares of the Company’s capital stock.  See Note 10, “Common Stock—Reverse Stock Split,” in the Notes to Consolidated Financial Statements.
 
Recently Issued Accounting Standards

See Note 2, “Recent Accounting Pronouncements Affecting the Company,” in the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2017 and June 30, 2016

Total Revenues

We had no revenues for the three and six months ended June 30, 2017 or 2016.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including business development, investor relations, and general legal activities.

General and administrative expenses increased approximately $64,000, or 3.8%, to $1,740,000 for the three months ended June 30, 2017 from $1,676,000 for the three months ended June 30, 2016.  General and administrative expenses increased approximately $360,000, or 11.7%, to $3,431,000 for the six months ended June 30, 2017 from $3,071,000 for the six months ended June 30, 2016.  The increases were primarily attributable to higher personnel costs in 2017.

Research and Development Expenses

Research and development expenses increased approximately $307,000, or 13.7%, to $2,544,000 for the three months ended June 30, 2017, from $2,237,000 for the three months ended June 30, 2016.  Increased research and development costs for the three months ended June 30, 2017 were primarily due to increased clinical trial and patient enrollment costs for RX-3117.  Research and development expenses decreased approximately $899,000, or 15.8%, to $4,807,000 for the six months ended June 30, 2017, from $5,706,000 for the six months ended June 30, 2016.  Decreased research and development costs for the six months ended June 30, 2017, were primarily attributable to lower manufacturing costs for our drug candidates due to a significant supply of our drug candidates already being available to us from earlier manufacturing campaigns.  During the six months ended June 30, 2017, we incurred approximately $632,000 of drug manufacturing costs, compared to approximately $1,967,000 during the six months ended June 30, 2016.  Because the volume and timing of drug manufacturing does not correlate directly with the level and timing of clinical trial activity, we expect expenses related to drug manufacturing costs to vary from period to period based not only on the progress of clinical trials, but also when we engage in manufacturing activities.  The decreases to drug manufacturing costs were partially offset by the increases in clinical costs discussed above.  We expect research and development expenses to increase in the remaining quarters of 2017 compared to the quarter ended June 30, 2017 due to continued patient enrollment in our clinical trials and new manufacturing campaigns.
 
The table below summarizes the approximate amounts incurred in each of our research and development projects for the three and six months ended June 30, 2017 and 2016:

   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Clinical Candidates:
                       
RX-3117
 
$
1,137,200
   
$
487,500
   
$
1,888,500
   
$
1,434,700
 
Supinoxin
   
286,700
     
593,300
     
697,800
     
1,329,400
 
Archexin
   
130,700
     
226,000
     
298,800
     
1,083,600
 
 
                               
Preclinical, Personnel and Overhead
   
989,662
     
930,233
     
1,921,557
     
1,857,907
 
                                 
Total Research and Development Expenses
 
$
2,544,262
   
$
2,237,033
   
$
4,806,657
   
$
5,705,607
 

Interest Income

Interest income increased approximately $14,000 and $17,000 or 48.2% and 29.2%, respectively for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016.  The increases were primarily attributable to higher aggregate balances of cash and cash equivalents and marketable securities and higher interest rates on marketable securities for the three and six months ended June 30, 2017 compared to the same periods in 2016.
 
Unrealized Gain (Loss) on Fair Value of Warrants

Our warrants are recorded as liabilities at fair value, and the warrants are valued using a lattice model.  Changes in the fair value of warrants are recorded as an unrealized gain or loss in our statement of operations.  During the three months ended June 30, 2017 and 2016, we recorded unrealized gains  on the fair value of our warrants of approximately $5,521,000 and $2,118,000.  During the six months ended June 30, 2017, we recorded unrealized gains (losses) on the fair value of warrants of ($12,168,000) and $2,974,000 respectively.  Estimating fair values of warrants requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the warrants due to related changes to external market factors.  The large unrealized gain for the three months ended June 30, 2017 primarily resulted from a significant decrease in the stock price of the underlying common stock at June 30, 2017 compared to March 31, 2017.  The large unrealized loss for the six months ended June 30, 2017 primarily resulted from a significant increase in the stock price of the underlying common stock at June 30, 2017 compared to December 31, 2016.  An increase in volatility of the common stock during that period and the large number of outstanding warrants also had an impact on the large unrealized loss for the six months ended June 30, 2017.
 
Financing Expense

We incurred approximately $333,000 of financing expenses during the three and six months ended June 30, 2017, related to our registered direct offering in June 2017.  We incurred approximately $170,000 of financing expenses during the six months ended June 30, 2016, related to our registered direct offering in March 2016.  We did not incur financing expenses during the three months ended June 30, 2016.

Net Income (Loss)

As a result of the above, net income (loss) for the three and six months ended June 30, 2017 was approximately $947,000 and ($20,664,000), or $0.04 and ($0.83) per basic share, respectively, compared to approximately ($1,766,000) and ($5,915,000), or ($0.08) and ($0.28) per share, respectively, for the three and six months ended June 30, 2016.  As previously discussed, included in the net income (loss) for the three and six months ended June 30, 2017 are non-cash charges of approximately $5,521,000 and ($12,168,000) in unrealized gains (losses) on the fair value of warrants, compared to unrealized gains of $2,118,000 and $2,974,000 for the three and six months ended June 30, 2016.

Research and Development Projects

Research and development costs are expensed as incurred.  These costs consist primarily of salaries and related personnel costs, costs to acquire pharmaceutical products and product rights for development and amounts paid to contract research organizations, hospitals and laboratories for the provision of services and materials for drug development and clinical trials.  Costs incurred in obtaining the license rights to technology in the research and development stage that have no alternative future uses are expensed as incurred.  Our research and development programs are related to our oncology clinical stage drug candidates, RX-3117, Supinoxin and Archexin, and our pre-clinical stage drug candidate, RX-21101.  As we expand our clinical studies, we expect to enter into additional development agreements.  Significant additional expenditures will be required if we complete our clinical trials, start new trials, apply for regulatory approvals, continue development of our technologies, expand our operations and bring our products to market.  The eventual total cost of each clinical trial is dependent on a number of uncertainties such as trial design, the length of the trial, the number of clinical sites and the number of patients.  The process of obtaining and maintaining regulatory approvals for new therapeutic products is lengthy, expensive and uncertain.  Because the successful development of our most advanced drug candidates, RX-3117, Supinoxin and Archexin, is uncertain, and because RX-21101 is in early-stage development, we are unable to estimate the costs of completing our research and development programs, the timing of bringing such programs to market and, therefore, when material cash inflows could commence from the sale of these drug candidates, if any.  If these projects are not completed as planned, our results of operations and financial condition would be negatively affected.

RX-3117
 
  RX-3117 is a novel, investigational oral small molecule nucleoside compound.  We believe RX-3117 has therapeutic potential in a broad range of cancers including pancreatic, bladder, cervical, non-small cell lung cancer and colon cancer.  We previously identified the MTD of RX-3117, which we are evaluating in Phase IIa proof-of-concept clinical trials in patients with relapsed or refractory metastatic pancreatic cancer and patients with locally advanced or metastatic bladder cancer.
 
Expenses related to RX-3117 increased during the three and six months ended June 30, 2017 compared to the same period in 2016 due to increased clinical trial costs and increased patient enrollments resulting from the progression of our pancreatic and bladder cancer clinical trials. We expect that expenses related to RX-3117 will increase in the remainder of 2017 compared to the three and six months ended June 30, 2017 due to patient enrollment costs, new manufacturing campaigns, and the commencement of a combination Phase IIa clinical trial with Abraxane in pancreatic cancer.

Supinoxin (RX-5902)
 
Supinoxin is a potential first-in-class small molecule inhibitor of phosphorylated p68, a protein that we believe plays a key role in cancer growth, progression and metastasis through its interaction with beta-catenin. Phosphorylated p68 results in up-regulation of cancer-related genes and a subsequent proliferation of cancer cells and tumor growth.  In February 2017, we initiated a Phase IIa clinical study of Supinoxin in patients with metastatic TNBC.

Expenses related to Supinoxin decreased during the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016.  The decrease is primarily attributable to decreased manufacturing costs due to a significant supply of drug product already available from earlier manufacturing campaigns.  However, we expect that expenses related to Supinoxin will increase in the remainder of 2017 compared to the three and six months ended June 30, 2017 due to patient enrollment costs associated with our Phase IIa trial in patients with metastatic TNBC and new manufacturing campaigns.

Archexin

Archexin is a potential best-in-class, potent inhibitor of the protein kinase Akt-1, which we believe plays a critical role in cancer cell proliferation, survival, angiogenesis, metastasis and drug resistance.  We are currently conducting a Phase IIa proof-of-concept clinical trial of Archexin in patients with metastatic RCC to evaluate its safety and efficacy in combination with AFINITOR (everolimus).

Expenses related to Archexin decreased during the three and six months ended June 30, 2017 compared to the same periods in 2016.  The decrease is primarily attributable to decreased manufacturing costs due to a significant supply of drug product already available.  We expect that expenses related to Archexin will remain flat for the remainder of 2017 compared to the three and six months ended June 30, 2017 as we continue the ongoing Archexin clinical trial.

Pre-clinical Pipeline

Expenses related to our pre-clinical candidates decreased for the three and six months ended June 30, 2017 compared to the same periods in 2016 primarily as a result of the timing of costs incurred for ongoing preclinical development.  We expect that expenses related to our pre-clinical pipeline, including RX-21101, will increase slightly for the remainder of 2017 compared to the three and six months ended June 30, 2017 as we continue testing and development.
 
Research and Development Process
 
We have engaged third-party contract research organizations and other investigators and collaborators, such as universities and medical institutions, to conduct our pre-clinical studies, toxicology studies and clinical trials.  Engaging third-party contract research organizations is typical practice in our industry. However, relying on such organizations means that the clinical trials and other studies described above are being conducted at external locations and that the completion of these trials and studies is not within our direct control. Trials and studies may be delayed due to circumstances outside our control, and such delays may result in additional expenses for us.
 
Liquidity and Capital   Resources

Cash Flows

Cash used in operating activities was approximately $8,268,000 for the six months ended June 30, 2017.  The operating cash flows during the six months ended June 30, 2017 reflect a net loss of $20,664,000, offset by an unrealized loss on the fair value of warrants of $12,168,000 and a net increase of cash components of working capital and non-cash charges totaling $228,000.  Cash used in operating activities was approximately $8,612,000 for the six months ended June 30, 2016.  The operating cash flows during the six months ended June 30, 2016 reflect our net loss of $5,915,000, an unrealized gain on the fair value of warrants of 2,974,000 and a net increase of cash components of working capital and other non-cash charges totaling $277,000.

Cash used in investing activities was approximately $9,307,000 for the six months ended June 30, 2017, which consisted of $15,009,000 and $18,000 for the purchases of marketable securities and equipment, respectively, offset by $5,720,000 from the redemption of marketable securities. Cash provided by investing activities was approximately $1,711,000 for the six months ended June 30, 2016, which consisted of $3,440,000 from the redemption of marketable securities, offset by $1,722,000 and $7,000 for the purchases of marketable securities and equipment, respectively.

Cash provided by financing activities was approximately $14,787,000 for the six months ended June 30, 2017, which consisted of net proceeds of $9,355,000 from our registered direct public offering in June 2017 and $5,354,000 and $78,000 from the exercise of stock warrants and options, respectively.  Cash provided by financing activities was approximately $4,580,000 for the six months ended June 30, 2016, which consisted of net proceeds from our registered direct public offering in March 2016.

Contractual Obligations

We have a variety of contractual obligations, as more fully described in our 2016 Form 10-K.  These obligations include, but are not limited to, contractual obligations in connection with license agreements (including related milestone payments), lease payments, employee compensation and incentive program expenses, and contracts with various vendors for research and development services.  As of June 30, 2017, the total estimated cost to complete our contracts with vendors for research and development services was approximately $8,500,000 under the terms of the applicable agreements.  All of these agreements may be terminated by either party upon appropriate notice as stipulated in the respective agreements.
 
Current and Future Financing Needs

We have incurred negative cash flow from operations since we started our business.  We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials and our research and development efforts.  We will need to raise additional capital through public or private equity or debt offerings or through arrangements with strategic partners or other sources in order to continue to develop our drug candidates.  There can be no assurance that additional capital will be available when needed or on terms satisfactory to us, if at all.  If we are not able to raise sufficient additional capital, we will have to reduce our research and development activities. We believe our cash, cash equivalents, and marketable securities will be sufficient to cover our cash flow requirements for our current activities for at least the next 12 months from the date these financial statements were issued.

The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control.  These factors include the following:

·
the progress of our product development activities;

·
the number and scope of our product development programs;

·
the progress of our pre-clinical and clinical trial activities;

·
the progress of the development efforts of parties with whom we have entered into collaboration agreements;

·
our ability to maintain current collaboration programs and to establish new collaboration arrangements;

·
the costs involved in prosecuting and enforcing patent claims and other intellectual property rights; and

·
the costs and timing of regulatory approvals.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or holdings in variable interest entities.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

For quantitative and qualitative disclosures about market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in our 2016 Form 10-K.  Our exposures to market risk have not changed materially since December 31, 2016.

Item 4.
Controls and Procedures.

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC’s”) rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II.
Other Information

Item 1A.
Risk Factors.

Investing in our stock involves a high degree of risk.  In addition to the other information set forth in this report, you should carefully consider the factors set forth in the Risk Factors section of our 2016 Form 10-K, as well as other information contained in the 2016 Form 10-K and in other reports we file with the SEC. We do not believe that there have been any material changes to the risk factors disclosed in our 2016 Form 10-K.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended June 30, 2017, we issued 27,852 and 13,257 shares of common stock to warrant holders upon exercise of unregistered warrants that were issued pursuant to letter agreements, dated February 26, 2016, and November 5, 2015, respectively, between us and H.C. Wainwright and Company, LLC.  The warrants and the warrant shares were not registered under the Securities Act pursuant to the exemption from registration requirements provided by Section 4(a)(2) of the Securities Act, as transactions not involving a public offering.

Item 5.
Other Information.

On August 2, 2017, we terminated the at market issuance sales agreement, dated as of March 16, 2015, with MLV & Co. LLC, now part of FBR & Co. (“MLV”) pursuant to which we were entitled to issue and sell shares of our common stock having an aggregate offering price of up to $40 million from time to time, at our option, through MLV as our sales agent.  Prior to termination of the agreement, due to limitations agreed to by us in connection with our prior registered direct offerings, we were not able to use the sale agreement until June 12, 2018.

Item 6.
Exhibits.

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
REXAHN PHARMACEUTICALS, INC.
   
                         (Registrant)
     
 
By:
/s/ Peter D. Suzdak
Date: August 4, 2017
 
Peter D. Suzdak
   
Chief Executive Officer
(principal executive officer)
     
 
By:
/s/ Tae Heum Jeong
Date: August 4, 2017
 
Tae Heum Jeong
   
Chief Financial Officer and Secretary
(principal financial and accounting officer)
 
EXHIBIT INDEX
 
Exhibit No.
Description
3.1
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Rexahn Pharmaceuticals, Inc., filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed May 5, 2017, is incorporated herein by reference.
   
4.1
Form of Warrant, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 7, 2017, is incorporated herein by reference.
   
10.1
Form of Securities Purchase Agreement, dated as of June 6, 2017, by and between Rexahn Pharmaceuticals, Inc. and the purchasers identified on the signature pages thereto, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 7, 2017, is incorporated herein by reference.
   
Fifth Amendment to Lease Agreement, dated April 13, 2017, by and between Rexahn Pharmaceuticals, Inc. and SG Plaza Holdings, LLC.
   
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) / 15d-14(a)
   
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) / 15d-14(a)
   
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101
The following materials from Rexahn Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q, formatted in Extensible Business Reporting Language (“XBRL”): (i) Condensed Balance Sheet; (ii) Condensed Statement of Operations; (iii) Condensed Statement of Comprehensive Income (Loss); (iv) Condensed Statement of Cash Flows; and (v) Notes to the Financial Statements.
 
 


Exhibit 10.2
 
FIFTH AMENDMENT TO LEASE

This Fifth Amendment to Lease (the “Fifth Amendment”) is made and entered into this 13 th day of April, 2017 (the “Effective Date”), by and between SG PLAZA HOLDINGS, LLC , a Delaware limited liability company ("Landlord"), and REXAHN PHARMACEUTICALS, INC. , a Delaware corporation ("Client").

WHEREAS, The Realty Associates Fund V, L.P., as landlord (“Original Landlord”), and Client entered into a Standard Office Lease and Addendum thereto (“Addendum”), both dated June 5, 2009; and Landlord, as successor in interest to Original Landlord, and Client entered into a First Amendment to Lease dated June 7, 2013 (“First Amendment”), a Second Amendment to Lease dated July 26, 2014 (“Second Amendment”), a Third Amendment to Lease dated May 6, 2015 (“Third Amendment”), and a Fourth Amendment to Lease dated April 4, 2016 (“Fourth Amendment”) (collectively, the “Lease”), under which Client leases approximately seven thousand one hundred three (7,103) rentable square feet of space on the Fifth (4 th ) floor of the Building (the “Premises”), comprised of Suite 455 (approximately 5,466 rentable square feet) and Suite 475 (approximately 1,637 rentable square feet), in the building located at 15245 Shady Grove Road, Rockville, Maryland 20850, and known as Shady Grove Plaza (the “Building”); and

WHEREAS, the Lease is scheduled to expire on June 30, 2019 with respect to Suite 455; and

WHEREAS, the Lease is scheduled to expire on August 31, 2017 with respect to Suite 475; and

WHEREAS, Suite 475 has been remeasured and contains 1,727 rentable square feet; and

WHEREAS, Landlord and Client wish, among other matters, to amend the Lease to further extend the term of the Lease with respect to Suite 475 and to correct the rentable square feet therein, all on the terms hereinafter contained.

NOW THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by the parties, the parties agree as follows:

1.            Suite 475 Third Extension Term.   The “Suite 475 Third Extension Term” shall commence on September 1, 2017 (the “Suite 475 Third Extension Term Commencement Date”) and shall expire on June 30, 2019.

2.            Remeasurement of Suite 475.   As of the Suite 475 Third Extension Term Commencement Date, the rentable square feet in Suite 475 shall be 1,727 and the total rentable square feet in the Premises shall be 7,193.
 

3.            Base Rent Payable for Suite 475 during the Suite 475 Third Extension Term.   Effective as of the Suite 475 Third Extension Term Commencement Date, Client shall pay Landlord Base Rent for Suite 475 at an initial rate of Twenty-six and 00/100 Dollars ($26.00) per rentable square foot of space, in legal tender, at Landlord’s office, the annual sum of Forty-Four Thousand Nine Hundred Two and 00/100 Dollars ($44,902.00), payable in equal monthly installments of Three Thousand Seven Hundred Forty-one and 83/100 Dollars ($3,741.83), in advance, promptly on the first day of each calendar month, without notice or demand, the same being hereby waived, and without any setoff, deduction, or recoupment whatsoever.  Notwithstanding the foregoing, so long as Client is not in default under the Lease beyond any applicable notice and cure periods, Landlord shall abate the Base Rent otherwise payable for Suite 475 for each of the months of September 2017 and October 2017.  On September 1, 2018, the Base Rent payable for Suite 475 shall be increased to Twenty-six and 78/100 Dollars ($26.78) per rentable square foot of space, the annual sum of Forty-Six Thousand Two Hundred Forty-nine and 06/100 Dollars ($46,249.06), payable as aforesaid in equal monthly installments of Three Thousand Eight Hundred Fifty-four and 09/100 Dollars ($3,854.09).  The Base Rent payable under this Section 2 is for Suite 475 only and is in addition to the Base Rent payable for Suite 455.

4.            Operating Expenses and Real Property Taxes Payable for Premises during Suite 475 Third Extension Term.    During the Suite 475 Third Extension Term, Client shall continue to pay to Landlord Client’s Share of increased Operating Expenses and Client’s Share of increased Real Property Taxes for the Premises in accordance with the provisions of the Lease, except that Client’s Share shall mean 3.93%.

5.            Condition of Premises.   Client agrees to accept the Premises in its then “as is" condition as of the Suite 475 Third Extension Term Commencement Date.

6.            Brokerage.   Client warrants that it has had no dealings with any broker or agent other than CBRE, Inc., Client’s agent, and Scheer Partners, Landlord’s agent, in connection with the negotiation or execution of this Fifth Amendment, and Client agrees to indemnify Landlord against all costs, expenses, attorneys' fees or other liability for commissions or other compensation or charges claimed by any other broker or agent claiming the same by, through or under Client.

7.            Option to Renew.   Client’s option to renew the term of the Lease for an additional five (5) years in accordance with the provisions of Section 4 of the Addendum shall apply to the entire Premises (i.e., if Client exercises such option, it must do so with respect to the entire Premises).

8.            Defined Terms.   Except as otherwise expressly provided herein, all defined terms shall have the same meanings as provided in the Lease.

9.            Headings.   Headings contained in this Fifth Amendment are for convenience only and are not substantive to the provisions of this Fifth Amendment.

10.          Lease Terms Ratified.   Except as otherwise expressly provided herein, and unless inconsistent with the terms hereof, all other terms, conditions and covenants of the Lease are hereby ratified and confirmed, and shall apply to the Premises during the Suite 475 Third Extension Term.  Client certifies to Landlord that the Lease is in full force and effect, that Landlord is not in default or breach of any of Landlord's obligations under the Lease, and that Client is unaware of any condition or circumstance which, but for the passage of time or delivery of notice, would constitute a default by Landlord under the Lease.
 
- 2 -

IN WITNESS WHEREOF, the parties have executed this Fifth Amendment by affixing their hands and seals as of the date noted above.

   
Client:
     
WITNESS/ATTEST:
 
REXAHN PHARMACEUTICALS, INC. , a Delaware corporation
     
/s/ Tae Heum Jeong
By: /s/ Peter Suzdak      [SEAL]
   
Name: Peter Suzdak
   
Title: CEO
     
   
Landlord:
     
WITNESS/ATTEST:
 
SG PLAZA HOLDINGS, LLC , a Delaware limited liability company
     
/s/ Natalia Maselli
 
By: /s/ Andrew Nathan
   
Andrew Nathan, CEO
 
 
- 3 -


Exhibit 31.1
 
CERTIFICATION PURSUANT TO RULES 13A-14(D)
AND 15D-14(D)

I, Peter D. Suzdak, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Rexahn Pharmaceuticals, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:  August 4, 2017
 
/s/ Peter D. Suzdak
 
Peter D. Suzdak
 
Chief Executive Officer
 
 
 


Exhibit 31.2
 
CERTIFICATION PURSUANT TO RULES 13A-14(D)
AND 15D-14(D)

I, Tae Heum Jeong, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Rexahn Pharmaceuticals, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Dated:  August 4, 2017
/s/ Tae Heum Jeong
Tae Heum Jeong
Chief Financial Officer
 
 


Exhibit 32.1

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350

SECTION 1350 CERTIFICATION*

In connection with the Quarterly Report of Rexahn Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter D. Suzdak, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

  (1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

  (2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated: August 4, 2017
By:
/s/ Peter D. Suzdak
 
   
Peter D. Suzdak,
 
   
Chief Executive Officer
 
 
*
This Certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This Certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.

A signed original of this written statement required by 18 U.S.C. § 1350 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
 


Exhibit 32.2

CERTIFICATION OF
CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350

SECTION 1350 CERTIFICATION*

In connection with the Quarterly Report of Rexahn Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tae Heum Jeong, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
 
  (1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

  (2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 4, 2017
By:
/s/ Tae Heum Jeong
 
   
Tae Heum Jeong,
 
   
Chief Financial Officer
 
 
*
This Certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This Certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.

A signed original of this written statement required by 18 U.S.C. § 1350 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.