Attached files

file filename
EX-32.2 - REXAHN PHARMACEUTICALS, INC.ex32-2.htm
EX-32.1 - REXAHN PHARMACEUTICALS, INC.ex32-1.htm
EX-31.1 - REXAHN PHARMACEUTICALS, INC.ex31-1.htm
EX-31.2 - REXAHN PHARMACEUTICALS, INC.ex31-2.htm


UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
           x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Rexahn Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
 
Commission File No.: 001-34079
 
Delaware
 
11-3516358
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
15245 Shady Grove Road, Suite 455
Rockville, MD 20850
(Address of principal executive offices, including zip code)
 
Telephone: (240) 268-5300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o
 
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 o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
o
Accelerated Filer
x
Non-Accelerated Filer
o
Smaller reporting company
o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 95,237,656 shares of common stock outstanding as of May 9, 2011.
 


 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
 
   
Page
     
PART I
FINANCIAL INFORMATION
   
       
Item 1
Financial Statements
   
       
 
 
3
         
 
 
4
         
 
 
5
         
 
 
7
         
 
37
       
 
46
       
 
46
       
PART II
OTHER INFORMATION
   
       
 
47
     
 
 
47
       
 
47
       
 
47
       
 
47
       
 
47
       
 
47
     
 
48
 
 
PART I Financial Information
Item 1 Financial Statements
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
 
 
March 31, 2011
(unaudited)
 
December 31, 2010
 
ASSETS
 
Current Assets:
       
Cash and cash equivalents
  $ 20,513,075     $ 12,340,239  
Marketable securities (note 4)
    2,450,260       2,451,620  
Research tax credit receivable
          145,513  
Prepaid expenses and other current assets (note 5)
    725,122       706,649  
Note receivable – current portion (note 6)
    28,023       28,023  
                 
Total Current Assets
    23,716,480       15,672,044  
                 
Restricted Cash Equivalents (note 18)
    3,359,456       401,893  
                 
Note Receivable (note 6)
    11,676       18,682  
                 
Equipment, Net (note 7)
    109,438       123,565  
                 
Total Assets
  $ 27,197,050     $ 16,216,184  
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current Liabilities:
               
Accounts payable and accrued expenses (note 8)
  $ 2,939,634     $ 1,820,900  
                 
Deferred Revenue (note 9)
    881,250       900,000  
                 
Other Liabilities (note 10)
    128,005       133,117  
                 
Warrant Liabilities (note 15)
    6,114,800       2,966,710  
                 
Total Liabilities
    10,063,689       5,820,727  
Commitments and Contingencies (note 18)
               
Stockholders’ Equity (note 13):
               
Preferred stock, par value $0.0001, 100,000,000 authorized shares, none issued and outstanding
           
Common stock, par value $0.0001, 500,000,000 authorized shares, 95,251,861 (2010 – 84,175,504) issued and outstanding 95,237,656 (2010 – 84,160,849)
    9,525       8,418  
Additional paid-in capital
    67,331,770       56,157,452  
Accumulated other comprehensive loss
    (3,700 )     (2,340 )
Accumulated deficit during the development stage
    (50,175,824 )     (45,739,663 )
Treasury stock, 14,205 shares, at cost
    (28,410     (28,410 )
                 
Total Stockholders’ Equity
    17,133,361       10,395,457  
                 
Total Liabilities and Stockholders’ Equity
  $ 27,197,050     $ 16,216,184  
 
See the notes accompanying the condensed financial statements.
 

REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
(Unaudited)
 
               
Cumulative
 
               
from March 19,
 
               
2001
 
   
For the Three Months Ended March 31,
   
(Inception) to
 
   
2011
   
2010
   
March 31, 2011
 
         
(Restated)
       
Revenues:
           
Research
  $ 18,750     $ 18,750     $ 618,750  
                         
Expenses:
                       
General and administrative
    1,109,172       1,056,465       24,908,339  
Research and development
    2,736,277       491,122       23,229,794  
Patent fees
    72,514       52,734       1,627,492  
Depreciation and amortization
    14,127       11,547       609,594  
                         
Total Expenses
    3,932,090       1,611,868       50,375,219  
                         
Loss from Operations
    (3,913,340 )     (1,593,118 )     (49,756,469 )
                         
Other Income (Expense)
                       
Realized loss on marketable securities
                (9,341 )
Interest income
    42,471       22,014       1,354,540  
Interest expense
                (301,147 )
Other income
                56,047  
Unrealized loss on fair value of warrants
    (467,625 )     (6,560,205 )     (1,569,970 )
Unrealized gain on fair value of put feature on common stock
          97,713       2,315,539  
Financing expense
    (97,667 )           (640,023 )
Beneficial conversion feature
                (1,625,000 )
Total Other Income (Expense)
    (522,821 )     (6,440,478 )     (419,355 )
                         
Net Loss Before Provision for Income Taxes
    (4,436,161 )     (8,033,596 )     (50,175,824 )
                         
Provision for Income Taxes
                 
                         
Net Loss
  $ (4,436,161 )   $ (8,033,596 )   $ (50,175,824 )
                         
Net loss per share, basic and diluted
  $ (0.05 )   $ (0.11 )        
                         
Weighted average number of shares outstanding, basic and diluted      86,251,682       72,271,780          
 
See the notes accompanying the condensed financial statements.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
 
(Unaudited)
 
   
For the Three Months Ended
March 31,
   
Cumulative
From March 19, 2001
(Inception) to
March 31,
 
   
2011
   
2010
   
2011
 
         
(Restated)
       
Cash Flows from Operating Activities:
                 
Net loss
  $ (4,436,161 )   $ (8,033,596 )   $ (50,175,824 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Beneficial conversion feature
                1,625,000  
Compensatory stock
          366,000       2,129,877  
Depreciation and amortization
    14,127       11,547       609,594  
Stock option compensation
    201,988       195,378       5,141,010  
Amortization of deferred revenue
    (18,750 )     (18,750 )     (618,750 )
Note receivable
    7,007             (39,698 )
Realized losses on marketable securities
                9,341  
Unrealized loss on fair value of warrants
    467,625       6,560,205       1,569,970  
Unrealized gain on fair value of put feature on common stock
          (97,713 )     (2,315,539 )
Financing expense
    97,667             640,023  
Amortization of deferred lease incentive
    (5,000 )     (5,000 )     (35,000 )
Deferred lease expenses
    (112 )     12,420       63,005  
Loss on impairment of intangible assets
                286,132  
Changes in assets and liabilities:
                       
Prepaid expenses and other current assets
    (18,473 )     (170,988 )     (725,122 )
Research tax credit receivable
    145,513              
Accounts payable and accrued expenses
    1,118,734       131,452       2,939,634  
Net Cash Used in Operating Activities
    (2,425,835 )     (1,049,045 )     (38,896,347 )
                         
Cash Flows from Investing Activities:
                       
Restricted cash equivalents
    (2,957,563 )     116,233       (3,359,456 )
Purchase of equipment
          (1,270 )     (548,948 )
Purchase of marketable securities
                (13,123,960 )
Proceeds from sales of marketable securities
                10,660,659  
Payment of licensing fees
                (356,216 )
Net Cash (Used in) Provided by Investing Activities
    (2,957,563 )     114,963       (6,727,921 )
Cash Flows from Financing Activities:
                       
Issuance of common stock and units, net of issuance costs
    13,220,273             55,805,574  
Proceeds from exercise of stock options
    18,000       21,240       128,842  
Proceeds from exercise of stock warrants
    317,961       1,297,001       3,581,337  
Proceeds from long-term debt
                5,150,000  
Proceeds from research contribution
                1,500,000  
Purchase of treasury stock
                (28,410 )
Net Cash Provided by Financing Activities
    13,556,234       1,318,241       66,137,343  
Net Increase in Cash and Cash Equivalents
    8,172,836       384,159       20,513,075  
Cash and Cash Equivalents - beginning of period
    12,340,239       7,298,032        
Cash and Cash Equivalents - end of period
  $ 20,513,075     $ 7,682,191     $ 20,513,075  
 
See the notes accompanying the condensed financial statements.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Condensed Statement of Cash Flows (continued)
 
(Unaudited)
 
   
For the Three Months Ended
March 31,
   
Cumulative
From March 19, 2001
(Inception) to
March 31,
 
   
2011
   
2010
   
2011
 
         
(Restated)
       
Supplemental Cash Flow Information
                 
Interest paid
  $     $     $ 301,147  
Non-cash financing and investing activities:
                       
Warrants issued
  $ 2,924,333     $     $ 11,054,427  
Put feature on common stock issued
  $     $     $ 4,954,738  
Dilutive issuances of common stock
  $     $     $ 2,639,199  
Warrant liability extinguishment from exercise of warrants
  $ 243,868     $ 1,301,700     $ 6,180,660  
Leasehold improvement incentive
  $     $     $ 100,000  
Settlement of lawsuit
  $     $     $ 43,953  
 
See the notes accompanying the condensed financial statements.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
(Unaudited)
 
1.
Operations and Organization
 
Operations
 
Rexahn Pharmaceuticals, Inc. (the “Company”, “Rexahn Pharmaceuticals”), a Delaware corporation, is a development stage biopharmaceutical company dedicated to the discovery, development and commercialization of innovative treatments for cancer, central nervous system (“CNS”) disorders, sexual dysfunction and other medical needs.  The Company had an accumulated deficit of $50,175,824 at March 31, 2011 and anticipates incurring losses through the remainder of fiscal 2011 and beyond.  The Company has not yet generated commercial sales revenue and has been able to fund its operating losses to date through the sale of its common stock, warrants exercisable for common stock, units, issuance of long-term debt, and proceeds from reimbursed research and development costs.  Management has the capability of managing the Company’s operations within existing cash available by reducing research and development activities.
 
Basis of Presentation
 
The accompanying unaudited condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of March 31, 2011 and December 31, 2010 and the results of operations, changes and cash flows for the three months ended March 31, 2011 and 2010 have been included.  Operating results for the three month period ended March 31, 2011 are not necessarily indicative of results that may be expected for any other interim period or the full fiscal year ending December 31, 2011. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2010 (“2010 Form 10-K/A”).
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future.  Actual results may ultimately differ from those estimates.  These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become available.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
2.        Prior Period Adjustment
 
The financial statements of the Company for the three months ended March 31, 2010 have been restated as a result of management’s determination that the Company had misclassified warrants issued to investors through offerings occurring in December 2007, March 2008, June 2009 and October 2009.  The warrants were previously reported as equity, but further review by management concluded that these warrants should have been classified as liabilities at inception due to provisions within the warrant agreements, and should be reported at fair value at the balance sheet date.
 
Management also determined that the anti-dilution make whole provision (the “Anti-dilution provision”) which is a put on the common stock, issued in the 2007 and 2008 offerings were also misclassified as equity.  In the event that the Company issued shares or share indexed contracts below an effective purchase price paid by the investors, the investor would receive additional shares equal to a ratio of the initial purchase price per share less the original number of common shares issued.  The Anti-dilution provision expires on the second anniversary of the financing and should have been reported as a liability at fair value at inception.
 
The restatement had no effect on the Company’s cash, loss from operations or net cash used in operating activities for the three months ended March 31, 2010.  After reviewing the circumstances leading up to the restatement, management believes that the errors were inadvertent and unintentional.  In addition, following the discovery of these errors, the Company began implementing procedures intending to strengthen its internal control processes and prevent a recurrence of these errors.
 
The effects of the restatement on the Company’s statement of operations and cash flows for the three months ended March 31, 2010 is as follows:
 
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010
 
   
As previously reported
   
Effect of Restatement
   
As restated
 
                   
Unrealized loss on fair value of warrants
  $     $ (6,560,205 )   $ (6,560,205 )
Unrealized gain on fair value of put feature on common stock
          97,713       97,713  
Total other income (expense)
    22,014       (6,462,492 )     (6,440,478 )
Net loss before provision for income taxes
    (1,571,104 )     (6,462,492 )     (8,033,596 )
Net loss
    (1,571,104 )     (6,462,492 )     (8,033,596 )
Net loss per share, basic and diluted
    (0.02 )     (0.09 )     (0.11 )
 
STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2010
 
   
As previously reported
   
Effect of Restatement
   
As restated
 
Net loss
  $ (1,571,104 )   $ (6,462,492 )   $ (8,033,596 )
Unrealized gain on fair value of put feature on common stock
          (97,713 )     (97,713 )
Unrealized loss on fair value of warrants
          6,560,205       6,560,205  
Net cash used in operating activities
    (1,049,045 )           (1,049,045 )
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
3.        Recent Accounting Pronouncements Affecting the Company
 
Fair Value Measurements
 
In January 2010, the FASB issued guidance which requires, in both interim and annual financial statements, for assets and liabilities that are measured at fair value on a recurring basis disclosures regarding the valuation techniques and inputs used to develop those measurements.  It also requires separate disclosures of significant amounts transferred in and out of Level 1 and Level 2 fair value measurements and a description of the reasons for the transfers.  This guidance is effective for the Company beginning on January 1, 2011 and is required to be applied prospectively to new or significantly modified revenue arrangements.
 
Milestone Method of Revenue Recognition
 
In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions.   Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive.  Milestones should be considered substantive in their entirety and may not be bifurcated.  An arrangement may contain both substantive and nonsubstantive milestones, and each milestone should be evaluated individually to determine if it is substantive.  This guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010, with early adoption permitted.  The Company believes that there is no current impact to the financial statements.
 
4.
Marketable Securities
 
Cost and fair value of the Company’s marketable securities are as follows:
 
Securities available-for-sale
 

Cost
Basis
   
Gross
Unrealized
Losses
   
Fair
Value
 
March 31, 2011:
                 
State and municipal obligations
  $ 2,453,960     $ (3,700 )   $ 2,450,260  
                         
December 31, 2010:
                       
State and municipal obligations
  $ 2,453,960     $ (2,340 )   $ 2,451,620  
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
4.
Marketable Securities (cont’d)
 
Amortized cost and fair value at March 31, 2011 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because the Company may redeem certain securities at par.
 
Maturity
 
Cost
Basis
   
Gross
Unrealized
Losses
   
Fair
Value
 
1 year or less
  $ 503,960     $ (3,700 )   $ 500,260  
10 years or more
    1,950,000             1,950,000  
                         
    $ 2,453,960     $ (3,700 )   $ 2,450,260  
 
5.        Prepaid Expenses and Other Current Assets
 
   
March 31,
2011
   
December 31,
2010
 
             
Deposits on contracts
  $ 631,112     $ 564,074  
Other assets
    94,010       142,575  
                 
    $ 725,122     $ 706,649  
 
Deposits on contracts consist of deposits on research and development contracts for services that had not been incurred as of the balance sheet date.  Other assets include prepaid general and administrative expenses, such as insurance, rent, and investor relations services.
 
6.
Note Receivable
 
On June 16, 2010, Amarex, LLC (“Amarex”) executed a note payable to the Company in settlement of a contract dispute.  The Company settled the case with Amarex for $100,000 less a balance owed of $43,953.  The principal sum of the note was $56,047, and is included in other income in the Company’s statement of operations.  Monthly payments of $2,335 began on September 1, 2010 and will continue until August 1, 2012 at which time the balance is expected to be paid in full.  The note does not bear interest. Pursuant to the note, Amarex shall pay a late charge of five percent (5%) of any past due installment payments if any installment payment is not paid within 10 days of its due date.  As of March 31, 2011, all payments were made as scheduled.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
6.
Note Receivable (cont’d)
 
As of March 31, 2011, the principal amortization of the note is shown below:
   
 
 
Principal Amortization
 
Expected
Payment
 
Within 1 year
  $ 28,023  
1 year to Maturity Date (August 1, 2012)
    11,676  
         
    $ 39,699  
 
7.        Equipment, Net
 
   
March 31,
2011
   
December 31,
2010
 
             
Furniture and fixtures
  $ 32,169     $ 32,169  
Office equipment
    77,032       77,032  
Lab and computer equipment
    429,415       429,415  
Leasehold improvements
    110,713       110,713  
                 
Total fixed assets
    649,329       649,329  
Less: Accumulated depreciation
    (539,891 )     (525,764 )
                 
Net carrying amount
  $ 109,438     $ 123,565  
 
Depreciation expense was $14,127 and $11,547 for the three months ended March 31, 2011 and 2010, respectively.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
8.
Accounts Payable and Accrued Expenses
 
   
March 31,
2011
   
December 31,
2010
 
             
Trade payables
  $ 878,051     $ 487,527  
Accrued expenses
    817,199       18,466  
Accrued research and development contract costs
    1,129,339       1,239,233  
Payroll liabilities
    115,045       73,674  
                 
    $ 2,939,634     $ 1,820,900  
 
9.        Deferred Revenue
 
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.  A one-time contribution to the joint development and research of Archexin of $1,500,000 was paid to the Company in 2003 in accordance with the agreement.  The amount of revenue from this contribution is being recognized as income over the term of the agreement which terminates at the later of 20 years or the term of the patent on the licensed product.
 
The Company is using 20 years as its basis for recognition and accordingly $18,750 was included in revenues for the three months ended March 31, 2011 and 2010.  The remaining $881,250 and $900,000 at March 31, 2011 and December 31, 2010, respectively, is reflected as deferred revenue on the balance sheet.  The contribution is being used in the cooperative funding of the costs of development of Archexin. Royalties of 3% of net sales of licensed products will become payable to the Company on a quarterly basis once commercial sales of Archexin begin in Asia.  The product is still under development and commercial sales in Asia are not expected to begin until at least 2012.  Under the terms of the agreement, Rexgene does not receive royalties on Company net sales in the U.S.
 
10.      Other Liabilities
 
Deferred Lease Incentive
 
 
On June 29, 2009, the Company entered into a five year office lease agreement as discussed in note 18.  The lessor agreed to grant a leasehold improvement allowance of $100,000 to the Company to be used for the construction cost of improvements to the leased property, which included architectural and engineering fees, government agency plan check, permit and other fees, sales and use taxes, testing and inspection costs, and telephone and data cabling and wiring in the premises.  The Company accounts for the benefit of the leasehold improvement allowance as a reduction of rental expense over the five-year term of the office lease.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
10.      Other Liabilities (cont’d)
 
The following table sets forth the deferred lease incentive:
   
 
   
 
 
   
March 31,
2011
   
December 31,
2010
 
             
Deferred lease incentive
  $ 100,000     $ 100,000  
Less accumulated amortization
    (35,000 )     (30,000 )
                 
Balance
  $ 65,000     $ 70,000  
 
Deferred Office Lease Expense
 
The office lease agreement, discussed above, requires an initial annual base rent of $76,524 with annual increases over the next five years.  The Company recognizes rental expense on a straight-line basis over the term of the lease, which resulted in a deferred rent liability of $63,005 and $63,117 as of March 31, 2011 and December 31, 2010, respectively.
 
11.
Comprehensive Loss
 
The Company’s accumulated other comprehensive loss as of March 31, 2011 and December 31, 2010 was $3,700 and $2,340, which is computed as the difference between the cost and fair value of the Company’s marketable securities as of the balance sheet date.  The total comprehensive loss for the three months ended March 31, 2011 and 2010 was $4,437,159 and $8,033,596, respectively.
 
 
12.
Net Loss per Common Share
 
Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding and excluding any potential dilution.  Diluted loss per common share is also computed by dividing net loss by the weighted average number of common shares outstanding, but also reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that would then share in earnings, but such calculation excludes common shares in treasury.   Basic and diluted loss per common share are identical for all periods presented as potentially dilutive securities of the Company have been excluded from the calculation of the diluted net loss per common share because the inclusion of such securities would be anti-dilutive.  As of March 31, 2011 and December 31, 2010, there were stock options and warrants to acquire 16,718,937 and 13,701,378 shares of our common stock, respectively, which were the potentially dilutive securities of the Company.
 

REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
13.
Common Stock
 
 
The following transactions occurred from March 19, 2001 (inception) to March 31, 2011:
   
 
a)
On May 10, 2001, the Company issued 3,600,000 shares of common stock to the Company’s founders for cash of $1.
     
 
b)
On August 10, 2001, the Company issued:
     
   
i)
1,208,332 shares of common stock to the directors of the Company for cash of $1,450,000.
       
   
ii)
958,334 shares of common stock to Rexgene for cash of $550,000.
       
   
iii)
360,000 shares of common stock in a private placement to individual investors for cash of $1,080,000.
       
   
These share purchases were negotiated by the parties at various dates prior to the August 10, 2001 share issuance date.
     
 
c)
On October 10, 2001, the Company issued 400,000 shares of common stock to Chong Kun Dang Pharmaceutical Corp. (“CKD”) for cash of $479,991 and 400,000 shares of common stock to an individual investor for cash of $479,991.
     
 
d)
On October 10, 2001, the Company issued 200,000 shares of common stock to CKD for cash of $479,985.
     
 
e)
Since inception, the Company’s founders have transferred 800,000 shares of the common stock described in a) to officers and directors of the Company.
     
 
f)
In July 2003, the stockholders described in b) (iii) and e) transferred an aggregate of 1,268,332 shares of common stock to a voting trust.  The trust allows for the unified voting of the stock by the trustees.
     
   
The appointed trustees are senior management of the Company who, together with their existing shares, control a majority of the voting power of the Company.
     
 
g)
On August 20, 2003, the Company issued 500,000 shares of common stock to KT&G Corporation for cash consideration of $2,000,000.
     
 
h)
On October 29, 2004, an option holder exercised options to purchase shares of common stock for cash of $1,800 and the Company issued an aggregate of 1,500 shares.
     
 
i)
Pursuant to the agreement and plan of merger which occurred on May 13, 2005, (i) each share of the issued and outstanding common stock of Rexahn, Corp (“Rexahn”) (other than dissenting shares) was converted into the right to receive five shares of Rexahn Pharmaceuticals common stock; (ii) each issued, outstanding and unexercised option to purchase a share of Rexahn common stock was converted into an option to purchase five shares of Rexahn Pharmaceuticals’ common stock and (iii) the par value of Rexahn’s common stock was adjusted to reflect the par value of Corporate Road Show  Com Inc. (“CRS”) common stock. In the acquisition merger, 289,780,000 CRS pre-reverse stock split shares were converted into 2,897,802 post-reverse stock split Rexahn Pharmaceuticals shares, and an additional 500,000 post-reverse stock split Rexahn Pharmaceuticals shares were issued to a former executive of CRS.  All shares and earnings per share information have been retroactively restated in these financial statements.
     
 
j)
On August 8, 2005, the Company issued, in a transaction exempt from registration under the Securities Act of 1993, as amended, 4,175,000 shares of common stock at a purchase price of $2.00 per share.
     
 
k)
On October 3, 2005, the Company issued 7,000 shares of common stock for $21,877 and $7,500 cash in exchange for legal services from W. Rosenstadt and Steve Sanders.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
13.
Common Stock (cont’d)
 
 
l)
On December 2, 2005, the holders of a convertible note that was issued on August 8, 2005 and, represented $1,300,000 aggregate principal amount, exercised their option to convert the entire principal amount of the note into the Company’s common stock.  Based on a $2.00 per share conversion price, the holders received an aggregate of 650,000 shares.
 
 
m)
On December 27, 2005, option holders exercised options to purchase shares of the Company’s common stock for cash of $9,600 and the Company issued an aggregate of 40,000 shares.
 
 
n)
On February 22, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $1,200 and the Company issued an aggregate of 5,000 shares.
 
 
o)
On April 12, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $3,409 and the Company issued an aggregate of 14,205 shares.  On the same date, the Company agreed to repurchase common stock from the option holder based on the then market price for treasury in exchange for the aggregate purchase price of $28,410 in cash.
 
 
p)
On May 13, 2006, holders of the $3,850,000 convertible notes issued on February 28, 2005, exercised their rights to convert the entire principal amount of the notes into shares of the Company’s common stock.    Based on a $1.00 per share conversion price, the Company issued 3,850,000 shares of common stock in connection with the conversion.
 
 
q)
On October 9, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $2,400 and the Company issued an aggregate of 10,000 shares.
 
 
r)
On November 19, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $1,800 and the Company issued an aggregate of 7,500 shares.
 
 
s)
On December 19, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $6,000 and the Company issued an aggregate of 25,000 shares.
 
 
t)
On April 18, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $14,400 and the Company issued an aggregate of 18,000 shares.
 
 
u)
On July 23, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued an aggregate of 15,000 shares.
 
 
v)
On September 27, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $15,600 and the Company issued an aggregate of 19,500 shares.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
13.
Common Stock (cont’d)
 
 
w)
On December 18, 2007, the Company issued 4,857,159 units at a price $1.40 per share for total gross proceeds of $6,800,023.  Investors also were issued one warrant for every five shares purchased.  One warrant will entitle the holder to purchase an additional share of common stock at a purchase price of $1.80 at any time over a period of three years from the date of the closing. The Company has recorded the warrants as liabilities at fair value as discussed in footnote 15.  Private placement closing costs of $139,675 were recorded as a reduction of the issuance proceeds.  Private placements costs also consist of 107,144 warrants, valued at $138,326, and were recorded as a financing expense. The Company extended anti-dilutive protection to the investors. The anti-dilution protection provision is structured in a way that is designed to protect a holder’s position from being diluted and contains a price protection based on a mathematical calculation, and is recorded as a liability at fair value, as discussed in footnote 16.   The Company revalues these liabilities each reporting period, with the unrealized gain (loss) recorded as other income (expense).
 
 
A summary of the allocation of the proceeds of the offering is shown below:
 
Gross Proceeds:
  $ 6,800,023  
         
Allocated to liabilities:
       
Warrant liabilities
    1,392,476  
Put feature on common stock
    4,401,169  
Total allocated to liabilities
    5,793,645  
         
Allocated to equity:
       
Common stock and additional paid-in capital
    1,144,704  
         
Allocated to expense:
       
Financing expense
    (138,326 )
         
Total allocated gross proceeds:
  $ 6,800,023  
 
 
x)
On December 27, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $18,000 and the Company issued an aggregate of 75,000 shares.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
 (Unaudited)
 
13.
Common Stock (cont’d)
 
 
y)
On March 20, 2008, the Company issued 642,858 units consisting of one share of the Company’s common stock and one warrant for every five common shares purchased in a private placement at a price of $1.40 per unit for total gross proceeds of $900,001.  One warrant will entitle the holder to purchase an additional share of common stock at a price of $1.80 at any time over a period of three years from the date of the private placement, and is recorded as a liability at fair value.  The Company extended anti-dilution protection to investors, and the provision is structured in a way that is designed to protect the holder’s position from being diluted and contains a price based on a mathematical computation.
 
 
A summary of the allocation of the proceeds of the offering is shown below:
 
Gross Proceeds:
  $ 900,001  
         
Allocated to liabilities:
       
     Warrant liabilities
    190,917  
     Put feature on common stock
    553,569  
Total allocated to liabilities
    744,486  
         
Allocated to common stock and additional paid-in capital
    155,515  
Total allocated gross proceeds:
  $ 900,001  
 
 
z)
On May 30, 2008, an option holder exercised options to purchase shares of the Company’s common stock for cash of $7,200 and the Company issued an aggregate of 30,000 shares.
 
 
aa)
On June 2, 2008, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued an aggregate of 50,000 shares.
 
 
ab)
On June 30, 2008, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued an aggregate of 10,000 shares.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
13.
Common Stock (cont’d)
 
 
ac)
On June 5, 2009 the Company closed on a purchase agreement to issue 2,857,143 shares of common stock at a price of $1.05 per share to an institutional investor for total gross proceeds of $3,000,000 and incurred $289,090 of stock issuance costs.  The investor was also issued:
 
 
1)
Series I warrants to purchase 2,222,222 shares of common stock at a purchase price of $1.05 per share at any time before September 3, 2009;
 
 
2)
Series II warrants to purchase 1,866,666 shares of common stock at a purchase price of $1.25 per share at any time from December 3, 2009 to June 5, 2012; and
 
 
3)
Series III warrants to purchase 1,555,555 shares of common stock at a purchase price of $1.50 per share at any time from December 3, 2009 to June 5, 2014.
 
The closing costs included 142,857 warrants valued at $122,257 and were recorded as a financing         expense.  All warrants issued from this purchase agreement are recorded as liabilities at fair value.
 
The Company incurred a derivative loss upon issuance of these warrants, as the fair value of the warrants at inception was greater than the proceeds received from the investor.  The derivative loss was combined with unrealized gains (losses) for the year ended December 31, 2009.
 
 
A summary of the allocation of the proceeds of the offering is shown below:
 
Gross Proceeds:
  $ 3,000,000  
         
Allocated to liabilities:
       
Warrant liabilities
    3,451,194  
         
Allocated to equity:
       
Common stock and additional paid-in capital
     
         
Allocated to expense:
       
Financing expense
    (122,257 )
Derivative loss at inception
    (328,937 )
Total allocated to expense
    (451,194 )
         
Total allocated gross proceeds:
  $ 3,000,000  
 
 
ad)
On June 9, 2009, the Company issued 1,833,341 shares of common stock and 862,246 warrants to purchase common stock at a purchase price of $1.05 per share to existing stockholders pursuant to the anti-dilution protection provisions of the private placements transacted on December 18, 2007 and March 20, 2008.  The issuance of additional warrants resulted in an increase in fair value of approximately $422,300. 
 
 
ae)
On September 4, 2009, an option holder exercised options to purchase shares of the Company’s common stock for cash of $3,600 and the Company issued an aggregate of 15,000 shares.
 
 
af)
On September 21, 2009, the Company issued 3,102,837 shares of common stock at a purchase price of $1.13 per share to an institutional investor for net proceeds of $3,371,340, which includes $128,659 of stock issuance costs.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
13.
Common Stock (cont’d)
 
 
ag)
On October 23, 2009, the Company closed on a purchase agreement to issue 6,072,383 shares of common stock at a price of $0.82 per share to five institutional investors for gross proceeds of $5,000,000, which includes $351,928 of stock issuance costs.  The investors were also issued warrants to purchase 2,125,334 shares of common stock at a purchase price of $1.00 per share, exercisable on or after the date of delivery until the five-year anniversary, and were recorded as liabilities at fair value. The closing costs included 245,932 warrants valued at $101,693 and were recorded as a financing expense.
 
 
 
A summary of the allocation of the proceeds of the offering is shown below:
 
Gross Proceeds:
  $ 5,000,000  
         
Allocated to liabilities:
       
Warrant liabilities
    1,114,627  
         
Allocated to equity:
       
Common stock and additional paid-in capital
    3,987,066  
         
Allocated to expense:
       
Financing expense
    (101,693 )
         
Total allocated gross proceeds:
  $ 5,000,000  
 
 
ah)
On October 23, 2009, the Company issued 2,018,143 shares of common stock and 569,502 warrants to purchase common stock at a purchase price of $0.82 per share to existing stockholders pursuant to anti-dilution protection provisions of the private placements transacted on December 24, 2007 and March 20, 2008. The issuance of additional warrants resulted in an increase in fair value of approximately $476,200.
 
 
ai)
On February 12, 2010, the Company entered into two consulting agreements pursuant to which the Company issued 300,000 shares of common stock upon the execution of the agreements.  Upon the extension of the term, 200,000 shares of common stock for each month will be issued until the termination of services.
 
 
The following table lists the issuances of shares by the Company under the consulting agreement:
 
Date of Issuance
 
Number of
Shares Issued
   
Market
Value
Per Share
   
Total Market Value of Share
Issuance
 
February 12, 2010
    300,000     $ 1.22     $ 366,000  
May 24, 2010
    200,000       1.40       280,000  
June 15, 2010
    200,000       1.15       230,000  
August 2, 2010
    400,000       1.37       548,000  
September 21, 2010
    200,000       1.20       240,000  
October 21, 2010
    200,000       1.16       232,000  
November 11, 2010
    200,000       1.06       212,000  
                         
Total
    1,700,000             $ 2,108,000  
 
 
The market value of these shares was recorded as an expense and is reflected in general and administrative expenses in the Company’s statement of operations.  The agreements were terminated by the Company on November 11, 2010.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
13.
Common Stock (cont’d)
 
 
aj)
In March 2010, warrant holders exercised their warrants to purchase shares of Company’s common stock for cash of $1,297,001 and the Company issued an aggregate of 1,197,001 shares.
 
 
ak)
In March 2010, option holders exercised options to purchase shares of Company’s common stock for cash of $21,240 and the Company issued an aggregate of 48,000 shares.
 
 
al)
In April 2010, warrant holders exercised their warrants to purchase shares of Company’s common stock for cash of $1,966,375 and the Company issued an aggregate of 1,595,825 shares.
 
 
am)
On April 20, 2010, an option holder exercised options to purchase shares of Company’s common stock for cash of $86,000 and the Company issued an aggregate of 107,500 shares.
 
 
an)
In May 2010, warrant holders exercised warrants to obtain shares of Company’s common stock and the Company issued an aggregate of 547,674 shares.
 
 
ao)
On June 30, 2010, the Company entered into a purchase agreement to issue 6,666,667 shares of common stock at a price of $1.50 per share to investors for gross proceeds of $10,000,000, which includes $681,773 of stock issuance costs.  The investors were also issued warrants to purchase 2,000,000 shares of common stock at an exercise price of $1.90 per share.  The warrants became immediately exercisable on the date of delivery until the four-year anniversary of the date of issuance.  These warrants have been valued at $1,800,800 and recorded as warrant liabilities.  The closing costs included 200,000 warrants valued at $180,080 and were recorded as a financing expense.
 
Gross Proceeds:
  $ 10,000,000  
         
Allocated to liabilities:
       
     Warrant liabilities
    1,980,880  
         
Allocated to equity:
       
    Common stock and additional paid-in capital
    8,199,200  
         
Allocated to expense:
       
    Financing expense
    (180,080 )
         
Total allocated gross proceeds:
  $ 10,000,000  
 
 
ap)
In November 2010, warrant holders exercised 936,883 cashless warrants to obtain shares of Company’s common stock and the Company issued an aggregate of 247,491 shares.
 
 
aq)
In December 2010, warrant holders exercised 530,900 cashless warrants to obtain shares of Company’s common stock and the Company issued an aggregate of 126,195 shares.
 
 
ar)
On January 19, 2011, the Company issued 2,334,515 shares of common stock at a purchase price of $1.69 per share to an institutional investor for net proceeds of $3,926,397, which includes $23,603 of stock issuance costs.
 
 
as)
On February 15, 2011, a warrant holder exercised warrants to purchase shares of the Company’s common stock for cash of $215,104 and the Company issued 209,042 shares.
 
 
at)
On February 28, 2011, an option holder exercised options to purchase shares of Company’s common stock for cash of $6,000 and the Company issued 25,000 shares.
 
 
au)
On March 11, 2011, an option holder exercised options to purchase shares of Company’s common stock for cash of $12,000 and the Company issued 50,000 shares.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
13.
Common Stock (cont’d)
 
 
av)
On March 28, 2011,warrant holders exercised their warrants to purchase shares of the Company’s common stock for cash of $102,857 and the Company issued 124,917 shares.
 
 
aw)
On March 31, 2011, the Company closed on a purchase agreement to issue 8,333,333 shares of common stock at a price of $1.20 per share to five institutional investors for gross proceeds of $10,000,000, which includes $803,791 of stock issuance costs.  The investors were also issued warrants to purchase 3,333,333 shares of common stock at a purchase price of $1.50 per share, exercisable on or after six months after the closing date until the five-year anniversary of the initial exercise date, and were recorded as liabilities at fair value. The closing costs included 208,333 warrants valued at $97,667 and were recorded as a financing expense.
 
 
 
A summary of the allocation of the proceeds of the offering is shown below:
 
Gross Proceeds:
  $ 10,000,000  
         
Allocated to liabilities:
       
     Warrant liabilities
    2,924,333  
         
Allocated to equity:
       
    Common stock and additional paid-in capital
    7,173,334  
         
Allocated to expense:
       
    Financing expense
    (97,667 )
         
Total allocated gross proceeds:
  $ 10,000,000  
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
14.      Stock-Based Compensation
 
On August 5, 2003, the Company established a stock option plan (the “Plan”).  Under the Plan, the Company grants stock options to key employees, directors and consultants of the Company.  For all grants prior to September 12, 2005 and grants to employees of the Company after September 12, 2005, the vesting period is 30% on the first anniversary of the grant date, an additional 30% on the second anniversary and the remaining 40% on the third anniversary.  Options expire between five and ten years from the date of grant.
 
For grants to non-employee consultants of the Company after September 12, 2005, the vesting period is between one to three years, subject to the fulfillment of certain conditions in the individual stock option grant agreements, or 100% upon the occurrence of certain events specified in the individual stock option grant agreements.  Options authorized for issuance under the Plan total 17,000,000 after giving effect to an amendment to the Plan approved at the Annual Meeting of the Stockholders of the Company on June 2, 2006.  At March 31, 2011, 8,385,000 shares of common stock were available for issuance.
 
Prior to adoption of the plan, the Company made restricted stock grants.  During 2003 all existing restricted stock grants were converted to stock options.  The converted options maintained the same full vesting period as the original restricted stock grants.
 
Accounting for Employee Awards
 
The Company’s results of operations for the three months ended March 31, 2011 and 2010 include share-based employee compensation expense totaling $150,246 and $116,270 respectively.  Such amounts have been included in the statement of operations in general and administrative and research and development expenses.  No income tax benefit has been recognized in the statement of operations for share-based compensation arrangements as the Company has provided for a 100% valuation allowance on its deferred tax assets.
 
Employee stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite vesting service period for the entire portion of the award.
 
Accounting for Non-Employee Awards
 
Stock compensation expenses related to non-employee options were $51,742 and $79,108 for the three months ended March 31, 2011 and 2010, respectively.  Such amounts have been included in the statement of operations in general and administrative and research and development expenses.
 

REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
14.
Stock-Based Compensation (cont’d)
 
Summary of Stock Compensation Expense Recognized
 
Total stock-based compensation recognized by the Company in the three months ended March 31, 2011 and 2010, and the period from inception (March 19, 2001) to March 31, 2011, is as follows:
 
   
Three Months Ended March 31,
    Cumulative from March 19, 2001  
 
2011
   
2010
   
(Inception) to
March 31, 2011
 
Statement of operations line item:
                 
General and administrative:
                       
Payroll
  $ 126,202     $ 100,886     $ 2,119,718  
Consulting and other professional fees
    35,649       75,444       795,606  
Research and development:
                       
Payroll
    24,044       15,384       900,340  
Consulting and other professional fees
    16,093       3,664       1,325,346  
                         
Total
  $ 201,988     $ 195,378     $ 5,141,010  
 
Summary of Stock Option Transactions
 
There were 130,000 stock options granted at an exercise price of $1.84 with a fair value of $180,326 during the three months ended March 31, 2011. There were 375,000 stock options granted at an exercise price of $1.33 with a fair value of $304,043 during the three months ended March 31, 2010.
 
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 Accounting Standards Codification (“ASC”) 718, “Compensation-Stock Compensation” and Staff Accounting Bulletin (“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.
 

REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
14.
Stock-Based Compensation (cont’d)
 
The assumptions made in calculating the fair values of options are as follows:
             
   
Three Months Ended March 31,
 
       
   
2011
   
2010
 
             
Black-Scholes weighted average assumptions
           
Expected dividend yield
    0 %     0 %
Expected volatility
    101 %     107 %
Risk free interest rate
    2.29 %     2.4%-4.1 %
Expected term (in years)
 
5 years
   
1 - 5 years
 
 
The following table summarizes the employee and non-employee share-based transactions:
 
   
2011
   
2010
 
                         
   
Shares
Subject to Options
   
Weighted Avg.
Exercise Price
   
Shares
Subject to Options
   
Weighted
Avg. Exercise Prices
 
Outstanding at                                 
January 1
    8,076,795     $ 1.02       7,715,795     $ 0.98  
Granted
    130,000       1.84       375,000       1.33  
Exercised
    (75,000 )     0.24       (48,000 )     0.44  
Cancelled
    (89,000 )     1.16              
                                 
Outstanding at March 31
    8,042,795     $ 1.03       8,042,795     $ 1.01  
 

REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
14.      Stock-Based Compensation (cont’d)
 
The following table summarizes information about stock options outstanding as of March 31, 2011 and December 31, 2010.
 
   
Shares Subject to Options
   
Weighted Avg. Exercise Prices
 
Weighted
Average
Remaining
Contractual Term
 
Aggregate Intrinsic Value
 
Outstanding at March 31, 2011
    8,042,795     $ 1.03  
5.2 years
  $ 2,440,797  
                           
Exercisable at March 31, 2011
    6,792,795     $ 1.01  
4.7 years
  $ 2,239,447  
                           
Outstanding at December 31, 2010
    8,076,795     $ 1.01  
5.4 years
  $ 2,198,790  
                           
Exercisable at December 31, 2010
    6,762,795     $ 1.00  
4.8 years
  $ 2,023,980  
 
The total intrinsic value of the options exercised was $94,250 and $54,660 respectively, for the three months ended March 31, 2011 and 2010, respectively.  The weighted average fair value of the options vested was $0.79 and $1.03 for the three months ended March 31, 2011 and 2010, respectively.
 
A summary of the Company’s unvested shares as of March 31, 2011 and changes during the three months ended March 31, 2011 is presented below:
 
   
2011
 
   
Subject to Options
   
Weighted Average Fair Value at Grant Date
 
Unvested at January 1, 2011
    1,314,000     $ 0.77  
Granted
    130,000     $ 1.39  
Vested
    (105,000 )   $ 0.79  
Cancelled
    (89,000 )   $ 0.90  
                 
Unvested at March 31, 2011
    1,250,000     $ 0.81  
 
As of March 31, 2011 and December 31, 2010, there was $639,816 and $685,636 of total unrecognized compensation cost, respectively, related to all unvested stock options, which is expected to be recognized over a weighted average vesting period of 1.2 years and 1.4 years, respectively.
 

REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
15.      Warrants
 
As of March 31, 2011, warrants to purchase 8,676,142 shares were outstanding, having exercise prices ranging from $1.00 to $1.90 and expiration dates ranging from August 8, 2013 to September 30, 2016.
 
   
2011
   
2010
 
   
Number of warrants
   
Weighted average exercise price
   
Number of warrants
   
Weighted average exercise price
 
Balance, January 1
    5,624,583     $ 1.48       8,575,243     $ 1.10  
Issued during the period
    3,541,666     $ 1.50           $  
Exercised during the period
    (333,959 )   $ (0.95 )     (1,197,001 )   $ (1.08 )
Expired during the period
    (156,148 )   $ (0.82 )         $  
                                 
Balance, March 31
    8,676,142     $ 1.53       7,378,242     $ 1.10  
 
At March 31, 2011 and December 31, 2010, the average remaining contractual life of the outstanding warrants was 4.1 years and 3.4 years, respectively.
 
The warrants, which were issued to investors in the December 2007, March 2008, May 2009, October 2009, June 2010 and March 2011 offerings, contain a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer, or share exchange).   If a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a non-public company, then the warrant holder has the option to receive cash, equal to the fair value of the remaining unexercised portion of the warrant.  Due to this contingent redemption provision, the warrants require liability classification in accordance with ASC 480, “Distinguishing Liabilities from Equity,” (“ASC 480”) and are recorded at fair value.  In addition, these warrants are not indexed to the Company’s stock, and therefore also require liability classification under ASC 815, “Derivatives and Hedging,” (ASC 815).
 
ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition.  Fair values for warrants are determined using the Binomial Lattice (“Lattice”) valuation technique. The Lattice model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to maturity. Accordingly, within the contractual term, the Company provided multiple date intervals over which multiple volatilities and risk free interest rates were used. These intervals allow the Lattice model to project outcomes along specific paths which consider volatilities and risk free rates that would be more likely in an early exercise scenario.
 
Significant assumptions are determined as follows:
Trading market values—published trading market values;
Exercise price—Stated exercise price;
Term—remaining contractual term of the warrant;
Volatility—Historical trading volatility for periods consistent with the remaining terms;
Risk-free rate—Yields on zero coupon government securities with remaining terms consistent with the remaining terms of the warrants.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
15.
Warrants (cont’d)
 
Due to the fundamental transaction provision, which could provide for early redemption of the warrants, the model also considered the probability the Company would enter into a fundamental transaction during the remaining term of the warrant. Since the Company is still in its development stage and is not yet achieving positive cash flow, management believes the probability of a fundamental transaction occurring over the term of the warrant is approximately 5%.  For valuation purposes, the Company also assumed that if such a transaction did occur, it was more likely to occur towards the end of the term of the warrants.
 
The warrants issued in December 2007 and March 2008 are not only subject to traditional anti-dilution protection, such as stock splits and dividends, but they are also subject to down-round anti-dilution protection. Accordingly, if the Company sells common stock or common stock indexed financial instruments below the stated exercise price, the exercise price related to these warrants will adjust to that lower amount.  The Lattice model used to value the warrants with down-round anti-dilution protection provides for multiple, probability-weighted scenarios at the stated exercise price and at five additional decrements/scenarios on each valuation date in order to encompass the value of the anti-dilution provisions in the estimate of fair value of the warrants. Calculations were performed at the stated exercise price and at five additional decrements/scenarios on each valuation date. The calculations provide for multiple, probability-weighted scenarios reflecting decrements that result from declines in the market prices. Decrements are predicated on the trading market prices in decreasing ranges below the contractual exercise price. For each valuation date, multiple Binomial Lattice calculations were performed which were probability weighted by considering both the Company’s (i) historical market pricing trends, and (ii) an outlook for whether or not the Company may need to issue equity or equity-indexed instruments in the future with a price less than the current exercise price.
 
The following table summarizes the fair value of the warrants as of the respective balance sheet or transaction dates:
 
Fair Values:
 
March 31,
2011
   
December 31,
2010
   
Transaction
Date
 
December 18, 2007 financing
  $     $     $ 1,392,476  
March 20, 2008 financing
          123,558       190,917  
June 5, 2009 financing:
                       
     Series I warrants
                707,111  
     Series II warrants
                1,315,626  
     Series III warrants
    942,666       751,022       1,306,200  
     Warrants to placement agent
    84,545       69,032       122,257  
October 23, 2009 financing:
                       
     Warrants to institutional investors
    937,095       694,377       1,012,934  
     Warrants to placement agent
    10,881       111,241       101,693  
June 30, 2010 financing
    1,215,280       1,217,480       1,980,880  
March 31, 2011 financing:
                       
     Warrants to institutional investors
    2,826,666             2,826,666  
     Warrants to placement agent
    97,667             97,667  
Total:
  $ 6,114,800     $ 2,966,710     $ 11,054,427  
 
Warrants issued to the placement agents in the December 18, 2007 and June 30, 2010 financings are included with the warrants to investors as they have identical exercise prices and terms.  Warrants issued to the placement agents in the June 5, 2009, October 23, 2009 and March 31, 2011 offerings have different exercise prices and terms than the warrants issued to the investors and are therefore disclosed separately.
 
 
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
15.
Warrants (cont’d)
 
The following table summarizes the number of shares indexed to the warrants as of the respective balance sheet or transaction dates:
 
Number of Shares indexed:
 
March 31,
2011
   
December 31,
2010
   
Transaction
Date
 
December 18, 2007 financing
                1,078,579  
March 20, 2008 financing
          281,065       128,572  
June 5, 2009 financing:
                       
Series I warrants
                2,222,222  
Series II warrants
                1,866,666  
Series III warrants
    1,555,555       1,555,555       1,555,555  
Warrants to placement agent
    132,143       132,143       142,857  
October 23, 2009 financing:
                       
Warrants to institutional investors
    1,228,333       1,228,333       2,125,334  
Warrants to placement agent
    18,445       227,487       245,932  
June 30, 2010 financing
    2,200,000       2,200,000       2,200,000  
March 31, 2011 financing:
                       
Warrants to institutional investors
    3,333,333             3,333,333  
Warrants to placement agent
    208,333             208,333  
Total:
    8,676,142       5,624,243       15,107,383  
 
The assumptions used in calculating the fair values of the warrants are as follows:
 
December 18, 2007 financing:
 
March 31,
2011
   
December 31,
2010
   
Transaction
Date
 
Trading market prices
  $     $     $ 1.75  
Estimated future volatility
                143 %
Dividend
                 
Estimated future risk-free rate
                3.27 %
Equivalent volatility
                106 %
Equivalent risk-free rate
                3.26 %
Estimated additional shares to be issued upon dilutive event
                98,838  
 
March 20, 2008 financing:
 
March 31,
2011
   
December 31,
2010
   
Transaction
Date
 
Trading market prices
  $     $ 1.12     $ 2.14  
Estimated future volatility
          75 %     142 %
Dividend
                 
Estimated future risk-free rate
          0.47 %     1.95 %
Equivalent volatility
          42 %     97 %
Equivalent risk-free rate
          0.12 %     1.31 %
Estimated additional shares to be issued upon dilutive event
          25,462       7,479  
 
     
REXAHN PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
 
15.
Warrants (cont’d)
 
June 5, 2009 financing:
 
March 31,
2011
   
December 31,
2010
   
Transaction
Date
 
Trading market prices
  $ 1.18     $ 1.12     $ 1.14  
Estimated future volatility
    100 %     94-100 %     100 %
Dividend
                 
Estimated future risk-free rate
    2.25 %     1.84-4.18 %     0.63-4.31 %
Equivalent volatility
    87 %     72-73 %     103-117 %
Equivalent risk-free rate
    0.58-0.59 %     0.52 %     0.20-1.44 %
 
October 23, 2009 financing:
 
March 31,
2011
   
December 31,
2010
   
Transaction
Date
 
Trading market prices
  $ 1.18     $ 1.12     $ 0.69  
Estimated future volatility
    100 %     100 %     100 %
Dividend
                 
Estimated future risk-free rate
    1.32-2.25 %     1.84 %     2.63-3.80 %
Equivalent volatility
    79-90 %     65-74 %     98-99 %
Equivalent risk-free rate
    0.41-0.67 %     0.38-0.58 %     0.93-1.16 %
 
June 30, 2010 financing:
 
March 31,
2011
   
December 31,
2010
   
Transaction
Date
 
Trading market prices
  $ 1.18     $ 1.12     $ 1.43  
Estimated future volatility
    99 %     67 %     100 %
Dividend
                 
Estimated future risk-free rate
    2.25 %     1.84 %     1.78 %
Equivalent volatility
    87 %     89 %     98 %
Equivalent risk-free rate
    0.58 %     0.52 %     0.59 %
 
March 31, 2011 financing:
 
March 31,
2011