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)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
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)
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)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
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.