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 $
114,498,726
at September 30, 2016 and anticipates incurring losses through fiscal year 2016 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, financings, 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. 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 its general and administrative affairs.
Basis of Presentation
The accompanying unaudited condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission 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 September 30, 2016 and December 31, 2015 and of the results of operations and comprehensive loss for the three and nine months ended September 30, 2016 and 2015, and the results of cash flows for the nine months ended September 30, 2016 and 2015 have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of results that may be expected for any other interim period or the full fiscal year ending December 31, 2016. 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, 2015 (the “2015 Form 10-K”). Information included in the condensed balance sheet as of December 31, 2015 has been derived from the Company’s audited financial statements for the year ended December 31, 2015 included in the 2015 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, but not before the original effective date of December 15, 2016. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial statements and future operating results.
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management to perform interim and annual assessments as to the entity’s ability to continue as a going concern and provides related disclosure guidance. ASU 2014-15 will be effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact the adoption of this guidance will have on its financial statements.
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 is currently evaluating the impact the adoption of this guidance will have on its financial statements.
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
Marketable securities are considered “available-for-sale” in accordance with FASB Accounting Standard 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 September 30, 2016 and December 31, 2015:
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
2,400,000
|
|
|
$
|
979
|
|
|
$
|
-
|
|
|
$
|
2,400,979
|
|
Commercial Paper
|
|
|
5,974,806
|
|
|
|
406
|
|
|
|
(1,152
|
)
|
|
|
5,974,060
|
|
Corporate Bonds
|
|
|
5,049,209
|
|
|
|
-
|
|
|
|
(4,889
|
)
|
|
|
5,044,320
|
|
Total Marketable Securities
|
|
$
|
13,424,015
|
|
|
$
|
1,385
|
|
|
$
|
(6,041
|
)
|
|
$
|
13,419,359
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
6,240,000
|
|
|
$
|
571
|
|
|
$
|
(5,575
|
)
|
|
$
|
6,234,996
|
|
Commercial Paper
|
|
|
2,981,307
|
|
|
|
-
|
|
|
|
(3,737
|
)
|
|
|
2,977,570
|
|
Corporate Bonds
|
|
|
4,036,820
|
|
|
|
-
|
|
|
|
(9,300
|
)
|
|
|
4,027,520
|
|
Total Marketable Securities
|
|
$
|
13,258,127
|
|
|
$
|
571
|
|
|
$
|
(18,612
|
)
|
|
$
|
13,240,086
|
|
The Company typically invests in highly-rated securities, with the primary objective of minimizing the potential risk of principal loss. As of September 30, 2016 the Company had five investments of commercial paper with an aggregate fair value of $4,975,230 and unrealized losses of $1,152, and four corporate bonds with an aggregate fair value of $4,044,320 and unrealized losses of $4,889 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 and does not consider any of its investments other-than-temporarily impaired, and anticipates that it will recover the entire amortized cost basis.
As of September 30 2016, all of the Company’s marketable securities are due to mature in less than one year.
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
4.
|
Prepaid Expenses and Other Current Assets
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Deposits on contracts
|
|
$
|
126,712
|
|
|
$
|
501,170
|
|
Prepaid expenses and other current assets
|
|
|
675,341
|
|
|
|
720,648
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
802,053
|
|
|
$
|
1,221,818
|
|
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.
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
78,794
|
|
|
$
|
78,794
|
|
Office and computer equipment
|
|
|
113,529
|
|
|
|
105,266
|
|
Lab equipment
|
|
|
431,650
|
|
|
|
431,650
|
|
Leasehold improvements
|
|
|
133,762
|
|
|
|
133,762
|
|
|
|
|
|
|
|
|
|
|
Total equipment
|
|
|
757,735
|
|
|
|
749,472
|
|
Less: Accumulated depreciation and amortization
|
|
|
(660,695
|
)
|
|
|
(636,572
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
97,040
|
|
|
$
|
112,900
|
|
6.
|
Accounts Payable and Accrued Expenses
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
416,708
|
|
|
$
|
774,543
|
|
Accrued expenses
|
|
|
106,999
|
|
|
|
92,752
|
|
Accrued research and development contract costs
|
|
|
1,115,518
|
|
|
|
1,515,151
|
|
Payroll liabilities
|
|
|
146,499
|
|
|
|
278,852
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,785,724
|
|
|
$
|
2,661,298
|
|
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
7.
|
Deferred Research and Development Arrangements
|
Rexgene Biotech Co., Ltd.
In 2003, the Company entered into a collaborative research agreement with Rexgene Biotech Co., Ltd. (“Rexgene”), a shareholder. Rexgene is engaged in the development of pharmaceutical products in Asia and has agreed to assist the Company with the research, development and clinical trials necessary for registration of the Company’s drug candidate Archexin in Asia. This agreement provides Rexgene with exclusive rights to license, sublicense, make, have made, use, sell and import Archexin in Asia. In accordance with the agreement, Rexgene paid the Company a one-time fee of $1,
500,000
in 2003. The agreement terminates at the later of 20 years or the term of the patent. The amortization reduces research and development expenses for the periods presented.
The Company is using 20 years as its basis for recognition and accordingly research and development expenses were reduced by
$18,750 and $56,250
for the three and nine months ended September 30, 2016 and 2015, respectively. The remaining $468,750 and $525,000 to be amortized at September 30, 2016 and December 31, 2015, 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 2017. Under the terms of the agreement, Rexgene does not
pay royalties on the Company’s net sales outside of Asia.
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:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Deferred lease incentive
|
|
$
|
154,660
|
|
|
$
|
154,660
|
|
Less accumulated amortization
|
|
|
(120,441
|
)
|
|
|
(111,108
|
)
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
34,219
|
|
|
$
|
43,552
|
|
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 $51,681 and $60,468 as of September 30, 2016 and December 31, 2015, respectively.
9.
|
Net Loss per Common Share
|
Basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Diluted loss per common share is 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 September 30, 2016 and December 31, 2015, there were stock options and warrants to acquire, in the aggregate, 72,300,887 and 39,082,886 shares of the Company’s common stock, respectively, that are potentially dilutive. However, diluted loss per share for all periods presented is the same as basic loss per share because the inclusion of common share equivalents would be anti-dilutive.
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
The following transactions occurred since December 31, 2015:
Public Offerings
March 2016
On March 2, 2016 the Company closed on a registered direct public offering of 15,625,000 shares of common stock and warrants to purchase up to 11,718,750 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 0.75 shares of common stock, at a price of $0.
32
per unit, with an exercise price for the warrants of $0.
42 per share
. The total gross proceeds of the offering were $5,000,000. The issued warrants issued became 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:
|
|
$
|
5,000,000
|
|
|
|
|
|
|
Allocated to warrant liabilities:
|
|
|
2,419,922
|
|
Allocated to common stock and additional paid-in capital
|
|
|
2,580,078
|
|
|
|
|
|
|
Total allocated gross proceeds:
|
|
$
|
5,000,000
|
|
The closing costs of $
575,751
included 78
1,250
warrants valued at $15
5,938
and $
419,813
for placement agent and other fees. Based upon the estimated fair value of the stock and warrants in the units, the Company allocated $1
69,887
to financing expense and $
405,864
as stock issuance costs.
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
September 2016
On September 19, 2016 the Company closed on a registered direct public offering of 24,000,000 shares of common stock and warrants to purchase up to 18,000,000 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 0.75 shares of common stock, at a price of $0.
25
per unit, with an exercise price for the warrants of $0.
30 per share
. The total gross proceeds of the offering were $6,000,000. The warrants issued will become exercisable beginning six months after the closing date and 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:
|
|
$
|
6,000,000
|
|
|
|
|
|
|
Allocated to warrant liabilities:
|
|
|
1,671,120
|
|
Allocated to common stock and additional paid-in capital
|
|
|
4,328,880
|
|
|
|
|
|
|
Total allocated gross proceeds:
|
|
$
|
6,000,000
|
|
The closing costs of $575,09
4
included 1,440,000 warrants valued at $117,130 and $457,96
4
for placement agent and other fees. Based upon the estimated fair value of the stock and warrants in the units, the Company allocated $143,203 to financing expense and $431,891 as stock issuance costs.
Compensatory Shares
During the nine months ended September 30, 2016, the Company issued 330,000 shares to vendors in exchange for investor relations services. The aggregate market value of the stock issued was $97,649.
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
11.
|
Stock-Based Compensation
|
As of September 30, 2016, the Company had 1
7,774,040
options to purchase common stock outstanding.
At the Company’s Annual Meeting of Stockholders held on June 10, 2013, the Company’s stockholders voted to approve the Rexahn Pharmaceuticals, Inc. 2013 Stock Option Plan (the “2013 Plan”). Under the 2013 Plan, the Company grants equity awards to key employees, directors and consultants of the Company. A total of 17,000,000 shares of common stock have been reserved for issuance pursuant to the 2013 Plan. As of September 30, 2016, there were 1
2,635,540
options outstanding under the 2013 Plan, and 4,356,960 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 September 30, 2016, there were 5,018,500 outstanding options under the 2003 Plan.
In March 2016, the Company granted to a third party an option to purchase up to 120,000 shares of the Company’s common stock. Of the Company’s outstanding options as of September 30, 2016, these were the only options that were not issued pursuant to the 2013 Plan or the 2003 Plan.
At the Company’s Annual Meeting of the Stockholders held on June 9, 2016, the Company’s stockholders voted to approve an amendment to the 2013 Plan, including to provide for awards of restricted stock and restricted stock units. As of September 30, 2016, no awards of restricted stock or restricted stock units had been granted.
For the majority of the option grants to employees, 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 expire between five and 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.
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
Accounting for Awards
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. Total stock-based compensation recognized by the Company for the three and nine months ended September 30, 2016 and 2015 is as follows:
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Statement of operations line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
232,951
|
|
|
$
|
127,203
|
|
|
$
|
673,064
|
|
|
$
|
492,908
|
|
Research and development
|
|
|
136,451
|
|
|
|
98,113
|
|
|
|
390,525
|
|
|
|
276,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
369,402
|
|
|
$
|
225,316
|
|
|
$
|
1,063,589
|
|
|
$
|
769,668
|
|
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.
Summary of Stock Option Transactions
There were 5,876,391 stock options granted at exercise prices ranging from $0.
26
to $0.
37
with an aggregate fair value of $
1,150,513
during the nine months ended September 30, 2016. There were 4,201,316 stock options granted at exercise prices ranging from $0.
54
to $0.
89
with an aggregate fair value of $1,
994,893
during the nine months ended September 30, 2015.
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:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Black-Scholes assumptions
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
31-75
|
%
|
|
|
72-80
|
%
|
Risk free interest rate
|
|
|
0.8-1.4
|
%
|
|
|
1.2-1.7
|
%
|
Expected term (in years)
|
|
2-6 years
|
|
|
5-6 years
|
|
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
The following table summarizes share-based transactions:
|
|
Number of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, January 1, 2016
|
|
|
12,590,982
|
|
|
$
|
0.83
|
|
6.8 years
|
|
$
|
26,500
|
|
Granted
|
|
|
5,876,391
|
|
|
|
0.32
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Expired
|
|
|
(610,000
|
)
|
|
|
1.20
|
|
|
|
|
|
|
Cancelled
|
|
|
(83,333
|
)
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2016
|
|
|
17,774,040
|
|
|
$
|
0.65
|
|
7.4 years
|
|
$
|
-
|
|
Exercisable, September 30, 2016
|
|
|
8,530,929
|
|
|
$
|
0.82
|
|
5.7 years
|
|
$
|
-
|
|
There were no stock options exercised during the three and nine months ended September 30, 2016, or for the three months ended September 30, 2015. The total intrinsic value of the options exercised was $99,895 for the nine months ended September 30, 2015. The weighted average fair value of the options granted was $0.20 and $0.47 for the nine months ended September 30, 2016 and 2015, respectively.
A summary of the Company’s unvested options as of September 30, 2016 and changes during the nine months ended September 30, 2016 is presented below:
|
|
2016
|
|
|
|
Number of Options
|
|
|
Weighted Average Fair
Value at Grant Date
|
|
Unvested at January 1, 2016
|
|
|
5,888,432
|
|
|
$
|
0.51
|
|
Granted
|
|
|
5,876,391
|
|
|
$
|
0.20
|
|
Vested
|
|
|
(2,476,504
|
)
|
|
$
|
0.46
|
|
Cancelled
|
|
|
(45,208
|
)
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2016
|
|
|
9,243,111
|
|
|
$
|
0.33
|
|
As of September 30, 2016 there was $2,297,290 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average vesting period of 2.
3
years.
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
As of September 30, 2016, warrants to purchase 54,526,847 shares were outstanding, having exercise prices ranging from $0.30
to $1.
28
and expiration dates ranging from December 4, 2017 to March 19, 20
22
.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Number of
warrants
|
|
|
Weighted average
exercise price
|
|
|
Number of
warrants
|
|
|
Weighted average
exercise price
|
|
Balance, January 1
|
|
|
26,491,904
|
|
|
$
|
0.80
|
|
|
|
13,205,871
|
|
|
$
|
1.07
|
|
Issued during the period
|
|
|
31,940,000
|
|
|
$
|
0.35
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercised during the period
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(47,300
|
)
|
|
$
|
0.47
|
|
Expired during the period
|
|
|
(3,905,057
|
)
|
|
$
|
1.37
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30
|
|
|
54,526,847
|
|
|
$
|
0.49
|
|
|
|
13,158,571
|
|
|
$
|
1.07
|
|
At September 30, 2016 the weighted average remaining contractual life of the outstanding warrants was 4.
5
years.
The warrants issued to investors in the December 2012, November 2015, March 2016, September 2016, and previous offerings contain a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer or share exchange). If a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a non-public company, then the warrant holder has the option to receive cash, equal to the fair value of the remaining unexercised portion of the warrant. Due to this contingent redemption provision, the warrants require liability classification in accordance with ASC 480 and are recorded at fair value. The warrants issued to investors in the July 2013, October 2013 and January 2014 offerings contain a fundamental transaction provision, but the warrant holders only have an option as to the type of consideration received if the holders of common stock receive an option as to their consideration. In addition, the warrants issued in the December 2012, July 2013, October 2013, January 2014, November 2015, March 2016, September 2016 and previous offerings contain a cashless exercise provision that is exercisable only in the event that a registration statement is not effective. That provision may not be operative if an effective registration statement is not available because an exemption under the U.S. securities laws 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:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Expired Warrants
|
|
$
|
-
|
|
|
$
|
2,590
|
|
December 2012 Investor Warrants
|
|
|
328
|
|
|
|
9,818
|
|
July 2013 Investor Warrants
|
|
|
5,480
|
|
|
|
121,420
|
|
October 2013 Investor Warrants
|
|
|
9,478
|
|
|
|
169,349
|
|
January 2014 Investor Warrants
|
|
|
1,571
|
|
|
|
131,476
|
|
November 2015 Investor Warrants
|
|
|
555,625
|
|
|
|
2,169,375
|
|
November 2015 Placement Agent Warrants
|
|
|
30,292
|
|
|
|
135,135
|
|
March 2016 Investor Warrants
|
|
|
742,031
|
|
|
|
-
|
|
March 2016 Placement Agent Warrants
|
|
|
43,750
|
|
|
|
-
|
|
September 2016 Investor Warrants
|
|
|
1,658,340
|
|
|
|
-
|
|
September 2016 Placement Agent Warrants
|
|
|
114,696
|
|
|
|
-
|
|
Total:
|
|
$
|
3,161,591
|
|
|
$
|
2,739,163
|
|
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
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Expired Warrants
|
|
|
-
|
|
|
|
3,905,057
|
|
December 2012 Investor Warrants
|
|
|
174,300
|
|
|
|
174,300
|
|
July 2013 Investor Warrants
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
October 2013 Investor Warrants
|
|
|
2,317,309
|
|
|
|
2,317,309
|
|
January 2014 Investor Warrants
|
|
|
4,761,905
|
|
|
|
4,761,905
|
|
November 2015 Investor Warrants
|
|
|
12,500,000
|
|
|
|
12,500,000
|
|
November 2015 Placement Agent Warrants
|
|
|
833,333
|
|
|
|
833,333
|
|
March 2016 Investor Warrants
|
|
|
11,718,750
|
|
|
|
-
|
|
March 2016 Placement Agent Warrants
|
|
|
781,250
|
|
|
|
-
|
|
September 2016 Investor Warrants
|
|
|
18,000,000
|
|
|
|
-
|
|
September 2016 Placement Agent Warrants
|
|
|
1,440,000
|
|
|
|
-
|
|
Total:
|
|
|
54,526,847
|
|
|
|
26,491,904
|
|
The assumptions used in calculating the fair values of the warrants are as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Trading market prices
|
|
$
|
0.21
|
|
|
$
|
0.36
|
|
Estimated future volatility
|
|
|
104
|
%
|
|
|
105
|
%
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
Estimated future risk-free rate
|
|
|
0.77 -1.46
|
%
|
|
|
0.82-2.38
|
%
|
Equivalent volatility
|
|
|
41-59
|
%
|
|
|
44-65
|
%
|
Equivalent risk-free rate
|
|
|
0.42 -0.80
|
%
|
|
|
0.22-1.11
|
%
|
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
Changes in the fair value of the warrant liabilities, carried at fair value, as reported as “unrealized gain on fair value of warrants” in the statement of operations:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Expired Warrants
|
|
$
|
-
|
|
|
$
|
(9,903
|
)
|
|
$
|
2,590
|
|
|
$
|
384,365
|
|
December 2012 Investor Warrants
|
|
|
2,212
|
|
|
|
16,350
|
|
|
|
9,490
|
|
|
|
46,021
|
|
July 2013 Investor Warrants
|
|
|
22,040
|
|
|
|
147,848
|
|
|
|
115,940
|
|
|
|
412,208
|
|
October 2013 Investor Warrants
|
|
|
30,264
|
|
|
|
166,744
|
|
|
|
159,871
|
|
|
|
472,682
|
|
January 2014 Investor Warrants
|
|
|
12,190
|
|
|
|
287,262
|
|
|
|
129,905
|
|
|
|
967,200
|
|
November 2015 Investor Warrants
|
|
|
409,125
|
|
|
|
-
|
|
|
|
1,613,750
|
|
|
|
-
|
|
November 2015 Placement Agent Warrants
|
|
|
24,683
|
|
|
|
-
|
|
|
|
104,842
|
|
|
|
-
|
|
March 2016 Investor Warrants
|
|
|
425,625
|
|
|
|
-
|
|
|
|
1,677,891
|
|
|
|
-
|
|
March 2016 Placement Agent Warrants
|
|
|
26,283
|
|
|
|
-
|
|
|
|
112,188
|
|
|
|
-
|
|
September 2016 Investor Warrants
|
|
|
12,780
|
|
|
|
-
|
|
|
|
12,780
|
|
|
|
-
|
|
September 2016 Placement Agent Warrants
|
|
|
2,435
|
|
|
|
-
|
|
|
|
2,435
|
|
|
|
-
|
|
Total:
|
|
$
|
967,637
|
|
|
$
|
608,301
|
|
|
$
|
3,941,682
|
|
|
$
|
2,282,476
|
|
REXAHN PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(Unaudited)
No provision for federal and state income taxes was required for the three and nine months ended September 30, 2016 and 2015 due to the Company’s operating losses and increased deferred tax asset valuation allowance. At September 30, 2016 and December 31, 2015, the Company had unused net operating loss carry-forwards of approximately $110,482,000 and $
98,954,000
, respectively, which expire at various dates through 203
6
. 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 September 30, 2016 and December 31, 2015, 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:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
43,088,000
|
|
|
$
|
38,592,000
|
|
Stock Compensation Expense
|
|
|
2,046,000
|
|
|
|
1,891,000
|
|
Book tax differences on assets and liabilities
|
|
|
293,000
|
|
|
|
380,000
|
|
Valuation Allowance
|
|
|
(45,427,000
|
)
|
|
|
(40,863,000
|
)
|
|
|
|
|
|
|
|
|
|
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 2015 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 September 30, 2016, the total estimated cost to complete these agreements was approximately $6,180,000.
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 September 30, 2016, the milestone has not occurred.
|
On June 7, 2013, the Company signed the first amendment to its commercial lease agreement for 5,466 square feet of office space in Rockville, Maryland. The amendment extends the lease term until June 30, 2019. Under the lease agreement, the Company pays its allocable portion of real estate taxes and common area operating charges.
On July 26, 2014 the Company entered into the second amendment to the lease agreement. According to the terms of this amendment, the Company leased an additional 1,637 square feet of office space, beginning on September 1, 2014 and ending on August 31, 2015. The Company subsequently renewed the lease for this space for additional one-year terms, beginning on September 1, 2015 and 2016.
Rent paid under the Company’s lease during the three months ended September 30, 2016 and 2015 was $
51,823
and $51,
110
, respectively, and rent paid during the nine months ended September 30, 2016 and 2015 was $1
54,426
and 1
51,227
, respectively.
Prior Laboratory Lease
On August 26, 2014, the Company signed a one-year renewal to use laboratory space commencing on July 1, 2014 and ending on June 30, 2015. The lease required monthly rental payments of $4,554. Rent paid under the Company’s lease during the nine months ended September 30, 2015 was
$27,324.
Current 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 and nine months ended September 30, 2016 was $
15,771 and
$
46,395, respectively
. Rent paid under this lease during the three and nine months ended September 30, 2015 was
$15,312
.
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 three months ending December 31:
|
2016
|
|
|
66,669
|
|
For the year ending December 31:
|
2017
|
|
|
255,731
|
|
|
2018
|
|
|
233,923
|
|
|
2019
|
|
|
152,955
|
|
|
2020
|
|
|
34,468
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
743,746
|
|
|
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 $29,114 and $
33,997
for the three months ended September 30, 2016 and 2015, respectively, and $
92,203
and $
98,155
for the nine months ended September 30, 2016 and 2015, 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 September 30, 2016, 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 September 30, 2016, 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 September 30, 2016 and December 31, 2015.
de
|
|
Fair Value Measurements at September 30, 2016
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
2,400,979
|
|
|
$
|
-
|
|
|
$
|
2,400,979
|
|
|
$
|
-
|
|
Commercial Paper
|
|
|
5,974,060
|
|
|
|
-
|
|
|
|
5,974,060
|
|
|
|
-
|
|
Corporate Bonds
|
|
|
5,044,320
|
|
|
|
-
|
|
|
|
5,044,320
|
|
|
|
-
|
|
Total Assets:
|
|
$
|
13,419,359
|
|
|
$
|
-
|
|
|
$
|
13,419,359
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liabilities
|
|
$
|
3,161,591
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,161,591
|
|
|
|
Fair Value Measurements at December 31, 2015
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
6,234,996
|
|
|
$
|
-
|
|
|
$
|
6,234,996
|
|
|
$
|
-
|
|
Commercial Paper
|
|
|
2,977,570
|
|
|
|
-
|
|
|
|
2,977,570
|
|
|
|
-
|
|
Corporate Bonds
|
|
|
4,027,520
|
|
|
|
-
|
|
|
|
4,027,520
|
|
|
|
-
|
|
Total Assets:
|
|
$
|
13,240,086
|
|
|
$
|
-
|
|
|
$
|
13,240,086
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liabilities
|
|
$
|
2,739,163
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,739,163
|
|
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), prepaid expenses, and other assets and accounts payable and accrued expenses approximate fair value because of the short term maturity of these financial instruments.
The following table sets forth a reconciliation of changes in the nine months ended September 30, 2016 and 2015 in the fair value of the liabilities classified as Level 3 in the fair value hierarchy:
|
|
Warrant Liabilities
|
|
Balance at January 1, 2016
|
|
$
|
2,739,163
|
|
Additions
|
|
|
4,364,110
|
|
Unrealized gains, net
|
|
|
(3,941,682
|
)
|
Transfers out of level 3
|
|
|
-
|
|
Balance at September 30, 2016
|
|
$
|
3,161,591
|
|
|
|
Warrant Liabilities
|
|
Balance at January 1, 2015
|
|
$
|
3,768,351
|
|
Additions
|
|
|
-
|
|
Unrealized gains, net
|
|
|
(2,282,476
|
)
|
Transfers out of level 3
|
|
|
(9,378
|
)
|
Balance at September 30, 2015
|
|
$
|
1,476,497
|
|
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.