Opus Genetics, Inc. 10-Q

Item 1. Financial Statements REXAHN PHARMACEUTICALS, INC. Condensed Balance Sheet (Unaudited) September 30, 2020 December 31, 2019 ASSETS Current Assets: Cash and cash equivalents $ 8,079,511 $ 9,219,547 Marketable securities - 2,997,220 Prepaid expenses and other current assets 573,635 447,206 Total Current Assets 8,653,146 12,663,973 Security Deposits 25,681 25,681 Operating Lease Right-of-Use Assets 106,126 203,348 Equipment, Net 48,757 75,770 Total Assets $ 8,833,710 $ 12,968,772 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable and accrued expenses $ 2,258,481 $ 1,265,731 Deferred revenue 650,000 1,500,000 Operating lease liabilities, current 100,397 139,765 Total Current Liabilities 3,008,878 2,905,496 Operating Lease Liabilities, non-current - 63,605 Warrant Liabilities 110,781 41,717 Total Liabilities 3,119,659 3,010,818 Commitments and Contingencies (Note 12) Stockholders’ Equity: Preferred stock, par value $0.0001, 10,000,000 authorized shares, none issued and outstanding - - Common stock, par value $0.0001, 75,000,000 authorized shares, 4,483,198 and 4,019,141 issued and outstanding 448 402 Additional paid-in capital 173,537,703 173,278,144 Accumulated other comprehensive income - 2,084 Accumulated deficit (167,824,100 ) (163,322,676 ) Total Stockholders’ Equity 5,714,051 9,957,954 Total Liabilities and Stockholders’ Equity $ 8,833,710 $ 12,968,772 (See accompanying notes to the condensed financial statements) 1 Table of Contents REXAHN PHARMACEUTICALS, INC. Condensed Statement of Operations (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Revenues $ - $ - $ 1,150,000 $ - Expenses: General and administrative 1,356,313 1,149,206 4,729,211 4,184,744 Research and development 149,594 1,131,418 837,991 5,022,049 Total Expenses 1,505,907 2,280,624 5,567,202 9,206,793 Loss from Operations (1,505,907 ) (2,280,624 ) (4,417,202 ) (9,206,793 ) Other Income Interest income 1,774 78,534 42,235 256,569 Unrealized gain (loss) on fair value of warrants 100,637 242,860 (126,457 ) 2,183,714 Total Other Income (Loss) 102,411 321,394 (84,222 ) 2,440,283 Net Loss Before Provision for Income Taxes (1,403,496 ) (1,959,230 ) (4,501,424 ) (6,766,510 ) Provision for Income Taxes - - - - Net Loss $ (1,403,496 ) $ (1,959,230 ) $ (4,501,424 ) $ (6,766,510 ) Net loss per share, basic and diluted $ (0.33 ) $ (0.49 ) $ (1.10 ) $ (1.72 ) Weighted average number of shares outstanding, basic and diluted 4,239,751 4,019,141 4,093,214 3,940,288 (See accompanying notes to the condensed financial statements) 2 Table of Contents REXAHN PHARMACEUTICALS, INC. Condensed Statement of Comprehensive Loss (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Net Loss $ (1,403,496 ) $ (1,959,230 ) $ (4,501,424 ) $ (6,766,510 ) Unrealized gain (loss) on available-for-sale securities - 669 (2,084 ) 25,684 Comprehensive Loss $ (1,403,496 ) $ (1,958,561 ) $ (4,503,508 ) $ (6,740,826 ) (See accompanying notes to the condensed financial statements) 3 Table of Contents REXAHN PHARMACEUTICALS, INC. Condensed Statement of Stockholders’ Equity For the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited) Common Stock Number of Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Balances at July 1, 2020 4,019,141 $ 402 $ 173,423,515 $ (166,420,604 ) $ - $ 7,003,313 Stock-based compensation - - 56,841 - - 56,841 Stock issued from warrant exchanges 464,057 46 57,347 - - 57,393 Net loss - - - (1,403,496 ) - (1,403,496 ) Balances at September 30, 2020 4,483,198 $ 448 $ 173,537,703 $ (167,824,100 ) $ - $ 5,714,051 Balances at July 1, 2019 4,019,141 $ 402 $ 173,110,047 $ (159,494,522 ) $ 7,179 $ 13,623,106 Stock-based compensation - - 90,695 - - 90,695 Net loss - - - (1,959,230 ) - (1,959,230 ) Other comprehensive income - - - - 669 669 Balances at September 30, 2019 4,019,141 $ 402 $ 173,200,742 $ (161,453,752 ) $ 7,848 $ 11,755,240 (See accompanying notes to the condensed financial statements) 4 Table of Contents REXAHN PHARMACEUTICALS, INC. Condensed Statement of Stockholders’ Equity For the Three and Nine Months Ended September 30, 2020 and 2019 (continued) (Unaudited) Common Stock Number of Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Balances at January 1, 2020 4,019,141 $ 402 $ 173,278,144 $ (163,322,676 ) $ 2,084 $ 9,957,954 Stock-based compensation - - 202,212 - - 202,212 Stock issued from warrant exchanges 464,057 46 57,347 - - 57,393 Net loss - - - (4,501,424 ) - (4,501,424 ) Other comprehensive loss - - - - (2,084 ) (2,084 ) Balances at September 30, 2020 4,483,198 $ 448 $ 173,537,703 $ (167,824,100 ) $ - $ 5,714,051 Balances at January 1, 2019 3,122,843 $ 312 $ 165,267,656 $ (154,687,242 ) $ (17,836 ) $ 10,562,890 Issuance of common stock and units, net of issuance costs 895,834 90 7,553,738 - - 7,553,828 Common stock issued from vested restricted stock units 464 - - - - - Stock-based compensation - - 379,348 - - 379,348 Net loss - - - (6,766,510 ) - (6,766,510 ) Other comprehensive income - - - - 25,684 25,684 Balances at September 30, 2019 4,019,141 $ 402 $ 173,200,742 $ (161,453,752 ) $ 7,848 $ 11,755,240 (See accompanying notes to the condensed financial statements) 5 Table of Contents REXAHN PHARMACEUTICALS, INC. Condensed Statement of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2020 2019 Cash Flows from Operating Activities: Net loss $ (4,501,424 ) $ (6,766,510 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 27,013 31,460 Loss on sale of equipment - 9,594 Amortization of premiums and discounts on marketable securities, net (4,864 ) (86,770 ) Stock-based compensation 202,212 379,348 Unrealized loss (gain) on fair value of warrants 126,457 (2,183,714 ) Changes in assets and liabilities: Prepaid expenses and other assets (126,429 ) 333,132 Accounts payable and accrued expenses 992,750 (1,786,335 ) Deferred revenue (850,000 ) 1,500,000 Other, net (5,751 ) 5,215 Net Cash Used in Operating Activities (4,140,036 ) (8,564,580 ) Cash Flows from Investing Activities: Purchase of equipment - (19,383 ) Sale of equipment - 5,500 Purchase of marketable securities - (8,887,566 ) Redemption of marketable securities 3,000,000 9,000,000 Net Cash Provided by Investing Activities 3,000,000 98,551 Cash Flows from Financing Activities: Issuance of common stock and units, net of issuance costs - 7,653,828 Net Cash Provided by Financing Activities - 7,653,828 Net Decrease in Cash and Cash Equivalents (1,140,036 ) (812,201 ) Cash and Cash Equivalents - beginning of period 9,219,547 8,744,301 Cash and Cash Equivalents - end of period $ 8,079,511 $ 7,932,100 Supplemental Cash Flow Information Operating cash flows paid for amounts included in the measurement of lease liabilities $ 116,061 $ 158,962 Non-cash financing and investing activities: Warrants issued $ - $ 4,735,913 Operating lease right-of-use assets obtained in exchange for lease obligations $ - $ 380,935 Warrant liability extinguishment from exchange of warrants $ 57,393 $ - (See accompanying notes to the condensed financial statements) 6 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) 1. Operations and Organization Operations Rexahn Pharmaceuticals, Inc. (the “Company”), a Delaware corporation, is a biopharmaceutical company whose principal operations have been the development of innovative therapies to improve patient outcomes in cancers that are difficult to treat. The Company had an accumulated deficit of $167,824,100 at September 30, 2020 and anticipates incurring losses for the foreseeable future. On June 17, 2020, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Original Merger Agreement,” and as amended on June 29, 2020, the “Merger Agreement”) with Razor Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Merger Sub”), and Ocuphire Pharma Inc., a Delaware corporation (“Ocuphire”), pursuant to which, among other things, and subject to the satisfaction and waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into Ocuphire, with Ocuphire continuing as a wholly owned subsidiary of the Company and the surviving corporation of the merger (the “Merger”). See Note 2, Merger Agreement and Pre-Merger Financing, for further information. The Company believes that its cash and cash equivalents of approximately $8.1 million as of September 30, 2020 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, assuming the Merger does not close. 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 (“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, 2020 and December 31, 2019 and of the results of operations, comprehensive loss, and stockholders’ equity for the three and nine months ended September 30, 2020 and 2019 and the cash flows for the nine months ended September 30, 2020 and 2019 have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of results that may be expected for any other interim period or the full fiscal year ending December 31, 2020. 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, 2019 (the “2019 Form 10-K”). Information included in the condensed balance sheet as of December 31, 2019 has been derived from the Company’s audited financial statements for the year ended December 31, 2019 included in the 2019 Form 10-K. The unaudited condensed financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. 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. 7 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) COVID-19 Pandemic The outbreak of the COVID-19 disease, which the World Health Organization declared a pandemic in March 2020, has led to disruption in the global economy and the biopharmaceutical industry. The extent of the COVID-19 pandemic’s impact on the Company’s business, financial condition and results of operations, as well as the Company’s ability to consummate the Merger, is highly uncertain and will depend on various factors, including the duration and scope of the pandemic, restrictions on business and social distancing guidelines that may be requested or mandated by governmental authorities, other actions taken to contain the impact of the pandemic, and the Company’s access to additional capital. 2. Merger Agreement and Pre-Merger Financing Merger Agreement On June 17, 2020, the Company, Merger Sub and Ocuphire entered into the Original Merger Agreement, which was subsequently amended on June 29, 2020, pursuant to which Merger Sub will merge with and into Ocuphire, with Ocuphire continuing as a wholly owned subsidiary of the Company in an all-stock transaction. For accounting purposes, Ocuphire is considered to be acquiring the Company even though the Company will be the issuer of the common stock in the Merger due to various considerations, including the expected ownership positions of former Company and Ocuphire stockholders post-Merger, as well as the expected composition of the Company’s Board of Directors and management team post-Merger. The Merger is expected to be accounted for as an asset acquisition by Ocuphire. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”): (a) each share of Ocuphire common stock outstanding immediately prior to the Effective Time (excluding shares held as treasury stock, shares held by Ocuphire and dissenting shares) will be converted into the right to receive shares of Company common stock equal to the Exchange Ratio described below; and (b) each outstanding Ocuphire stock option that has not previously been exercised prior to the Effective Time will be assumed by the Company. 8 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) Under the exchange ratio formula in the Merger Agreement (the “Exchange Ratio”), immediately following the consummation of the Merger (the “Closing”), the Company’s then-current stockholders would own approximately 14.3% of the combined company’s common stock, and the former Ocuphire securityholders would own approximately 85.7% of the combined company’s common stock, in each case calculated on a fully-diluted basis, assuming the Company’s net cash balance calculated on the date that is ten days prior to the anticipated Closing date (the “determination date”) is between $3.2 million and $6.0 million. The Exchange Ratio formula in the Merger Agreement is subject to adjustment for every $100,000 that the Company’s actual net cash balance calculated on the determination date is less than $3.2 million or more than $6.0 million. Based on the Company’s current estimates, the Company anticipates delivering net cash between $1.9 million and $2.4 million assuming the Closing occurs by November 14, 2020, which is the end date set forth in the Merger Agreement; however, the final net cash amount will not be calculated until the determination date, and may vary significantly depending on, among other things, the Company’s ability to control and correctly estimate its operating expenses, expenses relating to the Company’s ongoing litigation and the trading price of the Company’s common stock (and its impact on the estimated warrant liability, which reduces net cash). If the Company’s actual net cash balance as calculated on the determination date is $1.9 million, then immediately following the Closing, the Company’s then-current stockholders would own approximately 13.1% of the combined company’s common stock, and the former Ocuphire securityholders would own approximately 86.9% of the combined company’s common stock, in each case calculated on a fully-diluted basis. Under the terms of the Merger Agreement, the Company’s stockholders’ ownership percentage in the combined company is subject to a floor of 9.1% regardless of the Company’s actual net cash balance as calculated on the determination date, assuming Ocuphire waives the minimum net cash requirement at Closing. These ownership percentages give effect to the shares of Ocuphire common stock that will be issued to Investors (as defined below) in the Pre-Merger Financing (as defined below) prior to the Closing, but do not account for any additional shares of Company common stock that may be issued following the Closing or the warrants issuable to Investors after Closing. As a result, holders of Company common stock could own significantly less of the combined company than currently contemplated. For example, if the average of the five lowest volume-weighted average trading prices of Company common stock on Nasdaq Capital Market (“Nasdaq”) during the first ten trading days immediately following the closing of the Pre-Merger Financing reaches a certain floor price specified in the Securities Purchase Agreement (as defined below), then the pre-Merger holders of Company common stock could own a low single-digit percentage of the fully-diluted combined company equity securities, depending on the Company’s actual net cash amount as calculated on the determination date. Consummation of the Merger is subject to certain Closing conditions, including, among other things: (i) approval by the stockholders of the Company and Ocuphire; (ii) the continued listing of the Company’s common stock on the Nasdaq and the listing of the additional shares of Company common stock issued in connection with the Merger on Nasdaq; (iii) the accuracy of the representations and warranties, subject to certain materiality qualifications; (iv) satisfaction by the Company of a minimum net cash requirement of $0; and (v) completion of the Pre-Merger Financing. The Merger Agreement contains certain termination rights for both the Company and Ocuphire, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $750,000 or, in some circumstances, Ocuphire may be required to reimburse the Company’s expenses up to a maximum of $750,000. Immediately after the Effective Time, the Board of Directors of the Company is expected to be comprised of seven members, one of whom is expected to be Richard J. Rodgers, a current member of the Company’s Board of Directors, and the remaining six directors are expected to include existing Ocuphire board members and an additional director designated by Ocuphire. Following the Closing, Mina Sooch is expected to serve as the Company’s President and Chief Executive Officer. Also at the Effective Time, the Company expects to effect a name change to “Ocuphire Pharma, Inc.” and it is anticipated that the Company’s securities will be listed for trading on Nasdaq under the symbol “OCUP.” In accordance with the Merger Agreement, on June 17, 2020, the Board of Directors approved the termination of Douglas J. Swirsky’s employment with the Company, effective as of immediately following the Effective Time, as a result of which Mr. Swirsky will be entitled to the severance amounts and other benefits afforded Mr. Swirsky in connection with a termination of Mr. Swirsky’s employment by the Company without cause within the two-year period immediately following a change of control pursuant to Section 8(c) of Mr. Swirsky’s employment agreement, subject to Mr. Swirsky’s execution of a general release in favor of the Company. The termination of Mr. Swirsky’s employment is subject to and conditioned upon the closing of the Merger at the Effective Time, and therefore Mr. Swirsky shall not be terminated if the Merger is not consummated or the Merger Agreement is terminated prior to the Effective Time. 9 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) The Merger is expected to close, at the earliest, on or about November 5, 2020, subject to approval by the Company’s stockholders at a special meeting to be held on November 2, 2020 and other closing conditions. Contingent Value Rights Agreement Pursuant to the Merger Agreement and a Contingent Value Rights Agreement (the “CVR Agreement”) to be entered into immediately prior to Closing, Company stockholders as of immediately prior to the Effective Time will receive one contingent value right (“CVR”) for each share of Company common stock held of record as of immediately prior to the Effective Time. Each CVR will represent the right to receive cash payments upon the occurrence of certain triggering events. In particular, for each calendar quarter (each, a “CVR Payment Period”) during the 15-year period after the Closing (the “CVR Term”), CVR holders will be entitled to (i) 90% of all payments received by the Company from BioSense Global LLC (“BioSense”) pursuant to that certain License and Assignment Agreement, dated as of February 25, 2019, by and between BioSense and the Company, as amended (the “License and Assignment Agreement”), less certain permitted deductions, (ii) 90% of all payments received by the Company from Zhejiang HaiChang Biotechnology Co., Ltd. (“HaiChang”) pursuant to that certain Exclusive License Agreement, dated as of February 8, 2020, by and between HaiChang and the Company (the “HaiChang License Agreement”), less certain permitted deductions, and (iii) 75% of (a) all cash consideration paid by a third party to the Company during the applicable CVR Payment Period in connection with the grant, sale or transfer of rights to certain of the Company’s pre-Closing intellectual property (“Parent IP”) under an agreement that is entered into during the 10-year period after the Closing (“Parent IP Deal”); plus (b) with respect to any non-cash consideration received by the Company from a third party during the applicable CVR Payment Period in connection with any Parent IP Deal, all amounts received by the Company at the time such non-cash consideration is monetized, less (c) certain permitted deductions. Securities Purchase Agreement On June 29, 2020, Ocuphire, the Company and certain institutional healthcare investors, accredited investors and certain directors and officers of Ocuphire (the “Investors”) entered into a Securities Purchase Agreement, which amended and restated in its entirety the prior securities purchase agreement among the same parties dated June 17, 2020 (the “Securities Purchase Agreement”). Pursuant to the Securities Purchase Agreement, the Investors agreed to invest a total of $21.15 million in cash (the “Purchase Price”) to fund the combined company following the Merger (the “Pre-Merger Financing”). In return, based on an agreed upon pre-money valuation of the combined company of $120 million, Ocuphire will issue shares of Ocuphire common stock to the Investors, which shares will be exchangeable in the Merger for approximately 15% of the combined company on a fully diluted basis (the “Initial Shares”). In addition, (i) Ocuphire will deposit three times the number of Initial Shares into escrow with an escrow agent for the benefit of the Investors, to be exchanged for Company common stock in the Merger, and to be delivered, in whole or in part, based on the formula set forth in the Securities Purchase Agreement, out of escrow to the Investors if 85% of the average of the five lowest volume-weighted average trading prices of a share of Company common stock on Nasdaq during the first ten trading days (or earlier, at the election of any Investor) immediately following the closing date of the Pre-Merger Financing (which closing date will be the same date as the Closing) is lower than the effective price per share paid by the Investors for the shares of Company common stock issued at Closing in exchange for the Initial Shares, and (ii) on the tenth trading day following the closing date of the Pre-Merger Financing (the “warrant closing date”), the Company will issue to the Investors (x) Series A warrants to purchase shares of Company common stock and (y) Series B warrants to purchase shares of Company common stock. 10 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) 3. Marketable Securities Marketable securities are considered “available-for-sale” in accordance with Financial Accounting Standards Board 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 Company had no marketable securities as of September 30, 2020. 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 December 31, 2019: December 31, 2019 Cost Gross Unrealized Gross Unrealized Fair Basis Gains Losses Value Commercial Paper $ 1,996,216 $ 1,184 $ - $ 1,997,400 Corporate Bonds 998,920 900 - 999,820 Total Marketable Securities $ 2,995,136 $ 2,084 $ - $ 2,997,220 11 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) 4. Equipment, Net September 30, 2020 December 31, 2019 Furniture and fixtures $ 67,650 $ 67,650 Office and computer equipment 163,440 163,440 Leasehold improvements 116,403 116,403 Total equipment 347,493 347,493 Less: Accumulated depreciation and amortization (298,736 ) (271,723 ) Net carrying amount $ 48,757 $ 75,770 5. Accounts Payable and Accrued Expenses September 30, 2020 December 31, 2019 Trade payables $ 1,844,983 $ 488,285 Accrued expenses 287,300 471,700 Accrued research and development contract costs - 221,170 Payroll liabilities 126,198 84,576 $ 2,258,481 $ 1,265,731 12 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) 6. License Agreements BioSense Global LLC On March 10, 2020, the Company entered into an amendment to its collaboration and license agreement, (as amended, the “License and Assignment Agreement”) with BioSense to advance the development and commercialization of RX-3117 for all human uses in the Republic of Singapore, China, Hong Kong, Macau, and Taiwan (the “Territory”). Under the terms of the License and Assignment Agreement, upon payment in full of an upfront payment, the Company will (i) grant BioSense an exclusive license to develop and commercialize pharmaceutical products containing RX-3117 as a single agent for all human uses in the Territory and (ii) assign and transfer all of the Company’s patents and patent applications related to RX-3117 in the Territory. The upfront payment consists of an aggregate of $1,650,000, of which $1,550,000 has been received to date. Under the License and Assignment Agreement, the Company is eligible to receive milestone payments in an aggregate of up to $84,500,000 upon the achievement of development, regulatory and commercial goals and will also be eligible to receive tiered royalties in the mid-single digits to low tens on annual net sales in the Territory. The Company has evaluated the License and Assignment Agreement under ASC 606, “Revenue from Contracts with Customers,” to determine the appropriate amount of revenue to be recognized as the Company fulfills its obligations under the License and Assignment Agreement. The Company identified the exclusive license to develop RX-3117 and the supply of RX-3117 drug product, drug substance and intermediate materials (collectively, the “Transferred Materials”) as the distinct performance obligations in the contract. The Company has determined that it will recognize revenue related to the exclusive license to develop RX-3117 and the supply of the Transferred Materials transfers to BioSense at a point in time when the exclusive license is conveyed and the Transferred Materials are made available for delivery to BioSense, respectively. The Company has determined the transaction price contains both fixed and variable consideration. The fixed consideration is equal to the upfront payment of $1,650,000. The variable consideration relates to the milestone payments and future sales-based royalty payments. The Company estimates the variable consideration in the contract using the most likely amount method. The Company determined at the contract outset and as of September 30, 2020 that all milestone payments should be fully constrained, as it is not probable that a significant reversal of revenue will not occur in a future period, given the significance of the milestone payments and that the payments are earned based upon the achievement of events that are highly susceptible to factors outside of the Company’s control. Future sales-based royalties related to the exclusive license to develop RX-3117 will be recognized in the period the underlying sales transaction occurs. The $1,650,000 upfront payment has been allocated to the performance obligations on the basis of the relative standalone selling price estimated for each performance obligation. The Company has determined the standalone selling price of the exclusive license to develop RX-3117 using the adjusted market approach, which represents the price the market will bear based on the license rights granted and the state of the intellectual property, and has determined the standalone selling price of the supply of the Transferred Materials using a cost approach. Accordingly, the Company has allocated $750,000 of the upfront transaction price to the exclusive license to develop RX-3117 and $900,000 to the supply of the Transferred Materials. Additional transaction price recognized in future periods related to milestone payments and royalties will be allocated solely to the exclusive license to develop RX-3117, as these amounts relate to efforts associated with the development and commercialization of products related to the exclusive license to develop RX-3117. 13 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) As of September 30, 2020, $1,550,000 of the upfront payment had been paid, and the remaining $100,000 remained unpaid. As of September 30, 2020, the exclusive license had not been transferred and no revenue was recognized related to that performance obligation, however, the Company had satisfied the performance obligation related to the Transferred Materials during the three months ended March 31, 2020. Therefore, the Company recognized no revenue and $900,000 in revenue for the three and nine months ended September 30, 2020, respectively. Therefore, the Company has recorded the additional $650,000 of transaction consideration received as of September 30, 2020 as deferred revenue on the Company’s balance sheet. Zhejiang HaiChang Biotechnology Co., Ltd. On February 8, 2020, the Company entered into the HaiChang License Agreement with HaiChang pursuant to which the Company granted HaiChang an exclusive (even as to the Company), royalty-bearing, sublicensable worldwide license to research, develop and commercialize pharmaceutical products comprising RX-0201 (subject to and limited by the exclusive rights of NEXT BT Co. Ltd (“Next BT”) with respect to RX-0201 in Asia), the nano-liposomal formulation of RX-0201 known as RX-0301, and RX-0047, a proprietary compound currently in preclinical development. HaiChang has agreed to use commercially reasonable efforts to develop, seek regulatory approval for, and commercialize one product comprising RX-0301 and one product comprising RX-0047. HaiChang paid a one-time upfront payment of $250,000 to the Company for certain materials to be transferred by the Company to HaiChang. HaiChang will pay the Company development milestone payments in an aggregate of up to $63,000,000 with respect to RX-0201 and RX-0301 and up to $33,000,000 with respect to RX-0047, and royalties based on percentages of net sales in the low tens with respect to RX-0201 and RX-0301 and the mid-single digits with respect to RX-0047. However, if HaiChang exclusively sublicenses its rights to a third party with respect to RX-0201 and RX-0301 or RX-0047 in a particular jurisdiction, instead of the foregoing milestones and royalties to the extent relating to such compound(s) and jurisdiction, HaiChang will pay the Company a percentage of any sublicensing revenue received by HaiChang, provided that in any event HaiChang will pay a milestone payment on initiation of a Phase 3 clinical trial that is subject to reduction by the amount of any sublicensing revenue paid with respect to the applicable compound(s) as of the time of initiation of the trial. The Company accounts for the HaiChang License Agreement under ASC 606. The Company has determined the performance obligations under the contract relate to the transfer of materials and the license of intellectual property. Revenue associated with the materials and license is recognized at a point in time. The Company has determined the transaction price contains both fixed and variable consideration. The fixed consideration is equal to the upfront payment of $250,000. At the outset of the contract, the Company determined the value of the license to be de minimis given the early stage of clinical development of the intellectual property, and allocated the entire fixed consideration to the materials. The Company transferred the materials during the three months ended March 31, 2020 and therefore recognized $0 and $250,000 in revenue during the three and nine months ended September 30, 2020, respectively. The variable consideration relates to the milestone payments, sublicense fees and future sales-based royalty payments . The Company estimates variable consideration under the contract using the expected value method. Given the early stage and the uncertain success of the development work to be performed by HaiChang, the Company has determined that the variable consideration in the contract should be fully constrained at the contract outset and as of September 30, 2020. 14 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) 7. Leases The Company leases 5,466 square feet of office space in Rockville, Maryland, with a lease term ending June 30, 2024. Under the lease agreement, the Company pays its allocable portion of real estate taxes and common area operating charges, which are recorded as variable lease costs. The lease has escalating rent payments for which the Company records lease expense on a straight-line basis over the lease term, and an option to terminate the leased premises, without penalty, on June 30, 2021. The Company is reasonably certain that it will not remain in these leased premises after the optional termination date, and therefore, is using the optional termination date in assessing the lease term. The components of lease expense were as follows: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Operating lease cost $ 36,770 $ 36,770 $ 110,311 $ 164,178 Variable lease cost 3,524 2,856 15,327 25,527 Total Lease Cost $ 40,294 $ 39,626 $ 125,638 $ 189,705 The right-of-use asset and lease liability were calculated using an estimated incremental borrowing rate of 11%. At September 30, 2020, the weighted average lease term was 0.8 years. The table below summarizes the Company’s scheduled future minimum lease payments recorded on the balance sheet, as of September 30, 2020: Year Ending December 31: 2020 (excluding the nine months ended September 30, 2020) $ 39,219 2021 65,364 Minimum lease payments 104,583 Less: Imputed interest (4,186 ) Present value of minimum lease payments $ 100,397 8. 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, 2020 and December 31, 2019, there were stock options and warrants to acquire, in the aggregate, 1,071,790 and 2,126,063 shares of the Company’s common stock, respectively, that are potentially dilutive. However, 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. 15 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) 9. Stock-Based Compensation As of September 30, 2020, the Company had 146,058 options to purchase common stock outstanding. In June 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 has reserved 283,333 shares of common stock for issuance pursuant to the 2013 Plan. As of September 30, 2020, there were 142,066 options outstanding under the 2013 Plan, and 139,236 shares were available for issuance. In addition, as of September 30, 2020, there were 3,992 options outstanding under a previously established stock option plan under which no new stock options may be granted. Accounting for Awards Stock-based 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, 2020 and 2019 is as follows: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Statement of operations line item: General and administrative $ 54,501 $ 84,378 $ 193,272 $ 320,776 Research and development 2,340 6,317 8,940 58,572 Total $ 56,841 $ 90,695 $ 202,212 $ 379,348 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. 16 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) Summary of Stock Option Transactions A summary of stock option activity for the nine months ended September 30, 2020 is as follows: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding, January 1, 2020 204,574 $ 35.60 7.3 years $ - Granted - $ - Exercised - $ - Expired (3,162 ) $ 155.69 Cancelled (55,354 ) $ 59.54 Outstanding, September 30, 2020 146,058 $ 23.92 7.4 years $ - Exercisable, September 30, 2020 102,939 $ 27.98 7.1 years $ - A summary of the Company’s unvested options as of September 30, 2020 and changes during the nine months ended September 30, 2020 is presented below: 2020 Number of Options Weighted Average Fair Value at Grant Date Unvested at January 1, 2020 81,311 $ 7.90 Granted - $ - Vested (37,398 ) $ 6.20 Cancelled (794 ) $ 9.12 Unvested at September 30, 2020 43,119 $ 9.39 As of September 30, 2020, there was $368,685 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average vesting period of 1.7 years. 17 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) 10. Warrants The following table summarizes the Company’s outstanding warrants to purchase common stock as of September 30, 2020 and December 31, 2019: Number of Warrants: Warrant Issuance September 30, 2020 December 31, 2019 Exercise Price Expiration Date Liability-classified Warrants November 2015 Investors - 104,168 $ 63.60 May 2021 November 2015 Placement Agent 279 279 $ 63.60 Nov. 2020 March 2016 Investors 50,651 50,651 $ 50.40 Sept. 2021 September 2016 Investors 4,584 67,084 $ 36.00 Mar. 2022 June 2017 Investors 82,072 126,264 $ 48.00 Dec. 2022 June 2017 Placement Agent 15,153 15,153 $ 49.50 June 2022 October 2017 Investors 108,846 136,058 $ 34.20 Apr. 2023 October 2017 Placement Agent 16,327 16,327 $ 36.72 Oct. 2022 Total liability classified warrants 277,912 515,984 Equity-classified Warrants October 2018 Investors 160,257 480,771 $ 20.04 Apr. 2024 October 2018 Placement Agent 28,848 28,848 $ 19.50 Oct. 2023 January 2019 Investors 458,715 895,886 $ 9.60 Jan. 2024 Total equity-classified warrants 647,820 1,405,505 Total outstanding warrants 925,732 1,921,489 The following table summarizes the Company’s warrant activity for the nine months ended September 30, 2020: Number of Warrants Liability- classified Equity- classified Total Weighted average exercise price Balance, January 1, 2020 515,984 1,405,505 1,921,489 $ 22.10 Exchanged during the period (238,072 ) (757,685 ) (995,757 ) $ (22.64 ) Balances, September 30, 2020 277,912 647,820 925,732 $ 21.52 At September 30, 2020, the weighted average remaining contractual life of the outstanding warrants was 3.0 years. 18 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) The following table summarizes the fair value of the liability-classified warrants as of the respective balance sheet dates: Fair Value as of: Warrant Issuance: September 30, 2020 December 31, 2019 November 2015 Investors $ - $ 55 November 2015 Placement Agent - - March 2016 Investor 3,026 439 September 2016 Investors 1,093 3,196 June 2017 Investors 32,218 11,736 June 2017 Placement Agent 3,573 845 October 2017 Investors 64,196 23,772 October 2017 Placement Agent 6,675 1,674 Total: $ 110,781 $ 41,717 The assumptions used in calculating the fair values of the liability-classified warrants are as follows: September 30, 2020 December 31, 2019 Trading market prices $ 2.08 $ 1.91 Fundamental transaction volatility 134 % 102 % Dividend - - Fundamental transaction risk-free rate 0.17-0.21 % 1.57-1.72 % Equivalent volatility 77-89 % 85-94 % Equivalent risk-free rate 0.10-0.12 % 1.57-1.59 % Fundamental transaction likelihood 90 % 50 % Fundamental transaction timing November 2020 April 2020 As discussed in Note 2, on June 17, 2020, the Company entered into the Original Merger Agreement, which meets the definition of a fundamental transaction as defined by the warrant agreements. Therefore, the Company adjusted the likelihood and timing of its fundamental transaction assumptions when calculating the fair values of the liability-classified warrants as of September 30, 2020. 19 Table of Contents 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 September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 November 2015 Investors $ 2,262 $ 9,560 $ (969 ) $ 233,713 November 2015 Placement Agent - - - 435 March 2016 Investors 3,336 6,286 (2,587 ) 153,959 September 2016 Investors 8,246 28,382 (17,323 ) 318,464 June 2017 Investors 29,330 69,660 (42,397 ) 587,610 June 2017 Placement Agent 2,775 5,804 (2,728 ) 62,268 October 2017 Investors 50,075 112,729 (55,452 ) 744,355 October 2017 Placement Agent 4,613 10,439 (5,001 ) 82,910 Total: $ 100,637 $ 242,860 $ (126,457 ) $ 2,183,714 11. Income Taxes No provision for federal and state income taxes was required for the three and nine months ended September 30, 2020 and 2019 due to the Company’s operating losses and increased deferred tax asset valuation allowance. At September 30, 2020 and December 31, 2019, the Company had unused net operating loss carry-forwards of approximately $161,859,000 and $ 156,586 ,000 respectively, portions of which expire at various dates beginning in 2021. Some of the Company’s unused net operating loss carryforwards may be subject to annual limitations under certain provisions of the Internal Revenue Code related to “changes in ownership.” As of September 30, 2020 and December 31, 2019, 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, December 31, 2020 2019 Net Operating Loss Carryforwards $ 45,321,000 $ 43,844,000 Stock Compensation Expense 556,000 1,191,000 Book Tax Differences on Assets and Liabilities 238,000 464,000 Valuation Allowance (46,115,000 ) (45,499,000 ) Net Deferred Tax Assets $ - $ - The Company files income tax returns in the U.S. federal and Maryland state jurisdictions. Tax years for fiscal 2017 through 2019 are open and potentially subject to examination by the federal and Maryland state taxing authorities. 20 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) 12. Commitments and Contingencies a) The Company has contracted with various vendors for 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, 2020, the total estimated cost to complete these agreements was approximately $160,000. 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 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, 2020, the milestone has not occurred. c) 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 $7,840 and $16,355 for the three months ended September 30, 2020 and 2019, respectively, and $28,854 and $62,740 for the nine months ended September 30, 2020 and 2019, respectively. d) On February 5, 2018, the Company and Next BT terminated a research collaboration agreement between the Company and Rexgene Biotech Co., Ltd, a predecessor in interest to Next BT. The Company agreed to pay Next BT a royalty in the low single digits of any net sales of RX-0201 the Company makes in Asia and 50% of the Company’s licensing revenue related to licensing of RX-0201 in Asia, up to an aggregate of $5,000,000. On June 18, 2018, the Company reinstated the exclusive license to RX-0201 in Asia, which had no effect on the potential royalty payments granted to Next BT in February 2018. As of September 30, 2020, the Company has not made any royalty payments to Next BT. e) Legal Proceedings On July 31, 2020, a putative stockholder class action was filed in the Court of Chancery of the State of Delaware (the “Chancery Court”) styled Stahlman v. Rexahn Pharmaceuticals, Inc., et al., Case No. 2020-0639. Additionally, on August 3, 2020, a putative stockholder class action was filed in the United States District Court for the District of Delaware styled Thompson v. Rexahn Pharmaceuticals, Inc., et al. , Case No. 1:20-cv-01036-UNA (D. Del). On August 7, 2020 and August 17, 2020, putative stockholder class actions were filed in the United States District Court for the Southern District of New York styled, respectively, Manes v. Rexahn Pharmaceuticals, Inc., et al., Case No. 1:20-cv-06227 (S.D.N.Y.) and Talsma v. Rexahn Pharmaceuticals, Inc., et al., Case No. 1-20-cv-06541 (S.D.N.Y.). Finally, on August 18, 2020, a putative stockholder class action was filed in the United States District Court for the Eastern District of New York styled Juilfs v. Rexahn Pharmaceuticals, Inc., et al. , Case No 1:20-cv-03780 (F.D.N.Y.) (together with the Stahlman , Thompson , Manes and Talsma actions, the “Stockholder Actions”). The Stockholder Actions assert claims against the Company and members of its board of directors (the “Individual Defendants”). 21 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) The Stahlman and Manes complaints allege that the Individual Defendants breached their fiduciary duties owed to the Company’s stockholders. The Thompson , Manes , Juilfs and Talsma complaints allege that the Company and the Individual Defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by failing to disclose in the initial Registration Statement on Form S-4 that the Company filed with the SEC on July 6, 2020 (File No. 333-239702) (the “Initial Registration Statement”) certain information regarding, among other things, financial projections for the Company and Ocuphire, the valuation analyses performed by the Company’s financial advisor, Oppenheimer & Co., Inc., in support of its fairness opinion and the process leading to the execution of the Merger Agreement. The Thompson , Manes , Juilfs and Talsma complaints also allege that the Individual Defendants violated Section 20(a) of the Exchange Act as control persons who had the ability to prevent the Proxy Statement from being false and misleading. The Stockholder Actions seek, among other things, an injunction preventing consummation of the Merger, an award of damages, and an award of costs and expenses, including attorneys’ fees. On September 8, 2020, plaintiff Thompson made a filing in the United States District Court for the District of Delaware voluntarily dismissing the Thompson complaint. On September 22, 2020, the plaintiff filed a notice of voluntary dismissal of the Juilfs action in the United States District Court for the Eastern District of New York. On August 6, 2020, another party sent a letter to the Company’s counsel demanding that the Company and the Individual Defendants amend the Initial Registration Statement to provide additional disclosures that the party alleges were improperly omitted from the Initial Registration Statement in violation of Sections 14(a) and 20(a) of the Exchange Act, including certain information regarding financial data and the background and process leading to the execution of the Merger Agreement (the “Demand Letter”). The Company is unable to estimate the potential loss or range of losses as a result of the Stockholder Actions remaining as of September 30, 2020 and the Demand Letter. See Note 14, Subsequent Events , for information regarding developments in the Stahlman and Manes actions subsequent to September 30, 2020. 22 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) 13. 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; 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. Fair Value Measurements at September 30, 2020 Total Level 1 Level 2 Level 3 Liabilities: Warrant Liabilities $ 110,781 $ - $ - $ 110,781 Fair Value Measurements at December 31, 2019 Total Level 1 Level 2 Level 3 Assets: Commercial Paper $ 1,997,400 $ - $ 1,997,400 $ - Corporate Bonds 999,820 - 999,820 - Total Assets: $ 2,997,220 $ - $ 2,997,220 $ - Liabilities: Warrant Liabilities $ 41,717 $ - $ - $ 41,717 There have been no changes in the methodologies used at September 30, 2020 and December 31, 2019, and no transfers between Level 1, 2 and 3 during the nine months ended September 30, 2020. 23 Table of Contents REXAHN PHARMACEUTICALS, INC. Notes to Condensed Financial Statements (Unaudited) The reconciliation of changes to the fair value of the Company’s warrant liabilities for the nine months ended September 30, 2020 is as follows: Warrant Liabilities Balance at January 1, 2020 $ 41,717 Unrealized losses, net 126,457 Liability extinguished in warrant exchange (57,393 ) Balance at September 30, 2020 $ 110,781 14. Subsequent Events Legal Proceedings On October 1, 2020, the Chancery Court granted an unopposed motion to dismiss the Stahlman action, but retained jurisdiction for the limited purpose of deciding any fee application should that become necessary. On October 8, 2020, the plaintiff filed a notice of voluntary dismissal of the Manes action in the United States District Court for the Southern District of New York. 24 Table of Contents