Opus Genetics, Inc. 10-Q

Item 1. Financial Statements Ocuphire Pharma, Inc. Condensed Consolidated Balance Sheets (in thousands, except share amounts and par value) As of March 31, 2021 December 31, 2020 (unaudited) Assets Current assets: Cash and cash equivalents $ 10,597 $ 16,399 Prepaids and other assets 1,428 1,269 Deferred costs 88 — Total current assets 12,113 17,668 Property and equipment, net 13 14 Total assets $ 12,126 $ 17,682 Liabilities and stockholders’ deficit Current liabilities: Accounts payable $ 1,415 $ 1,214 Accrued expenses 895 1,971 Total current liabilities 2,310 3,185 Warrant liabilities — 27,964 Total liabilities 2,310 31,149 Commitments and contingencies (Note 4) Stockholders’ equity (deficit) Preferred stock, par value $0.0001; 10,000,000 shares authorized as of March 31, 2021 and December 31, 2020; no shares issued and outstanding at March 31, 2021 and December 31, 2020. — — Common stock, par value $0.0001; 75,000,000 shares authorized as of March 31, 2021 and December 31, 2020; 10,929,881 and 10,882,495 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively. 1 1 Additional paid-in-capital 81,504 19,207 Accumulated deficit (71,689 ) (32,675 ) Total stockholders’ equity (deficit) 9,816 (13,467 ) Total liabilities and stockholders’ equity (deficit) $ 12,126 $ 17,682 See accompanying notes. 2 Index Ocuphire Pharma, Inc. Condensed Consolidated Statements of Comprehensive Loss (in thousands, except share and per share amounts) (unaudited) Three Months Ended March 31, 2021 2020 Operating expenses: General and administrative $ 1,704 $ 391 Research and development 3,482 218 Acquired in‑process research and development — 2,126 Total operating expenses 5,186 2,735 Loss from operations (5,186 ) (2,735 ) Interest expense — (554 ) Fair value change in warrant liabilities and premium conversion derivatives (33,829 ) 198 Other income 1 3 Loss before income taxes (39,014 ) (3,088 ) Benefit (provision) for income taxes — — Net loss (39,014 ) (3,088 ) Other comprehensive loss, net of tax — — Comprehensive loss $ (39,014 ) $ (3,088 ) Net loss per share: Basic and diluted (Note 10) $ (3.57 ) $ (0.87 ) Number of shares used in per share calculations: Basic and diluted 10,923,651 3,547,990 See accompanying notes. 3 Index Ocuphire Pharma, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (in thousands, except share amounts) (Unaudited) Common Stock Additional Paid–In Accumulated Total Shares Amount Capital Deficit Equity (Deficit) Balance at December 31, 2019 2,852,485 $ — $ 495 $ (8,055 ) $ ( 7,560 ) Issuance of common stock in exchange for in-process research and development 891,422 — 2,126 — 2,126 Share–based compensation — — 61 — 61 Net and comprehensive loss — — — (3,088 ) (3,088 ) Balance at March 31, 2020 3,743,907 $ — $ 2,682 $ (11,143 ) $ (8,461 ) Balance at December 31, 2020 10,882,495 $ 1 $ 19,207 $ (32,675 ) $ (13,467 ) Reclassification of Series A warrant liability to equity — — 61,793 — 61,793 Share–based compensation 40,000 — 494 — 494 Exercise of stock options 7,386 — 10 10 Net and comprehensive loss — — — (39,014 ) (39,014 ) Balance at March 31, 2021 10,929,881 $ 1 $ 81,504 $ (71,689 ) $ 9,816 See accompanying notes. 4 Index Ocuphire Pharma, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (Unaudited) Three Months Ended March 31, 2021 2020 Operating activities Net loss $ (39,014 ) $ (3,088 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation 494 61 Depreciation 1 5 Non-cash acquired in-process research and development — 2,126 Non-cash interest on convertible notes — 123 Non-cash interest on convertible notes – related party — 15 Non-cash discount amortization on convertible notes — 376 Non-cash discount amortization on convertible notes – related party — 40 Fair value change in warrant liabilities and premium conversion derivatives 33,829 (198 ) Change in assets and liabilities: Prepaid expenses and other assets (159 ) (2 ) Accounts payable 200 10 Accrued and other liabilities (1,163 ) (200 ) Net cash used in operating activities (5,812 ) (732 ) Investing activities Net cash used in investing activities — — Financing activities Proceeds from issuance of convertible notes — 448 Exercise of stock options 10 — Net cash provided by financing activities 10 448 Net decrease in cash and cash equivalents (5,802 ) (284 ) Cash and cash equivalents at beginning of period 16,399 1,537 Cash and cash equivalents at end of period $ 10,597 $ 1,253 Supplemental disclosure of cash flow information: Cash paid for income taxes $ — $ — Cash paid for interest $ — $ — Supplemental non-cash financing transactions: Non-cash reclassification of Series A warrant liability to equity $ 61,793 $ — Bifurcation of premium conversion derivative related to convertible notes $ — $ 831 Unpaid deferred offering and issuance costs $ 88 $ 107 Net change in proceeds receivable from convertible note issuance $ — $ 1,750 See accompanying notes. 5 Index Notes to Condensed Consolidated Financial Statements 1. Company Description and Summary of Significant Accounting Policies Nature of Business Ocuphire Pharma, Inc. (together with its subsidiary OcuSub, Inc., the "Company" or "Ocuphire”) is a clinical-stage ophthalmic biopharmaceutical company focused on developing and commercializing therapies for the treatment of several eye disorders. The Company’s pipeline currently includes two small molecule product candidates targeting front and back of the eye indications. The Company’s lead product candidate, Nyxol® Eye Drops (“Nyxol”), is a once-daily eye drop formulation of phentolamine mesylate designed to reduce pupil diameter and improve visual acuity. The Company’s second product candidate, APX3330, is a twice-a-day oral tablet, designed to target multiple pathways relevant to retinal and choroidal vascular diseases, such as diabetic retinopathy (“DR”) and diabetic macular edema (“DME”). The Company has also in-licensed additional second-generation product candidates, analogs of APX3330, including APX2009 and APX2014. The Company has sustained operating losses since inception and expects such losses to continue indefinitely until a sustained revenue source is realized. Management plans to continue financing the Company’s operations through additional issuances of the Company’s equity and debt securities. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate part or all of its research and development programs. Reverse Merger with Rexahn On June 17, 2020, Ocuphire, Rexahn Pharmaceuticals, Inc. (“Rexahn”), and Razor Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Rexahn (“Merger Sub”), entered into an Agreement and Plan of Merger and Reorganization, as amended on June 29, 2020 (as amended, the “Merger Agreement”), pursuant to which, among other things, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub would merge with and into Ocuphire, with Ocuphire continuing as a wholly-owned subsidiary of Rexahn and the surviving corporation of the merger (the “Merger”). The Merger closed on November 5, 2020. Upon completion of the Merger, Rexahn changed its name to Ocuphire Pharma, Inc. and changed its ticker symbol on the Nasdaq Capital Market to "OCUP". The Company’s headquarters is located in Farmington Hills, Michigan. COVID-19 On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. As a result of the COVID-19 pandemic, Ocuphire has experienced a few disruptions in its manufacturing, supply chain, research and development operations, regulatory process, and financial position. These disruptions include the acceleration of shipment of active pharmaceutical ingredient supply from overseas, increased costs of supply ingredients, the convening of an FDA EOP2 meeting via teleconference, and difficulties in obtaining more favorable financing terms. The global outbreak of COVID-19 continues to rapidly evolve. The extent to which the COVID-19 pandemic may impact Ocuphire’s business and preclinical and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, travel restrictions and social distancing in the U.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in the U.S. and other countries to contain and treat the disease. Although Ocuphire cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on Ocuphire’s results of future operations, financial position, and liquidity over the next 12 or more months. 6 Index Notes to Condensed Consolidated Financial Statements Basis of Presentation The accompanying condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2020 condensed balance sheet was derived from audited financial statements, and may not include all disclosures required by GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the fiscal year ended December 31, 2020. In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. The condensed consolidated financial statements of the Company include a subsidiary, OcuSub, Inc., which is fully owned by the Company. All significant intercompany accounts and transactions have been eliminated in the preparation of the financial statements. All of the share and per share amounts presented were adjusted, on a retroactive basis, to reflect the exchange of the shares of Ocuphire pre-Merger (“Private Ocuphire”) into 1.0565 shares of the Company (the “Exchange Ratio”), except for par value and share authorizations of Private Ocuphire for periods presented prior to the Merger. Going Concern The Company’s ability to continue operating as a going concern is contingent upon, among other things, its ability to secure additional financing and to achieve and maintain profitable operations. The Company plans to issue additional equity instruments and possibly debt to finance operating and working capital requirements. While the Company expects to obtain the additional financing that is needed, there is no assurance that the Company will be successful in obtaining the necessary funding for future operations. These factors raise substantial doubt as to the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Common Stock Valuation Prior to the close of the Merger, due to the absence of an active market for the Private Ocuphire’s common stock, the Company utilized methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation , to estimate the fair value of Private Ocuphire common stock. The valuation methodology included estimates and assumptions that required the Company’s judgment. These estimates and assumptions included a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector, and the likelihood of achieving a liquidity event, such as an initial public offering (“IPO”), reverse merger or sale. Significant changes to the key assumptions used in the valuations resulted in different fair values of common stock at each valuation date. Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Segment Information Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer views the Company’s operations and manages its business in one operating segment, which is the business of development and commercialization of products related to vision performance and health. Accordingly, the Company has a single reporting segment. Fair Value Measurements The Company follows accounting guidance that emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Fair value is defined 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.” Fair value measurements are defined on a three-level hierarchy: Level 1 inputs: Unadjusted quoted prices for identical assets or liabilities in active markets; 7 Index Notes to Condensed Consolidated Financial Statements Level 2 inputs: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, whether directly or indirectly, for substantially the full term of the asset or liability; and Level 3 inputs: Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. As of March 31, 2021 and December 31, 2020, the fair values of cash and cash equivalents, prepaid and other assets, deferred costs, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. The estimated fair value of the Company’s convertible notes while outstanding were based on amortized cost which was deemed to approximate fair value. The fair value of the warrant liabilities and premium conversion derivatives, while outstanding, were based on cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments and were based on Level 3 inputs. There were no transfers between fair value hierarchy levels during the three months ended March 31, 2021 and 2020. The fair value of financial instruments measured on a recurring basis is as follows (in thousands): As of March 31, 2021 Description Total Level 1 Level 2 Level 3 Liabilities: Warrant liabilities $ — $ — $ — $ — Total liabilities at fair value $ — $ — $ — $ — As of December 31, 2020 Description Total Level 1 Level 2 Level 3 Liabilities: Warrant liabilities $ 27,964 $ — $ — $ 27,964 Total liabilities at fair value $ 27,964 $ — $ — $ 27,964 The following table provides a roll-forward of the warrant liabilities and premium conversion derivatives measured at fair value on a recurring basis using unobservable level 3 inputs for the three months ended March 31, 2021 and 2020 (in thousands): 2021 2020 Warrant liabilities Balance as of beginning of period $ 27,964 $ — Change in fair value of warrant liability 33,829 — Reclassification of Series A warrants from liability to equity (61,793 ) — Balance as of end of period $ — $ — 2021 2020 Premium conversion derivatives Balance as of beginning of period $ — $ 2,714 Value assigned to the underlying derivatives in connection with convertible notes — 831 Change in fair value of premium conversion derivatives — (198 ) Balance as of end of period $ — $ 3,347 There were no financial instruments measured on a non-recurring basis for any of the periods presented. Recent Accounting Pronouncements In August 2020, FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ​ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, this ASU modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in this ASU are effective for smaller reporting companies (as defined by the SEC) for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements. 8 Index Notes to Condensed Consolidated Financial Statements 2. Merger On November 5, 2020, the Company completed its merger transaction with Rexahn in accordance with the terms of the Merger Agreement. Immediately after the Merger, there were approximately 7,091,878 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) outstanding (not including 3,749,992 Additional Shares under the Securities Purchase Agreement that were held in escrow subject to final adjustment). The former stockholders and option holders of Private Ocuphire (including the Investors under the Securities Purchase Agreement) owned, or held rights to acquire, in the aggregate approximately 86.6% of the fully-diluted Common Stock, which for these purposes is defined as the outstanding Common Stock, plus outstanding options of the Company, and not including any Additional Shares (the “Fully-Diluted Common Stock”), with the former Rexahn stockholders immediately prior to the Merger owning approximately 13.4% of the Fully-Diluted Common Stock. Pursuant to the Merger Agreement, the number of shares of Common Stock issued to Private Ocuphire’s stockholders for each share of Ocuphire’s common stock outstanding immediately prior to the Merger was calculated using an Exchange Ratio of approximately 1.0565 shares of Common Stock for each share of Private Ocuphire common stock. Immediately following the Merger, the stockholders of Private Ocuphire owned approximately 86.6% of the outstanding common stock of the Company. The transaction was accounted for as an asset acquisition in accordance with GAAP. Under this method of accounting, Private Ocuphire was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Merger: (i) Private Ocuphire’s stockholders owned substantially all of the voting rights in the combined company, (ii) Private Ocuphire designated all, but one, of the members of the initial board of directors of the combined company, and (iii) Private Ocuphire’s senior management holds all key positions in the senior management of the combined company. As a result, as of the closing date of the Merger, the net assets of Rexahn were recorded at their acquisition-date relative fair values in the consolidated financial statements of the Company and the reported operating results prior to the Merger are those of Private Ocuphire. Contingent Value Rights Agreement On November 5, 2020, in connection with the Merger, the Company, Shareholder Representatives Services LLC, as representative of the Rexahn stockholders prior to the Merger, and Olde Monmouth Stock Transfer Co., Inc., as the rights agent, entered into a Contingent Value Rights Agreement (the “CVR Agreement”). Pursuant to the Merger Agreement and the CVR Agreement, Rexahn stockholders of record as of immediately prior to the Effective Time received one contingent value right (“CVR”) for each share of Rexahn Common Stock held. Each CVR entitles such holders to receive, for each calendar quarter (each, a “CVR Payment Period”) during the 15-year period after the Closing (the “CVR Term”), an amount equal to the following: • 90% of all payments received by Rexahn or its affiliates during such CVR Payment Period from or on behalf of BioSense Global LLC (“BioSense”) pursuant to that certain License and Assignment Agreement, dated as of February 25, 2019, by and between BioSense and Rexahn, as amended by Amendment No. 1, dated August 24, 2019, and as further amended by Amendment No. 2, dated March 10, 2020, minus certain permitted deductions; • 90% of all payments received by Rexahn or its affiliates during such CVR Payment Period from or on behalf of Zhejiang HaiChang Biotechnology Co., Ltd. (“HaiChang”) pursuant to that certain Exclusive License Agreement, dated as of February 8, 2020, by and between HaiChang and Rexahn, minus certain permitted deductions; and • 75% of the sum of (i) all cash consideration paid by a third party to Rexahn or its affiliates during the applicable CVR Payment Period in connection with the grant, sale or transfer of rights to Rexahn’s pre-Closing intellectual property (other than a grant, sale or transfer of rights involving a sale or disposition of the post-Merger combined company) that is entered into during the 10-year period after the Closing (“Parent IP Deal”), plus (ii) with respect to any non-cash consideration received by Rexahn or its affiliates from a third party during the applicable CVR Payment Period in connection with any Parent IP Deal, all amounts received by Rexahn and its affiliates for such non-cash consideration at the time such non-cash consideration is monetized by Rexahn or its affiliates, minus (iii) certain permitted deductions. The CVRs are not transferable, except in certain limited circumstances, will not be certificated or evidenced by any instrument, will not accrue interest and will not be registered with the SEC or listed for trading on any exchange. The CVR Agreement will continue in effect until the later of the end of the CVR Term and the payment of all amounts payable thereunder. As of the November 5, 2020, the Merger closing date, and March 31, 2021, no milestones had been accrued as there were no potential milestones yet considered probable. Former Rexahn Warrants Following the closing of the Merger, 231,433 outstanding, unexercised Rexahn warrants to purchase Common Stock remained outstanding upon close of the Merger, the majority of which were subsequently repurchased according to the terms of the original warrant agreements. As of March 31, 2021, 66,538 of the Rexahn warrants remained outstanding with exercise prices ranging from $38.40 to $198.00 per share with an average remaining contractual life of 2.7 years. 9 Index Notes to Condensed Consolidated Financial Statements 3. Pre-Merger Financing Waiver Agreements Effective February 3, 2021, each investor that invested in the Pre-Merger Financing (as defined below) entered into a Waiver Agreement with the Company (collectively, the “Waiver Agreements”). Pursuant to the Waiver Agreements, the investors and the Company agreed to waive certain rights, finalize the exercise price and number of Series A Warrants and Series B Warrants, eliminate certain financing restrictions, extend the term of certain leak-out agreements, and, in the case of certain investors, grant certain registration rights for the shares underlying the warrants. The Waiver Agreements provide for the elimination of the full ratchet anti-dilution provisions, contained in the Series A Warrants (as certain of the anti-dilution provisions had previously caused liability accounting treatment for the Series A Warrants). Upon the effective date of the Waiver Agreement, the Series A Warrants were reclassified to equity. Pursuant to the Waiver Agreements, the number of shares underlying all of the Series B Warrants was fixed to 1,708,334 in the aggregate with respect to all investors, eliminating any future resets. Securities Purchase Agreement On June 17, 2020, Ocuphire, Rexahn and certain investors entered into a Securities Purchase Agreement, which was amended and restated in its entirety on June 29, 2020 (as amended and restated, the “Securities Purchase Agreement”). Pursuant to the Securities Purchase Agreement, the investors invested a total of $21.15 million in cash, including $300,000 invested by five directors of Private Ocuphire and one director of Rexahn, upon closing of the Merger (the “Pre-Merger Financing”). Pursuant to the Pre-Merger Financing, (i) Ocuphire issued and sold to the investors shares of Private Ocuphire common stock (the “Initial Shares”) which converted pursuant to the exchange ratio in the Merger into an aggregate of approximately 1,249,996 shares (the “Converted Initial Shares”) of common stock, (ii) Ocuphire deposited into escrow, for the benefit of the Investors, additional shares of Private Ocuphire common stock (the “Additional Shares”) which converted pursuant to the exchange ratio in the Merger into an aggregate of approximately 3,749,992 shares of common stock (the “Converted Additional Shares”), which Converted Additional Shares were delivered (or became deliverable) to the investors on November 19, 2020, and (iii) the Company agreed to issue to each investor on the tenth trading day following the consummation of the Merger (x) Series A Warrants representing the right to acquire shares of common stock equal to the sum of (A) the Converted Initial Shares purchased by the investor, (B) the Converted Additional Shares delivered or deliverable to the investor, without giving effect to any limitation on delivery contained in the Securities Purchase Agreement and (C) the initial number of shares of common stock, if any, underlying the Series B Warrants issued to the Investor and (y) additional warrants to purchase shares of common stock. Series A Warrants The Series A Warrants were issued on November 19, 2020 at an initial exercise price of $4.4795 per share, were immediately exercisable upon issuance and have a term of five years from the date of issuance. The Series A Warrants are exercisable for 5,665,838 shares of common stock in the aggregate (without giving effect to any limitation on exercise contained therein). Prior to the execution of the Waiver Agreements, the Series A Warrants were accounted for and classified as liabilities on the accompanying condensed consolidated balance sheets given certain price reset provisions not used for a fair valuation under a fixed for fixed settlement scenario as required for equity balance sheet classification. Upon the February 3, 2021 effective date of the Waiver Agreements, the Series A Warrants were reclassified to equity. A final fair valuation of the Series A Warrants was performed utilizing a Black Scholes model to estimate the aggregate fair value of the Series A Warrants prior to being re-classified as equity. Input assumptions used were as follows: risk-free interest rate 0.4%; expected volatility of 86.6%; expected life of 4.8 years; and expected dividend yield zero percent. The underlying stock price used was the market price as quoted on Nasdaq as of February 3, 2021, the effective date of the Waiver Agreement. The fair value change of the Series A Warrants was $33.8 million and was recorded to the fair value change in warrant liabilities and premium conversion derivatives line item on the accompanying condensed consolidated statements of comprehensive loss for the three months ended March 31, 2021. As a result of the reclassification to equity, the Series A Warrants are no longer subject to remeasurement. Series B Warrants The Series B Warrants have an exercise price of $0.0001, were exercisable upon issuance and will expire on the day following the later to occur of (i) the Reservation Date (as defined therein), and (ii) the date on which the investor’s Series B Warrants have been exercised in full (without giving effect to any limitation on exercise contained therein) and no shares remain issuable thereunder. The Series B Warrants are fixed and were exercisable for 1,708,334 shares of Common Stock, as of the effective date of the Waiver Agreement, in the aggregate (without giving effect to any limitation on exercise contained therein). The Series B Warrants were accounted for and classified as equity on the accompanying condensed consolidated balance sheets. 4. Commitments and Contingencies Apexian Sublicense Agreement On January 21, 2020, the Company entered into a sublicense agreement with Apexian Pharmaceuticals, Inc., pursuant to which it obtained exclusive worldwide patent and other intellectual property rights. In exchange for the patent and other intellectual rights, the Company agreed to certain milestone payments and royalty payments on future sales (See Note 9 — Apexian Sublicense Agreement). As of March 31, 2021, there was sufficient uncertainty with regard to both the outcome of the relevant clinical trials and the ability of the Company to obtain sufficient funding to support any of the cash milestone payments under the sublicense agreement, that no liabilities were recorded related to the sublicense agreement. 10 Index Notes to Condensed Consolidated Financial Statements Facility Leases In May 2019, the Company entered into a short-term non-cancellable facility lease (the “Lease”) for its operations and headquarters for a seven-month term beginning in June 2019. In October 2019 and November 2020, the Lease was amended to ultimately extend the term to December 31, 2021. Additionally, Ocuphire is leasing office space in Rockville, Maryland previously occupied by Rexahn (the “Rexahn Lease”). The Lease and the Rexahn Lease qualified for the short-term lease exception under ASC 842. The monthly base rent is approximately $3,000 and $13,000 for the Lease and Rexahn Lease, respectively. The rent expense associated with the Lease and Rexahn Lease in the aggregate amounted to $48,000 and $9,000 during the three months ended March 31, 2021 and 2020, respectively. Other In the ordinary course of business, from time to time, the Company may be subject to a broad range of claims and legal proceedings that relate to contractual allegations, patent infringement and other claims. In addition, the Company from time to time may be potentially committed to reimburse third parties for costs incurred associated with business development related transactions upon the achievement of certain milestones. The Company establishes accruals when applicable for matters and commitments which it believes losses are probable and can be reasonably estimated. To date, no loss contingency for such matters and potential commitments have been recorded. Although it is not possible to predict with certainty the outcome of these matters or potential commitments, the Company is of the opinion that the ultimate resolution of these matters and potential commitments will not have a material adverse effect on its results of operations or financial position. 5. Supplemental Balance Sheet Information Prepaid and Other Assets Prepaid and other assets consist of the following (in thousands): March 31, 2021 December 31, 2020 Prepaids $ 1,402 $ 1,243 Other 26 26 Total prepaids and other assets $ 1,428 $ 1,269 Property and Equipment, net Property and equipment held for use by category are presented in the following table (in thousands): March 31, 2021 December 31, 2020 Equipment $ 20 $ 20 Furniture 5 5 Total property and equipment $ 25 25 Less accumulated depreciation (12 ) (11 ) Property and equipment, net $ 13 $ 14 Depreciation expense was $1,000 and $5,000 for the three months ended March 31, 2021 and 2020, respectively. Accrued Expenses Accrued expenses consist of the following (in thousands): March 31, December 31, 2021 2020 R&D services and supplies $ 473 $ 1,440 Payroll 146 320 Professional services 162 186 Deferred issuance costs 88 — Other 26 25 Total $ 895 $ 1,971 11 Index Notes to Condensed Consolidated Financial Statements 6. Convertible Notes The Company entered into a series of unsecured convertible note financings (the “Convertible Notes”) with certain investors beginning on May 25, 2018. The total issuance of Convertible Notes amounted to $8.5 million (see Note 7 - Related Party Transactions). On November 4, 2020, all of Ocuphire’s outstanding Convertible Notes were converted into 977,128 shares of Ocuphire common stock as adjusted for the Exchange Ratio in connection with the completion of the Merger. The Convertible Notes accrued interest at a rate of 8% per annum, calculated on a 365-day year basis. Interest expense on principal during the three months ended March 31, 2020 was $138,000. The outstanding principal of, and accrued interest on, the Convertible Notes were payable on demand, in the absence of the Merger closing discussed above, at any time as of the first to occur of (i) September 30, 2020 or (ii) an event of default (each defined by the Convertible Notes as a Payoff Event). If, prior to a Payoff Event, the Company (i) completed an initial public offering (“IPO”), (ii) completed a change in control (“CIC”), (iii) completed a sale and issuance of its capital stock resulting in gross proceeds to the Company of at least $5 million (“Qualified Financing”), or (iv) completed a reverse merger transaction (Reverse Merger), then the outstanding principal of, and accrued but unpaid interest on the Convertible Notes would have automatically converted upon the earliest of such events to occur as follows: • IPO: The Convertible Notes would have automatically converted into the number of fully paid and non-assessable shares of the Company’s common stock equal to One Hundred and Seventy-Five Percent (175%) times Note Value divided by the per share price such shares were issued to purchasers of the Company’s equity securities in the IPO rounded to the nearest whole share. • CIC: The Convertible Notes would have automatically converted prior to the effectiveness of such CIC into that number of fully paid and non-assessable shares of the Company’s common stock equal to Two Hundred Percent (200%) of the Note Value divided by the per share price of the Company’s common stock at which the Company’s common stock was valued in such CIC (after giving effect to such conversion). The Convertible Note holder would have been entitled to the same contractual rights and would have been bound by the same restrictions and obligations as the other stockholders of the Company in such CIC. • Qualified Financing : The Convertible Notes would have automatically converted into that number of fully paid and non-assessable shares of the Company that were issued by the Company in the Qualified Financing, determined by dividing an amount equal to One Hundred and Seventy-Five Percent (175%) times the Note Value by the per share price such shares of the Company were issued to purchasers of the Company’s equity securities in the Qualified Financing, rounded to the nearest whole share. The Convertible Note holder would have been entitled to the same contractual rights and would have been bound by the same restrictions and obligations as the other purchasers of shares in the Qualified Financing. A Qualified Financing was defined as a sale and issuance of capital stock of the Company (or its successor) in a single transaction or series of related transactions resulting in gross proceeds to the Company of not less than $5,000,000 (including new equity investment of at least $1,000,000 plus the sum of the outstanding principal amount of the Convertible Notes being so converted under this provision). • Reverse Merger (excluding close of Merger with Rexahn) : The Convertible Notes would have automatically converted into that number of fully paid and non-assessable shares of the Combined Company whose shares were publicly traded in the United States or other jurisdiction following the completion of the Reverse Merger (the “Reverse Merger Parent”), determined by dividing an amount equal to One Hundred and Seventy-Five Percent (175%) times the Note Value divided by the per share price at which such shares were issued by the Reverse Merger Parent in such Reverse Merger, rounded to the nearest whole share. The Convertible Note holder would have been entitled to the same contractual rights and would have been bound by the same restrictions and obligations as the other stockholders of the Company in the Reverse Merger. The Company was not permitted to prepay the Convertible Notes prior to a Payoff Event. The Convertible Notes contained default provisions, and when triggered, the holders of the Convertible Notes could have immediately accelerated payment of the Convertible Notes and the outstanding principal and interest would have become payable immediately. During a period of default, interest would have been assessed at a 12% per annum rate. Redemption Features The Company determined that all of the conversion provisions, except for the conversion provision upon Merger close, were redemption features that qualified as embedded derivatives. The qualifying embedded derivatives were collectively separated from their debt host upon the issuance of the Convertible Notes. The bifurcation of the embedded derivatives from the debt host resulted in a discount to the Convertible Notes in the amount of $0.8 million during the three months ended March 31, 2020. The embedded derivatives were accounted for separately on a fair market value basis. There were no outstanding premium conversion derivatives as of March 31, 2021 or December 31, 2020 given the conversion of the Convertible Notes. The Company recorded the fair value changes of the premium conversion derivatives while outstanding to fair value change in derivative and warrant liabilities in the accompanying condensed consolidated statements of comprehensive loss which amounted to a benefit of $0.2 million during the three months ended March 31, 2020. 12 Index Notes to Condensed Consolidated Financial Statements The note discounts were amortized to interest expense over the term of the Convertible Notes using the straight-line method which approximates the effective interest method and amounted to $0.4 million during the three months ended March 31, 2020. 7. Related Party Transactions Convertible Notes with Related Parties The Company entered into Convertible Notes with certain investors beginning on May 25, 2018. Through March 31, 2020, Convertible Notes in the principal aggregate amount equal to $0.7 million were issued to four board members and to two officers, one of which was also a board member of the Company. See Note 6 – Convertible Notes. Apexian Sublicense Agreement On January 21, 2020, as amended on June 4, 2020, the Company entered into a sublicense agreement with Apexian Pharmaceuticals, Inc. (“Apexian”) and issued a total of 891,422 shares of common stock (as adjusted for the Exchange Ration) to Apexian and to certain affiliates of Apexian, following which Apexian became a holder of over 5% of the Company’s common stock. See Note 9 – Apexian Sublicense Agreement. Pre-Merger Financing Five directors of Private Ocuphire and one director of Rexahn participated in the Pre-Merger Financing, investing an aggregate of $300,000. Following the closing of the Merger, these directors received 17,729 Converted Initial Shares, 53,189 Converted Additional Shares, 80,366 Series A Warrants and 9,444 Series B Warrants. See Note 3 – Pre-Merger Financing. Waiver Agreements Six directors of the Company signed Waiver Agreements, waiving certain reset provisions and financing restrictions. These directors did not receive any of the additional Series B Warrants that were issued in connection with the Waiver Agreements. See Note 3 – Pre-Merger Financing. 8. Share-based Compensation Share-based compensation expense was included in general and administrative and research and development costs as follows in the accompanying condensed consolidated statements of comprehensive loss for the three month periods indicated below (in thousands): March 31, 2021 2020 General and administrative $ 193 $ 42 Research and development 301 19 Total share-based compensation $ 494 $ 61 Ocuphire Stock Options 2020 Equity Incentive Plan The stockholders of the Company approved the 2020 Equity Incentive Plan (the “2020 Plan”) for stock-based awards, which became effective on November 5, 2020. Under the 2020 Plan, (i) 1,000,000 new shares of common stock were reserved for issuance and (ii) up to 70,325 additional shares of common stock may be issued, consisting of (A) shares that remain available for the issuance of awards under prior equity plans and (B) shares of common stock subject to outstanding stock options or other awards covered by prior equity plans that have been cancelled or expire on or after the date that the 2020 Plan became effective. 2018 Equity Incentive Plan Prior to the 2020 Plan, the Company adopted a 2018 Equity Incentive Plan (the “2018 Plan”) in April 2018 under which 1,241,387 shares of the Company’s common stock were reserved for issuance to employees, directors and consultants upon the amendment of the 2018 Plan in December 2019. The reserve of common stock for the 2018 Plan has been adjusted to give effect to the Exchange Ratio. Inducement Plan On February 22, 2021, the Company adopted the Ocuphire Pharma, Inc. Inducement Plan (the “Inducement Plan”), pursuant to which the Company reserved 325,258 shares of its common stock to be used exclusively for grants of awards to individuals who were not previously employees or directors of the Company, as an inducement material to the individual’s entry into employment with the Company within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. 13 Index Notes to Condensed Consolidated Financial Statements The 2020 Plan, 2018 Plan and Inducement Plan permit the grant of stock options, appreciation rights, restricted stock, restricted stock units, performance stock and cash awards, and other share‑based awards. Incentive and non‑statutory stock options may be granted under the 2020 and 2018 Plans. Only non-statutory options may be granted under the Inducement Plan. 2020 Plan Evergreen Provision Under the 2020 Plan, the shares reserved automatically increase on January 1st of each year, for a period of not more than ten years from the date the 2020 Plan is approved by the stockholders of the Company, commencing on January 1, 2021 and ending on (and including) January 1, 2030, by an amount equal to 5% of the shares of common stock outstanding as of December 31st of the preceding calendar year. Notwithstanding the foregoing, the Board of Directors may act prior to January 1st of a given year to provide that there will be no January 1st increase in the share reserve for such year or that the increase in the share reserve for such year will be a lesser number of shares of common stock than would otherwise occur pursuant to the preceding sentence. On January 1, 2021, 544,125 shares were added to the 2020 Plan as a result of the evergreen provision. During the three months ended March 31, 2021 and 2020, 41,800 and zero stock options were granted to newly-hired consultants (as adjusted for the Exchange Ratio), respectively, generally vesting over a six (6) to forty-eight (48) month period. The Company recognized $446,000 and $61,000 in share-based compensation expense related to stock options during the three months ended March 31, 2021 and 2020, respectively. The weighted average fair value per share of options granted during the three months ended March 31, 2021 was $6.71. The Company measures the fair value of stock options with service‑based and performance‑based vesting criteria to employees, directors, consultants and directors on the date of grant using the Black‑Scholes option pricing model. The Company does not have history to support a calculation of volatility and expected term. As such, the Company has used a weighted‑average volatility considering the volatilities of several guideline companies. For purposes of identifying similar entities, the Company considered characteristics such as industry, length of trading history, and stage of life cycle. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The average expected life of the options was based on the contractual term for agreements that allow for exercise of vested options through the end of the contractual term upon termination of continuous service, and for all other agreements, was based on the mid‑point between the vesting date and the end of the contractual term according to the “simplified method” as described in Staff Accounting Bulletin 110. The risk‑free interest rate is determined by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. The Company records forfeitures when they occur. The weighted‑average assumptions used in the Black‑Scholes option‑pricing model are as follows during the three months ended March 31, 2021 and 2020: 2021 2020 Expected stock price volatility 86.6 % — % Expected life of options (years) 5.6 — Expected dividend yield — % — % Risk free interest rate 0.8 % — % During the three months ended March 31, 2021 and 2020, 118,217 and 66,601 stock options vested (as adjusted for the Exchange Ratio), respectively. The weighted average fair value per share of options vesting during the three months ended March 31, 2021 and 2020 was $3.66 and $0.87, respectively. During the three months ended March 31, 2021 and 2020, zero and 7,923 options were forfeited, respectively. As of March 31, 2021, 1,274,408 shares were available for future issuance under the 2020 Plan and Inducement Plan. No shares were available for future issuance under the 2018 Plan. Unrecognized share‑based compensation cost was $2.3 million as of March 31, 2021. The unrecognized share‑based expense is expected to be recognized over a weighted average period of 1.4 years. Ocuphire Restricted Stock Awards The Company did not grant any restricted stock awards (RSAs) during any of the periods presented. The RSAs granted in previous periods were subject to various vesting schedules. During the three months ended March 31, 2021 and 2020, 40,000 and zero RSAs vested, respectively, and no RSAs were forfeited during the periods presented. The share-based compensation expense attributed to the RSAs during the three months ended March 31, 2021 and 2020 was $22,000 and zero, respectively. Ocuphire Stock Awards The Company granted stock awards in the amount of 4,474 common shares to two board members for services performed during the first quarter of 2021. The stock-based compensation related to these awards amounted to $26,000 during the three months ended March 31, 2021. 14 Index Notes to Condensed Consolidated Financial Statements Former Rexahn Options Following the closing of the Merger, 123 outstanding, unexercised and vested options to purchase Common Stock granted under the Rexahn Pharmaceuticals Stock Option Plan, as amended (the “Rexahn 2003 Plan”), remained outstanding as of March 31, 2021 and December 31, 2020. The exercise prices related to the outstanding options granted under the Rexahn 2003 Plan ranged from $182.40 to $600.00 per share with an average remaining contractual life of 0.9 years. 9. Apexian Sublicense Agreement On January 21, 2020, the Company entered into a sublicense agreement (as amended on June 4, 2020, the “Apexian Sublicense Agreement”) with Apexian, pursuant to which it obtained exclusive worldwide patent and other intellectual property rights that constitute a Ref-1 Inhibitor program relating to therapeutic applications to treat disorders related to ophthalmic and diabetes mellitus conditions. The lead compound in the Ref-1 Inhibitor program is APX3330, which the Company intends to develop as an oral pill therapeutic to treat diabetic retinopathy and diabetic macular edema initially, and potentially later to treat wet age-related macular degeneration. As a result of the Sublicense Agreement, Apexian is considered by Ocuphire to be a related party. In connection with the Apexian Sublicense Agreement, the Company issued a total of 891,422 shares (as adjusted for the Exchange Ratio) of its common stock to Apexian and to certain affiliates of Apexian. The share issuance transaction was recorded in the amount of $2.1 million as IPR&D expense for the three months ended March 31, 2020 based on the fair market value of the common shares issued since no processes or activities that would constitute a “business” were acquired and none of the rights and underlying assets acquired had alternative future uses or reached a stage of technological feasibility. Additionally, in accordance with the Apexian Sublicense Agreement, the Company paid the balance remaining of $0.4 million of Ref-1 Inhibitor program costs to Apexian following the Company’s listing on a major stock exchange. The Company also agreed to make one-time milestone payments under the Apexian Sublicense Agreement for each of the first ophthalmic indication and the first diabetes mellitus indication for the Development and Regulatory milestones, and once for each of the Sales milestones. These milestone payments include (i) payments for specified developmental and regulatory milestones (including completion of the first Phase 2 trial and the first Phase 3 pivotal trial in the United States, and filing and achieving regulatory approval from the FDA for the first New Drug Application for a compound) totaling up to $11 million in the aggregate and (ii) payments for specified sales milestones of up to $20 million in the aggregate, which net sales milestone payments are payable once, upon the first achievement of such milestone. Lastly, the Company also agreed to make a royalty payment equal to a single-digit percentage of its net sales of products associated with the covered patents under the Apexian Sublicense Agreement. If it is not terminated pursuant to its terms, the Apexian Sublicense Agreement shall remain in effect until expiration of the last to expire of the covered patents. None of the milestone or royalty payments were triggered as of March 31, 2021. 10. Net loss per share Basic loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings or loss per share of common stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s warrants, convertible notes, restricted stock awards and stock options while outstanding are considered common stock equivalents for this purpose. Diluted earnings is computed utilizing the treasury method for the warrants, restricted stock awards and stock options. Diluted earnings with respect to the convertible notes utilizing the if-converted method was not applicable during the periods presented as no conditions required for conversion had occurred. No incremental common stock equivalents were included in calculating diluted loss per share because such inclusion would be anti-dilutive given the net loss reported for the periods presented. The historical share and per share data for periods prior to the November 5, 2020 closing of the Merger have been adjusted to give effect to the Exchange Ratio. The following potential common shares were not considered in the computation of diluted net loss per share as their effect would have been anti-dilutive for the three month periods ended presented below: March 31, 2021 2020 Series A Warrants and Series B Warrants 7,374,172 — Stock options 1,818,612 1,029,781 Restricted stock awards 4,474 — Former Rexahn warrants 66,538 — Former Rexahn options 123 — 11. Income Taxes The effective tax rate for the three months ended March 31, 2021 and 2020 was zero percent. As of March 31, 2021, a full valuation allowance has been established to reduce the Company’s net deferred income tax assets. As such, no tax benefit related to the Company’s pre-tax loss was recognized for any of the periods presented. 15 Index Notes to Condensed Consolidated Financial Statements The Company’s corporate returns are subject to examination for the 2018 and 2019 tax years for federal income tax purposes and subject to examination for the 2018 and 2019 tax years in one state jurisdiction. The Company does not have any reserves for income taxes that represent the Company’s potential liability for uncertain tax positions. 12. Subsequent Events Warrant Exercise In April 2021, investors exercised Series B Warrants for a total of 1,629,634 shares, for total proceeds of $163. Issuance of Settlement Shares On May 6, 2021, the Company issued 350,000 shares of common stock of the Company to three accredited investors pursuant to a settlement agreement, dated May 6, 2021, in exchange for a release of potential claims. 16 Index Ocuphire Pharma, Inc. Form 10-Q