form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Rexahn Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

Commission File No.: 001-34079

Delaware		11-3516358
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

15245 Shady Grove Road, Suite 455

Rockville, MD 20850

(Address of principal executive offices, including zip code)

Telephone: (240) 268-5300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	o	Accelerated Filer	þ
Non-Accelerated Filer	o	Smaller reporting company	o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 95,345,656 shares of common stock outstanding as of November 9, 2011.

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

TABLE OF CONTENTS

			Page

PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	1)	Condensed Balance Sheet at September 30, 2011 (unaudited) and December 31, 2010	3

	2)	Condensed Statement of Operations (unaudited) for the three and nine months ended September 30, 2011 and 2010 and cumulative from March 19, 2001 (inception) to September 30, 2011	4

	3)	Condensed Statement of Cash Flows (unaudited) for the nine months ended September 30, 2011 and 2010 and cumulative from March 19, 2001 (inception) to September 30, 2011	5

	4)	Notes to Condensed Financial Statements (unaudited)	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38

Item 3	Quantitative and Qualitative Disclosures About Market Risk		47

Item 4	Controls and Procedures		47

PART II	OTHER INFORMATION

Item 1	Legal Proceedings		48

Item 1A	Risk Factors		48

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		48

Item 3	Defaults Upon Senior Securities		48

Item 4	(Removed and Reserved)		48

Item 5	Other Information		48

Item 6	Exhibits		48


SIGNATURES			49

Table of Contents

PART I Financial Information

Item 1 Financial Statements

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Condensed Balance Sheet

	September 30, 2011 (unaudited)			December 31, 2010
ASSETS
Current Assets:
Cash and cash equivalents	$	13,216,933		$	12,340,239
Marketable securities (note 4)		1,950,000			2,451,620
Research tax credit receivable		-			145,513
Prepaid expenses and other current assets (note 5)		455,709			706,649
Note receivable – current portion (note 6)		25,688			28,023

Total Current Assets		15,648,330			15,672,044

Restricted Cash Equivalents (note 18)		2,947,451			401,893

Note Receivable (note 6)		-			18,682

Equipment, Net (note 7)		93,072			123,565

Total Assets	$	18,688,853		$	16,216,184
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses (note 8)	$	3,905,460		$	1,820,900

Deferred Research and Development Arrangement (note 9)		843,750			900,000

Other Liabilities (note 10)		113,640			133,117

Warrant Liabilities (note 15)		3,653,706			2,966,710

Total Liabilities		8,516,556			5,820,727

Commitments and Contingencies (note 18)

Stockholders’ Equity (note 13):
Preferred stock, par value $0.0001, 100,000,000 authorized shares, none issued and outstanding		-			-
Common stock, par value $0.0001, 500,000,000 authorized shares, 95,279,861 (2010 – 84,175,504) issued and 95,265,656 (2010 – 84,160,849) outstanding		9,528			8,418
Additional paid-in capital		67,665,073			56,157,452
Accumulated other comprehensive loss		-			(2,340	)
Accumulated deficit during the development stage		(57,473,894	)		(45,739,663	)
Treasury stock, 14,205 shares, at cost		(28,410	)		(28,410	)

Total Stockholders’ Equity		10,172,297			10,395,457

Total Liabilities and Stockholders’ Equity	$	18,688,853		$	16,216,184

See the notes accompanying the condensed financial statements.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Condensed Statement of Operations

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						Cumulative from March 19, 2001 (Inception) to September 30,
	2011			2010			2011			2010			2011
				(Restated)						(Restated)
Revenues:
Research	$	-		$	-		$	-		$	-		$	-

Expenses:
General and administrative		774,307			1,561,377			2,811,097			4,423,376			26,610,263
Research and development		2,372,201			671,339			10,506,823			2,453,350			30,400,339
Patent fees		198,424			123,147			374,163			238,089			1,929,141
Depreciation and amortization		10,127			11,663			34,904			34,843			630,371

Total Expenses		3,355,059			2,367,526			13,726,987			7,149,658			59,570,114

Loss from Operations		(3,355,059	)		(2,367,526	)		(13,726,987	)		(7,149,658	)		(59,570,114	)

Other Income (Expense)
Realized loss on marketable securities .		-			-			(3,960	)		-			(13,301	)
Interest income		19,592			49,418			100,914			97,699			1,412,981
Interest expense		-			-			-			-			(301,147	)
Other income		-			-			-			56,047			56,047
Unrealized gain (loss) on fair value of warrants		1,866,249			2,536,999			1,993,469			(4,333,496	)		891,124
Unrealized gain on fair value of put feature on common stock		-			-			-			97,713			2,315,539
Financing expense		-			-			(97,667	)		(180,080	)		(640,023	)
Beneficial conversion feature		-			-			-			-			(1,625,000	)
Total Other Income (Expense)		1,885,841			2,586,417			1,992,756			(4,262,117	)		2,096,220

Net (Loss) Income Before Provision for Income Taxes		(1,469,218	)		218,891			(11,734,231	)		(11,411,775	)		(57,473,894	)
Provision for income taxes		-			-			-			-			-
Net (Loss) Income	$	(1,469,218	)	$	218,891		$	(11,734,231	)	$	(11,411,775	)	$	(57,473,894	)

Net loss per share, basic and diluted	$	(0.02	)	$	0.00		$	(0.13	)	$	(0.15	)

Weighted average number of shares outstanding, basic and diluted		95,240,221			83,063,250			92,276,111			76,932,814

See the notes accompanying the condensed financial statements.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Condensed Statement of Cash Flows

(Unaudited)

	For the Nine Months Ended September 30,						Cumulative From March 19, 2001 (Inception) to September 30,
	2011			2010			2011
				(Restated)
Cash Flows from Operating Activities:
Net loss	$	(11,734,231	)	$	(11,411,775	)	$	(57,473,894	)
Adjustments to reconcile net loss to net cash used in operating activities:
Beneficial conversion feature		-			-			1,625,000
Compensatory stock		-			1,663,999			2,129,877
Depreciation and amortization		34,904			34,843			630,371
Stock-based compensation		513,255			435,305			5,452,277
Amortization of deferred research and development contribution		(56,250	)		(56,250	)		(656,250	)
Note receivable		21,017			(53,711	)		(25,688	)
Realized losses on marketable securities		3,960			-			13,301
Unrealized (gain) loss on fair value of warrants		(1,993,469	)		4,333,496			(891,124	)
Unrealized gain on fair value of put feature on common stock		-			(97,713	)		(2,315,539	)
Financing expense		97,667			180,080			640,023
Amortization of deferred lease incentive		(15,000	)		(15,000	)		(45,000	)
Deferred lease expenses		(4,477	)		24,728			58,640
Loss on impairment of intangible assets		-			-			286,132
Changes in assets and liabilities:
Prepaid expenses and other current assets		250,940			(160,113	)		(455,709	)
Research tax credit receivable		145,513			-			-
Accounts payable and accrued expenses		2,084,560			555,268			3,905,460
Net Cash Used in Operating Activities		(10,651,611	)		(4,566,843	)		(47,122,123	)

Cash Flows from Investing Activities:
Restricted cash equivalents		(2,545,558	)		842,454			(2,947,451	)
Purchase of equipment		(4,411	)		(3,744	)		(553,359	)
Purchase of marketable securities		(8,000,000	)		(503,960	)		(21,123,960	)
Proceeds from sales of marketable securities		8,500,000			75,000			19,160,659
Payment of licensing fees		-			-			(356,216	)
Net Cash (Used in) Provided by Investing Activities		(2,049,969	)		409,750			(5,820,327	)
Cash Flows from Financing Activities:
Issuance of common stock and units, net of issuance costs		13,220,273			9,318,228			55,805,574
Proceeds from exercise of stock options		40,040			107,240			150,882
Proceeds from exercise of stock warrants		317,961			3,263,376			3,581,337
Proceeds from long-term debt		-			-			5,150,000
Proceeds from research contribution		-			-			1,500,000
Purchase of treasury stock		-			-			(28,410	)
Net Cash Provided by Financing Activities		13,578,274			12,688,844			66,159,383
Net Increase in Cash and Cash Equivalents		876,694			8,531,751			13,216,933
Cash and Cash Equivalents – beginning of period		12,340,239			7,298,032			-
Cash and Cash Equivalents - end of period	$	13,216,933		$	15,829,783		$	13,216,933

See the notes accompanying the condensed financial statements.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Condensed Statement of Cash Flows (continued)

(Unaudited)

	For the Nine Months Ended September 30,				Cumulative From March 19, 2001 (Inception) to September 30,
	2011		2010		2011
			(Restated)
Supplemental Cash Flow Information
Interest paid	$	-	$	-	$	301,147
Non-cash financing and investing activities:
Warrants issued	$	2,924,333	$	1,980,880	$	11,054,427
Put feature on common stock issued	$	-	$	-	$	4,954,738
Dilutive issuances of common stock	$	-	$	-	$	2,639,199
Warrant liability extinguishment from exercise of warrants	$	243,868	$	5,286,602	$	6,180,660
Leasehold improvement incentive	$	-	$	-	$	100,000
Settlement of lawsuit	$	-	$	43,953	$	43,953

See the notes accompanying the condensed financial statements.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

1.	Operations and Organization

Operations

Rexahn Pharmaceuticals, Inc. (the “Company”, “Rexahn Pharmaceuticals”), a Delaware corporation, is a development stage biopharmaceutical company dedicated to the discovery, development and commercialization of innovative treatments for cancer, central nervous system (“CNS”) disorders, sexual dysfunction and other medical needs. The Company had an accumulated deficit of $57,473,894 at September 30, 2011 and anticipates incurring losses through the remainder of fiscal 2011 and beyond. The Company has not yet generated commercial sales revenue and has been able to fund its operating losses to date through the sale of its common stock, warrants exercisable for common stock, units, issuance of long-term debt, and proceeds from reimbursed research and development costs. Management has the capability of managing the Company’s operations within existing cash available by focusing on core research and development activities.

Basis of Presentation

The accompanying unaudited condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of September 30, 2011 and December 31, 2010 and the results of operations and cash flows for the three and nine months ended September 30, 2011 and 2010 have been included. Operating results for the three and nine month periods ended September 30, 2011 are not necessarily indicative of results that may be expected for any other interim period or the full fiscal year ending December 31, 2011. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2010 (“2010 Form 10-K/A”). Information included in the condensed balance sheet as of December 31, 2010 has been derived from the Company’s audited financial statements for the year ended December 31, 2010 included in the 2010 Form 10-K/A.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Actual results may ultimately differ from those estimates. These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become available.

Reclassification

The Company has reclassified previously reported amortization of Rexgene’s research and development arrangement, as disclosed in Note 9, “Deferred Research and Development Arrangement”, from revenue to a reduction of research and development expenses in the statement of operations. The reclassification had no effect on the Company’s balance sheets, net loss, or cash flows from operating activities.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

2.	Prior Period Adjustment

The financial statements of the Company for the three and nine months ended September 30, 2010 have been restated as a result of management’s determination that the Company had misclassified warrants issued to investors through offerings occurring in December 2007, March 2008, June 2009, October 2009 and June 2010. The warrants were previously reported as equity, but further review by management concluded that these warrants should have been classified as liabilities at inception due to provisions within the warrant agreements, and should be reported at fair value at the balance sheet date.

Management also determined that the anti-dilution make whole provision (the “Anti-dilution provision”) which is a put on the common stock, issued in the 2007 and 2008 offerings were also misclassified as equity. In the event that the Company issued shares or share indexed contracts below an effective purchase price paid by the investors, the investor would receive additional shares equal to a ratio of the initial purchase price per share less the original number of common shares issued. The Anti-dilution provision expired on the second anniversary of the financing and should have been reported as a liability at fair value at inception.

The restatement had no effect on the Company’s cash, loss from operations or net cash used in operating activities for the three and nine months ended September 30, 2010. After reviewing the circumstances leading up to the restatement, management believes that the errors were inadvertent and unintentional. In addition, following the discovery of these errors, the Company began implementing procedures intending to strengthen its internal control processes and prevent a recurrence of these errors.

The effects of the restatement on the Company’s statement of operations and cash flows for the three and nine months ended September 30, 2010 are as follows:

STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010
	As previously reported			Effect of Restatement		As restated
Unrealized gain on fair value of warrants		-			2,536,999		2,536,999
Total other income (expense)		49,418			2,536,999		2,536,999
Net (loss) income before provision for income taxes		(2,318,108	)		2,536,999		218,891
Net (loss) income		(2,318,108	)		2,536,999		218,891
Net (loss) income per share, basic and diluted		(0.03	)		0.03		0.00

STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
	As previously reported			Effect of Restatement			As restated
Unrealized gain on fair value of put feature on common stock		-			97,713			97,713
Unrealized loss on fair value of warrants		-			(4,333,496	)		(4,333,496	)
Financing expense		-			(180,080	)		(180,080	)
Total other income (expense)		153,746			(4,415,863	)		(4,262,117	)
Net loss before provision for income taxes		(6,995,912	)		(4,415,863	)		(11,411,775	)
Net loss		(6,995,912	)		(4,415,863	)		(11,411,775	)
Net loss per share, basic and diluted		(0.09	)		(0.06	)		(0.15	)

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

2.	Prior Period Adjustment (cont’d)

STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
	As previously reported			Effect of Restatement			As restated
Net loss		(6,995,912	)		(4,415,863	)		(11,411,775	)
Unrealized gain on fair value of put feature on common stock		-			(97,713	)		(97,713	)
Unrealized loss on fair value of warrants		-			4,333,496			4,333,496
Financing expense		-			180,080			180,080
Net cash used in operating activities		(4,566,843	)		-			(4,566,843	)

3.	Recent Accounting Pronouncements Affecting the Company

Fair Value Measurements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-04 to Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”) which amends the disclosure requirements for fair value instruments. The new disclosures required include disclosure regarding the sensitivity of the fair value measurement to changes in unobservable inputs, and the interrelationships between those unobservable inputs. The guidance is effective for the Company for fiscal years and interim periods beginning on or after December 15, 2011.

Comprehensive Income

In June 2011, the FASB issued authoritative guidance for presentation and disclosure of comprehensive income in the financial statements. Under the new guidance, a Company may no longer present the components of other comprehensive income as part of the statement of changes in the Statement of Stockholder’s Equity, and instead must present the components of comprehensive income either in the Statement of Operations or in a separate statement immediately following the Statement of Operations. In addition, reclassification adjustments between comprehensive income and net income must be disclosed on the financial statements. This guidance is effective for the Company for fiscal years and interim periods beginning on or after December 15, 2011.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

4.	Marketable Securities

Cost and fair value of the Company’s marketable securities are as follows:

Securities available-for-sale	Cost Basis		Gross Unrealized Losses			Fair Value
September 30, 2011:
State and municipal obligations	$	1,950,000	$	-		$	1,950,000

December 31, 2010:
State and municipal obligations	$	2,453,960	$	(2,340	)	$	2,451,620

Amortized cost and fair value at September 30, 2011 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the Company may redeem certain securities at par.

Maturity		Cost Basis				Gross Unrealized Losses				Fair Value
10 years or more		$	1,950,000				-			$	1,950,000

During the nine months ended September 30, 2011, the Company sold $8,500,000 of securities at par and the total amount that was reclassified from accumulated comprehensive loss into net loss was $3,960. The Company did not sell any securities in the three months ended September 30, 2011. The unrealized loss on marketable securities for the nine months ended September 30, 2011 was $1,620, respectively. There was no unrealized loss on marketable securities for the three months ended September 30, 2011.

5.	Prepaid Expenses and Other Current Assets

	September 30,		December 31,
	2011		2010

Deposits on contracts	$	244,131	$	564,074
Other assets		211,578		142,575

	$	455,709	$	706,649

Deposits on contracts consist of deposits on research and development contracts for services that had not been incurred as of the balance sheet date. Other assets include prepaid general and administrative expenses, such as insurance, rent, and investor relations services.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

6.	Note Receivable

On June 16, 2010, Amarex, LLC (“Amarex”) executed a note payable to the Company in settlement of a contract dispute. The Company settled the case with Amarex for $100,000 less a balance owed of $43,953. The principal sum of the note was $56,047, and is included in other income in the Company’s statement of operations. Monthly payments of $2,335 began on September 1, 2010 and will continue until August 1, 2012 at which time the balance is expected to be paid in full. The note does not bear interest. Pursuant to the note, Amarex shall pay a late charge of five percent (5%) of any past due installment payments if any installment payment is not paid within 10 days of its due date. As of September 30, 2011, all payments were made as scheduled.

As of September 30, 2011, the principal amortization of the note is shown below:

Principal Amortization		Expected Payment
Within 1 year		$	25,688

7.	Equipment, Net

	September 30, 2011			December 31, 2010

Furniture and fixtures	$	32,646		$	32,169
Office equipment		80,120			77,032
Lab and computer equipment		430,261			429,415
Leasehold improvements		110,713			110,713

Total fixed assets		653,740			649,329
Less: Accumulated depreciation		(560,668	)		(525,764	)

Net carrying amount	$	93,072		$	123,565

Depreciation expense was $10,127 and $11,663 for the three months ended September 30, 2011 and 2010, respectively, and $34,904, and $34,843 for the nine months ended September 30, 2011 and 2010, respectively.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

8.	Accounts Payable and Accrued Expenses

	September 30, 2011		December 31, 2010

Trade payables	$	2,039,922	$	489,527
Accrued expenses		25,400		18,466
Accrued research and development contract costs		1,706,650		1,239,233
Payroll liabilities		133,488		73,674

	$	3,905,460	$	1,820,900

9.	Deferred Research and Development Arrangement

In 2003, the Company entered into a collaborative research agreement with Rexgene Biotech Co., Ltd. (“Rexgene”), a shareholder. Rexgene is engaged in the development of pharmaceutical products in Asia and has agreed to assist the Company with the research, development and clinical trials necessary for registration of the Company’s drug candidate, Archexin, in Asia. This agreement provides Rexgene with exclusive rights to license, sublicense, make, have made, use, sell and import Archexin in Asia. In accordance with the agreement, Rexgene paid the Company a one-time fee of $1,500,000 in 2003. The agreement terminates at the later of 20 years or the term of the patent. The amortization reduces research and development expenses for the periods presented.

The Company is using 20 years as its basis for recognition and accordingly $18,750 and $56,250 reduced research and development expenses for the three and nine months ended September 30, 2011 and 2010, respectively. The remaining $843,750 and $900,000 at September 30, 2011 and December 31, 2010, respectively, is reflected as deferred research and development arrangement on the balance sheet. The contribution is being used in the cooperative funding of the costs of development of Archexin. Royalties of 3% of net sales of licensed products will become payable to the Company on a quarterly basis once commercial sales of Archexin begin in Asia. The product is still under development and commercial sales in Asia are not expected to begin until at least 2013. Under the terms of the agreement, Rexgene does not receive royalties on Company net sales outside of Asia.

10.	Other Liabilities

Deferred Lease Incentive

On June 29, 2009, the Company entered into a five year office lease agreement as disclosed in Note 18. The lessor agreed to grant a leasehold improvement allowance of $100,000 to the Company to be used for the construction cost of improvements to the leased property, which included architectural and engineering fees, government agency plan check, permit and other fees, sales and use taxes, testing and inspection costs, and telephone and data cabling and wiring in the premises. The Company accounts for the benefit of the leasehold improvement allowance as a reduction of rental expense over the five-year term of the office lease.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

10.	Other Liabilities (cont’d)

The following table sets forth the deferred lease incentive:

	September 30, 2011			December 31, 2010

Deferred lease incentive	$	100,000		$	100,000
Less accumulated amortization		(45,000	)		(30,000	)

Balance	$	55,000		$	70,000

Deferred Office Lease Expense

The office lease agreement, disclosed above, requires an initial annual base rent with annual increases over the next five years. The Company recognizes rental expense on a straight-line basis over the term of the lease, which resulted in a deferred rent liability of $58,640 and $63,117 as of September 30, 2011 and December 31, 2010, respectively.

11.	Comprehensive Loss

The Company’s accumulated other comprehensive loss as of December 31, 2010 was $2,340 which is computed as the difference between the cost and fair value of the Company’s marketable securities as of the balance sheet date. The Company did not have an accumulated other comprehensive loss as of September 30, 2011. The total comprehensive (loss) income for the three months ended September 30, 2011 and 2010 was ($1,469,218) and $218,891 respectively, and the total comprehensive loss for the nine months ended September 30, 2011 and 2010 was $11,731,891 and $11,411,775, respectively.

12.	Net Loss per Common Share

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding and excluding any potential dilution. Diluted loss per common share is also computed by dividing net loss by the weighted average number of common shares outstanding, but also reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that would then share in earnings, and such calculation excludes common shares in treasury. Basic and diluted loss per common share are identical for all periods presented, with the exception of the three months ended September 30, 2010 as potentially dilutive securities of the Company have been excluded from the calculation of the diluted net loss per common share because the inclusion of such securities would be anti-dilutive. The Company did not disclose earnings per share and the diluted shares outstanding for three months ended September 30, 2010 since the impact is immaterial and the Company had a net loss for the nine months ended September 30, 2010. As of September 30, 2011 and December 31, 2010, there were stock options and warrants to acquire 16,857,937 and 13,701,378 shares of our common stock, respectively, which were the potentially dilutive securities of the Company.

Table of Contents

REXAHNPHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock

The following transactions occurred from March 19, 2001 (inception) to September 30, 2011:

On May 10, 2001, the Company issued 3,600,000 shares of common stock to the Company’s founders for cash of $1.

On August 10, 2001, the Company issued:

1,208,332 shares of common stock to the directors of the Company for cash of $1,450,000.

ii)

958,334 shares of common stock to Rexgene for cash of $550,000.

iii)

360,000 shares of common stock in a private placement to individual investors for cash of $1,080,000.

These share purchases were negotiated by the parties at various dates prior to the August 10, 2001 share issuance date.

On October 10, 2001, the Company issued 400,000 shares of common stock to Chong Kun Dang Pharmaceutical Corp. (“CKD”) for cash of $479,991 and 400,000 shares of common stock to an individual investor for cash of $479,991.

On October 10, 2001, the Company issued 200,000 shares of common stock to CKD for cash of $479,985.

Since inception, the Company’s founders have transferred 800,000 shares of the common stock described in a) to officers and directors of the Company.

In July 2003, the stockholders described in b) (iii) and e) transferred an aggregate of 1,268,332 shares of common stock to a voting trust. The trust allows for the unified voting of the stock by the trustees.

The appointed trustees are senior management of the Company who, together with their existing shares, control a majority of the voting power of the Company.

On August 20, 2003, the Company issued 500,000 shares of common stock to KT&G Corporation for cash consideration of $2,000,000.

On October 29, 2004, an option holder exercised options to purchase shares of common stock for cash of $1,800 and the Company issued an aggregate of 1,500 shares.

Pursuant to the agreement and plan of merger which occurred on May 13, 2005, (i) each share of the issued and outstanding common stock of Rexahn, Corp (“Rexahn”) (other than dissenting shares) was converted into the right to receive five shares of Rexahn Pharmaceuticals common stock; (ii) each issued, outstanding and unexercised option to purchase a share of Rexahn common stock was converted into an option to purchase five shares of Rexahn Pharmaceuticals’ common stock and (iii) the par value of Rexahn’s common stock was adjusted to reflect the par value of Corporate Road Show Com Inc. (“CRS”) common stock. In the acquisition merger, 289,780,000 CRS pre-reverse stock split shares were converted into 2,897,802 post-reverse stock split Rexahn Pharmaceuticals shares, and an additional 500,000 post-reverse stock split Rexahn Pharmaceuticals shares were issued to a former executive of CRS. All shares and earnings per share information have been retroactively restated in these financial statements.

On August 8, 2005, the Company issued, in a transaction exempt from registration under the Securities Act of 1993, as amended, 4,175,000 shares of common stock at a purchase price of $2.00 per share.

On October 3, 2005, the Company issued 7,000 shares of common stock for $21,877 and $7,500 cash in exchange for legal services from W. Rosenstadt and Steve Sanders.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

On December 2, 2005, the holders of a convertible note that was issued on August 8, 2005 and, represented $1,300,000 aggregate principal amount, exercised their option to convert the entire principal amount of the note into the Company’s common stock. Based on a $2.00 per share conversion price, the holders received an aggregate of 650,000 shares.

On December 27, 2005, option holders exercised options to purchase shares of the Company’s common stock for cash of $9,600 and the Company issued an aggregate of 40,000 shares.

On February 22, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $1,200 and the Company issued an aggregate of 5,000 shares.

On April 12, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $3,409 and the Company issued an aggregate of 14,205 shares. On the same date, the Company agreed to repurchase common stock from the option holder based on the then market price for treasury in exchange for the aggregate purchase price of $28,410 in cash.

On May 13, 2006, holders of the $3,850,000 convertible notes issued on February 28, 2005, exercised their rights to convert the entire principal amount of the notes into shares of the Company’s common stock. Based on a $1.00 per share conversion price, the Company issued 3,850,000 shares of common stock in connection with the conversion.

On October 9, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $2,400 and the Company issued an aggregate of 10,000 shares.

On November 19, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $1,800 and the Company issued an aggregate of 7,500 shares.

On December 19, 2006, an option holder exercised options to purchase shares of the Company’s common stock for cash of $6,000 and the Company issued an aggregate of 25,000 shares.

On April 18, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $14,400 and the Company issued an aggregate of 18,000 shares.

On July 23, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued an aggregate of 15,000 shares.

On September 27, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $15,600 and the Company issued an aggregate of 19,500 shares.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

On December 18, 2007, the Company issued 4,857,159 units at a price $1.40 per share for total gross proceeds of $6,800,023. Investors also were issued one warrant for every five shares purchased. One warrant will entitle the holder to purchase an additional share of common stock at a purchase price of $1.80 at any time over a period of three years from the date of the closing. The Company has recorded the warrants as liabilities at fair value as disclosed in Note 15. Private placement closing costs of $139,675 were recorded as a reduction of the issuance proceeds. Private placements costs also consist of 107,144 warrants, valued at $138,326, and were recorded as a financing expense. The Company extended anti-dilutive protection to the investors. The anti-dilution protection provision is structured in a way that is designed to protect a holder’s position from being diluted and contains a price protection based on a mathematical calculation, and is recorded as a liability at fair value, as disclosed in Note 16. The Company revalues these liabilities each reporting period, with the unrealized gain (loss) recorded as other income (expense).

A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:	$	6,800,023

Allocated to liabilities:
Warrant liabilities		1,392,476
Put feature on common stock		4,401,169
Total allocated to liabilities		5,793,645

Allocated to equity:
Common stock and additional paid-in capital		1,144,704

Allocated to expense:
Financing expense		(138,326	)

Total allocated gross proceeds:	$	6,800,023

On December 27, 2007, an option holder exercised options to purchase shares of the Company’s common stock for cash of $18,000 and the Company issued an aggregate of 75,000 shares.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

On March 20, 2008, the Company issued 642,858 units consisting of one share of the Company’s common stock and one warrant for every five common shares purchased in a private placement at a price of $1.40 per unit for total gross proceeds of $900,001. One warrant will entitle the holder to purchase an additional share of common stock at a price of $1.80 at any time over a period of three years from the date of the private placement, and is recorded as a liability at fair value. The Company extended anti-dilution protection to investors, and the provision is structured in a way that is designed to protect the holder’s position from being diluted and contains a price based on a mathematical computation.

A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:	$	900,001

Allocated to liabilities:
Warrant liabilities		190,917
Put feature on common stock		553,569
Total allocated to liabilities		744,486

Allocated to common stock and additional paid-in capital		155,515

Total allocated gross proceeds:	$	900,001

On May 30, 2008, an option holder exercised options to purchase shares of the Company’s common stock for cash of $7,200 and the Company issued an aggregate of 30,000 shares.

aa)

On June 2, 2008, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued an aggregate of 50,000 shares.

ab)

On June 30, 2008, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued an aggregate of 10,000 shares.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

ac)

On June 5, 2009 the Company closed on a purchase agreement to issue 2,857,143 shares of common stock at a price of $1.05 per share to an institutional investor for total gross proceeds of $3,000,000 and incurred $289,090 of stock issuance costs. The investor was also issued:

Series I warrants to purchase 2,222,222 shares of common stock at a purchase price of $1.05 per share at any time before September 3, 2009;

Series II warrants to purchase 1,866,666 shares of common stock at a purchase price of $1.25 per share at any time from December 3, 2009 to June 5, 2012; and

Series III warrants to purchase 1,555,555 shares of common stock at a purchase price of $1.50 per share at any time from December 3, 2009 to June 5, 2014.

The closing costs included 142,857 warrants valued at $122,257 and were recorded as a financing expense. All warrants issued from this purchase agreement are recorded as liabilities at fair value.

The Company incurred a derivative loss upon issuance of these warrants, as the fair value of the warrants at inception was greater than the proceeds received from the investor. The derivative loss was combined with unrealized gains (losses) for the year ended December 31, 2009.

A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:	$	3,000,000

Allocated to liabilities:
Warrant liabilities		3,451,194

Allocated to equity:
Common stock and additional paid-in capital		-

Allocated to expense:
Financing expense		(122,257	)
Derivative loss at inception		(328,937	)
Total allocated to expense		(451,194	)

Total allocated gross proceeds:	$	3,000,000

ad)

On June 9, 2009, the Company issued 1,833,341 shares of common stock and 862,246 warrants to purchase common stock at a purchase price of $1.05 per share to existing stockholders pursuant to the anti-dilution protection provisions of the private placements transacted on December 18, 2007 and March 20, 2008. The fair value of the additional warrants issued was approximately $422,300.

ae)

On September 4, 2009, an option holder exercised options to purchase shares of the Company’s common stock for cash of $3,600 and the Company issued an aggregate of 15,000 shares.

af)

On September 21, 2009, the Company issued 3,102,837 shares of common stock at a purchase price of $1.13 per share to an institutional investor for net proceeds of $3,371,340, which includes $128,659 of stock issuance costs.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

ag)

On October 23, 2009, the Company closed on a purchase agreement to issue 6,072,383 shares of common stock at a price of $0.82 per share to five institutional investors for gross proceeds of $5,000,000, which includes $351,928 of stock issuance costs. The investors were also issued warrants to purchase 2,125,334 shares of common stock at a purchase price of $1.00 per share, exercisable on or after the date of delivery until the five-year anniversary, and were recorded as liabilities at fair value. The closing costs included 245,932 warrants valued at $101,693 and were recorded as a financing expense.

A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:	$	5,000,000

Allocated to liabilities:
Warrant liabilities		1,114,627

Allocated to equity:
Common stock and additional paid-in capital		3,987,066

Allocated to expense:
Financing expense		(101,693	)

Total allocated gross proceeds:	$	5,000,000

ah)

On October 23, 2009, the Company issued 2,018,143 shares of common stock and 569,502 warrants to purchase common stock at a purchase price of $0.82 per share to existing stockholders pursuant to anti-dilution protection provisions of the private placements transacted on December 24, 2007 and March 20, 2008.The fair value of the additional warrants issued was approximately $476,200.

ai)

On February 12, 2010, the Company entered into two consulting agreements pursuant to which the Company issued 300,000 shares of common stock upon the execution of the agreements. Upon the extension of the term, 200,000 shares of common stock for each month will be issued until the termination of services.

The following table lists the issuances of shares by the Company under the consulting agreement:

Date of Issuance	Number of Shares Issued		Market Value Per Share		Total Market Value of Share Issuance
February 12, 2010		300,000	$	1.22	$	366,000
May 24, 2010		200,000		1.40		280,000
June 15, 2010		200,000		1.15		230,000
August 2, 2010		400,000		1.37		548,000
September 21, 2010		200,000		1.20		240,000
October 21, 2010		200,000		1.16		232,000
November 11, 2010		200,000		1.06		212,000

Total		1,700,000			$	2,108,000

The market value of these shares was recorded as an expense and is reflected in general and administrative expenses in the Company’s statement of operations. The agreements were terminated by the Company on November 11, 2010.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

aj)

In March 2010, warrant holders exercised their warrants to purchase shares of the Company’s common stock for cash of $1,297,001 and the Company issued an aggregate of 1,197,001 shares.

ak)

In March 2010, option holders exercised options to purchase shares of the Company’s common stock for cash of $21,240 and the Company issued an aggregate of 48,000 shares.

al)

In April 2010, warrant holders exercised their warrants to purchase shares of the Company’s common stock for cash of $1,966,375 and the Company issued an aggregate of 1,595,825 shares.

am)

On April 20, 2010, an option holder exercised options to purchase shares of the Company’s common stock for cash of $86,000 and the Company issued an aggregate of 107,500 shares.

an)

In May 2010, warrant holders exercised warrants to obtain shares of the Company’s common stock and the Company issued an aggregate of 547,674 shares.

ao)

On June 30, 2010, the Company entered into a purchase agreement to issue 6,666,667 shares of common stock at a price of $1.50 per share to investors for gross proceeds of $10,000,000, which includes $681,773 of stock issuance costs. The investors were also issued warrants to purchase 2,000,000 shares of common stock at an exercise price of $1.90 per share. The warrants became immediately exercisable on the date of delivery until the four-year anniversary of the date of issuance. These warrants were valued at $1,800,800 and recorded as warrant liabilities. The closing costs included 200,000 warrants valued at $180,080 and were recorded as a financing expense.

Gross Proceeds:	$	10,000,000

Allocated to liabilities:
Warrant liabilities		1,980,880

Allocated to equity:
Common stock and additional paid-in capital		8,199,200

Allocated to expense:
Financing expense		(180,080	)

Total allocated gross proceeds:	$	10,000,000

ap)

In November 2010, warrant holders exercised 936,883 cashless warrants to obtain shares of the Company’s common stock and the Company issued an aggregate of 247,491 shares.

aq)

In December 2010, warrant holders exercised 530,900 cashless warrants to obtain shares of the Company’s common stock and the Company issued an aggregate of 126,195 shares.

ar)

On January 19, 2011, the Company issued 2,334,515 shares of common stock at a purchase price of $1.69 per share to an institutional investor for net proceeds of $3,926,397, which includes $23,603 of stock issuance costs.

as)

On February 15, 2011, a warrant holder exercised warrants to purchase shares of the Company’s common stock for cash of $215,104 and the Company issued 209,042 shares.

at)

On February 28, 2011, an option holder exercised options to purchase shares of the Company’s common stock for cash of $6,000 and the Company issued 25,000 shares.

au)

On March 11, 2011, an option holder exercised options to purchase shares of the Company’s common stock for cash of $12,000 and the Company issued 50,000 shares.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

av)

On March 28, 2011, warrant holders exercised their warrants to purchase shares of the the Company’s common stock for cash of $102,857 and the Company issued 124,917 shares.

aw)

On March 31, 2011, the Company closed on a purchase agreement to issue 8,333,333 shares of common stock at a price of $1.20 per share to five institutional investors for gross proceeds of $10,000,000, which includes $803,791 of stock issuance costs. The investors were also issued warrants to purchase 3,333,333 shares of common stock at a purchase price of $1.50 per share, exercisable on or after six months after the closing date until the five-year anniversary of the initial exercise date, and were recorded as liabilities at fair value. The closing costs included 208,333 warrants valued at $97,667 and were recorded as a financing expense.

A summary of the allocation of the proceeds of the offering is shown below:

Gross Proceeds:	$	10,000,000

Allocated to liabilities:
Warrant liabilities		2,924,333

Allocated to equity:
Common stock and additional paid-in capital		7,173,334

Allocated to expense:
Financing expense		(97,667	)

Total allocated gross proceeds:	$	10,000,000

ax)

In September 2011, an option holder exercised options to purchase shares of the Company’s common stock for cash of $22,040 and the Company issued 28,000 shares.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

14.	Stock-Based Compensation

On August 5, 2003, the Company established a stock option plan (the “Plan”). Under the Plan, the Company grants stock options to key employees, directors and consultants of the Company. For all grants prior to September 12, 2005 and grants to employees of the Company after September 12, 2005, the vesting period is 30% on the first anniversary of the grant date, an additional 30% on the second anniversary and the remaining 40% on the third anniversary. Options expire between five and ten years from the date of grant.

For grants to non-employee consultants of the Company after September 12, 2005, the vesting period is between one to three years, subject to the fulfillment of certain conditions in the individual stock option grant agreements, or 100% upon the occurrence of certain events specified in the individual stock option grant agreements. Options authorized for issuance under the Plan total 17,000,000 after giving effect to an amendment to the Plan approved at the Annual Meeting of the Stockholders of the Company on June 2, 2006. At September 30, 2011, 8,218,000 shares of common stock were available for issuance.

Prior to adoption of the Plan, the Company made restricted stock grants. During 2003 all existing restricted stock grants were converted to stock options. The converted options maintained the same full vesting period as the original restricted stock grants.

Accounting for Employee Awards

The Company’s results of operations for the three months ended September 30, 2011 and 2010 include share-based employee compensation expense totaling $161,876 and $115,907 respectively. The Company’s results of operations for the nine months ended September 30, 2011 and 2010 include share-based compensation expense totaling $466,739 and $338,899 respectively. Such amounts have been included in the statement of operations in general and administrative and research and development expenses. No income tax benefit has been recognized in the statement of operations for share-based compensation arrangements as the Company has provided for a 100% valuation allowance on its deferred tax assets.

Employee stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite vesting service period for the entire portion of the award.

Accounting for Non-Employee Awards

Stock compensation expenses related to non-employee options were ($20,787) and ($4,305) for the three months ended September 30, 2011 and 2010, respectively. Stock compensation expenses related to non-employee options were $46,515 and $96,406, for the nine months ended September 30, 2011 and 2010, respectively. Such amounts have been included in the statement of operations in general and administrative and research and development expenses.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

14.	Stock-Based Compensation (cont’d)

Summary of Stock Compensation Expense Recognized

Total stock-based compensation recognized by the Company in the three and nine months ended September 30, 2011 and 2010, and the period from inception (March 19, 2001) to September 30, 2011, is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,				Cumulative from March 19, 2001 (Inception) to September 30,
	2011			2010			2011		2010		2011
Statement of operations line item: General and administrative:
Payroll	$	138,170		$	94,375		$	397,192	$	286,011	$	2,390,708
Consulting and other professional fees		(16,915	)		(6,851	)		30,265		81,961		790,220
Research and development:
Payroll		23,706			21,532			69,546		52,888		945,844
Consulting and other professional fees		(3,872	)		2,546			16,252		14,445		1,325,505

Total	$	141,089		$	111,602		$	513,255	$	435,305	$	5,452,277

Summary of Stock Option Transactions

The table below summarizes the stock options granted for the nine months ended September 30, 2011 and 2010:

For the nine months ended September 30, 2011
Date Granted	Number of Options Granted		Exercise Price		Grant Date Fair Value
February 7, 2011		130,000	$	1.84	$	180,326
June 6, 2011		100,000	$	1.25		91,334
June 10, 2011		20,000	$	1.22		17,915
September 8, 2011		150,000	$	1.12		121,595
Total		400,000			$	411,170
For the nine months ended September 30, 2010
Date Granted	Number of Options Granted		Exercise Price		Grant Date Fair Value
February 17, 2010		375,000	$	1.33	$	304,043
June 14, 2010		160,000	$	1.17		142,150
September 17, 2010		190,000	$	1.19		171,280
Total		725,000			$	617,473

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

14.	Stock-Based Compensation (cont’d)

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The Company took into consideration guidance under Accounting Standards Codification (“ASC”) 718, “Compensation-Stock Compensation” and Staff Accounting Bulletin (“SAB”) 107 when reviewing and updating assumptions. The expected volatility is based upon historical volatility of the Company’s stock. The expected term is based upon the simplified method as allowed under SAB 107.

The assumptions made in calculating the fair values of options are as follows:

	Nine Months Ended September 30,
	2011			2010
Black-Scholes weighted average assumptions
Expected dividend yield		0	%		0	%
Expected volatility		96-101	%		100-114	%
Risk free interest rate		0.11-2.29	%		0.26-2.40	%
Expected term (in years)	5 years			1- 5 years

The following table summarizes the employee and non-employee share-based transactions:

	2011					2010
	Number of Options			Weighted Avg. Exercise Price		Number of Options			Weighted Avg. Exercise Prices
Outstanding at January 1		8,076,795		$	1.01		7,715,795		$	0.98
Granted		400,000			1.39		725,000			1.26
Exercised		(103,000	)		0.39		(155,500	)		0.69
Cancelled		(192,000	)		1.21		(78,500	)		1.00

Outstanding at September 30		8,181,795		$	1.03		8,206,795		$	1.02

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

14.	Stock-Based Compensation(cont’d)

The following table summarizes information about stock options outstanding as of September 30, 2011 and December 31, 2010.

	Number of Options		Weighted Avg. Exercise Prices		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at September 30, 2011		8,181,795	$	1.03	4.9 years	$	1,466,974

Exercisable at September 30, 2011		6,971,795	$	1.02	4.3 years	$	1,356,324

Outstanding at December 31, 2010		8,076,795	$	1.01	5.4 years	$	2,198,790

Exercisable at December 31, 2010		6,762,795	$	1.00	4.8 years	$	2,198,790

The total intrinsic value of the options exercised was $103,450 and $239,560 for the nine months ended September 30, 2011 and 2010, respectively. The total intrinsic value of the options exercised was $9,200 for the three months ended September 30, 2011. There were no options exercised in the three months ended September 30, 2010. The weighted average fair value of the options vested was $0.85 and $0.91 for the nine months ended September 30, 2011 and 2010, respectively.

A summary of the Company’s unvested shares as of September 30, 2011 and changes during the nine months ended September 30, 2011 is presented below:

	2011
	Number of Options			Weighted Average Fair Value at Grant Date
Unvested at January 1, 2011		1,314,000		$	0.77
Granted		400,000		$	1.03
Vested		(415,000	)	$	0.85
Cancelled		(89,000	)	$	0.90

Unvested at September 30, 2011		1,210,000		$	0.80

As of September 30, 2011 and December 31, 2010, there was $524,820 and $685,636 of total unrecognized compensation cost, respectively, related to all unvested stock options, which is expected to be recognized over a weighted average vesting period of 1.2 years and 1.4 years, respectively.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

15.

Warrants

As of September 30, 2011, warrants to purchase 8,676,142 shares were outstanding, having exercise prices ranging from $1.00 to $1.90 and expiration dates ranging from August 8, 2013 to September 30, 2016.

	2011						2010
	Number of warrants			Weighted average exercise price			Number of warrants			Weighted average exercise price
Balance, January 1		5,624,583		$	1.48			8,575,243		$	1.10
Issued during the period		3,541,666		$	1.50			2,200,000		$	1.90
Exercised during the period		(333,959	)	$	(0.95	)		(3,682,877	)	$	(0.89	)
Expired during the period		(156,148	)	$	(0.82	)		-		$	-

Balance, September 30		8,676,142		$	1.53			7,092,366		$	1.35

At September 30, 2011 and December 31, 2010, the average remaining contractual life of the outstanding warrants was 3.4 years.

The warrants, which were issued to investors in the December 2007, March 2008, May 2009, October 2009, June 2010, and March 2011 offerings, contain a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer, or share exchange). If a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a non-public company, then the warrant holder has the option to receive cash, equal to the fair value of the remaining unexercised portion of the warrant. Due to this contingent redemption provision, the warrants require liability classification in accordance with ASC 480, “Distinguishing Liabilities from Equity,” (“ASC 480”) and are recorded at fair value. In addition, the warrants issued in the May 2009, October 2009, June 2010 and March, 2011 offerings contain a cashless exercise provision that is exercisable only in the event that a registration statement is not effective, which provision may not be operative if an effective registration statement is not available because of an exemption under the U.S. Securities laws may not be available to issue unregistered shares. As a result, net cash settlement may be required.

ASC 820 provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition. Fair values for warrants are determined using the Binomial Lattice (“Lattice”) valuation technique. The Lattice model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to maturity. Accordingly, within the contractual term, the Company provided multiple date intervals over which multiple volatilities and risk free interest rates were used. These intervals allow the Lattice model to project outcomes along specific paths which consider volatilities and risk free rates that would be more likely in an early exercise scenario.

Significant assumptions are determined as follows:

Trading market values—published trading market values;

Exercise price—Stated exercise price;

Term—remaining contractual term of the warrant;

Volatility—Historical trading volatility for periods consistent with the remaining terms;

Risk-free rate—Yields on zero coupon government securities with remaining terms consistent with the remaining terms of the warrants.

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

15.	Warrants (cont’d)

Due to the fundamental transaction provision, which could provide for early redemption of the warrants, the model also considered the probability the Company would enter into a fundamental transaction during the remaining term of the warrant. Since the Company is still in its development stage and is not yet achieving positive cash flow, management believes the probability of a fundamental transaction occurring over the term of the warrant is approximately 5%. For valuation purposes, the Company also assumed that if such a transaction did occur, it was more likely to occur towards the end of the term of the warrants.

The warrants issued in December 2007 and March 2008 are not only subject to traditional anti-dilution protection, such as stock splits and dividends, but they are also subject to down-round anti-dilution protection. Accordingly, if the Company sells common stock or common stock indexed financial instruments below the stated exercise price, the exercise price related to these warrants will adjust to that lower amount. The Lattice model used to value the warrants with down-round anti-dilution protection provides for multiple, probability-weighted scenarios at the stated exercise price and at five additional decrements/scenarios on each valuation date in order to encompass the value of the anti-dilution provisions in the estimate of fair value of the warrants. Calculations were performed at the stated exercise price and at five additional decrements/scenarios on each valuation date. The calculations provide for multiple, probability-weighted scenarios reflecting decrements that result from declines in the market prices. Decrements are predicated on the trading market prices in decreasing ranges below the contractual exercise price. For each valuation date, multiple Binomial Lattice calculations were performed which were probability weighted by considering both the Company’s (i) historical market pricing trends, and (ii) an outlook for whether or not the Company may need to issue equity or equity-indexed instruments in the future with a price less than the current exercise price.

The following table summarizes the fair value of the warrants as of the respective balance sheet or transaction dates:

	Fair Value as of:
Warrant Issuance:	September 30, 2011		December 31, 2010		Transaction Date
December 18, 2007 financing	$	-	$	-	$	1,392,476
March 20, 2008 financing		-		123,558		190,917
June 5, 2009 financing:
Series I warrants		-		-		707,111
Series II warrants		-		-		1,315,626
Series III warrants		485,800		751,022		1,306,200
Warrants to placement agent		46,012		69,032		122,257
October 23, 2009 financing:
Warrants to institutional investors		579,650		694,377		1,012,934
Warrants to placement agent		5,886		111,241		101,693
June 30, 2010 financing
Warrants to institutional investors		516,400		1,106,800		1,800,800
Warrants to placement agent		28,040		110,680		180,080
March 31, 2011 financing:
Warrants to institutional investors		1,950,000		-		2,826,666
Warrants to placement agent		41,918		-		97,667
Total:	$	3,653,706	$	2,966,710	$	11,054,427

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

15.	Warrants (cont’d)

The following table summarizes the number of shares indexed to the warrants as of the respective balance sheet or transaction dates:

	Number of Shares indexed as of:
Warrant Issuance	September 30, 2011		December 31, 2010		Transaction Date
December 18, 2007 financing		-		-		1,078,579
March 20, 2008 financing		-		281,065		128,572
June 5, 2009 financing:
Series I warrants		-		-		2,222,222
Series II warrants		-		-		1,866,666
Series III warrants		1,555,555		1,555,555		1,555,555
Warrants to placement agent		132,143		132,143		142,857
October 23, 2009 financing:
Warrants to institutional investors		1,228,333		1,228,333		2,125,334
Warrants to placement agent		18,445		227,487		245,932
June 30, 2010 financing
Warrants to institutional investors		2,000,000		2,000,000		2,000,000
Warrants to placement agent		200,000		200,000		200,000
March 31, 2011 financing:
Warrants to institutional investors		3,333,333		-		3,333,333
Warrants to placement agent		208,333		-		208,333
Total:		8,676,142		5,624,583		15,107,383

The assumptions used in calculating the fair values of the warrants are as follows:

December 18, 2007 financing:	September 30, 2011		December 31, 2010		Transaction Date
Trading market prices	$	-	$	-	$	1.75
Estimated future volatility		-		-		143	%
Dividend		-		-		-
Estimated future risk-free rate		-		-		3.27	%
Equivalent volatility		-		-		106	%
Equivalent risk-free rate		-		-		3.26	%
Estimated additional shares to be issued upon dilutive event		-		-		98,838

March 20, 2008 financing:	September 30, 2011		December 31, 2010			Transaction Date
Trading market prices	$	-	$	1.12		$	2.14
Estimated future volatility		-		75	%		142	%
Dividend		-		-			-
Estimated future risk-free rate		-		0.47	%		1.95	%
Equivalent volatility		-		42	%		97	%
Equivalent risk-free rate		-		0.12	%		1.31	%
Estimated additional shares to be issued upon dilutive event		-		25,462			7,479

Table of Contents

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

15.	Warrants (cont’d)

June 5, 2009 financing:	September 30, 2011			December 31, 2010			Transaction Date
Trading market prices	$	1.00		$	1.12		$	1.14
Estimated future volatility		80-86	%		94-100	%		100	%
Dividend		-			-			-
Estimated future risk-free rate		0.76	%		1.84-4.18	%		0.63-4.31	%
Equivalent volatility		68	%		72-73	%		103-117	%