Ocuphire Pharma, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Warrants

Warrants

12 Months Ended

Dec. 31, 2011

Warrants

Warrants

13.

Warrants

As at December 31, 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 and September 30, 2016.

	2011					2010
	Number of warrants			Weighted average exercise price		Number of warrants			Weighted average exercise price
Balance at 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		(5,150,660	)	$	1.01
Expired during the period		(156,148	)	$	0.82		-		$	-

Balance at December 31		8,676,142		$	1.53		5,624,583		$	1.48

At December 31, 2011 and 2010, the average remaining contractual life of the outstanding warrants was 3.2 years and 3.4 years, respectively.

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. This 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.

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 balance sheet date:

	Fair Value as of:
Fair Values:	December 31, 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		89,756		751,022		1,306,200
Warrants to placement agent		8,893		69,032		122,257
October 23, 2009 financing:
Warrants to institutional investors		129,221		694,377		1,012,934
Warrants to placement agent		714		111,241		101,693
June 30, 2010 financing
Warrants to institutional investors		89,800		1,106,800		1,800,800
Warrants to placement agent		2,320		110,680		180,080
March 31, 2011 financing:
Warrants to institutional investors		544,000		-		2,826,666
Warrants to placement agent		4,021		-		97,667
Total:	$	868,725	$	2,966,710	$	11,054,427

The following table summarizes the number of shares indexed to the warrants as of the balance sheet date:

	Number of Shares Indexed as of:
Number of Shares Indexed:	December 31, 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:	December 31, 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:	December 31, 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

June 5, 2009 financing:	December 31, 2011			December 31, 2010			Transaction Date
Trading market prices	$	0.38		$	1.12		$	1.14
Estimated future volatility		98-100	%		94-100	%		100	%
Dividend		-			-			-
Estimated future risk-free rate		0.38	%		1.84-4.18	%		0.63-4.31	%
Equivalent volatility		80-81	%		72-73	%		103-117	%
Equivalent risk-free rate		0.14	%		0.52	%		0.20-1.44	%

October 23, 2009 financing:	December 31, 2011			December 31, 2010			Transaction Date
Trading market prices	$	0.38		$	1.12		$	0.69
Estimated future volatility		98-100	%		100	%		100	%
Dividend		-			-			-
Estimated future risk-free rate	$	0.38			1.84	%		2.63-3.80	%
Equivalent volatility		72-81	%		65-74	%		98-99%	%
Equivalent risk-free rate		0.08-0.16	%		0.38-0.58	%		0.93-1.16	%

June 30, 2010 financing:	December 31, 2011			December 31, 2010			Transaction Date
Trading market prices	$	0.38		$	1.12		$	1.43
Estimated future volatility		86-100	%		67	%		100	%
Dividend		-			-			-
Estimated future risk-free rate		0.38-0.58	%		1.84	%		1.78	%
Equivalent volatility		72-79	%		89	%		98	%
Equivalent risk-free rate		0.08-0.14	%		0.52	%		0.59	%

March 31, 2011 financing:	December 31, 2011			December 31, 2010		Transaction Date
Trading market prices	$	0.38		$	-	$	1.18
Estimated future volatility		87-100	%		-		100	%
Dividend		-			-		-
Estimated future risk-free rate		0.38-1.54	%		-		1.32-3.64	%
Equivalent volatility		72-90-	%		-		79-96	%
Equivalent risk-free rate		0.08-0.28	%		-		0.39-1.09	%

Changes in the fair value of the warrant liabilities, carried at fair value, as reported as "unrealized gain (loss) on fair value of warrants" in the Statement of Operations:

	For the Year Ended December 31,									Cumulative from March 19, 2011 (Inception) to December 31,
	2011			2010			2009			2011
December 18, 2007 financing	$	-		$	(510,776	)	$	(243,841	)	$	50,722
March 20, 2008 financing		92,704			(18,806	)		(36,196	)		160,063
June 5, 2009 financing:
Series I warrants		-			-			707,111			707,111
Series II warrants		-			(2,996,828	)		805,653			(2,191,175	)
Series III warrants		661,266			(191,333	)		746,511			1,216,444
Warrants to placement agent		60,139			(29,255	)		68,100			98,984
Derivative loss at inception		-			-			(328,937	)		(328,937	)
October 23, 2009 financing:
Warrants to institutional investors		565,156			(798,694	)		68,011			(165,527	)
Warrants to placement agent		(102,487	)		(40,854	)		6,689			(136,652	)
June 30, 2010 financing
Warrants to institutional investors		1,017,000			694,000			-			1,711,000
Warrants to placement agent		108,360			69,400			-			177,760
March 31, 2011 financing:
Warrants to institutional investors		2,282,666			-			-			2,282,666
Warrants to placement agent		93,646			-			-			93,646
Total:	$	4,778,450		$	(3,823,146	)	$	1,793,101		$	3,676,105