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RNN > SEC Filings for RNN > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for REXAHN PHARMACEUTICALS, INC.

Form 10-Q for REXAHN PHARMACEUTICALS, INC.


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

Our efforts and resources have been focused primarily on acquiring and developing our pharmaceutical technologies, raising capital and recruiting personnel. We are a development stage company and have no product sales to date and we will not generate any product sales until we receive approval from the Food and Drug Administration (the "FDA") or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. Our major sources of working capital have been proceeds from various private financings, primarily private sales of common stock and debt securities, and collaboration agreements with our strategic investors.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with the unaudited condensed financial statements and notes thereto set forth in Item 1 of this Quarterly Report. This Quarterly Report contains statements accompanied by such phrases as "believe," "estimate," "expect," "anticipate," "may," "intend" and other similar expressions, that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. We caution that forward-looking statements are based largely on our expectations, and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements may differ materially from those contemplated, expressed, or implied by the forward-looking statements.

The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

· our lack of profitability and the need for additional capital to operate our business;

· our ability to obtain the necessary U.S. and worldwide regulatory approvals for our drug candidates;

· successful and timely completion of clinical trials for our drug candidates;

· demand for and market acceptance of our drug candidates;

· the availability of qualified third-party researchers and manufacturers for our drug development programs;

· our ability to develop and obtain protection of our intellectual property; and

· Other risks and uncertainties, including those detailed from time to time in our filings with the Securities and Exchange Commission (the "SEC").

These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. The safe harbors for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995 are unavailable to issuers of "penny stock." Our shares may be considered a penny stock and, as a result, the safe harbors may not be available to us.


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RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended September 30, 2012 and 2011:

Total Revenues

The Company had no revenues for the three and nine months ended September 30, 2012 and 2011.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related personnel and stock option compensation expenses for executive, finance and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including business development, investor relations and general legal activities.

General and administrative expenses decreased $174,065, or 22.5%, to $600,242 for the three months ended September 30, 2012 from $774,307 for the three months ended September 30, 2011. The decrease is attributed primarily to stock option compensation. There were a large number of options that fully vested in 2011, which were incurring expenses in 2011 but not in 2012. In addition, we reduced professional fees and investor relations activities for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. General and administrative expenses decreased $740,089, or 26.3%, to $2,071,008 for the nine months ended September 30, 2012 from $2,811,097 for the nine months ended September 30, 2011. The decrease is primarily attributed to reduced stock option compensation, as described above, and legal and professional fees for the restatement of the 2009 financial data incurred in the nine months ended September 30, 2011, but was not applicable in the nine months ended September 30, 2012.

Research and Development Expenses

Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for laboratory development and other expenses relating to the design, development, testing, and enhancement of our drug candidates. We expense our research and development costs as they are incurred. See the discussion under "Research and Development Projects" below for additional information about expected future research and development expenses.

Research and development expenses decreased $1,305,956 or 55.1%, to $1,066,245 for the three months ended September 30, 2012 from $2,372,201 for the three months ended September 30, 2011. The large decrease in research and development expenses is attributable to the Serdaxin Phase IIb trial, which was being conducted in 2011, but not in 2012. Research and development expenses decreased $7,379,622 or 70.2%, to $3,127,201 for the nine months ended September 30, 2012 from $10,506,823 for the nine months ended September 30, 2011. The significant decrease was primarily attributable to the termination of the Serdaxin Phase IIb clinical trial described above.

Patent Fees

Our patent fees decreased $75,853, or 38.2%, to $122,571 for the three months ended September 30, 2012 from $198,424 for the three months ended September 30, 2011. Our patent fees decreased $71,630, or 19.1%, to $302,533 for the nine months ended September 30, 2012 from $374,163 for the nine months ended September 30, 2011. The decrease was primarily due to a reduction in legal costs to respond to fewer inquiries on pending patent applications in the three and nine months ended September 30, 2012.

Depreciation and Amortization

Depreciation and amortization expenses increased $594 or 5.9%, to $10,721 for the three months ended September 30, 2012 from $10,127 for the three months ended September 30, 2011. The increase is primarily due to a leasehold improvement that was placed in service during the fourth quarter of 2011 that incurred depreciation for the three months ended September 30, 2012, but not September 30, 2011. Depreciation and amortization expenses decreased $2,741, or 7.9%, to $32,163 for the nine months ended September 30, 2012 from $34,904 for the nine months ended September 30, 2011. The decrease is primarily due to assets that became fully depreciated in the nine months ended September 30, 2011 and did not incur depreciation in 2012.


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Interest Income

Interest income decreased $12,951, or 66.1%, to $6,641 for the three months ended September 30, 2012 from $19,592 for the three months ended September 30, 2011. Interest income decreased $83,730, or 83.0%, to $17,184 for the nine months ended September 30, 2012 from $100,914 for the nine months ended September 30, 2011. The decrease was primarily due to a decrease in interest-bearing investments and lower interest rates on such investments.

Unrealized (Loss)/Gain on Fair Value of Warrants

Our warrants are recorded as liabilities at fair value, and are valued using a lattice model. Changes in the fair value of warrants are recorded as an unrealized gain or loss in our statement of operations. For the three months ended September 30, 2012 and 2011, respectively, we recorded unrealized (losses)/gains on the fair value of our warrants of ($1,195,932) and $1,866,249, respectively. For the nine months ended September 30, 2012 and 2011, we recorded unrealized (losses)/gains on the fair value of our warrants of ($655,545) and $1,993,469. Estimating fair values of warrants requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the warrant with related changes to external and internal market factors. In addition, option-based techniques are highly volatile and sensitive to the trading market price of the Company's common stock and the resulting estimated volatility of the common stock.

Net Loss

As a result of the above, the net loss for the three and nine months ended September 30, 2012 was $2,989,070, and $6,171,266 or $0.03 and $0.06 per share, respectively, compared to a net loss of $1,469,218 and $11,734,231, or $0.02 and $0.13 per share, respectively, for the three and nine months ended September 30, 2011.

Research and Development Projects

Research and development expenses are expensed as incurred. Research and development expenses consist primarily of salaries and related personnel costs, costs to acquire pharmaceutical products and product rights for development and amounts paid to contract research organizations, hospitals and laboratories for the provision of services and materials for drug development and clinical trials. Costs incurred in obtaining the license rights to technology in the research and development stage and that have no alternative future uses are expensed as incurred. Our research and development programs are related to our four clinical stage drug candidates, Archexin, Serdaxin, Zoraxel, and RX-3117, and pre-clinical stage drug candidates, RX-5902, RX-0201-Nano, RX-0047-Nano and Nano-polymer Anticancer Drugs. Each of our lead drug candidates is in various stages of completion as described below. As we expand our clinical studies, we will enter into additional development agreements. Significant additional expenditures will be required if we complete our clinical trials, start new trials, apply for regulatory approvals, continue development of our technologies, expand our operations and bring our products to market. The eventual total cost of each clinical trial is dependent on a number of uncertainties such as trial design, the length of the trial, the number of clinical sites and the number of patients. The process of obtaining and maintaining regulatory approvals for new therapeutic products is lengthy, expensive and uncertain. Because the successful development of our most advanced drug candidates, Archexin, Serdaxin and Zoraxel, is uncertain, and because RX-0201-Nano, RX-0047-Nano and Nano-polymer Anticancer Drugs are in early-stage development, we are unable to estimate the costs of completing our research and development programs, the timing of bringing such programs to market and, therefore, when material cash inflows could commence from the sale of these drug candidates. If these projects are not completed as planned, or the findings are not positive, our results of operations and financial condition could be negatively affected and if we are unable to obtain additional financing to fund these projects, we may not be able to continue as a going concern.


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Archexin®

Archexin is a 20 nucleotide single stranded DNA anti-sense molecule, which is a first-in-class inhibitor of the protein kinase Akt. Akt plays critical roles in cancer cell proliferation, survival, angiogenesis, metastasis, and drug resistance. Archexin received "orphan drug" designation from the U.S. Food and Drug Administration, or FDA, for five cancer indications (renal cell carcinoma, or RCC, glioblastoma, ovarian cancer, stomach cancer and pancreatic cancer). The FDA orphan drug program provides seven years of marketing exclusivity after approval and tax incentives for clinical research. In August, 2012, we announced top line results of our Phase IIa clinical trial. The open label 2-stage study was designed to assess the safety and efficacy of Archexin in combination with gemcitabine. Stage 1 was the dose finding portion and Stage 2 was the dose expansion portion using the dose identified in Stage 1 to be administered with gemcitabine. The study enrolled 31 subjects aged 18-65 with metastatic pancreatic cancer at nine centers in the United States and India. The primary endpoint was overall survival following four cycles of therapy with a six month follow-up. For those evaluable patients, the study demonstrated that treatment with Archexin in combination with gemcitabine provided a median survival rate of 9.1 months compared to the historical survival data of 5.65 months for standard single agent gemcitabine therapy. The most frequent reported adverse events were constipation, nausea, abdominal pain and pyrexia, regardless of relatedness. Rexahn is evaluating options for advancing Archexin, including entering into a Phase IIb trial beginning in the first quarter of 2013. We own one issued U.S. patent for Archexin.

The costs incurred for the Phase I clinical trial was approximately $1,500,000. As of September 30, 2012, we have spent approximately $6,420,000 for the development of Archexin. The trial was completed in the third quarter of 2012, and we estimate that we have approximately an additional $120,000 of costs yet to be billed by vendors for this trial.

RX-3117

On September 21, 2009, we closed on a securities purchase agreement with Teva Pharmaceutical Industries Limited ("Teva"), for the development of our novel anti-cancer compound, RX-3117. RX-3117 is a small molecule, new chemical entity nucleoside compound that has an anti-metabolite mechanism of action, and has therapeutic potential in a broad range of cancers including colon, lung, and pancreatic cancer. The investment by TEVA is restricted to supporting the research and development program for the development of RX-3117. We will be eligible to receive royalties on net sales of RX-3117 worldwide. This compound entered into an exploratory Phase I clinical study during the first quarter of 2012. The primary objective of the study was to determine oral bioavailability of RX-3117 in humans. On August 6, 2012, we released the results that the study demonstrated the oral bioavailability of RX-3117 in humans when delivered orally to patients, and there were no adverse events reported in the study. We estimate that the costs of the exploratory Phase I clinical study were approximately $550,000.

RX-5902

RX-5902 is a first-in-class small molecule that inhibits the phosphorylated p68 RNA helicase, a protein that plays a key role in cancer growth, progression, and metastasis. In July, 2012, we submitted an Investigational New Drug Application to the FDA for RX-5902. RX-5902 may enter Phase I clinical trials during the first half of 2013. We estimate the costs of the Phase I clinical study to be approximately $1,100,000.

Serdaxin® (RX-10100)

Serdaxin is an extended release formulation of clavulanic acid, which is an ingredient present in antibiotics approved by the FDA. We developed Serdaxin for the treatment of depression and neurodegenerative disorders. From January to September, 2011, we conducted a randomized, double-blind, placebo-controlled study compared two doses of Serdaxin, 0.5 mg and 5 mg, to placebo over an 8-week treatment period for major depressive disorder ("MDD") patients. On November 4, 2011, we released results that the study showed Serdaxin did not demonstrate efficacy compared to a placebo group as measured by the Montgomery-Asberg Depression Rating Scale ("MADRS"). All groups showed an approximate 14 point improvement in the protocol defined primary endpoint of MADRS, and had a substantial number of patients who demonstrated a meaningful clinical improvement from baseline. The study showed that Serdaxin was safe and well tolerated. At this point, we have not made any determinations of Serdaxin's future paths and have not allocated resources to the further development of Serdaxin for treatment for MDD.

Through September 30, 2012, the pre-clinical and clinical costs incurred for development of Serdaxin to date have been approximately $9,750,000. We do not anticipate additional costs for the Phase IIb trial.


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Zoraxel™ (RX-10100)

Zoraxel is an immediate release formulation of clavulanic acid, the same active ingredient found in our product candidate Serdaxin. The Phase IIa proof of concept, completed with positive results, was a randomized, double blind, placebo controlled and dose ranging (5 mg, 10 mg, 15 mg) study of 39 erectile dysfunction patients (ages of 18 to 65) treated with Zoraxel. The Phase IIb study is designed to assess Zoraxel's efficacy in approximately 150 male subjects, ages 18 to 70, with ED. The double blind, randomized, placebo-controlled, 12-week study will include IIEF as the primary endpoint following treatment with Zoraxel at 25 and 50 mg doses. However, given the recently reported results of the Serdaxin Phase IIb clinical trial and that Zoraxel and Serdaxin share a common ingredient, we are currently evaluating how to proceed with the Phase IIb study for Zoraxel.

Through September 30, 2012, the costs incurred for development of Zoraxel to date have been approximately $1,245,000. We currently estimate that these Phase IIb studies would require approximately $2,300,000 throughout the remainder of 2012 and 2013, but we have not allocated additional resources to the development of Zoraxel at this time.

Pre-clinical Pipeline

RX-0201-Nano, RX-0047-Nano and RX-21101 are all in a pre-clinical stage of development. Through September 30, 2012, the costs incurred for development of these compounds to date have been approximately $3,170,000. The estimated cost to complete pre-clinical toxicology and Phase I clinical trials is estimated to be approximately $1,500,000 per each compound.

The conduct of the clinical trial and toxicology studies described above are being accomplished in conjunction with third-party clinical research organizations at external locations. This business practice is typical for the pharmaceutical industry and companies like us. As a result, the risk of completion or delay of these studies is not within our direct control and a program delay may occur due to circumstances outside our control. A delay in any of these programs may not necessarily have a direct impact on our daily operations. However, to the extent that a delay results in additional cost to us, unexpected expenses may result.

We will need to raise additional money through debt and/or equity offerings in order to continue to develop our drug candidates. If we are not able to raise sufficient additional money, we will have to reduce our research and development activities. We will first reduce research and development activities associated with our preclinical compounds. To the extent necessary, we will then reduce our research and development activities related to some or all of our clinical drugs.

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operating activities was $5,546,081 for the nine months ended September 30, 2012 compared to cash used in operating activities of $10,651,611 for the same period ended September 30, 2011. The operating cash flows during the nine months ended September 30, 2012 reflect our net loss of $6,171,266 and a net increase in cash components of working capital and non-cash charges totaling $625,185.

Cash provided by investing activities of $3,064,592 for the nine months ended September 30, 2012 consisted of a decrease of restricted cash equivalents of $1,214,592, and $1,850,000 from sales of marketable securities. Cash used in investing activities was $2,049,969 during the nine months ended September 30, 2011.

There were no cash flows from financing activities for the nine months ended September 30, 2012. Cash provided by financing activities of $13,578,274 during the nine months ended September 30, 2011 consisted of proceeds of $317,961 from the exercise of stock warrants, $40,040 from the exercise of stock options, $3,926,397 from the issuance of common stock to Teva, net of issuance costs, and $9,293,876 from the issuance of 8,333,333 shares of common stock to institutional investors, net of issuance costs. The institutional investors were also issued warrants to purchase 3,333,333 shares of common stock.

For the nine months ended September 30, 2012, we experienced a net loss of $6,171,266. Our accumulated deficit as of September 30, 2012 was $63,255,879.


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We have not yet generated commercial sales revenue and have been able to fund our operating losses to date through the sale of our common stock, convertible debt financings, interest income from investments of cash and cash equivalents and proceeds from reimbursed research and development costs. During the nine months ended September 30, 2012, we had a net decrease in cash and cash equivalents of $2,481,489. Total cash as of September 30, 2012 was $7,379,999 compared to $9,861,488 as of December 31, 2011. Total cash, restricted cash, and marketable securities were $7,697,172, which we believe will be sufficient to cover our cash flow requirements through September 30, 2013. Although we expect to have to pursue additional financing, there can be no assurance that we will be able to secure financing when needed or obtain such financing on terms satisfactory to us, if at all, or that any additional funding we do obtain will be sufficient to meet our needs in the long term. If we are not able to raise sufficient additional financing, we may not be able to fund the research and development.

CONTRACTUAL OBLIGATIONS

We have contracted with various vendors to provide research and development services. The terms of these agreements usually require an initiation fee and monthly or periodic payments over the term of the agreement, ranging from two months to 36 months. The costs to be incurred are estimated and are subject to revision. As of September 30, 2012, the total contract value of these agreements was approximately $19,050,433 and we have made payments totaling $17,938,504 under the terms of the agreements as of September 30, 2012. All of these agreements may be terminated by either party upon appropriate notice as stipulated in the respective agreements.

On September 9, 2010, we and three of our key executives entered into Amended and Restated Employment Agreements. The Amended and Restated Employment Agreements replace the prior employment contracts entered into on August 10, 2009. We entered into the Amended and Restated Employment Agreements in order to provide the key executives with: (i) an automatic one year renewal upon the expiration of the initial three year term and upon each consecutive year term unless such employment with the Company is terminated earlier by the Company or the executives; (ii) an annual base salary adjustment for inflation as determined by the Consumer Price Index subject to review by the Company's Compensation Committee; (iii) an increase in the Company provided life insurance coverage from an amount equal to two times the executive's annual base salary to an amount equal to four times the executive's annual base salary; and (iv) a one-time cash payment, subject to applicable withholding requirements under applicable state and federal law, in an amount equal to the executive's increased income tax costs as a result of payments made to the executive by the Company under the change of control provisions of the Amended and Restated Employment Agreement. Other than these changes, the new contracts have substantially similar terms to the executives' prior employment agreements. The agreements result in annual commitments of $350,000, $250,000 and $200,000, respectively.

On May 21, 2009, the Company entered into a one year agreement to use lab space commencing on July 1, 2009. The Company agreed to pay monthly payments of $4,554. The agreement has been renewed annually for one-year terms, most recently commencing on July 1, 2012 with the same payment schedule.

On June 22, 2009, the Company entered into a License Agreement with Korea Research Institute of Chemical Technology ("KRICT") to acquire the rights to all intellectual properties related to Quinoxaline-Piperazine derivatives that were synthesized under a Joint Research Agreement. The initial license fee was $100,000, all of which was paid as of June 30, 2010. The agreement with KRICT calls for a one-time milestone payment of $1,000,000 within 30 days after the first achievement of marketing approval of the first commercial product arising out of or in connection with the use of KRICT's intellectual properties.

On September 21, 2009, we closed on the initial stock purchase transaction contemplated by the securities purchase agreement, dated June 26, 2009, as amended (the "Securities Purchase Agreement"), with Teva, pursuant to which Teva purchased 3,102,837 shares of our common stock for $3.5 million. Contemporaneous with the execution and delivery of the Securities Purchase Agreement, the parties executed a research and exclusive license option agreement, dated June 26, 2009, (the "License Agreement"), for the development of the anti-cancer compound, RX-3117. Pursuant to the terms of the Securities Purchase Agreement, Teva has the option to make an additional investment in Rexahn common stock for the purpose of supporting the research and development program for the anti-cancer compound RX-3117, and we will be eligible to receive additional development, regulatory and sales milestone payments. On January 19, 2011, we entered into a second amendment to the Securities Purchase Agreement (the "Second Amendment"). The Second Amendment amends the Securities Purchase Agreement to change the aggregate purchase price to be paid by Teva for a second investment in Rexahn common stock, which aggregate amount shall equal the sum of
(i) the estimated amount that is required to complete the research and development program for RX-3117 plus (ii) $450,000 for expenses. Pursuant to the terms of the Second Amendment, Teva purchased 2,334,515 shares of Rexahn Common stock in a private offering for $3.95 million. In addition, the Second Amendment provided for a possible third investment in Rexahn common stock by Teva in the amount of $750,000, which investment may be made by Teva, in its sole discretion, upon the satisfactory completion by Rexahn of an exploratory Phase I clinical study of the compound RX-3117.


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On June 29, 2009, the Company signed a five year lease for 5,466 square feet of office space in Rockville, Maryland commencing on June 29, 2009. The lease requires annual base rents of $76,524 with increases over the next five years. Under the lease agreement, the Company pays its allocable portion of real estate taxes and common area operating charges. Rent paid under the Company's lease agreement during the nine months ended September 30, 2012 was $118,636.

In connection with the lease agreement, the Company issued a letter of credit of $100,000 in favor of the lessor. The Company has restricted cash equivalents of the same amount for the letter of credit. On August 2, 2010 and July 1, 2011, the letter of credit was reduced to $50,000 and $37,500, respectively.

CURRENT AND FUTURE FINANCING NEEDS

We have incurred negative cash flow from operations since we started our business. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned . . .

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