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In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140". This Statement permits fair value of remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amended SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company is currently reviewing the effect, if any, the proposed guidance will have on its financial position.

 

 

In July 2006, FASB issued Financial Accounting Standards Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises' financial statement in accordance with SFAS No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently reviewing the effect, if any, the proposed guidance will have on its financial position.

 

For the three months and nine months ended September 30, 2006, we recorded revenues of $89,848 and $326,627, respectively, compared to $76,292 and $150,561 in the same period last year. Revenues include $18,750 and $56,250 from the recognition of deferred revenue from a $1,500,000 contribution made in 2003 to us under a collaborative research agreement with Rexgene Biotech Co., Ltd., a minority shareholder in the three and nine months ended September 30, 2006 and the same period last year. We recorded $71,098 and $270,397, respectively, of interest and other income from the investment of our cash and cash equivalents and other short-term investments for the three months and nine months ended September 30, 2006, compared to $57,542 and $94,311, respectively, for the same periods in 2005. The increase of $13,556 and $176,066 in total revenues, or 18% and 117%, respectively, was primarily due to an increase in interest income in the three months and nine months ended September 30, 2006, compared to the same periods in 2005 as a result of higher cash and cash equivalent balances and higher interest rates during the 2006 period.

Research and development expenses increased $359,228 and $2,275,030, or 130% and 248%, respectively, from $275,819 and $917,633, respectively, for the three months and nine months ended September 30, 2005 to $635,047 and $3,192,663, respectively, for the three months and nine months ended September 30, 2006. The increases during the 2006 periods were due primarily to the fact that the clinical trials of RX-0201, one of our drug candidates, are continuing and we have taken preliminary steps to prepare other drug candidates for clinical trials. We expect that research and development expenses will continue to increase as our other drug candidates move into the clinical trials phases of development. Higher research and development expenses during the 2006 periods were also attributable to the adoption of SFAS No. 123R, effective January 1, 2006, and an increase in the number of outstanding shares subject to options during the three and nine months ended September 30, 2006 compared to the same periods last year. We incurred stock option compensation expense of $90,485 and $176,862, respectively, for the three months and nine months ended September 30, 2005 compared to $193,011 and $502,319, respectively, for the three months and nine months ended September 30, 2006.

Depreciation and amortization expenses increased $24,743 and $33,974, or 82% and 54% respectively, from $30,074 and $63,107, respectively, for the three months and nine months ended September 30, 2005 to $54,817 and $97,081, respectively, for the three months and nine months ended September 30, 2006. The increase was due primarily to the purchase of new laboratory equipment.

As a result of the above, the net loss for the three months and nine months ended September 30, 2006 was $1,708,655 and $5,885,792, or $0.03 and $0.12 per share, respectively, compared to a net loss of $1,171,870 and $3,242,872, or $0.03 and $0.08 per share, respectively, for the three months and nine months ended September 30, 2005.

On October 17, 2006, we announced the conclusion of the Phase I clinical trial of RX-0201, our leading drug candidate. The cost incurred for the clinical trial was approximately $1,300,000. RX-0201 is a first-in-class signal inhibitor that directly blocks the production of Akt, a protein kinase that plays a key role in cancer progression. Akt is over-activated in a significant number of cancers, such as breast, colorectal, gastric, head and neck, ovarian, pancreatic, prostate, and thyroid cancers. Akt's transformation ability, as well as its role in cancer progression, makes it a highly attractive and unique target in the treatment of cancer.

 

 

As the main purpose of the clinical trial was to establish the safety of RX-0201, the parameters that determined the completion of this project were a direct function of the safety profile of this compound in humans. As this was the first time that RX-0201 had been administered to humans, the safety profile in humans was unknown and therefore, the number of doses required to determine the dosage at which the FDA safety endpoints would be met was estimated.

 

RX-0047 and RX-5902 are both in a pre-clinical stage of development and the next scheduled program for each compound is a pre-clinical toxicology study required prior to submission of an Investigational New Drug ("IND") application to the FDA. RX-0047 directly inhibits HIF-1 alpha by reducing expressions of its mRNA and protein, resulting in the arrest of tumor growth and tumor metastasis, while reversing radiation resistance and inducing apoptosis. While it will be developed initially as an orphan drug, RX-0047 may also be developed to target a broad spectrum of human cancers, which will significantly expand its potential market. RX-5902, a piperazine analogue, is a G₂/M-specific cell cycle inhibitor. In pre-clinical studies, it strongly induced apoptosis (cell death) and inhibited proliferation of various human cancer cells at nanomolar concentrations. To date, the costs incurred for development of these compounds to date have been approximately $800,000 for RX-0047, and $300,000 for RX-5902. The estimated cost to complete pre-clinical toxicology and Phase I clinical trials is estimated to be approximately $1,500,000 per compound for a total of $3,000,000. These compounds may be entered into these Phase I clinical trials in late 2007 or early 2008.

Cash used in operating activities was $4,874,591 for the nine months ended September 30, 2006 compared to cash used in operating activities of $2,637,479 for the same period ended September 30, 2005. The operating cash flows during the nine months ended September 30, 2006 reflect our loss from operations of $5,885,792 offset by non-cash charges of $1,353,548 and a net decrease in cash components of working capital of $342,347. Non-cash charges consist of depreciation and amortization of $97,081, stock option compensation expense of $1,312,717 and amoritization of deferred revenue of $(56,250). The decrease in working capital primarily consists of a $297,813 decrease in accounts payable and accrued expenses and an increase of $44,534 to prepaid and other assets.

Cash used in investing activities during the nine months ended September 30, 2005 reflects $45,117 of capital expenditures for the purchase of equipment. Cash used in investing activities during the nine months ended September 30, 2006 reflects $48,911 of capital expenditures for the purchase of equipment. Cash provided by financing activities of $13,361,415 during the nine months ended September 30, 2005 reflects proceeds from the issuance of common stock and long-term debt in financing transactions of $8,349,982 and $5,150,000, respectively, net of principal payments on long-term debt of $138,567. Cash used in financing activities of $154,371 during the nine months ended September 30, 2006 consisted of principal payments on long-term debt of $130,570 and the purchase of treasury stock in the amount of $28,410, offset by proceeds of $4,609 from the issuance of common stock.

We have financed our operations since inception primarily through equity and convertible debt financings and interest income from investments of cash and cash equivalents. During the nine months ended September 30, 2006, we had a net decrease in cash and cash equivalents of $5,077,873. This decrease primarily resulted from the net loss of $5,885,792. Total cash and cash equivalents as of September 30, 2006 were $5,038,752 compared to $10,116,625 as of December 31, 2005.

In April 2004, we signed a 5-year lease for 8,030 square feet of office space in Rockville, Maryland commencing July 2004. The lease requires annual base rents of $200,750 subject to annual increases of 3% of the preceding years adjusted base rent. Under the leasing agreement, we also pay our allocable portion of real estate taxes and common area operating charges.

 

 

For the years ending December 31
2006		$	209,874
2007			216,170
2008			222,655
2009			112,972
		$	761,671

On January 3, 2006 and March 29, 2006, we contracted with Formatech to perform RX-0201 experiments in an effort to develop a more concentrated dosage form. The cost of the project was $57,000, the total cost of which was paid in the nine months ended September 30, 2006. In addition, on January 6, 2006, we entered into a drug packaging agreement with Formatech for Phase II clinical trials of RX-0201. In accordance with the agreement, the estimated cost of the project is $128,250 plus pass through expenses (e.g., outsourced testing), of which $138,540 was paid during the nine months ended September 30, 2006.

 

·

the progress of our product development activities;

 

·

the number and scope of our product development programs;

 

·

the progress of our pre-clinical and clinical trial activities;

 

·

the progress of the development efforts of parties with whom we have entered into collaboration agreements;

 

·

our ability to maintain current collaboration programs and to establish new collaboration arrangements;

 

·

the costs involved in prosecuting and enforcing patent claims and other intellectual property rights; and

 

·

the costs and timing of regulatory approvals.

 

 

 

 

 

 

We will need additional financing to continue to develop our drug candidates, which may not be available on favorable terms, if at all. If we are unable to secure additional financing in the future on acceptable terms, or at all, we may be unable to complete our planned pre-clinical and clinical trials or obtain approval of our drug candidates from the FDA and other regulatory authorities. In addition, we may be forced to reduce or discontinue product development or product licensing, reduce or forego sales and marketing efforts and forego attractive business opportunities in order to improve our liquidity to enable us to continue operations. Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive effect on our stockholders.

 

We have generated no revenues to date from product sales. Our accumulated deficit as of September 30, 2006 and December 31, 2005 was $20,090,115 and $14,204,323, respectively. For the nine months ended September 30, 2006 and the year ended December 31, 2005, we had net losses of $5,885,792 and $6,349,540, respectively, primarily as a result of expenses incurred through a combination of research and development activities related to the various technologies under our control and expenses supporting those activities. Even if we succeed in developing and commercializing one or more of our drug candidates, we expect to incur substantial losses for the foreseeable future and may never become profitable. We also expect to continue to incur significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future, based on the following considerations:

·

continued pre-clinical development and clinical trials for our current and new drug candidates;

 

·

efforts to seek regulatory approvals for our drug candidates;

 

·

implementing additional internal systems and infrastructure;

 

·

licensing in additional technologies to develop; and

 

·

hiring additional personnel.

 

 

 

·

conducting pre-clinical and clinical trials;

 

·

participating in regulatory approval processes;

 

·

formulating and manufacturing products; and

 

·

conducting sales and marketing activities.

 

 

 

Our drug candidates are in an early stage of development and require extensive clinical testing, which are very expensive, time-consuming and difficult to design. In 2006, we expect to have one oncology drug candidate in Phase I clinical trials. In 2007, we expect to have RX-0201, an oncology drug candidate and RX-10100, a neuroscience drug candidate, entering Phase II clinical trials.

 

 

·

unforeseen safety issues;

 

·

determination of dosing issues;

 

·

lack of effectiveness during clinical trials;

·

reliance on third party suppliers for the supply of drug candidate samples;

 

·

slower than expected rates of patient recruitment;

 

·

inability to monitor patients adequately during or after treatment;

 

·

inability or unwillingness of medical investigators and institutional review boards to follow our clinical protocols; and

 

·

lack of sufficient funding to finance the clinical trials.

 

 

Even if our clinical trials are completed as planned, we cannot be certain that our results will support our drug candidate claims. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and pre-clinical testing. The clinical trial process may fail to demonstrate that our drug candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a drug candidate and may delay development of other drug candidates. Any delay in, or termination of, our clinical trials will delay the filing of our NDAs with the FDA and, ultimately, delay our ability to commercialize our drug candidates and generate product revenues. In addition, our trial designs may involve a small patient population. Because of the small sample size, the results of early clinical trials may not be indicative of future results.

 

·

awareness of the drug's availability and benefits;

 

·

perceptions by members of the health care community, including physicians, about the safety and effectiveness of our drugs;

 

·

pharmacological benefit and cost-effectiveness of our product relative to competing products;

 

·

availability of reimbursement for our products from government or other healthcare payers;

 

·

effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any; and

 

·

the price at which we sell our products.

 

 

We depend upon independent investigators and collaborators, such as universities and medical institutions, to conduct our pre-clinical and clinical trials. For example, the Phase I clinical trials of RX-0201 were conducted at the Lombardi Comprehensive Cancer Center of Georgetown Medical Center with the assistance of Amarex, LLC, a pharmaceutical clinical research service provider who will be responsible for creating the reports that will be submitted to the FDA. We also relied on TherImmune Research Corporation (currently Gene Logic Laboratories, Inc.), a discovery and pre-clinical service provider, to summarize RX-0201's pre-clinical data. While we make every effort internally to oversee their work, these collaborators are not our employees and we cannot control the amount or timing of resources that they devote to our programs. These investigators may not assign priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and resources to our drug-development programs, or if their performance is substandard, the approval of our FDA applications, if any, and our introduction of new drugs, if any, may be delayed. These collaborators may also have relationships with other commercial entities, some of whom may compete with us. If our collaborators assist our competitors at our expense, our competitive position would be harmed.

 

·

We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA must approve any replacement contractor. This approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, the production of our products after receipt of FDA approval, if any.

 

·

Our third-party manufacturers might be unable to formulate and manufacture our drugs in the volume and of the quality required to meet our clinical needs and commercial needs.

 

·

Our contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products.

 

·

Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Agency ("DEA"), and corresponding state agencies to ensure strict compliance with good manufacturing practice and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers' compliance with these regulations and standards, but we may be ultimately responsible for any of their failures.

·

If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation.

Each of these risks could delay our clinical trials, drug approval and commercialization and potentially result in higher costs and/or reduced revenues.

 

We have no experience selling, marketing or distributing products and currently no internal capability to do so.

We currently have no sales, marketing or distribution capabilities. While we intend to have a role in the commercialization of our products, we do not anticipate having the resources in the foreseeable future to globally develop sales and marketing capabilities for all of our proposed products. Our future success depends, in part, on our ability to enter into and maintain collaborative relationships with other companies having sales, marketing and distribution capabilities, the collaborator's strategic interest in the products under development and such collaborator's ability to successfully market and sell any such products. To the extent that we decide not to, or are unable to, enter into collaborative arrangements with respect to the sales and marketing of our proposed products, significant capital expenditures, management resources and time will be required to establish and develop an in-house marketing and sales force with technical expertise. We cannot assure you that we will be able to establish or maintain relationships with third party collaborators or develop in-house sales and distribution capabilities. To the extent that we depend on third parties for marketing and distribution, any revenues we receive will depend upon the efforts of such third parties, as well as the terms of its agreements with such third parties, which cannot be predicted at this early stage of our development. We cannot assure you that such efforts will be successful. In addition, we cannot assure you that we will be able to market and sell our products in the United States or overseas.

 

·

developing drugs;

 

·

undertaking pre-clinical testing and human clinical trials;

 

·

obtaining FDA and other regulatory approvals of drugs;

 

·

formulating and manufacturing drugs; and

 

·

launching, marketing and selling drugs.

 

·

the degree and range of protection any patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our licensed patents;

 

·

if and when patents will issue;

 

·

whether or not others will obtain patents claiming aspects similar to those covered by our licensed patents and patent applications; or

 

·

whether we will need to initiate litigation or administrative proceedings which may be costly whether we win or lose.

Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors as well as our licensors and contractors. To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, we require all employees to enter into agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.

 

 

·

obtain licenses, which may not be available on commercially reasonable terms, if at all;

 

·

redesign our products or processes to avoid infringement;

 

·

stop using the subject matter claimed in the patents held by others, which could cause us to lose the use of one or more of our drug candidates;

 

·

pay damages; or

 

·

defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our management resources.

 

 

 

In addition to our own internally developed drug candidates, we proactively seek opportunities to license in and advance compounds in oncology and other therapeutic areas that are strategic and have value creating potential to take advantage of our development know-how. We are actively pursuing additional drug candidates to acquire for development. Such additional drug candidates could significantly increase our capital requirements and place further strain on the time of our existing personnel, which may delay or otherwise adversely affect the development of our existing drug candidates. Alternatively, we may be required to hire more employees, further increasing the size of our organization and related expenses. If we are unable to manage our growth effectively, we may not efficiently use our resources, which may delay the development of our drug candidates and negatively impact our business, results of operations and financial condition.

 

The loss of the technical knowledge and management and industry expertise of any of our key personnel, especially Dr. Chang H. Ahn, our Chairman and Chief Executive Officer and regulatory expert, could result in delays in product development and diversion of management resources, which could adversely affect our operating results. We do not have "key person" life insurance policies for any of our officers.

 

 

The testing and marketing of medical products entail an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with collaborators. Although we currently carry clinical trial insurance and product liability insurance, we, or any collaborators, may not be able to maintain such insurance at a reasonable cost. Even if our agreements with any future collaborators entitles us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.

 

To date, we have generated no revenues from product sales and only minimal revenues from a research agreement with a minority shareholder, and interest on bank account balances and short-term investments. Our accumulated deficit as of September 30, 2006 and December 31, 2005 was $20,090,115 and $14,204,323, respectively. For the nine months ended September 30, 2006 and the year ended December 31, 2005, we had net losses of $5,885,792 and $6,349,540, respectively, primarily as a result of expenses incurred through a combination of research and development activities related to the various technologies under our control and expenses supporting those activities. Until we receive approval from the FDA and other regulatory authorities for our drug candidates, we cannot sell our drugs and will not have product revenues.

 

 

·

the announcement of new products or product enhancements by us or our competitors;

 

·

developments concerning intellectual property rights and regulatory approvals;

 

·

variations in our and our competitors' results of operations;

 

·

changes in earnings estimates or recommendations by securities analysts; and

 

·

developments in the biotechnology industry.

 

 

Some or all of the "restricted" shares of our common stock issued in the merger of CPRD and Rexahn, Corp or held by other stockholders may be offered from time to time in the open market pursuant to Rule 144, and these sales may have a depressive effect on the market for our common stock. In general, a person who has held restricted shares for a period of one year may, upon filing with the SEC a notification on Form 144, sell into the market common stock in an amount equal to 1 percent of the outstanding shares (approximately 500,000 shares) during a three month period. Any of the restricted shares may be freely sold by a non-affiliate after they have been held two years.

 

These factors may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock. Currently, there are approximately 250 holders of record of our common stock.

 

Because our common stock may be a "penny stock," it may be more difficult for you to sell shares of our common stock, and the market price of our common stock may be adversely affected.

Item 3. CONTROLS AND PROCEDURES

 

 

 

 

 

 

 

 

 

 

Exhibit Number	Description
31.1	Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e)
31.2	Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e)
32.1	Certification of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350
32.2	Certification of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350

 

 

 

	REXAHN PHARMACEUTICALS, INC.
	/s/ Ted T.H. Jeong
	Name: Ted T. H. Jeong
	Title: Chief Financial
	Officer and Secretary
	Date: November 14, 2006

 

Exhibit Number	Description
31.1	Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e)
31.2	Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e)
32.1	Certification of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350
32.2	Certification of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350