10KSB: Optional form for annual and transition reports of small business issuers [Section 13 or 15(d), not S-B Item 405]
Published on April 2, 2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-KSB
(Mark
One)
x ANNUAL
REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the
Fiscal Year Ended December 31, 2006
OR
o TRANSITION
REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the
Transition Period from _________ to _________
Commission
file number: 000-50590
REXAHN
PHARMACEUTICALS, INC.
(Name
of
small business issuer in its charter)
|
Delaware
|
11-3516358
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
9620
Medical Center Drive
Rockville,
Maryland 20850
(Address
of principle executive offices)
(240)
268-5300
(Issuer's
telephone number)
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, par value $0.0001 per share
(Title
of
class)
Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the
past 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
x No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No
x
State
issuer's revenues for its most recent fiscal year: $75,000
As
of
March 30, 2007, the aggregate market value of the voting common equity held
by
non-affiliates of the issuer was approximately $57,195,481
based on
the closing trade reported on the Over-the-Counter Bulletin Board.
As
of
March 30, 2007, the number of shares of the issuer's common stock outstanding
was: 50,308,132
Documents
incorporated by reference: None
Transitional
Small Business Disclosure Format (Check one): Yes o No
x
Cautionary
Statement Regarding Forward-Looking Statements.
This
Annual Report on Form 10-KSB contains statements (including certain
projections and business trends) accompanied by such phrases as "believe",
"estimate", "expect", "anticipate", "will", "intend" and other similar
expressions, that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including but not limited to the following:
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·
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our
lack of profitability and the need for additional capital to operate
our
business;
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our
ability to obtain the necessary U.S. and worldwide regulatory
approvals for our drug candidates;
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·
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successful
and timely completion of clinical trials for our drug
candidates;
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demand
for and market acceptance of our drug
candidates;
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the
availability of qualified third-party researchers and manufacturers
for
our drug development programs;
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·
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our
ability to develop and obtain protection of our intellectual property;
and
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·
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other
risks and uncertainties, including those set forth herein under the
caption "Risk Factors" and those detailed from time to time in our
filings
with the Securities and Exchange Commission.
|
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 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.
i
REXAHN
PHARMACEUTICALS, INC.
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PART
I
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Item
1.
|
Description
of Business
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Any
references to "we", "us", "our," the "Company" or "Rexahn" shall mean Rexahn
Pharmaceuticals, Inc.
We
are a
clinical stage biopharmaceutical company dedicated to the discovery,
development, and commercialization of innovative treatments for cancer, central
nervous system (CNS) disorders, sexual dysfunction and other unmet medical
needs. We develop therapies that make it possible to regain normalcy for
patients suffering from disease. We have one drug candidate entering
Phase II clinical trials this year and five other drug candidates in
pre-clinical development. We plan to enter two drug candidates into Phase II
clinical trials this year, subject to obtaining sufficient additional
financing. We intend to leverage our drug-discovery technologies,
scientific expertise and developmental know-how to develop and commercialize
signal inhibitor cancer drugs with greater clinical benefits for patients and
new drugs for the treatment of diseases of the central nervous system. We will
continue to identify internally developed compounds as potential drug
candidates, as well as assess compounds developed by others and, if necessary,
license the rights to these compounds in order to develop and commercialize
them
as drugs. For a description of our pipeline drug candidates, see "Our Pipeline
Drug Candidates" in this Item 1.
Our
principal corporate offices are located at 9620 Medical Center Drive,
Rockville, Maryland 20850 in Maryland's I-270 technology corridor. Our
telephone number is (240) 268-5300.
Our
current therapeutic focus in the anti-cancer area is on therapies that target
signal transduction molecules of cancer cells. Signal transduction is the
process of transforming external information from the cell surface to a specific
internal response, such as cell growth or cell death. Signals are conveyed
through tightly regulated communication networks. The signaling pathways are
comprised of functionally diverse molecules, including proteins. Most, if not
all, cancer disease states arise from aberrant cell communication. Recent trends
in anti-cancer chemotherapy drug development involve signal transduction
inhibitors that are target-specific. Our signal transduction inhibitors directly
attack these signaling pathways and halt the growth of cancer cells. We believe
this approach will lead to the development of more targeted and less toxic
drugs
than are currently available to help treat cancer and that may also have
potential applications in other disease areas.
We
currently have a number of drug candidates in clinical development for cancer,
CNS disorders and sexual dysfunction. Our lead anti-cancer drug candidate,
Archexin, which we previously referred to as RX-0201, completed Phase I clinical
trials in 2006 and will begin its Phase II clinical trials in the second quarter
of 2007 in patients with advanced stage renal cell carcinoma (RCC), an abnormal
growth of cells lining the tubules of the kidney. Additional Archexin Phase
II
clinical trials in gastrointestinal (GI) indications, such as pancreatic and
stomach cancers, are expected to follow. Archexin received "orphan drug"
designation from the Food and Drug Administration, or FDA, for five cancer
indications (RCC, pancreatic cancer, stomach cancer, brain cancer and ovarian
cancer). The FDA's orphan drug program is intended to stimulate research,
development and approval of products that treat rare diseases. With orphan
drug
designation, sponsor companies benefit from an expedited FDA approval process,
seven years of marketing exclusivity after approval and tax incentives for
clinical research. We plan to enter our RX-10100 drug candidates into Phase
II trials for two separate indications, anxiety (as Serdaxin) and sexual
dysfunction (as Zoraxel), in 2007, subject to obtaining sufficient additional
financing. Based on early studies, both candidates appear to act on serotonin
and dopamine, which are key neurotransmitters in the brain implicated in anxiety
and sexual dysfunction.
Company
Background
Our
company resulted from a merger of Corporate Road Show.Com Inc., originally
a New
York corporation ("CPRD"), and Rexahn, Corp, a Maryland corporation, immediately
after giving effect to a 1-for-100 reverse stock split and the
reincorporation of CPRD as a Delaware corporation under the name "Rexahn
Pharmaceuticals, Inc." ("Rexahn Pharmaceuticals"), with Rexahn, Corp surviving
as a wholly owned operating subsidiary of ours (the "Merger"). The Merger was
effective as of May 13, 2005. On September 29, 2005, Rexahn, Corp, was
merged with and into us and Rexahn, Corp's separate existence was
terminated.
Rexahn,
Corp was founded in March 2001 and began as a biopharmaceutical company
focusing on oncology drugs. Dr. Chang Ahn, our Chairman, a former Food and
Drug
Administration, or FDA, reviewer, and National Cancer Institute, or NCI,
research scientist, helped guide the company's initial research efforts toward
signal inhibitor therapies. Our mission is to discover, develop and market
innovative therapeutics that address unmet medical needs.
Industry
Background
Overview
Our
research and development focuses on three therapeutic areas that affect the
lives of many people—cancer, diseases of the central nervous system (namely
anxiety, depression) and sexual dysfunction. All of these disorders can have
a
debilitating effect on the quality of life for patients who suffer from them.
Our strategy is to develop drugs that satisfy unmet needs in the market and
to
allow patients suffering from disease to regain normalcy in their
lives.
According
to the American Cancer Society's Cancer Facts & Figures 2007, cancer is
the second leading cause of death among Americans and is responsible for one
of
every four deaths in the United States. In 2007, more than 560,000
Americans are expected to die of cancer and close to 1.4 million
new cases are expected to be diagnosed.
These
estimates do not include non-invasive cancer or more than 1 million cases
of basal and squamous cell skin cancers expected to be diagnosed in
2007.
The
high
rate of cancer prevalence and the inadequacy of available treatments justify
continued investment in new therapies. In the United States alone, over
$25 billion in cancer therapeutics are sold annually. According to a market
research report by Datamonitor, sales of anti-cancer drugs are predicted to
grow
each year, reaching $55 billion globally in 2009. The report attributes the
growth in sales to increased demand for innovative drugs, which are expected
to
rise in market share from 18% to 33% of total anti-cancer drug sales by
2009.
The
National Institute of Mental Health, or NIMH, estimates that 26.2 percent of
adults, or 57.7 million people, suffer from a diagnosable mental disorder
in a given year. The NIMH also reports that nearly half of those with a mental
disorder suffer from two or more disorders. With this large prevalence and
given
many people suffer from more than one mental disorder at a given time, the
burden of illness is significant and mental disorders are the leading cause
of
disability in the United States. The anti-anxiety and anti-depression market
is
estimated to be over $22 billion by 2010 according to a Business
Communications article entitled "The Expanding Market for Psychotherapeutic
Drugs".
Current
Cancer
Treatments
Traditional
cancer treatments include surgery, radiation therapy, and chemotherapy. Surgery
is widely used to treat cancer, and in many cases cure cancer, provided the
cancer has not metastasized. However, the complications associated with surgery
are significant. Even if a cure may be achieved through surgery, the costs
to
the patient in terms of health and reduced quality of life often does not
support the surgical option.
Radiation
therapy, or radiotherapy, is the treatment of cancer and other diseases with
ionizing radiation and can be highly effective for treating cancers. Ionizing
radiation deposits energy that injures or destroys cells in the area being
treated by damaging their genetic material, making it impossible for these
cells
to continue to grow. Although radiation damages both cancer cells and normal
cells, the normal cells are generally able to repair themselves and function
properly. In certain cancer tumor types, radiotherapy cure rates are as high
as
for surgery and can be used when surgery would be unable to remove the tumor
completely or is deemed inappropriate.
Chemotherapy
destroys cancer tumor cells by interfering with various stages of the cell
division process. Chemotherapy is used as a primary treatment for leukemia,
other blood cancers, and inoperable or metastatic solid cancer tumors. However,
many current chemotherapy drugs have limited efficacy and debilitating adverse
side effects and may result in the development of multi-drug resistance.
Unmet
Needs in Cancer Therapies
While
surgery remains the best available treatment for long-term survival provided
the
cancer is still localized and radiation and chemotherapy offer more limited
benefits for those whose disease is more widespread at the time of diagnosis,
a
considerable number of unmet needs remain in the treatment of
cancer.
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Long-term
control of advanced tumors:
For advanced cancer (particularly stage III-IV disease in which the
cancer
has spread throughout the body), surgery cannot eliminate the tumor
and
the patient becomes reliant on chemotherapy and/or radiation. However,
current chemotherapy, in the majority of cases, fails to eliminate
the
tumor, tending to, at best, shrink the tumor and fails to extend
the
patient’s life. These limitations translate into a need for safer and
effective cancer therapies offering a significant improvement in
survival
time or long-term chronic disease control.
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Decreased
relapse for early-stage patients:
While many early-stage patients will enter remission as a result
of
treatment with surgery and radiation therapy and chemotherapy as
well, the
rate of relapse is high, as small numbers of tumor cells remain after
the
treatments despite standard surgical and radiation therapies. Upon
relapse, the tumor is often more aggressive than the initial occurrence,
and unresponsive to standard first-line therapies. The development
of
therapies that can maintain a patient in remission following treatment
for
the initial tumor, rather than permitting relapse, is a significant
unmet
need.
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Less
toxic therapies:
Current chemotherapeutic drugs are associated with a high level of
toxicities, due to their nonspecific mechanism of targeting all rapidly
dividing cells, rather than cancer tumor cells in particular. For
patients
with terminal disease, the maintenance of quality of life, in addition
to
extending life, is of prime importance; however, treatment-related
toxicities severely impair the quality of life of cancer patients.
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Current
Renal Cell Carcinoma Treatments
Renal
cell carcinoma (RCC) is one of the most difficult cancers to treat. Current
treatments for RCC include radiation, surgery and chemotherapy. Only 20% of
metastatic RCC tumors respond to standard therapy, leaving 80% of advanced
RCC
patients without any effective treatment. Further, up to 50% of stage I-III
RCC
patients relapse following treatment. With existing therapies, the five-year
survival rate for RCC patients is less than 20%.
Given
the
poor prognosis of patients with advanced stage RCC disease, we believe the
development of an effective and less toxic treatment for RCC represents a
significant unmet need in the marketplace.
Unmet
Needs in RCC Treatment
Our
first
anti-cancer drug candidate on the market will focus on patients with RCC. Each
year nearly 208,000 people worldwide are diagnosed with RCC, the most common
form of kidney cancer. More than 102,000 die from RCC annually according to
the
Kidney Cancer Association (2005). In the United States, approximately 30,000
new
cases are diagnosed each year, accounting for 3% of all cancer cases and
approximately 1.5% of all cancer deaths.
Current
CNS Treatments
Anxiety
is the stress response (e.g., fight, fright, flight) that is provoked by a
genuine threat or challenge. In a healthy individual, such stress is used as
a
spur for appropriate action. However, in an individual with anxiety, such stress
induces an excessive or inappropriate state of arousal characterized by feelings
of apprehension, uncertainty and/or fear, resulting in paralyzing the individual
into action or withdrawal. An anxiety disorder persists once the threat is
removed, while a healthy response to a threat resolves. Anxiety is linked to
high levels of amygdale action that are associated with an increased prevalence
of anxiety symptoms and dispositional negative affect.
Anxiety
disorders are classified according to the severity and duration of their
symptoms and specific behavioral characteristics. Categories
include:
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Generalized
anxiety disorder (GAD), which is long lasting and low-grade.
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Panic
disorder, which has more dramatic symptoms.
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Phobias.
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Obsessive−compulsive
disorder (OCD).
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Post−traumatic
stress disorder (PTSD)
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Separation
anxiety disorder (which is almost always seen in
children).
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Social
phobia, also known as social anxiety disorder, is the fear of being publicly
scrutinized and humiliated and is exhibited by extreme shyness and discomfort
in
social settings. This phobia often leads people to avoid situations and is
not
due to a physical, mental problem. According to the U.S. National Morbidity
Survey from 1994, social phobia is the third most common psychiatric disorder
in
the United States. Prevalence has been estimated at 7%.
The
anxiety and depression markets are dominated by a few classes of products.
Selective serotonin reuptake inhibitors (SSRIs) and serotonin
norepinephrine reuptake inhibitors (SNRIs) are the two major classes of
anti-depressants. SSRIs and benzodiazepines are the most frequently used
products to treat anxiety. While many of these products help to control anxiety
and depression for some patients, they have significant drawbacks that limit
patient use, such as being potentially habit-forming, causing drowsiness,
limitations on use with certain pre-existing medical conditions, slow onset
of
action, causing sexual dysfunction, insomnia and interacting with certain food
or drugs. The marketing exclusivity period of many currently marketed drugs
for
the treatment of anxiety and depression are close to ending, resulting in fierce
competition from generic drug makers. While major pharmaceutical companies
are
trying to extend the protection of their blockbuster drugs, they also want
to
develop new classes of drugs that will give another decade of exclusivity with
better efficacy. Serdaxin, as a dual action drug candidate, has a potential
to
address this market.
Unmet
Needs in CNS Therapies
The
marketing exclusivity period of many key drugs for the treatment of anxiety
and
depression has expired or is close to expiration and has resulted in fierce
competition from generic drug makers. Major pharmaceutical companies are waiting
for better and safer new classes of drugs that will give them another decade
of
exclusivity in the market.
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Better
safety profile: Adverse
reactions associated
with current SSRI anxiolytics and antidepressants include nausea,
sexual
dysfunction, insomnia, suicidal tendency and weight gain. The occurrence
of one or more of these side effects in patients is the primary reason
that over
30% of
patients discontinue use of these
treatments.
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Fast
therapeutic onset with immediate results:
Onset
of therapeutic action within the first week of use has been one of
the key
goals for all drug discovery programs involved in treating anxiety
and
depression. All current medications require several weeks to see
therapeutic onset.
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Broad
spectrum of activity:
The
vast majority of patients who suffer from anxiety also display symptoms
of
depression and vice versa. In the past, each disorder was treated
with
separate medications. Recent clinical studies have demonstrated the
ability of SSRIs to be somewhat effective in treating both anxiety
and
depression. Newer drugs should have more potent efficacy with better
safety profiles than SSRIs to address both symptoms of anxiety and
depression.
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Current
Sexual Dysfunction Treatment
There
are
currently only three oral drugs approved on the market to treat erectile
dysfunction. All three products are selective inhibitors of phosphodiesterase
type 5 (PDE5). These drugs may result in numerous adverse reactions, including
cardiovascular effects and death. Zoraxel is not a PDE5 inhibitor, but works
through a brain mediated mechanism that produces release of serotonin and
dopamine. There are currently no products on the market to treat premature
ejaculation, although a few products are in development.
Unmet
Needs in Sexual Dysfunction
Premature
ejaculation represents the largest segment of male sexual dysfunction. An
estimated 30 million men in the United States and 36 million in Europe
suffer from premature ejaculation, however, there are few treatment options
available. There
is
presently no approved drug for treatment of premature ejaculation.
Market
Opportunity
We
believe that several factors make drug development for cancer and diseases
of
the central nervous system attractive to large pharmaceutical companies,
including:
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Favorable
Environment for Formulary Access and Reimbursement.
Given the significant death rate, the relatively poor performance
of
existing drugs, and the life threatening nature of cancer, decisions
by
medical providers and health insurance companies are more heavily
focused
on outcomes than product cost for cancer drugs compared to drugs
from
other therapeutic classes. As a result cancer drugs with proven efficacy
are expected to gain rapid formulary listing and patient reimbursement,
and in addition, drugs that have orphan designations are generally
reimbursed by insurance companies given that there are few, if any,
alternatives. Since mental disorders affect an estimated 57.7 million
people in the United States, the burden of illness is significant
for
insurance companies as well as for employers. Given the significant
cost
of treating behavioral health problems, there is a favorable environment
for formulary access and reimbursement for effective products that
treat
multiple disorders.
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Focus
on Specialty Markets.
Cancer patients are treated by oncologists, a group of physician
specialists who are early adopters of new therapies. Marketing products
to
this physician group can be accomplished with a specialty sales force
that
requires less investment than a typical product sales force that
markets
to primary care physicians and general practitioners.
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Lower
Development Expenses/Shorter Development Time.
Drugs for life-threatening diseases such as cancer are often treated
by
the Food and Drug Administration (FDA) as candidates for fast track,
priority and accelerated reviews. Clinical studies for cancer require
fewer patients than those for non-life threatening diseases. This
results
in reduced cost and shorter clinical trials. Our lead CNS product,
Serdaxin, is also expected to have lower development expenses as
well as
shorter development time given the drug has been on the market for
20
years for other treatments, with a well-established safety
record.
|
Our
therapeutic areas focus on large markets with significant unmet needs. The
high
rate of cancer prevalence and the inadequacy of available treatments justify
continued investment in new therapies. Datamonitor estimates that in 2004,
drugs
for the treatment of cancer represented a $40 billion market. In the United
States alone, over $25 billion in cancer therapeutics are sold annually.
Sales of cancer drugs are predicted to grow annually reaching $55 billion
globally in 2009. Datamonitor attributes the sales growth will be driven mainly
by innovative drugs, increasing the market share of innovative cancer therapy
from 18% presently to 33% of total cancer sales by 2009.
Our
Strategy
Our
goal
is to build value through a strong drug pipeline and marketed products in each
of our market segments (cancer, CNS and sexual dysfunction) or sub-segments;
however, to date, we have no marketed products. To achieve these goals, our
strategy has several key components:
Target
Signal Transducer Molecules With Multiple Drug
Candidates
We
plan
to expand our drug candidate pipeline and introduce several new signal inhibitor
drugs into clinical trials over the next five years. By identifying and
characterizing the genes and proteins that control the signaling pathways and
gene expression of cancer cells, we seek to develop DNA/RNA-based and
small-molecule drugs to treat a broad range of diseases caused by abnormal
expression or functions of those genes and proteins. In addition to developing
our own signal transduction inhibitors, we will use our technology platforms
to
screen and identify compounds developed by other companies, either on their
own
or in collaboration with us, which could be effective signal transduction
inhibitors for anti-cancer applications.
Establish
Partnerships With Large Pharmaceutical Companies
We
will
seek to establish partnerships with large pharmaceutical companies in order
to
reduce drug development costs and to expand the disease treatment indications
of
the drug candidates and access to markets. We plan to market products for which
we obtain regulatory approval either directly or through co-marketing
arrangements or other licensing arrangements with large pharmaceutical
companies. To market those drug candidates with disease treatment indications
that are larger or geographically diverse, we expect to enter into licensing,
distribution or partnering agreements with pharmaceutical companies that have
large established sales organizations; however, to date, we have not entered
into such agreements with any large pharmaceutical companies.
Clinically
Develop Drug Candidates as Orphan Drugs to Reduce
Time-to-Market
Under
the
Orphan Drug Act, the FDA may expedite approval of new drugs that treat diseases
affecting less than 200,000 patients each year. This category of diseases is
called an "orphan indication". Incentives in the Orphan Drug Act include a
faster time-to-market of the drug (with FDA approval possible after
Phase II trials instead of Phase III trials) and seven years of drug
marketing exclusivity for the sponsor. In addition, the FDA sometimes provides
orphan research grants to aid in the costs of developing an orphan drug. Once
the drug candidate has received orphan drug approval, the sponsor may conduct
larger, more extensive clinical trials seeking approval for other, more
widespread diseases. We plan to develop drug candidates initially for orphan
category cancers in order to reduce the time-to-market for these potential
products. Our drug candidates may also be effective against non-orphan category
cancers, providing additional market opportunities for off-label use. This
would
enable us to either license these drugs for further development by major
pharmaceutical companies or conduct the necessary studies to seek FDA approval
for additional disease treatment indications. In the future, we may develop
drug
candidates for other orphan category diseases to take advantage of our expertise
with the orphan drug development process.
In-License
Unique Technology
We
seek
to keep abreast of emerging technologies and development stage drugs. We seek
to
proactively review opportunities to in-license 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. For example, in
February 2005, we licensed the intellectual property of Revaax
Pharmaceuticals LLC ("Revaax") for development as potential drug candidates
for
the treatment of neurological diseases. Through licensing arrangements, we
seek
to strengthen our pipeline of drug candidates.
Capitalize
on Our Management Team's Expertise for Drug Development and Product
Commercialization
Commercializing
drugs requires regulatory, clinical development, and marketing skill sets that
our management team possesses. Our regulatory knowledge comes from team members
who have either been regulatory reviewers at the FDA or regulatory consultants
who have prepared and filed regulatory documents in the U.S. and
worldwide. Our management team also possesses clinical development experience
in
oncology and several other therapeutic areas. We believe that this knowledge
and
experience with the FDA drug approval process permits us to develop strategies
that take advantage of the FDA's fast track policies. Where possible, our
management will seek to use their experience to design and implement drug
development programs that minimize the time for clinical trials, while
maximizing success rates for approval of our drug candidates. Members of our
management team also have prior experience in pharmaceutical product launch
and
marketing.
Our
Pipeline Drug Candidates
Our
anti-cancer therapeutic technology consists of both proprietary RNA/DNA-based
signal transduction inhibitors and small molecule candidate compounds believed
to be effective for treating a large number of human cancers. We have a number
of drug candidates in clinical development for cancer, CNS disorders and sexual
dysfunction. In 2006, Phase I clinical trials of Archexin in patients with
advanced cancer was successfully completed. In 2007, we plan to initiate Phase
II clinical trials targeting patients with renal cell cancer (Archexin), and
plan to initiate, subject to obtaining sufficient additional financing, Phase
II
clinical trials targeting patients with social phobia (Serdaxin) and sexual
dysfunction (Zoraxel). The following description of our pipeline drug candidates
is based on clinical and pre-clinical trials and studies.
Cancer
Our
unique approach to improving cancer patients’ lives is to develop potent,
targeted therapeutics with fewer side effects than current chemotherapeutics,
which are highly toxic.
We
develop targeted therapeutics that directly disrupt the signals responsible
for
the disease progression. Through a process known as signal transduction,
external information is transmitted from the cell surface to specific internal
signal molecules for specific functional responses, such as cell growth or
cell
death. The signaling pathways are comprised of functionally diverse molecules,
including proteins. Most, if not all, cancer disease states arise from aberrant
cell communication. Our drug candidates target critical signal molecules in
cell
signaling pathways, which are believed to have a broad and highly effective
impact on cell survival, proliferation, metastasis and angiogenesis.
Our
signal targets (e.g. Akt and HIF-1) are over-expressed and/or over-activated
in
many different types of human solid tumors, giving our anticancer drugs utility
across a wide range of cancers.
Archexin:
First-in-class
Akt
Inhibitor
Our
leading anti-cancer drug candidate, Archexin,
inhibits cellular communication of both activated and native Akt. Akt is an
important target in the treatment of cancer because it plays a key role in
cancer progression by stimulating cell proliferation and cell survival, and
promoting angiogenesis. Archexin inhibits Akt by significantly reducing
expressions of its mRNA and subsequently its protein, resulting in disruption
of
signaling by both
activated and native
Akt.
Small molecule compounds may only be able to inhibit either activated or native
protein.
In
October 2006, we announced the conclusion of the Phase I clinical trial of
Archexin. The Phase I clinical trial of Archexin, which took place at Georgetown
University's Lombardi Cancer Center beginning in September 2004 and at the
University of Alabama at Birmingham beginning in August 2005, was primarily
to determine the safety and tolerability of the drug in patients with advanced
cancer. The Phase I study demonstrated that fatigue was the dose limiting
toxicity. Unlike most anti-cancer drugs, no hematological abnormalities were
observed. The Phase II trial, which is expected to last 1 ½ to 2 years, is
expected to begin in the second quarter of 2007 and will be a multi-center
study
in the U.S. and worldwide. To enhance cellular uptake and improve tumor
targeting, we are also developing a nanotechnology-based delivery system for
Archexin. With an outstanding profile of safety established, the goal of Phase
II is to determine the efficacy of Archexin in patients with late stage renal
cell carcinoma, one of the orphan indications for which we received orphan
drug
designation from the FDA. In addition, we plan to expand Archexin to the
treatment of other orphan and non-orphan indications.
In
November 2006, we announced that we had been granted a U.S. patent for
our anti-Akt compounds, including Archexin. The patent covers the
nucleotide sequences of the anti-sense compounds that target and inhibit the
expression of Akt in human tissues or cells. The patent also covers the method
of using the compounds to induce cytotoxicity in cancer cells.
RX-5902:
Microtubule Inhibitor and RX-0047: First-in-class HIF-1 Alpha Inhibitor
Our
RX-5902 and RX-0047 drug candidates 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-5902, a piperazine analogue, is a
microtubule inhibitor specifically acting on G2/M
cell
cycle. In pre-clinical studies, it strongly induced apoptosis and inhibited
proliferation of various human cancer cells at nanomolar concentrations, and
significantly reduced the growth of tumors in animal xenograft models. RX-5902
demonstrated potent anti-proliferating effects on drug-resistant cancer cells
and showed synergism with known anti-cancer drugs as well. RX-5902 appears
to
process excellent oral bioavailability and thus may be developed in both
intravenous and oral forms. RX-5902 is expected to enter Phase I clinical trials
in 2008. RX-0047 directly inhibits HIF-1 by reducing expressions of its mRNA
and
protein. HIF-1 is a major regulating mechanism of cancer cell growth, invasion,
angiogenesis and radiation resistance. HIF is known to be over-expressed in
a
broad range of human cancers and is associated with increased mortality,
metastasis and/or resistance to radiation therapy.
Preclinical
studies demonstrated that RX-0047 inhibits proliferation of various human cancer
cells at nanomolar concentrations and significantly reduced tumor growth and
metastasis in animal xenograft models. Phase I clinical trials of RX-0047 are
expected to begin in 2008.
CNS
CNS
disorders are another one of our therapeutic focus areas. We have exclusive
patent rights (five U.S. patents and multiple pending patents) on a series
of
compounds that affect anxiety, depression, cognition, aggression and
neurodegenerative diseases.
Serdaxin,
Rexahn’s leading CNS drug candidate, modulates both serotonin and dopamine
neurotransmitters, simultaneously, making it a potent therapy for anxiety and
depression. The active ingredient of Serdaxin has been in medical use in other
treatments for more than two decades and its safety has been well established.
Serdaxin
Serdaxin
acts on the neurotransmission systems of serotonin and dopamine, which are
key
controlling mechanisms of anxiety and mood disorders.
It
has
been recognized that Serotonin is linked to the negative affect mood factor
leading to negative mood states such as anxiety, disgust, fear, guilt,
hostility, irritability and loneliness. Recent findings indicate that dopamine
is linked to the positive affect related to positive mood states such as
happiness, pleasure, motivation, and energy mood factor. Symptoms of mood
disorders are causally related and clinical evidence identifies low levels
of
dopamine in the brain of patients. The negative mood states as well as loss
of
the positive mood states are common to both anxiety and mood
disorders.
Serdaxin
modulates both serotonin and dopamine at the same time with unique mechanisms
of
action that is different from currently marketed anxiolytic and anti-depressant
drugs such as benzodiazepines and SSRIs. In animal models of hamsters, mice,
rats and monkeys, Serdaxin increased levels of serotonin and dopamine in the
brain, exhibited potent anxiolytic activities, and induced significant active
imaging changes in the rat brain in fMRI(functional magnetic resonance imaging)
tests. However, Serdaxin did not disrupt learning and memory functions unlike
current anxiolytic drugs.
We
plan
to initiate, subject to obtaining sufficient additional financing, Phase II
clinical trials of Serdaxin, beginning in the second half of 2007,
focusing on patients with social phobia, a category of anxiety.
Sexual
Dysfunction
We
also
aim to develop therapeutics for sexual dysfunction indications.
Zoraxel
Similar
to Serdaxin for CNS disorders, Zoraxel, our leading sexual dysfunction drug
candidate, modulates both serotonin and dopamine neurotransmitters, which
coordinate copulatory rate and sexual function. The active ingredient of Zoraxel
has been in medical use in other treatments for more than two decades and its
safety has been well established.
As
coordinated changes in serotonin and dopamine release in different areas of
the
brain appears to play a critical role in controlling sexual dysfunction, Zoraxel
will
also
be evaluated in the treatment of patients with sexual dysfunction (erectile
dysfunction and premature ejaculation)
more
safely and effectively by enhancing dual neurotransmitters
simultaneously.
In
rodent and monkey models of sexual dysfunction, Zoraxel
was
shown to significantly enhance sexual activities.
We
plan
to initiate, subject to obtaining sufficient additional financing, Phase II
clinical trials of Zoraxel for sexual dysfunctions beginning in the second
half
of 2007.
Competition
Our
principal drug candidates under development are expected to address unmet
medical needs within the oncology, CNS and sexual dysfunction markets. For
many
of these disease treatment indications, our drug candidates will be competing
with products and therapies either currently existing or expected to be
developed. Competition among these products will be based, among other things,
on product efficacy, safety, and reliability, price and patent position. An
important factor will be the timing of market introduction of our competitive
products. Accordingly, the relative speed with which we can bring drug
candidates to the market is expected to be an important competitive factor.
Our
competitive position will also depend upon our ability to attract and retain
qualified personnel, to obtain patent protection or otherwise develop
proprietary products or processes, and to secure sufficient capital resources
for the often substantial period between technological conception and commercial
sales.
There
are
a number of pharmaceutical and biotechnology companies both privately and
publicly held that are conducting research and development activities on
technologies and products for treatment of cancers, CNS diseases and sexual
dysfunction. We cannot assure you that our competitors will not succeed in
developing products based on technology which is similar to ours, or other
novel
technologies that are more effective than any which are being developed by
us or
which would render our technology and products obsolete and noncompetitive
prior
to recovery by us of the research, development and commercialization expenses
incurred with respect to those products.
Our
competitors engaged in developing treatments for cancer, CNS and sexual
dysfunction include major pharmaceutical, specialized biotechnology firms,
and
academic and other research institutions. Many of our competitors have
substantially greater financial, technical and human resources than we do.
In
addition, many of our competitors have significantly greater experience than
we
do in undertaking pre-clinical testing and human clinical trials of new
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in health care. Accordingly, our competitors may succeed in
obtaining FDA approval for products more rapidly than we can.
As
we
expand our drug development programs to include diseases other than cancer,
CNS
and sexual dysfunction, we will also face competition from pharmaceutical and
biotechnology companies conducting research and development activities on
technologies and products for treatment of those other diseases, increasing
both
the number and the types of competitors we face. For many of the same reasons
described above with respect to our competitors in the cancer, CNS and sexual
dysfunction market, we cannot assure you that we will compete successfully
against these additional competitors.
Competition
for Archexin
Direct
competitors for Archexin are anti-cancer therapies that treat RCC. Current
noninvasive treatments for RCC include immunotherapy and chemotherapy.
Immunotherapy manipulates the immune system to improve the body's natural
defense against cancers, using cytokines such as interferon-alpha. However,
cytokine therapy has several shortcomings, such as high cost and severe
toxicities. Chemotherapy usually targets cells that divide quickly, including
normal cells such as those found in the blood, hair, and the lining of the
gastrointestinal tract. Chemotherapy can damage these healthy cells leading
to
serious side effects such as nausea, anemia, hair loss, fatigue, nerve pain,
infection and even treatment-related cancers.
Nexavar,
developed by Bayer/Onyx, and Sutent, developed by Pfizer, are the most recently
FDA-approved drugs to treat metastatic RCC. These drugs showed only limited
extension of PFS (Progression-Free Survival) in patients with no prior cytokine
therapy. Both have side effects such as skin rash, diarrhea, and hypertension.
We
believe that the efficacy and safety profile of Archexin will make it an
excellent alternative to existing therapies for RCC and other cancer
indications. With fatigue as Archexin’s only dose limiting toxicity, we believe
that Archexin can be an important addition to current treatments.
Competition
for Serdaxin
SSRIs
and
anxiolytics are most frequently used to treat anxiety. While many of these
products help to control anxiety, they have significant drawbacks that limit
patient compliance, such as being potentially habit-forming, causing drowsiness,
motor impairment, slow onset of action, sexual dysfunction, insomnia, weight
gain, and suicidal tendencies.
Major
competitors of Serdaxin are SSRIs currently on the market (e.g.,
Zoloft,
Prozac and Paxil). Certain SSRIs are approved to treat depression, anxiety,
and/or premenstrual dysphonic disorder (PMDD). The most common side effects
of
SSRIs include dry mouth, insomnia, sexual side effects (e.g.,
decreased libido, delayed ejaculation), diarrhea, nausea, and
sleepiness.
Despite
their shortcomings, anxyliotics and SSRIs are expected to continue to dominate
the market for anxiety therapy. However, we believe that Serdaxin may be a
superior treatment for the following reasons:
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·
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Safety:
Serdaxin has established an excellent safety profile, and appears
to avoid
the major side effects associated with SSRIs and
anxyliotics.
|
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·
|
Potency:
Combined effects of the serotonin and dopamine appear to be
pharmacologically superior to SSRIs and anxyliotics, potentially
covering
patients from both negative mood states and loss of positive mood
states.
|
|
·
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Patent:
Unlike the most SSRIs whose patents have expired or will soon expire,
Serdaxin’s patent extends until 2024 or
longer.
|
Competition
for Zoraxel
There
is
currently no approved drug for treating premature ejaculation, though many
are
under development. Two leading candidates in various stages of development
are
Dapoxetine, developed by ALZA and Johnson & Johnson, and PSD502, developed
by Plethora Solutions.
Dapoxetine
has been demonstrated to be relatively effective in treating premature
ejaculation when administered from 30 minutes to 4 hours before sexual activity.
However, the sponsor of the drug had withdrawn its NDA application, in part
due
to potential tumor formation.
PSD502
is
a topical mixture for treatment of premature ejaculation. Side effects observed
in Phase II clinical trials include hypoesthesia, a partial loss of sensitivity
to sensory stimuli. PSD502 is currently in Phase III of development by Plethora
Solutions.
Despite
several drugs under development (e.g.,
SSRIs
with short half-lives, such as Dapoxetine)) we believe Zoraxel will provide
superior benefits to the potential competitors for patients with sexual
dysfunction with its excellent safety profile and CNS-based dual
neurotransmitter mechanisms that control sexual activities.
Government
Regulation
Regulation
by governmental authorities in the United States and in other countries
constitutes a significant consideration in our product development,
manufacturing and marketing strategies. We expect that all of our drug
candidates will require regulatory approval by appropriate governmental agencies
prior to commercialization and will be subjected to rigorous pre-clinical,
clinical, and post-approval testing, as well as to other approval processes
by
the FDA and by similar health authorities in foreign countries.
U.S. federal regulations control the ongoing safety, manufacture, storage,
labeling, record keeping, and marketing of all biopharmaceutical products
intended for therapeutic purposes. We believe that we are in compliance in
all
material respects with currently applicable rules and regulations.
Obtaining
governmental approvals and maintaining ongoing compliance with federal
regulations is expected to require the expenditure of significant financial
and
human resources not currently at our disposal. We plan to fulfill our short-term
needs through consulting agreements and joint ventures with academic or
corporate partners while building our own internal infrastructure for long-term
corporate growth.
The
process by which biopharmaceutical compounds for therapeutic use are approved
for commercialization in the United States is lengthy. Many other countries
have
instituted equally difficult approval processes. In the United States,
regulations published by the FDA require that the person or entity sponsoring
and/or conducting a clinical study for the purpose of investigating a potential
biological drug product's safety and effectiveness submit an IND application
to
the FDA. These investigative studies are required for any drug product for
which
the product manufacturer intends to pursue licensing for marketing the product
in interstate commerce. If the FDA does not object to the IND application,
clinical testing of the compound may begin in humans after a 30-day review
period. Clinical evaluations typically are performed in three
phases.
In
Phase I, the drug is administered to a small number of healthy human
subjects or patients to confirm its safety and to develop detailed profiles
of
its pharmacological and pharmacokinetic actions (i.e.,
absorption, metabolism, excretion, duration of therapeutic concentration and
effects, if any).
In
Phase II, the drug is administered to groups of patients (up to a total of
500) to determine its efficacy against the targeted disease and the requisite
dose and dose intervals. In a typical development program, additional animal
toxicology studies precede this phase. Some Phase I clinical studies may
also proceed in parallel with some Phase II studies.
In
Phase III, the drug is administered to a larger group of patients (usually
1000 to 3000) by practicing expert physicians in a network of participating
clinics and hospitals. The extensive clinical testing is intended to confirm
Phase II results and to document the nature and incidence of adverse
reactions. Studies also are performed in patients with concomitant diseases
and
medications. Phase III is intended to model more closely the real world in
which the drug will be used. Two multiclinical trials typically constitute
Phase III evaluations. Although larger numbers of patients are evaluated in
Phase III at more clinical study sites, many of these are done in parallel
and therefore Phase III may not require a longer time than
Phase II.
After
completing the IND clinical studies, the product developer submits the safety
and effectiveness data generated by the studies to the FDA in the form of a
New
Drug Application (NDA) to market the product. It is the legal
responsibility of the FDA to review the proposed product labeling, the
pre-clinical (animal and laboratory) data, the clinical data, as well as the
facilities utilized and the methodologies employed in the manufacture of the
product which have been submitted to the agency to determine whether the product
is safe and effective for its intended use.
Even
after initial FDA approval has been obtained, further studies may be required
to
provide additional data on safety or to gain approval for the use of a product
as a treatment in clinical disease treatment indications other than those for
which the product was initially tested. Also, the FDA may require post-marketing
testing and surveillance programs to monitor the drug's effects. Side effects
resulting from the use of drug products may prevent or limit the further
marketing of the products.
For
marketing outside the United States, we will be subject to foreign regulatory
requirements governing human clinical trials and marketing approval for drugs.
The requirements relating to the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.
Certain
drugs are eligible in the United States for designation by the FDA as "orphan"
drugs if their use is intended to treat a disease that affects less than
200,000 persons in the U.S. or the disease affects more than
200,000 persons in the United States but there is no reasonable expectation
that the cost of developing and marketing a drug will be recovered from the
U.S. sales of such drug. In order for a sponsor to obtain orphan
designation for a drug product, an application must be submitted for approval
to
the FDA's Office of Orphan Products Development. The approval of an application
for orphan designation is based upon the information submitted by the sponsor.
A
drug that has obtained orphan designation is said to have "orphan status".
Each
designation request must stand on its own merit. Sponsors requesting designation
of the same drug for the same disease treatment indication as a previously
designated product must submit their own data in support of their designation
request. The approval of an orphan designation request does not alter the
standard regulatory requirements and process for obtaining marketing approval.
Safety and efficacy of a compound must be established through adequate and
well-controlled studies.
Orphan
drugs may obtain FDA approval after successful Phase II trials, rather than
after completion of Phase III trials, resulting in faster time-to-market for
those drugs. If a sponsor obtains orphan drug designation for a particular
compound and is the first to obtain FDA regulatory approval of that compound,
then that sponsor is granted marketing exclusivity for a period of seven years.
As a result, orphan drug designation blocks all other competitors from marketing
the same drug for the approved use for seven years.
Sales
and Marketing
We
seek
to market our products as a market leader or first-in-class drug in each of
its
therapeutic categories or subcategories. We will have two distinct marketing
channels, depending on the relative market size and required resources. For
orphan indication drugs targeting specialized physicians, we plan to maintain
our own marketing campaign by building a specialty sales force. In cancer
treatment, the oncologist is virtually the sole decision maker, with certain
limitations by health insurance companies. The specialty sales representatives
will regularly visit oncologists, especially those who have experience of
treating orphan cancer such as RCC.
We
will
form a co-marketing partnership with a large pharmaceutical company to market
non-orphan indication drugs like Serdaxin and Zoraxel for CNS diseases and
sexual dysfunction, which has a much larger market segment. The number of
potential patients and clinicians who treat such patients are many. The
partner’s sales reps will cover broader stakeholders which will include
physicians, patients and insurance companies. We believe that a large
pharmaceutical partner is best equipped to manage and execute the most effective
means of reaching the consumers and of differentiating our product from those
already on the market.
Research
and Development
Our
research and development has focused on proprietary multi-targeting genomics
and
nanotechnology-based projects. Our genomics-based platform technology is aimed
at novel targets to affect multiple signaling events in cancer cell
proliferation and growth. We are also exploring nanomedicine-based approaches
to
develop a targeted drug delivery system to improve the efficacy and safety
of
its therapeutics. For a discussion of collaboration arrangements pursuant to
which we obtain research and development services from universities, research
institutions and other organizations, see "Collaboration Agreements" and
"Certain Relationships and Related Transactions" in Item 12 of this Annual
Report.
Multi-Targeting
Genomics Platform
Cancer
is
a complex disease caused by multiple factors including multiple genetic changes.
Due to the multiplicity of its causal mechanisms, cancer treatment involves
a
combination of drugs with different mechanisms of action. The resulting outcome
is a severe compounded accumulation of toxicities from each drug. Our approach
is to control multiple mechanisms of cancer cell proliferation and growth with
a
single agent, instead of a combination therapy, so that only toxicities, if
there are any, from the single agent may be expressed. We have conducted
numerous genomics-based studies and established an integrated system, named
CAMTAS, which enabled us to discover potentially important targets that control
multiple genes. We believe that this novel approach will lead to the discovery
of new cancer drugs based on newly discovered targets, offering greater clinical
benefits for cancer patients.
Nanomedicine
Delivery System
We
are
developing unique nanomedicine delivery systems that may increase the
availability of a drug at the disease site, minimize adverse reactions, and/or
provide longer duration of action of a drug in the body. Currently,
nanoliposome- and nanopolymer-based anti-cancer drugs are under development.
To
accelerate its efforts, we are collaborating with the Center for Nanomedicine
of
the University of Maryland. Recently, the Maryland Industrial Partnerships
(MIPS) program awarded us with a two-year grant to develop nanomedicine-based
anti-cancer drugs.
Manufacturing
We
do not
currently have the resources required for commercial manufacturing of our drug
candidates. We currently outsource the manufacturing of drug substances and
drug
products for our drug candidates. We have no current plans to build internal
manufacturing capacity for any product. Manufacturing will be accomplished
through outsourcing or through partnerships with large pharmaceutical
companies.
Intellectual
Property
Proprietary
protection for our drug candidates, processes and know-how is important to
our
business. We plan to aggressively prosecute and defend our patents and
proprietary technology. Our policy is to file patent applications to protect
technology, inventions, and improvements that are considered important to the
development of our business. We also rely upon trade secrets, know-how,
continuing technological innovation and licensing opportunities to develop
and
maintain our competitive position. As of March 2007, we have one U.S.
patent issued, one allowed and three patent applications pending in cancer
treatment. In March 2005, we licensed-in CNS-related intellectual property
(five U.S. patents, five pending patents and multiple worldwide coverage) from
Revaax Pharmaceuticals, LLC. The intellectual property rights acquired cover
use
of certain compounds for anxiety, depression, aggression, cognition, Attention
Deficit Hyperactivity Disorder, neuroprotection and sexual dysfunction. See
"Collaboration Arrangements" and "Certain Relationships and Related
Transactions" in Item 12 of this Annual Report on Form 10-KSB for a
description of the intellectual property rights we have or share in connection
with our collaborative research and development relationships with universities,
research institutions and other organizations.
Collaboration
and License Arrangements
We
have
numerous collaborative research and development relationships with universities,
research institutions and other organizations. Also see the discussion in
"Certain Relationships and Related Transactions" in Item 12 of this Annual
Report on Form 10-KSB. A brief description of some of these relationships is
below:
UPM
Pharmaceuticals, Inc. ("UPM").
On
April 3, 2006, we entered into an agreement with UPM to develop a
short-acting extended release formulation for Serdaxin and Zoraxel.
Korean
Research Institute of Bioscience and Biotechnology
("KRIBB").
On
April 1, 2006, we entered into a research agreement with KRIBB to evaluate
anti-tumor activity, toxicology, pharmacokinetics and mechanisms of action
for
RX-5902.
Ewha
Womans University ("Ewha").
On
March 1, 2004, we entered into an agreement with Ewha to collaborate with
and sponsor Ewha's research in the area of carbocyclic nucleoside, which relates
to our anticancer drug discovery efforts. Intellectual property made or
developed in the course of this agreement is or will be owned by us. On
March 1, 2006, we entered into a research program with Ewha.
Amarex,
LLC ("Amarex").
On
January 6, 2006, we contracted with Amarex to conduct Phase II clinical
studies of Archexin.
Korea
Research Institute of Chemical Technology ("KRICT"). On
June 1, 2005, we entered into a joint research agreement with KRICT with
respect to research regarding protein kinases in human cancer diseases. The
research term expired in early 2006. Intellectual property made or developed
under this agreement is jointly owned by us and KRICT.
The
University of Maryland ("UMD"). On
March 15, 2005, we entered into a Maryland Industrial Partnership agreement
with the Biotechnology Institute of UMD to collaborate with and sponsor UMD's
research in the area of ligand screening for novel anticancer therapeutics.
Intellectual property made or developed under this agreement is jointly owned
by
us and UMD.
Revaax
Pharmaceuticals LLC ("Revaax"). On
February 10, 2005, we licensed on an exclusive basis, with the right to
sublicense, all of the intellectual property of Revaax, which includes five
patents and 14 patent applications, with respect to certain chemical structures
that have demonstrated in pre-clinical research the potential to treat certain
behavioral disorders, such as anxiety, depression and cognitive disorders.
This
agreement expires upon the expiration of the royalty term for all licensed
products in all countries, which is no earlier than August 2020 and could
extend to August 2024. This agreement provides for an initial license fee
and milestone payments based on the initiation of pivotal trials for disease
treatment indication for licensed products. Furthermore, we will pay Revaax
a
specified fee for each licensed product under the agreement upon receipt of
marketing approval for the licensed product. Notwithstanding the milestone
payment arrangement described above, we are not obligated to make any milestone
payment with respect to milestone events for which we receive sublicense
revenues and are obligated to pay Revaax a percentage of such sublicense
revenues, as well royalties for sales of licensed products based on net sales
of
the licensed products.
Formatech,
Inc. ("Formatech"). On
August 17, 2004 we entered into an agreement with Formatech to monitor and
perform stability studies on our drug candidate, Archexin. On January 3,
2006 and March 29, 2006, we contracted with Formatech to
perform Archexin experiments in an effort to develop a more concentrated
dosage form.
Employees
We
currently have 15 employees, all of whom are based at our Rockville, Maryland
office. Our employees are not covered by any collective bargaining agreement
and
we have never experienced a work stoppage. We believe our relationships with
our
employees are satisfactory.
RISK
FACTORS
You
should carefully consider the risks described below together with the other
information included in this Annual Report on Form 10-KSB. Our business,
financial condition or results of operations could be adversely affected by
any
of these risks. If any of these risks occur, the value of our common stock
could
decline.
We
currently have no product revenues and will need to raise additional capital
to
operate our business.
To
date,
we have generated no product revenues. 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. Therefore, for the foreseeable future,
we will have to fund all of our operations and capital expenditures from the
net
proceeds of equity or debt offerings we may make, cash on hand, licensing fees
and grants. Over the next year we expect to spend approximately $1 million
on clinical development for Phase II clinical trials of Archexin. Based on
our
current plans and our capital resources, we believe that our cash and cash
equivalents will be sufficient to enable us to meet our planned operating needs
for at least the next year, including the clinical trials of Archexin. We plan
to initiate, subject to obtaining sufficient additional financing, Phase II
clinical trials of Serdaxin and Zoraxel beginning in the second half of 2007
at
an additional cost of up to approximately $3 million.
However,
changes may occur that would consume our existing capital at a faster rate
than
projected, including but not limited to, the progress of our research and
development efforts, the cost and timing of regulatory approvals and the costs
of protecting our intellectual property rights. We may seek additional financing
to implement and fund other drug candidate development, clinical trial and
research and development efforts, including Phase I clinical trials for other
new drug candidates, as well as other research and development projects, which
together with the current operating plan for the next year, could aggregate
up
to $7 million through the end of 2007.
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 or securities convertible into our equity
securities, which may have a dilutive effect on our stockholders.
We
are not currently profitable and may never become profitable.
We
have
generated no revenues to date from product sales. Our accumulated deficit as
of
December 31, 2006 and 2005 was $20,690,326 and $14,204,323, respectively.
For the years ended December 31, 2006 and 2005, we had net losses of
$6,486,003 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:
|
·
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continued
pre-clinical development and clinical trials for our current and
new drug
candidates;
|
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·
|
efforts
to seek regulatory approvals for our drug
candidates;
|
|
·
|
implementing
additional internal systems and
infrastructure;
|
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·
|
licensing
in additional technologies to develop;
and
|
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·
|
hiring
additional personnel.
|
We
also
expect to continue to experience negative cash flow for the foreseeable future
as we fund our operating losses and capital expenditures. As a result, we will
need to generate significant revenues in order to achieve profitability.
We
have a limited operating history.
We
are a
development-stage company with a limited number of drug candidates. To date,
we
have not demonstrated an ability to perform the functions necessary for the
successful commercialization of any of our drug candidates. The successful
commercialization of our drug candidates will require us to perform a variety
of
functions, including, but not limited to:
|
·
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conducting
pre-clinical and clinical trials;
|
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·
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participating
in regulatory approval processes;
|
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·
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formulating
and manufacturing products; and
|
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·
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conducting
sales and marketing activities.
|
To
date,
our operations have been limited to organizing and staffing our company,
acquiring, developing and securing our proprietary technology and undertaking,
through third parties, pre-clinical trials and clinical trials of our principal
drug candidates. These operations provide a limited basis for assessment of
our
ability to commercialize drug candidates.
We
may not obtain the necessary U.S. or worldwide regulatory approvals to
commercialize our drug candidates.
We
will
need FDA approval to commercialize our drug candidates in the U.S. and
approvals from the FDA-equivalent regulatory authorities in foreign
jurisdictions to commercialize our drug candidates in those jurisdictions.
In
order to obtain FDA approval of our drug candidates, we must submit to the
FDA a
New Drug Application ("NDA") demonstrating that the drug candidate is safe
for humans and effective for its intended use. This demonstration requires
significant research and animal tests, which are referred to as pre-clinical
studies, as well as human tests, which are referred to as clinical trials.
Satisfaction of the FDA's regulatory requirements typically takes many years,
and depends upon the type, complexity and novelty of the drug candidate and
requires substantial resources for research, development and testing. We cannot
predict whether our research and clinical approaches will result in drugs that
the FDA considers safe for humans and effective for indicated uses. Two of
our
drug candidates, Archexin and RX-0047, are ASO compounds. To date, the FDA
has
not approved any NDAs for any ASO compounds. In addition, both Archexin and
RX-0047 are of a drug class (Akt inhibitor, in the case of Archexin, and
HIF inhibitor, in the case of RX-0047) that has not been approved by the FDA
to
date. After the clinical trials are completed, the FDA has substantial
discretion in the drug approval process and may require us to conduct additional
pre-clinical and clinical testing or to perform post-marketing
studies.
In
foreign jurisdictions, we must receive approval from the appropriate regulatory
authorities before we can commercialize our drugs. Foreign regulatory approval
processes generally include all of the risks associated with the FDA approval
procedures described above. We cannot assure you that we will receive the
approvals necessary to commercialize our drug candidates for sale outside the
United States.
Our
drug candidates are in early stages of clinical trials.
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
2007, we expect Archexin, an oncology drug candidate, to enter Phase II clinical
trials. We plan to initiate, subject to obtaining sufficient additional
financing, Phase II clinical trials of Serdaxin and Zoraxel, neuroscience and
sexual dysfunction dmg candidates, beginning in the second half of
2007.
Clinical
trials are very expensive, time-consuming and difficult to design and implement.
Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time consuming. We estimate that clinical trials of our
current drug candidates will take at least three years to complete. Furthermore,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials. The commencement and
completion of clinical trials may be delayed by several factors, including,
but
not limited to:
|
·
|
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.
|
In
addition, we or the FDA may suspend clinical trials at any time if it appears
that we are exposing participants to unacceptable health risks or if the FDA
finds deficiencies in our IND submissions or the conduct of these trials.
If
the results of our clinical trials fail to support our drug candidate claims,
the completion of development of such drug candidate may be significantly
delayed or we may be forced to abandon development altogether, which will
significantly impair our ability to generate product revenues.
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.
If
physicians and patients do not accept and use our drugs, our ability to generate
revenue from sales of our products will be materially impaired.
Even
if
the FDA approves our drug candidates, physicians and patients may not accept
and
use them. Future acceptance and use of our products will depend upon a number
of
factors including:
|
·
|
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.
|
Because
we expect sales of our current drug candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of any of these drugs to find market acceptance would harm our business
and could require us to seek additional financing.
Much
of our drug development program depends upon third-party researchers, and the
results of our clinical trials and such research activities are, to a limited
extent, beyond our control.
We
depend
upon independent investigators and collaborators, such as universities and
medical institutions, to conduct our pre-clinical and clinical trials and
toxicology studies. This business practice is typical for the pharmaceutical
industry and companies like us. For example, the Phase I clinical trials of
Archexin were conducted at the Lombardi Comprehensive Cancer Center of
Georgetown Medical Center and the University of Alabama at Birmingham, with
the
assistance of Amarex, LLC, a pharmaceutical clinical research service provider
who is responsible for creating the reports that will be submitted to the FDA.
We also relied on TherImmune Research Corporation (now named Bridge Global
Pharmaceutical Services, Inc.), a discovery and pre-clinical service provider,
to summarize Archexin '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. 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, a higher than expected expense may result. 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
rely exclusively on third parties to formulate and manufacture our drug
candidates, which expose us to a number of risks that may delay development,
regulatory approval and commercialization of our products or result in higher
product costs.
We
have
no experience in drug formulation or manufacturing. Internally, we lack the
resources and expertise to formulate or manufacture our own drug candidates.
Therefore, we rely on third party expertise to support us in this area. For
example, we have entered into contracts with third-party manufacturers such
as
Raylo Chemicals Inc., Formatech, Inc., Avecia Biotechnology Inc. and UPM
Pharmaceuticals, Inc. to manufacture, supply, store and distribute supplies
of
our drug candidates for our clinical trials. If any of our drug candidates
receive FDA approval, we will rely on these or other third-party contractors
to
manufacture our drugs. Our reliance on third-party manufacturers exposes us
to
the following potential risks:
|
·
|
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.
Developments
by competitors may render our products or technologies obsolete or
non-competitive.
We
will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations, such as Keryx Biopharmaceuticals, Genta Incorporated and Imclone
Systems Incorporated. In addition, many of these competitors, either alone
or
together with their collaborative partners, operate larger research and
development programs or have substantially greater financial resources than
we
do, as well as more experience in:
|
·
|
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.
|
Large
pharmaceutical companies such as Bristol-Myers, Squibb, Eli-Lilly, Novartis
and
Glaxo-SmithKline currently sell both generic and proprietary compounds for
the
treatment of cancer. In addition, companies pursuing different but related
fields represent substantial competition. Many of these organizations have
substantially greater capital resources, larger research and development staffs
and facilities, longer drug development history in obtaining regulatory
approvals and greater manufacturing and marketing capabilities than we do.
These
organizations also compete with us to attract qualified personnel, parties
for
acquisitions, joint ventures or other collaborations.
If
we fail to adequately protect or enforce our intellectual property rights or
secure rights to patents of others, the value of our intellectual property
rights would diminish and our business and competitive position would suffer.
Our
success, competitive position and future revenues will depend in part on our
ability and the abilities of our licensors to obtain and maintain patent
protection for our products, methods, processes and other technologies, to
preserve our trade secrets, to prevent third parties from infringing on our
proprietary rights and to operate without infringing the proprietary rights
of
third parties. We have filed U.S. and PCT patent applications for anti-Akt
compounds, including Archexin, anti-HIF compounds, including RX-0047. In
November 2006, we were granted a U.S. patent for our anti-Akt
compounds, including Archexin. The patent covers the nucleotide sequences of
the
anti-sense compounds that target and inhibit the expression of Akt in human
tissues or cells. The patent also covers the method of using the compounds
to
induce cytotoxicity in cancer cells. We have also filed three
U.S. provisional patent applications for new anti-cancer quinazoline
compounds, new anti-cancer nucleoside products and a drug target, cenexin,
a
polo-box binding protein. In December 2004, we also filed two Korean patent
applications for new anti-cancer piperazine compounds. Through our licensing
agreement with Revaax, we hold exclusive rights to five patents and 14 patent
applications, with respect to certain chemical structures related to
antibiotics, but without antibiotic efficacy. However, we cannot
predict:
|
·
|
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.
If
we infringe the rights of third parties we could be prevented from selling
products and be forced to pay damages and defend against
litigation.
If
our
products, methods, processes and other technologies infringe the proprietary
rights of other parties, we could incur substantial costs and may have
to:
|
·
|
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.
|
Although
to date, we have not received any claims of infringement by any third parties,
as our drug candidates move into clinical trials and commercialization, our
public profile and that of our drug candidates may be raised and generate such
claims.
Our
license agreement with Revaax may be terminated in the event we commit a
material breach, the result of which would significantly harm our business
prospects.
Our
license agreement with Revaax is subject to termination by Revaax if we
materially breach our obligations under the agreement, including breaches with
respect to certain installment payments and royalty payments, if such breaches
are not cured within a 60-day period. The agreement also provides that it may
be
terminated if we become involved in a bankruptcy, insolvency or similar
proceeding. If this license agreement is terminated, we will lose all of our
rights to develop and commercialize the licensed compounds, including Serdaxin
and Zoraxel, which would significantly harm our business and future
prospects.
If
we are unable to successfully manage our growth, our business may be harmed.
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.
We
may not be able to attract and retain qualified personnel necessary for the
development and commercialization of our drug candidates. Our success may be
negatively impacted if key personnel leave.
Attracting
and retaining qualified personnel will be critical to our future success. We
compete for qualified individuals with numerous biopharmaceutical companies,
universities and other research institutions. Competition for such individuals
is intense, and we cannot assure you that we will be successful.
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.
We
may incur substantial liabilities and may be required to limit commercialization
of our products in response to product liability lawsuits.
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.
An
investment in shares of our common stock is very speculative and involves a
very
high degree of risk.
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
December 31, 2006 and 2005 was $20,690,326 and $14,204,323, respectively.
For the years ended December 31, 2006 and 2005, we had net losses of
$6,486,003 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
market price of our common stock may fluctuate
significantly.
The
market price of our common stock may fluctuate significantly in response to
factors, some of which are beyond our control, such as:
|
·
|
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.
|
Further,
the stock market, in general, and the market for biotechnology companies, in
particular, have experienced extreme price and volume fluctuations. Continued
market fluctuations could result in extreme volatility in the price of our
common stock, which could cause a decline in the value of our common stock.
You
should also be aware that price volatility might be worse if the trading volume
of our common stock is low. We have not paid, and do not expect to pay, any
cash
dividends because we anticipate that any earnings generated from future
operations will be used to finance our operations and as a result, you will
not
realize any income from an investment in our common stock until and unless
you
sell your shares at a profit.
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.
Trading
of our common stock is limited.
Trading
of our common stock is currently conducted on the National Association of
Securities Dealers' Over-the-Counter Bulletin Board ("OTC-BB"). The liquidity
of
our securities has been limited, not only in terms of the number of securities
that can be bought and sold at a given price, but also through delays in the
timing of transactions and reduction in security analysts' and the media's
coverage of us.
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 500 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.
Our
common stock may be a "penny stock" if, among other things, the stock price
is
below $5.00 per share, we are not listed on a national securities exchange
or approved for quotation on the Nasdaq Stock Market, or we have not met certain
net tangible asset or average revenue requirements. Broker-dealers who sell
penny stocks must provide purchasers of these stocks with a standardized
risk-disclosure document prepared by the SEC. This document provides information
about penny stocks and the nature and level of risks involved in investing
in
the penny-stock market. A broker must also give a purchaser, orally or in
writing, bid and offer quotations and information regarding broker and
salesperson compensation, make a written determination that the penny stock
is a
suitable investment for the purchaser, and obtain the purchaser's written
agreement to the purchase. Broker-dealers must also provide customers that
hold
penny stock in their accounts with such broker-dealer a monthly statement
containing price and market information relating to the penny stock. If a penny
stock is sold in violation of the penny stock rules, purchasers may be able
to
cancel their purchase and get their money back. If applicable, the penny stock
rules may make it difficult for investors to sell their shares of our stock.
Because of the rules and restrictions applicable to a penny stock, there is
less
trading in penny stocks and the market price of our common stock may be
adversely affected. Also, many brokers choose not to participate in penny stock
transactions. Accordingly, purchasers may not always be able to resell shares
of
our common stock publicly at times and prices that they feel are
appropriate.
|
Item 2.
|
Description
of Property.
|
We
lease
approximately 8,030 square feet of laboratory and office space in Rockville,
Maryland. The facility is equipped with the requisite laboratory services
required to conduct our business and we believe that our existing facilities
are
adequate to meet our needs for the foreseeable future. Our lease expires on
June 30, 2009. We do not own any real property.
|
Item 3.
|
Legal
Proceedings.
|
We
are
not subject to any pending legal proceedings, nor are we aware of any threatened
claim against us.
|
Item 4.
|
Submission
of Matters to a Vote of Security
Holders.
|
None.
PART
II
|
Item 5.
|
Market
for Common Equity and Related Stockholder
Matters.
|
As
of
March 30, 2007, we are authorized to issue two classes of capital stock,
which are common stock and preferred stock. Our total authorized shares of
common stock and preferred stock are 500,000,000 shares, par value
$0.0001 per share, and 100,000,000 shares, par value $0.0001, respectively.
As of March 30, 2007, we have 50,308,132 shares of common stock outstanding
and approximately 500 stockholders of record of common stock. As of
March 30, 2007, no shares of preferred stock are outstanding.
Our
common stock is traded on the Over the Counter Bulletin Board (the "OTC-BB")
under the ticker symbol "RXHN." Prior to May 13, 2005, the Company common
stock was traded on the OTC-BB under the ticker symbol "CPRD" since
November 2004. The quarterly reported high and low bid and asked prices for
our common stock are shown below for the eight fiscal quarters ended
December 31, 2006. The prices presented are bid and ask prices, which
represent prices between broker-dealers and do not include retail mark-ups
and
mark-downs or any commission to the broker-dealer. The prices may not
necessarily reflect actual transactions.
|
Period
|
High
|
Low
|
|||||
|
2005
|
|||||||
|
First
Quarter1
|
$
|
0.15
|
$
|
0.02
|
|||
|
Second
Quarter 1,2
|
$
|
4.00
|
$
|
0.30
|
|||
|
Third
Quarter
|
$
|
4.60
|
$
|
2.50
|
|||
|
Fourth
Quarter
|
$
|
3.25
|
$
|
1.50
|
|||
|
2006
|
|||||||
|
First
Quarter
|
$
|
2.50
|
$
|
1.11
|
|||
|
Second
Quarter
|
$
|
2.00
|
$
|
1.15
|
|||
|
Third
Quarter
|
$
|
5.00
|
$
|
1.50
|
|||
|
Fourth
Quarter
|
$
|
3.05
|
$
|
1.01
|
|||
________________________
|
1
|
Reflects
adjustments made in accordance with a 1-for-100 reverse stock split
in
May 2005.
|
|
2
|
The
merger of Corporate Road Show.Com and Rexahn, Corp was completed
on
May 13, 2005.
|
Dividends
We
have
not paid any cash dividends on common stock and do not expect to do so in the
foreseeable future. We anticipate that any earnings generated from future
operations will be used to finance our operations. No restrictions exist upon
our ability to pay dividends.
|
Item 6.
|
Management's
Discussion and Analysis or Plan of
Operation
|
You
should read the following discussion and analysis of our results of operations,
financial condition and liquidity in conjunction with our financial statements
and the related notes, which are included in this Annual
Report on Form 10-KSB. Some of the information contained in this discussion
and analysis or set forth elsewhere in this Annual Report on Form 10-KSB,
including information with respect to our plans and strategies for our business,
statements regarding the industry outlook, our expectations regarding the future
performance of our business, and the other non-historical statements contained
herein are forward-looking statements. See "Cautionary Statement Regarding
Forward-Looking Statements". You should also review the "Risk Factors" section
under this Item 1 of this Annual Report for a discussion of important
factors that could cause actual results to differ materially from the results
described herein or implied by such forward-looking statements.
Overview
Our
company resulted from the merger of Corporate Road Show.Com Inc., a New York
corporation incorporated in November 1999, and Rexahn, Corp, a Maryland
corporation, immediately after giving effect to our reincorporation as a
Delaware corporation under the name "Rexahn Pharmaceuticals, Inc." In connection
with that transaction, a wholly owned subsidiary of ours merged with and into
Rexahn, Corp, with Rexahn, Corp remaining as the surviving corporation and
a
wholly owned subsidiary of ours. In exchange for their shares of capital stock
in Rexahn, Corp, the former stockholders of Rexahn, Corp received shares of
common stock representing approximately 91.8% of the Company's outstanding
equity after giving effect to the transaction. Further, upon the effective
time
of the Merger, our historic business was abandoned and the business plan of
Rexahn, Corp was adopted. The transaction was therefore accounted for as a
reverse acquisition with Rexahn, Corp as the accounting acquiring party and
CPRD
as the acquired party. In September 2005, Rexahn, Corp was merged with and
into the Company.
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 receive any product sales until we receive approval from 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.
Critical
Accounting Policies
A
"critical accounting policy" is one which is both important to the portrayal
of
our financial condition and results and requires our management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
accounting policies are in accordance with United States generally accepted
accounting principles, or GAAP, and their basis of application is consistent
with that of the previous year.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP 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.
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004),
"Shared-Based Payment" ("SFAS No. 123R"). This pronouncement amends SFAS No.
123, "Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No. 123R requires that companies account for awards of equity
instruments issued to employees under the fair value method of accounting and
recognize such amount in the statement of operations. The implementation of
this
statement was effective January 1, 2006 and has been adopted by the Company
using the modified prospective method.
For
all
non-employee stock-based compensation the Company uses the fair value method
in
accordance with SFAS No. 123 and EITF 96-18.
In
management's opinion, existing stock option valuation models do not provide
a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. As option valuation models require
the input of highly subjective assumptions, changes in such subjective
assumptions can materially affect the fair value estimate of employee stock
options.
Prior
to
the adoption of SFAS No. 123R, the Company used the intrinsic value method
to
account for stock-based compensation in accordance with APB Opinion No. 25
and,
as permitted by SFAS No. 123, provided pro forma disclosures of net loss
and loss per common share as if the fair value methods had been applied in
measuring compensation expense. Under the intrinsic value method, compensation
cost for employee stock awards is recognized as the excess, if any, of the
deemed fair value for financial reporting purposes of our common stock on the
date of grant over the amount an employee must pay to acquire the stock.
Compensation cost is amortized over the vesting period using an accelerated
graded method in accordance with FASB Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award
Plans".
Our
results include non-cash compensation expense as a result of stock option
grants. For stock-based awards prior to January 1, 2006, we accounted for
stock-based employee compensation arrangements in accordance with the provisions
of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and comply
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Compensation expense for options granted to
employees represents the difference between the fair market value of our common
stock and the exercise price of the options at the date of grant. This amount
is
being recorded over the respective vesting periods of the individual stock
options. We expect to record additional non-cash compensation expense in the
future, which may be significant. Compensation for options granted to
non-employees has been determined in accordance with SFAS No. 123 and EITF
96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services,"
as
the fair value of the equity instruments issued.
On
August 5, 2003, the Company established a stock option plan. Under the
plan, we issued options to employees and non-employees during fiscal 2004 and
incurred a compensation expense of $230,770. During fiscal 2005, we incurred
a
compensation expense of $436,748 for options issued to employees and
non-employees.
The
plan
grants stock options to key employees, directors and consultants of the Company.
For grants prior to September 12, 2005 and grants to employees of the
Company after September 12, 2005, the vesting period is 30% after the first
year, an additional 30% after the second year and the remaining 40% after the
third year. For grants to non-employee directors and consultants of the Company
after September 12, 2005, the vesting period is 100% after the first year,
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, subject to the fulfillment of certain
conditions in the individual stock option grant agreements.
The
exercise prices of the options granted to employees were below the fair market
value of the common stock on the date of the grant. In December 2005,
employees holding stock options that were not vested as of December 31,
2004 and stock options that were granted on or after January 1, 2005 agreed
to amend the exercise prices of those options from $0.24 per share to
$0.80 per share, the fair market value of the common stock (as determined
by the board of directors), in order to comply with the requirements of Internal
Revenue Code Section 409A. The repricing of the options issued to employees
was accounted as a cancellation of existing options and issuance of new options.
The effective date of this repricing was January 1, 2005. The amendment was
accounted for prospectively and resulted in a reversal of stock option
compensation expense of $306,896 related to employee options recorded in the
period from January 1, 2005 to September 30, 2005. There was no impact
on the Company's results of operations for the year ended December 31,
2004. Using the intrinsic value method, the total compensation cost for the
year
ended December 31, 2005 amounted to $0 (2004-$658,000) and is being
amortized over the vesting period.
The
options issued to certain non-employees accounted under the fair value method
were similarly repriced as of January 1, 2005. As a result, Stock
Compensation expense of $158,531 recorded in the period from January 1,
2005 to September 30, 2005, related to non-employee options was reversed.
The stock compensation expense related to non-employees during 2005 was
$436,748,
after
accounting for the repricing adjustment.
See
Note
8 to the Financial Statements in Item 7 of this Annual Report for further
information on our stock option compensation expense.
Recently
Issued Accounting Standards
In
July 2006, the 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, FIN 48 will have on its financial position and results
of
operations
In
September 2006, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements". SAB No. 108 was issued to provide consistency in how
registrants quantify financial statement misstatements. The Company is required
to and has applied SAB No. 108 in connection with the preparation of is annual
financial statements for the year ending December 31, 2006. The application
of SAB No. 108 did not to have a material effect on its financial position
and
results of operations.
On
September 15, 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 provides enhanced guidance for using fair value
to
measure assets and liabilities. The standard applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value in any new circumstances. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years.
Earlier application is encouraged, provided that the reporting entity has not
yet issued financial statements for that fiscal year, including financial
statements for an interim period within that fiscal year. The Company will
adopt
this pronouncement effective periods beginning January 1, 2008. The Company
is currently evaluating the impact of adopting SFAS No. 157 on its financial
statements.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", which permits entities to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. An entity would report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. The decision about whether to elect the fair value option is applied
instrument by instrument, with a few exceptions; the decision is irrevocable;
and it is applied only to entire instruments and not to portions of instruments.
SFAS No. 159 requires disclosures that facilitate comparisons (a) between
entities that choose different measurement attributes for similar assets and
liabilities and (b) between assets and liabilities in the financial statements
of an entity that selects different measurement attributes for similar assets
and liabilities. SFAS No. 159 is effective for financial statements issued
for
fiscal years beginning after November 15, 2007. Early adoption is permitted
as
of the beginning of a fiscal year provided the entity also elects to apply
the
provisions of SFAS No. 157. Upon implementation, an entity shall report the
effect of the first remeasurement to fair value as a cumulative-effect
adjustment to the opening balance of retained earnings. Since the provisions
of
SFAS No. 159 are applied prospectively, any potential impact will depend on
the
instruments selected for fair value measurement at the time of implementation.
The Company is currently evaluating the impact, if any, adoption of SFAS No.
159
will have on its financial statements.
Results
of Operations
Comparison
of the Year Ended December 31, 2006 and the Year Ended December 31,
2005
Total
Revenues
During
2003 we entered into a collaborative research agreement with Rexgene Biotech
Co., Ltd. ("Rexgene"), a minority shareholder. Rexgene is engaged in the
development of pharmaceutical products in Asia and has agreed to assist us
with
the research, development and clinical trials necessary for registration of
our
Archexin drug candidate in Asia. This agreement provides Rexgene with exclusive
rights to license, sublicense, make, have made, use, sell and import Archexin
in
Asia. A one-time contribution to the joint development and research of Archexin
of $1,500,000 was paid to us in 2003 in accordance with the agreement. The
amount of revenue from this contribution is being recognized as income over
the
term of this agreement which terminates at the later of 20 years or the term
of
the patent on the licensed product. We use 20 years as the basis for revenue
recognition and accordingly $75,000 was included in revenues in each fiscal
year
beginning with 2003 and the remaining $1,200,000 is reflected as deferred
revenue on the balance sheet as of December 31, 2006. We adopted SAB No.
104, "Revenue Recognition - Nonrefundable Upfront Fees" with respect to the
accounting for this transaction. These fees are to be used in the cooperative
funding of the costs of development of Archexin.
General
and Administrative Expenses
General
and administrative expenses consist primarily of salaries and related expenses
for executive, finance and other administrative personnel, recruitment expenses,
professional fees and other corporate expenses, including business development
and general legal activities.
General
and administrative expenses increased $249,750, or 8.9%, from $2,801,743 in
fiscal 2005 to $3,051,493 in fiscal 2006. The increase was due primarily to
an
increase in professional fees and expenses incurred related to preparing for
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and
professional fees related to the Company's proposed transaction with Future
Systems, Inc in early 2006. Higher general and administrative expenses during
fiscal 2006 were also attributable to the higher stock compensation expense
resulting from the adoption of SFAS No. 123R, effective January 1,
2006.
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.
Research
and development expenses increased $1,608,857, or 93.7%, from $1,716,566 in
fiscal 2005 to $3,325,423 in fiscal 2006. The increase was due primarily to
the
fact that several of our drug candidates are continuing to undergo clinical
trials 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 fiscal 2006 were
also attributable to the higher stock compensation expense resulting from the
adoption of SFAS No. 123R, effective January 1, 2006 and an increase in the
number of outstanding shares subject to options during fiscal 2006 compared
to
fiscal 2005.
Patent
Fees
Our
patent fees increased $112,549, or 63%, from $178,625 in fiscal 2005 to $291,174
in fiscal 2006. The increase was due primarily to an increase in the number
of
patent filings made during fiscal 2006 compared to fiscal 2005.
Depreciation
and Amortization
Depreciation
expense increased $28,110, or 29.2%, from $96,400 in fiscal 2005 to $124,510
in
fiscal 2006. The increase was due primarily to the purchase of new laboratory
equipment.
Interest
Expense
Our
interest expense decreased $97,165, or 49.3%, from $196,816 in fiscal 2005
to
$99,651 in fiscal 2006. The decrease was due primarily to conversion of
$3,850,000 principal amount of the Company's convertible notes into common
stock
in May 2006.
Interest
Income
In
fiscal
2006, we recorded $331,248 of interest income from the investment of our cash
and cash equivalents and other short-term investments, compared to $190,610
recorded in fiscal 2005. The increase of $140,638, or 73.8%, was primarily
due
to higher cash and cash equivalent balances and higher interest rates during
fiscal 2006.
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 five lead
drug candidates, Archexin, RX-0047, RX-5902, Serdaxin and Zoraxel.
We
have
allocated direct and indirect costs to each program based on certain assumptions
and our review of the status of each program, payroll-related expenses and
other
overhead costs based on estimated usage by each program. 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-0047 and RX-5902 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, 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.
Archexin
In
October 2006, we announced the conclusion of the Phase I
clinical
trial of Archexin, our leading drug candidate. The costs incurred for the
clinical trial was approximately $1,500,000.
The
Phase
I
clinical
trial of Archexin, which took place at Georgetown University's Lombardi Cancer
Center beginning in September 2004 and at the University of Alabama at
Birmingham beginning in August 2005, was primarily to determine the safety
and tolerability of the drug in patients with advanced cancer. We expect to
file
a complete final report of Phase I results with the Food and Drug Administration
this year.
As
the
main purpose of the clinical trial was to establish the safety of Archexin,
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 Archexin 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.
The
Phase
II clinical trial of Archexin is expected to begin this year in patients with
advanced renal cell carcinoma who have failed previous treatments. The trial
is
the first of multiple trials planned for Archexin. We estimate that the Phase
II
trials will be completed in 2009 and will require approximately $5,000,000.
In
January 2005,
we received "orphan drug designation" from the FDA for Archexin for five cancer
indications, including renal cell carcinoma, ovarian cancer, glioblastoma,
stomach cancer, and pancreatic cancer. The orphan drug program is intended
to
provide patients with faster access to drug therapies for diseases and
conditions that affect fewer than 200,000 people. Companies that receive orphan
drug designation are provided an accelerated review process, tax advantages,
and
seven years of market exclusivity in the United States. In
the
future, we plan to apply Archexin to the treatment of other orphan indications
and other cancers.
RX-0047
and RX-5902
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. Through December 31, 2006, 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 2008.
The
conduct of the clinical trial and toxicology studies described above are being
accomplished in conjunction with third-party clinical research organizations,
or
CROs, 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, a higher than expected expense may result.
Serdaxin
and Zoraxel
Serdaxin
and Zoraxel are scheduled to enter Phase II trials in 2007, subject to obtaining
sufficient additional financing. We currently estimate that these studies will
require approximately $4,000,000 and $3,000,000, respectively.
Liquidity
and Capital Resources
Cash
used
in operating activities was $5,843,198 in fiscal 2006 compared to $4,131,450
in
fiscal 2005. Fiscal 2006 operating cash flows reflect our loss from continuing
operations of $6,486,003, offset by net non-cash charges of $1,083,406
and a
net decrease in cash components of working capital of $440,661.
Non-cash charges consist of depreciation and amortization of $124,510, stock
option compensation expense of $1,033,956 and amortization of deferred revenue
of $75,000. The decrease in working capital primarily consists of a
$12,249
decrease
in accounts payable and accrued expenses and an increase of $428,412
to
prepaid and other assets. Fiscal 2005 operating cash flows reflect our loss
from
continuing operations of $6,349,540, offset by net non-cash charges of
$2,105,025 and a net increase in cash components of working capital of $113,065.
Non-cash charges consisted of $1,625,000 representing the beneficial conversion
feature of our convertible notes, compensatory stock expense of $21,877,
depreciation of $96,400 and stock option compensation expense of $436,748.
The
increase in working capital primarily consisted of the beneficial conversion
feature charge of $1,625,000, a $205,978 increase in stock option compensation
expenses and a $43,611 increase in depreciation, offset by a decrease in
accounts payable of $37,843.
Cash
used
in investing activities of $52,952 in fiscal 2006 reflects capital expenditures
of $52,952 for the purchase of equipment. Cash used in investing activities
of
$7,915,750 in fiscal 2005 consisted of purchases of short-term investments
of
$7,821,667, in addition to capital expenditures of $94,083 for the purchase
of
equipment.
Cash
used
in financing activities of $186,415 in fiscal 2006 consists of principal
payments on long-term debt of $172,813 and the purchase of treasury stock in
the
amount of $28,410, offset by proceeds of $14,808 from the issuance of common
stock upon the exercise of stock options. Cash provided by financing activities
of $13,326,179 in fiscal 2005 consisted of proceeds of $8,359,582 from the
issuance of common stock and $5,150,000 from proceeds of long-term debt, offset
by principal payments on long-term debt of $183,403.
For
the
years ended December 31, 2006 and 2005, we experienced net losses of
$6,486,003
and
$6,349,540, respectively. Our accumulated deficit as of December 31, 2006
and 2005 were $20,690,326 and $14,204,323, respectively.
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 fiscal 2006, we had a net decrease in cash and cash
equivalents of $6,082,565. This decrease primarily resulted from the cash used
in operating activities of $5,843,198, investing activities of $52,952 and
financing activites of $186,415.
For
the
foreseeable future, we will have to fund all of our operations and capital
expenditures from the net proceeds of equity and debt offerings we may make,
cash on hand, licensing fees and grants. Although we have plans 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.
Contractual
Obligations
In
April 2004, we entered into a clinical development agreement with
Georgetown University with an effective period from April 5, 2004 through
April 5, 2006. The total estimated cost of the program is $223,126, based
on the fees, enrollment and completion of 20 patients and is payable based
on
the progress of the treatment over the effective period of the agreement. We
expect to make payments under the agreement in 2007.
On
August 17, 2004, we entered into an agreement with Formatech, Inc. to
monitor and perform stability studies on our drug candidate, Archexin. The
total
cost of these services is $46,700. For the years ended December 31, 2006
and 2005, we paid $5,200 and $10,400, respectively, towards the cost of these
studies. A payment of $8,200 is due during 2007.
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.
Minimum
future rental payments under this lease are as follows:
|
For
the years ended December 31
|
||||
|
2007
|
$
|
216,170
|
||
|
2008
|
222,655
|
|||
|
2009
|
112,972
|
|||
|
$
|
551,797
|
|||
On
January 3, 2006 and March 29, 2006, we contracted with Formatech to
perform Archexin 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 year ended December 31, 2006. In addition, on January 6,
2006, we entered into a drug packaging agreement with Formatech for Phase II
clinical trials of Archexin. 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 year ended December 31,
2006.
On
January 6, 2006, we contracted with Amarex, LLC to conduct Phase II
clinical studies. In accordance with the agreement, the estimated contract
duration is 24 months for a total cost of $596,244 plus pass through
expenses. The service costs are payable in 24 monthly payments of $18,633
plus an initiation fee of $149,061 due upon signing. We paid $361,973 towards
the cost of the study in the year ended December 31, 2006.
On
March 1, 2006, we entered into a research program with Ewha Woman's
University. The effective period of the agreement was from March 1, 2006 to
February 28, 2007. In accordance with the agreement, the cost of the
research program was $40,000 and was paid upon full execution of the agreement.
The Company paid $40,000 in connection with the agreement during the year ended
December 31, 2006.
On
April 1, 2006, we entered into research agreement with Korean Research
Institute of Bioscience and Biotechnology to evaluate antitumor activity,
toxicology, pharmacokinetics and mechanisms of action for RX-5902. In accordance
with the agreement, the estimated contract duration is twelve months for a
cost
of $120,000, which was paid during the year ended December 31,
2006.
On
April 3, 2006, we contracted with UPM Pharmaceuticals, Inc. to develop
several release formulation for Serdaxin and Zoraxel. In accordance with the
agreement, the estimated contract duration was seven months for an estimated
cost of $443,975, of which $112,124 was paid during the year ended
December 31, 2006. The service costs were payable based upon a payment
schedule related to certain milestones.
On
April
19, 2006, we executed definitive agreements with Future Systems, Inc. ("FSI"),
a
Korean stock exchange (KOSDAQ) listed information technology company based
in
Seoul, Korea. Pursuant to the agreements, we would transfer to FSI exclusive
rights and a non-exclusive license to develop, manufacture, and sell products
based on Rexahn’s RX-0201, RX-0047 and RX-10100 drug candidates in certain
territories for approximately $35.8 million, and simultaneously, FSI would
issue
and sell 4,326,854 shares of its common stock to us, representing approximately
28% of FSI’s outstanding shares, after giving effect to the subscription. The
investment, of approximately $35.8 million, would have made us the largest
single stockholder of FSI. In addition, we entered into an agreement with FSI
and Core F.G. Co., Ltd., the general partner of Triplewin Corporate
Restructuring Partnership, the then-current majority shareholder of FSI, with
respect to the management of FSI in connection with redirecting FSI’s business
focus to the biopharmaceutical industry. Completion of the transactions was
subject to customary closing conditions, including approval by FSI
shareholders. On June 8, 2006, we terminated the agreements entered into
with FSI and Core F.G. Co., Ltd., including a share subscription agreement,
an
intellectual property assignment and license agreement and a management
agreement, providing for, among other things, the assignment and license by
us
to FSI of certain intellectual property rights for our drug candidates in
specified markets and the acquisition by us of an ownership interest in FSI.
The
termination followed a vote on the proposed transactions that was not approved
by the FSI shareholders at a meeting in Seoul, Korea on June 7,
2006.
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 product
development efforts, our clinical trials, and our research and development
efforts. Based on our current plans and our capital resources, we believe that
our cash and cash equivalents will be sufficient to enable us to meet our
minimum planned operating needs for at least the next 12 months, which
would entail focusing our resources on Phase II clinical trials of Archexin.
Over
the
next 12 months we expect to spend a minimum of approximately $1.0 million
on clinical development for Phase II clinical trials of Archexin (including
our
commitments described under "Contractual Commitments" of this Item 6),
$2.6 million on general corporate expenses, and approximately $216,000 on
facilities rent. We plan to initiate, subject to obtaining sufficient
additional financing, Phase II clinical trials of Serdaxin and Zoraxel beginning
in the second half of 2007 at an additional cost of up to approximately $3
million. We may seek additional financing to implement and fund other drug
candidate development, clinical trial and research and development efforts
to
the maximum extent of our operating plan, including in-vivo animal and
pre-clinical studies and Phase I clinical trials for RX-5902, Phase II clinical
trials for new product candidates, as well as other research and development
projects, which together with the minimum operating plan for the next
12 months, could aggregate up to $7 million through the end of
2007.
However,
the actual amount of funds we will need to operate is subject to many factors,
some of which are beyond our control. These factors include the
following:
|
·
|
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.
|
Impact
of Inflation
To
date
inflationary factors have not had a significant effect on our
operations.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements.
|
Item 7.
|
Financial
Statements
|
REXAHN
PHARMACEUTICALS, INC.
(A
Development
Stage Company)
Balance
Sheets
|
December
31,
2006
|
December
31,
2005
|
||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
4,034,060
|
$
|
10,116,625
|
|||
|
Prepaid
expenses and other
|
483,186
|
54,774
|
|||||
|
Total
Current Assets
|
4,517,246
|
10,171,399
|
|||||
|
Equipment,
Net (note
3)
|
149,993
|
203,632
|
|||||
|
Intangible
Assets, Net (note
4)
|
321,971
|
339,890
|
|||||
|
Total
Assets
|
$
|
4,989,210
|
$
|
10,714,921
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
575,363
|
$
|
587,612
|
|||
|
Licensing
fee payable (note 4)
|
-
|
172,813
|
|||||
|
Total
Current Liabilities
|
575,363
|
760,425
|
|||||
|
Long-Term
Convertible Debt (note
5)
|
-
|
3,850,000
|
|||||
|
Deferred
Revenue (note
6)
|
1,200,000
|
1,275,000
|
|||||
|
Total
Liabilities
|
1,775,363
|
5,885,425
|
|||||
|
Commitment
and Contingencies (note
10)
|
|||||||
|
Stockholders'
Equity (note
7):
|
|||||||
|
Preferred
stock, par value $0.0001, 100,000 authorized shares, none issued and
outstanding
|
-
|
-
|
|||||
|
Common
stock, par value $0.0001, 500,000,000 authorized shares, 50,322,337
issued
(2005- 46,410,632) and 50,308,132 outstanding (2005- 46,410,632)
|
5,032
|
4,641
|
|||||
|
Treasury
stock, 14,205 (2005 - 0) shares, at cost
|
(28,410
|
)
|
-
|
||||
|
Additional
paid-in capital
|
23,927,551
|
19,029,178
|
|||||
|
Accumulated
deficit during the development stage
|
(20,690,326
|
)
|
(14,204,323
|
)
|
|||
|
Total
Stockholders' Equity
|
3,213,847
|
4,829,496
|
|||||
|
Total
Liabilities and Stockholders' Equity
|
$
|
4,989,210
|
$
|
10,714,921
|
|||
See
the
notes accompanying the financial statements.
REXAHN
PHARMACEUTICALS, INC.
(A
Development
Stage Company)
Statements
of Operations
|
Cumulative
from March 19, 2001 (Inception) to
|
Years
Ended
December
31,
|
|||||||||
|
December
31, 2006
|
2006
|
2005
|
||||||||
|
Revenues:
|
||||||||||
|
Research
|
$
|
300,000
|
$
|
75,000
|
$
|
75,000
|
||||
|
Expenses:
|
||||||||||
|
General
and administrative
|
9,610,582
|
3,051,493
|
2,801,743
|
|||||||
|
Research
and development
|
9,275,043
|
3,325,423
|
1,716,566
|
|||||||
|
Patent
fees
|
518,860
|
291,174
|
178,625
|
|||||||
|
Depreciation
and amortization
|
382,391
|
124,510
|
96,400
|
|||||||
|
Total
Expenses
|
19,786,876
|
6,792,600
|
4,793,334
|
|||||||
|
Loss
from Operations
|
(19,486,876
|
)
|
(6,717,600
|
)
|
(4,718,334
|
)
|
||||
|
Other
(Income) Expense
|
||||||||||
|
Interest
income
|
(722,697
|
)
|
(331,248
|
)
|
(190,610
|
)
|
||||
|
Interest
expense
|
301,147
|
99,651
|
196,816
|
|||||||
|
Beneficial
conversion feature
|
1,625,000
|
-
|
1,625,000
|
|||||||
|
1,203,450
|
(231,597
|
)
|
1,631,206
|
|||||||
|
Net
Loss
|
$
|
(20,690,326
|
)
|
$
|
(6,486,003
|
)
|
$
|
(6,349,540
|
)
|
|
|
Loss
per weighted average number of shares outstanding, basic and
diluted
|
$
|
(0.13
|
)
|
$
|
(0.15
|
)
|
||||
|
Weighted
average number of shares outstanding, basic and diluted
|
48,865,988
|
41,976,959
|
||||||||
See
the
notes accompanying the financial statements.
REXAHN
PHARMACEUTICALS, INC.
(A
Development
Stage Company)
Statements
of Changes in Stockholders' Equity (Deficit)
Period
from March 19, 2001 (Inception) to December 31, 2006
|
Accumulated
|
||||||||||||||||||||||
|
Deficit
|
||||||||||||||||||||||
|
During
|
Total
|
|||||||||||||||||||||
|
Common
Stock
|
Treasury
Stock
|
Additional
|
the
|
Stockholders’
|
||||||||||||||||||
|
Number
|
Number
|
Paid
in
|
Development
|
Equity
|
||||||||||||||||||
|
of
shares
|
Amount
|
of
shares
|
Amount
|
Capital
|
Stage
|
(Deficit)
|
||||||||||||||||
|
Opening
balance, March 19, 2001
|
-
|
$
|
-
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Common
shares issued
|
7,126,666
|
71,266
|
-
|
-
|
4,448,702
|
-
|
4,519,968
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(625,109
|
)
|
(625,109
|
)
|
|||||||||||||
|
Balance,
December 31, 2001
|
7,126,666
|
71,266
|
-
|
-
|
4,448,702
|
(625,109
|
)
|
3,894,859
|
||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(1,181,157
|
)
|
(1,181,157
|
)
|
|||||||||||||
|
Balance,
December 31, 2002
|
7,126,666
|
71,266
|
-
|
-
|
4,448,702
|
(1,806,266
|
)
|
2,713,702
|
||||||||||||||
|
Common
shares issued
|
500,000
|
5,000
|
-
|
-
|
1,995,000
|
-
|
2,000,000
|
|||||||||||||||
|
Stock
option compensation
|
-
|
-
|
-
|
-
|
538,074
|
-
|
538,074
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(2,775,075
|
)
|
(2,775,075
|
)
|
|||||||||||||
|
Balance,
December 31, 2003
|
7,626,666
|
76,266
|
-
|
-
|
6,981,776
|
(4,581,341
|
)
|
2,476,701
|
||||||||||||||
|
Common
shares issued
|
1,500
|
15
|
-
|
-
|
1,785
|
-
|
1,800
|
|||||||||||||||
|
Stock
option compensation
|
-
|
-
|
-
|
-
|
230,770
|
-
|
230,770
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,273,442
|
)
|
(3,273,442
|
)
|
|||||||||||||
|
Balance,
December 31, 2004
|
7,628,166
|
$
|
76,281
|
-
|
$
|
-
|
$
|
7,214,331
|
$
|
(7,854,783
|
)
|
$
|
(564,171
|
)
|
||||||||
See
the
notes accompanying the financial statements.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Statements
of Changes in Stockholders' Equity (Deficit)
Period
from March 19, 2001 (Inception) to December 31, 2006
|
Accumulated
|
||||||||||||||||||||||
|
Deficit
|
||||||||||||||||||||||
|
During
|
Total
|
|||||||||||||||||||||
|
Common
Stock
|
Treasury
Stock
|
Additional
|
the
|
Stockholders’
|
||||||||||||||||||
|
Number
|
Number
|
Paid
in
|
Development
|
Equity
|
||||||||||||||||||
|
of
shares
|
Amount
|
of
shares
|
Amount
|
Capital
|
Stage
|
(Deficit)
|
||||||||||||||||
|
Balance,
December 31, 2004
|
7,628,166
|
$
|
76,281
|
-
|
$
|
-
|
$
|
7,214,331
|
$
|
(7,854,783
|
)
|
$
|
(564,171
|
)
|
||||||||
|
Stock
split (5 for 1)
|
30,512,664
|
(72,467
|
)
|
-
|
-
|
72,467
|
-
|
-
|
||||||||||||||
|
Common
shares issued in connection with merger
|
3,397,802
|
340
|
-
|
-
|
(340
|
)
|
-
|
-
|
||||||||||||||
|
Common
stock issued for cash
|
4,175,000
|
417
|
-
|
-
|
8,349,565
|
-
|
8,349,982
|
|||||||||||||||
|
Common
shares issued on conversion of convertible debt
|
650,000
|
65
|
-
|
-
|
1,299,935
|
-
|
1,300,000
|
|||||||||||||||
|
Exercise
of stock options
|
40,000
|
4
|
-
|
-
|
9,596
|
-
|
9,600 | |||||||||||||||
|
Common
shares issued in exchange for services
|
7,000
|
1
|
-
|
-
|
21,876
|
-
|
21,877
|
|||||||||||||||
|
Beneficial
conversion feature
|
-
|
-
|
-
|
-
|
1,625,000
|
-
|
1,625,000
|
|||||||||||||||
|
Stock
option compensation
|
-
|
-
|
-
|
-
|
436,748
|
-
|
436,748
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(6,349,540
|
)
|
(6,349,540
|
)
|
|||||||||||||
|
Balance,
December 31, 2005
|
46,410,632
|
4,641
|
-
|
-
|
19,029,178
|
(14,204,323
|
)
|
4,829,496
|
||||||||||||||
|
Exercise
of stock options
|
61,705
|
6
|
-
|
-
|
14,802
|
-
|
14,808
|
|||||||||||||||
|
Common
shares issued on conversion of convertible debt
|
3,850,000
|
385
|
-
|
-
|
3,849,615
|
-
|
3,850,000
|
|||||||||||||||
|
Purchase
of treasury stock
|
-
|
-
|
14,205
|
(28,410
|
)
|
-
|
-
|
(28,410
|
)
|
|||||||||||||
|
Stock
option compensation
|
-
|
-
|
-
|
-
|
1,033,956
|
-
|
1,033,956
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(6,486,003
|
)
|
(6,486,003
|
)
|
|||||||||||||
|
Balance,
December 31, 2006
|
50,322,337
|
$
|
5,032
|
14,205
|
$
|
(28,410
|
)
|
$
|
23,927,551
|
$
|
(20,690,326
|
)
|
$
|
3,213,847
|
||||||||
See
the
notes accompanying the financial statements.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Statements
of Cash Flows
|
Cumulative
from March 19, 2001 (Inception) to
|
Years
Ended
December
31,
|
|||||||||
|
December
31, 2006
|
2006
|
2005
|
||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||
|
Net
loss
|
$
|
(20,690,326
|
)
|
$
|
(6,486,003
|
)
|
$
|
(6,349,540
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||
|
Beneficial
conversion feature
|
1,625,000
|
-
|
1,625,000
|
|||||||
|
Compensatory
stock
|
21,877
|
-
|
21,877
|
|||||||
|
Depreciation
and amortization
|
382,391
|
124,510
|
96,400
|
|||||||
|
Stock
option compensation expense
|
2,239,548
|
1,033,956
|
436,748
|
|||||||
|
Amortization
of deferred revenue
|
(300,000
|
)
|
(75,000
|
)
|
(75,000
|
)
|
||||
|
Changes
in assets and liabilities:
|
||||||||||
|
Prepaid
expenses and other
|
(483,186
|
)
|
(428,412
|
)
|
(38,579
|
)
|
||||
|
Accounts
payable and accrued expenses
|
575,363
|
(12,249
|
)
|
151,644
|
||||||
|
Net
Cash Used in Operating Activities
|
(16,629,333
|
)
|
(5,843,198
|
)
|
(4,131,450
|
)
|
||||
|
Cash
Flows from Investing Activities:
|
||||||||||
|
Purchase
of equipment
|
(498,139
|
)
|
(52,952
|
)
|
(94,083
|
)
|
||||
|
Net
Cash Used in Investing Activities
|
(498,139
|
)
|
(52,952
|
)
|
(94,083
|
)
|
||||
|
Cash
Flows from Financing Activities:
|
||||||||||
|
Issuance
of common stock
|
14,896,158
|
14,808
|
8,359,582
|
|||||||
|
Proceeds
from long-term debt
|
5,150,000
|
-
|
5,150,000
|
|||||||
|
Proceeds
from research contribution
|
1,500,000
|
-
|
-
|
|||||||
|
Payment
of licensing fees
|
(356,216
|
)
|
(172,813
|
)
|
(183,403
|
)
|
||||
|
Purchase
of treasury stock
|
(28,410
|
)
|
(28,410
|
)
|
-
|
|||||
|
Net
Cash Provided by (Used in) Financing Activities
|
21,161,532
|
(186,415
|
)
|
13,326,179
|
||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
4,034,060
|
(6,082,565
|
)
|
9,100,646
|
||||||
|
Cash
and Cash Equivalents - beginning of period
|
-
|
10,116,625
|
1,015,979
|
|||||||
|
Cash
and Cash Equivalents - end of period
|
$
|
4,034,060
|
$
|
4,034,060
|
$
|
10,116,625
|
||||
|
Supplemental
Cash Flow Information
|
||||||||||
|
Interest
paid
|
$
|
292,912
|
$
|
280,535
|
$
|
4,316
|
||||
Non-cash
investing and financing activities:
In
February 2005, the Company entered into a licensing agreement in exchange for
debt of $356,216.
In
December 2005, the Company’s convertible notes of $1.3 million were converted
into 650,000 shares of the Company’s common stock.
In
May
2006, the Company’s convertible notes of $3.85 million were converted into 3.85
million shares of the Company’s common stock.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
1.
|
Operations
and Organization
|
Operations
Rexahn
Pharmaceuticals, Inc. (the "Company" or "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.
Reverse
Merger Acquisition
Pursuant
to an Agreement and Plan of Merger by and among Rexahn, Corp ("Rexahn"),
Corporate Road Show.Com Inc. ("CRS"), a New York corporation and predecessor
corporation of the Company, CRS Merger Sub, Inc., a Delaware corporation and
wholly owned subsidiary of CRS ("Merger Sub"), CRS Delaware, Inc., a Delaware
corporation and wholly owned subsidiary of CRS ("CRS Delaware"), immediately
after giving effect to a 1-for-100 reverse stock split and the reincorporation
of CRS as a Delaware corporation under the name Rexahn Pharmaceuticals, Inc.
("Rexahn Pharmaceuticals"), on May 13, 2005, Merger Sub merged with and into
Rexahn, with Rexahn surviving as a wholly owned subsidiary of Rexahn
Pharmaceuticals (the "Acquisition Merger"). In the Acquisition Merger, (i)
each
share of the issued and outstanding common stock of Rexahn (other than
dissenting shares) was converted into the right to receive five shares of Rexahn
Pharmaceuticals common stock; and (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.
Shares
of
Rexahn Pharmaceuticals common stock issued in the Acquisition Merger were exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to Regulation D under the Securities Act and/or
Regulation S under the Securities Act. These shares of Rexahn Pharmaceuticals
common stock are deemed "restricted securities" and bear an appropriate
restrictive legend indicating that the resale of such shares may be made only
pursuant to registration under the Securities Act or pursuant to an available
exemption from such registration.
As
part
of the Acquisition Merger, the Company assumed the convertible notes further
described in note 5 and the conversion price was adjusted to reflect the merger
exchange ratio.
For
accounting purposes, the Acquisition Merger is accounted for as a reverse
acquisition of CRS (legal acquirer) by Rexahn (accounting acquirer). As a
result, following the Acquisition Merger, the historical financial statements
of
Rexahn became the historical financial statements of the
Company.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
1.
|
Operations
and Organization (cont’d)
|
Merger
of Subsidiary
On
September 29, 2005, the Company's wholly owned subsidiary, Rexahn, was merged
with and into the Company and Rexahn's separate existence was
terminated.
|
2.
|
Summary
of Significant Accounting
Policies
|
|
a)
|
Cash
and Cash Equivalents
|
Cash
and
cash equivalents include cash on hand and short-term investments with remaining
maturities of three months or less at acquisition.
|
b)
|
Equipment
|
Equipment
is stated at cost less accumulated depreciation. Depreciation, based on the
estimated useful lives of the assets, is provided as follows:
|
Life
|
Depreciation
Method
|
||||||
|
Furniture
and fixtures
|
7
years
|
double declining balance | |||||
|
Office
equipment
|
5
years
|
double declining balance | |||||
|
Lab
equipment
|
5-7
years
|
double declining balance | |||||
|
Computer
equipment
|
5
years
|
straight line | |||||
|
Leasehold
improvements
|
3
years
|
straight line | |||||
|
Cylinders
and designs
|
3
years
|
straight line | |||||
|
c)
|
Research
and Development
|
Research
and development costs are expensed as incurred. Research and development
expenses consist primarily of salaries and related personnel costs, as well
as
stock compensation related to these 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.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
2.
|
Summary
of Significant Accounting Policies (cont’d)
|
|
d)
|
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.
|
e)
|
Fair
Value of Financial Instruments
|
The
carrying amounts reported in the accompanying financial statements for current
assets and current liabilities approximate fair value because of the short-term
maturity of these financial instruments.
|
f)
|
Income
Taxes
|
The
Company accounts for income taxes pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred tax assets
and liabilities are recorded for differences between the financial statement
and
tax basis of the assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates. Valuation
allowances are established when necessary to reduce deferred tax assets to
the
amount expected to be realized. Income tax expense is recorded for the amount
of
income tax payable or refundable for the period, increased or decreased by
the
change in deferred tax assets and liabilities during the
period.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
2.
|
Summary
of Significant Accounting Policies (cont’d)
|
|
g)
|
Earnings
or Loss Per Share
|
The
Company accounts for earnings per share pursuant to SFAS No. 128, "Earnings
per
Share", which requires disclosure on the financial statements of "basic" and
"diluted" earnings (loss) per share. Basic earnings (loss) per share is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding for the year. Diluted earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding plus potentially dilutive securities outstanding for each year.
Potentially dilutive securities include stock options and warrants and shares
of
common stock issuable upon conversion of the Company's convertible
notes.
The
following potentially dilutive securities have been excluded from the diluted
net earnings (loss) per share calculations for the years ended December 31,
2006
and 2005 because their effect would have been antidilutive:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Shares
subject to options
|
6,123,295
|
5,770,000
|
|||||
|
Shares
potentially issued upon conversion of convertible debt
|
-
|
3,850,000
|
|||||
|
Total
|
6,123,295
|
9,620,000
|
|||||
|
h)
|
Stock-Based
Compensation
|
Effective
January 1, 2006, the Company adopted SFAS No. 123(R) (Revised 2004),
“Share-Based Payment” (“SFAS No. 123R”), which requires the measurement and
recognition of compensation expense for all stock-based awards made to employees
and directors based on the estimated grant date fair value of those awards.
SFAS
No. 123R also requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The
fair
value of stock options is calculated using the Black-Scholes option-pricing
model.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
2.
|
Summary
of Significant Accounting Policies (cont’d)
|
|
h)
|
Stock-Based
Compensation (cont’d)
|
Prior
to
January 1, 2006, the Company used the intrinsic value method to account for
stock-based compensation in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" (“APB No.25”), and,
as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), provided pro forma disclosures of net income and earnings per common
share as if the fair value methods had been applied in measuring compensation
expense. Under the intrinsic value method, compensation cost for employee stock
awards was recognized as the excess, if any, of the deemed fair value for
financial reporting purposes of the Company's common stock on the date of grant
over the amount an employee must pay to acquire the stock. Compensation cost
was
amortized over the vesting period. The
Company accounted for forfeitures as they occurred.
The
Company adopted SFAS No.123R using the modified prospective transition method,
which requires the recognition of compensation expense for awards granted after
January 1, 2006 that are expected to vest and for unvested awards granted
prior to adoption of SFAS No. 123R that are expected to vest. The compensation
expense related to the awards granted prior to adoption SFAS No. 123R is based
on the grant date fair value estimated in accordance with SFAS No. 123 and
the
stock based compensation expense for awards granted on or after January 1,
2006
is based on the grant date fair value estimated in accordance with SFAS No.
123R. The value of the portion of the award that is ultimately expected to
vest
is recognized as expense over the requisite service period. Prior period results
have not been adjusted to reflect the adoption of SFAS No.123R.
For
non-employee
stock-based compensation, the Company uses the fair value method in accordance
with SFAS No. 123 and Emerging Issues Task Force (“EITF”) 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring or
in
Conjunction with Selling, Goods or Services" (“EITF 96-18”).
|
i)
|
Impairment
of Long-Lived Assets
|
In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", long-lived assets to be held and used are analyzed for
impairment whenever events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. The Company evaluates at each balance
sheet date whether events and circumstances have occurred that indicate possible
impairment. If there are indications of impairment, the Company uses future
undiscounted cash flows of the related asset or asset grouping over the
remaining life in measuring whether the assets are recoverable. In the event
such cash flows are not expected to be sufficient to recover the recorded asset
values, the assets are written down to their estimated fair value. Long-lived
assets to be disposed of are reported at the lower of the carrying amount or
the
fair value of the asset less costs of selling.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
2.
|
Summary
of Significant Accounting Policies (cont’d)
|
|
j)
|
Concentration
of Credit Risk
|
SFAS
No.
105, "Disclosure of Information About Financial Instruments with Off-Balance
Sheet Risk and Financial Instruments with Concentration of Credit Risk",
requires disclosure of any significant off-balance sheet risk and credit risk
concentration. The Company does not have significant off-balance sheet risk
or
credit concentration. The Company maintains cash and short-term investments
with
major financial institutions. From time to time the Company has funds on deposit
with commercial banks that exceed federally insured limits. Management does
not
consider this to be a significant credit risk as these banks and financial
institutions are well-known.
|
k)
|
Recent
Accounting Pronouncements Affecting the
Company
|
In
July
2006, FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements 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 does not expect the adoption of FIN 48 to
have a material effect on its financial statements.
In
September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No.
157 provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. SFAS No. 157 does not expand
the use of fair value in any new circumstances. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including financial statements for an interim
period within that fiscal year. The Company will adopt SFAS No. 157
effective for periods beginning January 1, 2008. The Company is
currently evaluating the impact, if any, adoption of SFAS No. 157 will have
on
our financial statements.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
2.
|
Summary
of Significant Accounting Policies (cont’d)
|
|
k)
|
Recent
Accounting Pronouncements Affecting the
Company(cont’d)
|
In
September 2006, the Securities and Exchange Commission ("SEC") staff issued
Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." SAB No. 108 was issued to provide consistency in how
registrants quantify financial statement misstatements. The Company is required
to and will initially apply SAB No.108 in connection with the preparation of
its
annual financial statements for the year ending December 31, 2006. The
application of SAB No. 108 did not have a material effect on the Company’s
financial position and results of operations.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", which permits entities to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. An entity would report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. The decision about whether to elect the fair value option is applied
instrument by instrument, with a few exceptions; the decision is irrevocable;
and it is applied only to entire instruments and not to portions of instruments.
SFAS No. 159 requires disclosures that facilitate comparisons (a) between
entities that choose different measurement attributes for similar assets and
liabilities and (b) between assets and liabilities in the financial statements
of an entity that selects different measurement attributes for similar assets
and liabilities. SFAS No. 159 is effective for financial statements issued
for
fiscal years beginning after November 15, 2007. Early adoption is permitted
as
of the beginning of a fiscal year provided the entity also elects to apply
the
provisions of SFAS No. 157. Upon implementation, an entity shall report the
effect of the first remeasurement to fair value as a cumulative-effect
adjustment to the opening balance of retained earnings. Since the provisions
of
SFAS No. 159 are applied prospectively, any potential impact will depend on
the
instruments selected for fair value measurement at the time of implementation.
The Company is currently evaluating the impact, if any, adoption of SFAS No.
159
will have on its financial statements.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
2.
|
Summary
of Significant Accounting Policies (cont’d)
|
|
m)
|
Comparative
information
|
Certain
amounts for fiscal 2005, as well as cumulative
amounts from March 19, 2001 to December 31, 2006, have been
reclassified to conform with the current year's financial statement
presentation.
|
3.
|
Equipment,
Net
|
|
|
December
31,
|
December
31,
|
|||||
|
2006
|
2005
|
||||||
|
Furniture
and fixtures
|
$
|
31,713
|
$
|
31,713
|
|||
|
Office
equipment
|
43,648
|
43,648
|
|||||
|
Lab
equipment
|
416,093
|
363,140
|
|||||
|
Computer
equipment
|
5,066
|
5,066
|
|||||
|
Cylinders
and designs
|
2,000
|
2,000
|
|||||
|
498,520
|
445,567
|
||||||
|
Less:
Accumulated depreciation
|
348,526
|
241,935
|
|||||
|
Net
carrying amount
|
$
|
149,993
|
$
|
203,632
|
|||
Depreciation
expense was $106,591 and $80,074 for 2006 and 2005, respectively.
|
4.
|
Intangible
Assets, Net
|
On
February 10, 2005, the Company entered into a licensing agreement with Revaax
Pharmaceuticals LLC ("Revaax"), whereby the Company received an exclusive,
worldwide, royalty bearing license, with the right to sub-license, of Revaax's
licensed technology and products. The agreement calls for an initial licensing
fee of $375,000 to be payable to Revaax in eight quarterly installments ending
on November 10, 2006. Accordingly, the Revaax license has been measured at
fair
value at the date the licensing agreement was entered into. The fair value
of
the license component of $356,216 was
determined by discounting the stream of future quarterly payments of $46,875
at
6%, the prevailing market rate for a debt instrument of comparable maturity
and
credit quality. The asset is amortized on a straightline basis over the
estimated useful life of 20 years. The discount was accreted over the term
of
the liability, calculated based on the Company's estimated effective market
interest rate of 6%. As at December 31, 2006 the outstanding balance was paid.
Amortization expense was $17,919 and $16,326 for 2006 and 2005, respectively.
The Company tested the asset for impairment and found none.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
5.
|
Long-Term
Convertible Debt
|
On
February 28, 2005, the Company issued, in a transaction exempt from registration
under the Securities Act of 1933, as amended, $3,850,000 aggregate principal
amount of 6% convertible notes due on February 28, 2008. The notes were
subject to conversion into shares of common stock of the Company, at the
holder's option, at any time from and after the earlier of (i) the date of
the
first anniversary of the closing of the Acquisition Merger (May 13, 2006) or
(ii) May 26, 2006 to the maturity date, February 28, 2008. The notes would
be
automatically converted upon (i) the closing of the sale of all or substantially
all of the assets of the Company or any merger, consolidation or other business
combination or (ii) the maturity date. The conversion price was equal to the
lesser of $1.00 per share (as adjusted in the Acquisition Merger) and a floating
price determined by the average of three lowest current market prices of Company
common stock during the 40 calendar day period immediately preceding conversion.
On May 13, 2006, owners of the convertible notes exercised their rights to
convert the entire principal amount of the notes into 3,850,000 shares of the
Company’s common stock at a conversion price of $1.00 per share.
On
August
8, 2005, the Company completed a private placement of $1.3 million aggregate
principal amount of convertible notes. The holders of these notes were entitled
any time after September 19, 2005 until August 8, 2008, or upon the occurrence
and continuance of any of the events of default, to convert the principal amount
of any convertible notes or portions thereof into common stock at a conversion
price of $2.00 per share. The Company evaluated this transaction and determined
that based on the market price of the Company's common stock on August 8,
2005 of $4.50 per share, there was an associated deferred beneficial
conversion feature of $2.50 per share, or a total of $1,625,000, and
recorded such amount as interest to be recognized over the term of the note.
On
December 2, 2005, the note holders exercised their rights to convert the entire
principal amount of the notes into an aggregate of 650,000 shares of the
Company's common stock. Upon conversion, the deferred beneficial conversion
feature of $1,625,000 was recorded as an increase in net loss and an increase
in
the value of additional paid in capital.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
6.
|
Deferred
Revenue
|
In
2003,
the Company entered into a collaborative research agreement with Rexgene Biotech
Co., Ltd. ("Rexgene"), a minority 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, RX-0201, in Asia. This agreement
provides Rexgene with exclusive rights to license, sublicense, make, have made,
use, sell and import RX-0201 in Asia. A one-time contribution to the joint
development and research of RX-0201 of $1,500,000 was paid to the Company in
2003 in accordance with the agreement. The amount of revenue from this
contribution is being recognized as income over the term of the agreement which
terminates at the later of 20 years or the term of the patent on the licensed
product. The Company is using 20 years as its basis for recognition and
accordingly $75,000
was included in revenues for each of the years ended December 31, 2006 and
2005.
The remaining $1,200,000 at December 31, 2006 (2005-$1,275,000) is reflected
as
deferred revenue on the balance sheet. The Company adopted SAB No. 104, "Revenue
Recognition Nonrefundable Up-front Fees" with respect to the accounting for
this
transaction. These fees are being used in the cooperative funding of the costs
of development of RX-0201. Royalties of 3% of net sales of licensed products
will become payable to the Company on a quarterly basis once commercial sales
of
RX-0201 begin. The product is still under development and commercial sales
are
not expected to begin until at least 2009.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
7.
|
Common
Stock
|
Pursuant
to the agreement and plan of merger as disclosed in Note 1, in the Acquisition
Merger, (i) each share of the issued and outstanding common stock of Rexahn
(other than dissenting shares) was converted into the right to receive five
shares of Rexahn Pharmaceuticals common stock; and (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.
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.
The
following transactions occurred during fiscal years 2001 through
2006:
|
a)
|
On
May 10, 2001 the Company issued 3,600,000 shares of common stock
to the
Company's founders for $1.
|
|
b)
|
On
August 10, 2001 the Company issued:
|
|
i)
|
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.
|
c)
|
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.
|
|
d)
|
On
October 10, 2001 the Company issued 200,000 shares of common stock
to CKD
for cash of $479,985.
|
|
e)
|
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.
|
|
f)
|
In
July 2003, the shareholders 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.
|
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
7.
|
Common
Stock (cont’d)
|
|
g)
|
On
August 20, 2003 the Company issued 500,000 shares of common stock
to
KT&G Corporation for cash of
$2,000,000.
|
|
h)
|
On
October 29, 2004, 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 1,500 shares.
|
|
i)
|
Pursuant
to the agreement and plan of merger as disclosed in Note 1, in the
Acquisition Merger, (i) each share of the issued and outstanding
common
stock of 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 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.
For purposes of the Statement of Stockholders' Equity, the five-for-one
stock split is reflected as a one-line adjustment. All shares and
earnings
per share information has been retroactively restated in these financial
statements.
|
|
j)
|
On
August 8, 2005, the Company issued, in a transaction exempt from
registration under the Securities Act, 4,175,000 shares of common
stock at
a purchase price of $2.00 per
share.
|
|
k)
|
On
October 3, 2005, the Company issued 7,000 shares of common stock
for
$21,877 and $7,500 cash in exchange for
services.
|
|
l)
|
On
December 2, 2005, the holders of a convertible note, representing
$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.
|
|
m)
|
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.
|
|
n)
|
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.
|
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
7.
|
Common
Stock (cont’d)
|
|
o)
|
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.
|
|
p)
|
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 (See note
5).
|
|
q)
|
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.
|
|
r)
|
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.
|
|
s)
|
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.
|
|
8.
|
Stock-Based
Compensation
|
On
August
5, 2003, the Company established a stock option 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. For grants to non-employee directors
and consultants of the Company after September 12, 2005, the vesting period
is
between 1 to 3 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, subject to
the
fulfillment of certain conditions 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 Company's Stock Option Plan approved
at the Annual Meeting of the Stockholders of the Company on June 2, 2006 and
as
of December 31, 2006, 10,876,705 options
are available for issuance (2005- 1,182,500).
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
8.
|
Stock-Based
Compensation (cont'd)
|
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
Effective
January 1, 2006, the plan is accounted for in accordance with the recognition
and measurement provisions of SFAS No. 123R, which replaces SFAS No. 123 and
supersedes APB No. 25, and related interpretations. SFAS No. 123R requires
compensation costs related to share-based payment transactions, including
employee stock options, to be recognized in the financial statements. In
addition, the Company adheres to the guidance set forth in SEC SAB No. 107,
which provides the SEC staff's views regarding the interaction between SFAS
No.
123R and certain SEC rules and regulations and provides interpretations with
respect to the valuation of share-based payments for public
companies.
Prior
to
January 1, 2006, the Company accounted for similar employee transactions in
accordance with APB No. 25 which employed the intrinsic value method of
measuring compensation cost. Accordingly, compensation expense was not
recognized for employee stock options if the exercise price of the option
equaled or exceeded the fair value of the underlying stock at the grant
date.
While
SFAS No. 123, for employee options, encouraged recognition of the fair value
of
all stock-based awards on the date of grant as expense over the vesting period,
companies were permitted to continue to apply the intrinsic value-based method
of accounting prescribed by APB No. 25 and disclose certain pro forma amounts
as
if the fair value approach of SFAS No. 123 had been applied. In December 2002,
SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and
Disclosure, an amendment of SFAS No. 123", was issued, which, in addition to
providing alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation, required
more
prominent pro-forma disclosures in both the annual and interim financial
statements. The Company complied with these disclosure requirements for all
applicable periods prior to January 1, 2006.
In
adopting SFAS No. 123R, the Company applied the modified prospective approach
to
transition. Under the modified prospective approach, the provisions of SFAS
No.
123R are to be applied to new employee awards and to employee awards modified,
repurchased, or cancelled after the required effective date. Additionally,
compensation cost for the portion of employee awards for which the requisite
service has not been rendered that are outstanding as of the required effective
date will be recognized as the requisite service is rendered on or after the
required effective date. The compensation cost for that portion of employee
awards will be based on the grant-date fair value of those awards as calculated
for either recognition or pro-forma disclosures under SFAS No.
123.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
8.
|
Stock-Based
Compensation (cont'd)
|
As
a
result of the adoption of SFAS No. 123R, the Company's results of operations
for
the year ended December 31, 2006 include share-based employee compensation
expense totaling $656,169. Such amounts have been included in the Statements
of
Operations in general and administrative and research and development expenses.
No income tax benefit has been recognized in the Statements of Operations for
share-based compensation arrangements as the Company has provided for a 100%
valuation allowance on its net deferred tax assets. No stock option compensation
expense was recorded under APB No. 25 in the Statements of Operations for the
year ended December 31, 2005.
Employee
stock option compensation expense in 2006 is the estimated fair value of options
granted amortized on a straight-line basis over the requisite service period
for
the entire portion of the award. The Company has not adjusted the expense by
estimated forfeitures, as required by SFAS No. 123R for employee options, since
the forfeiture rate based upon historical data was determined to be
immaterial.
Accounting
for Non-Employee Awards
The
Company previously accounted for options granted to its non-employee consultants
and non-employee registered representatives using the fair value cost in
accordance with SFAS No. 123 and EITF 96-18. The adoption of SFAS No. 123R
and
SAB No. 107, as of January 1, 2006, had no material impact on the accounting
for
non-employee awards. The Company continues to consider the additional guidance
set forth in EITF Issue No. 96-18.
Stock
compensation expense related to non-employee options was $377,787 for the year
ended December 31, 2006 and $436,748 for the year ended December 31, 2005.
Such
amounts have been included in the Statements of Operations in general and
administrative and research and development expenses.
The
weighted average estimated fair value of stock options granted in the year
ended
December 31, 2006 and 2005 was $0.83 and $0.77, respectively. The fair value
of
options at the date of grant was estimated using the Black-Scholes option
pricing model. During 2006, the Company took into consideration guidance under
SFAS No. 123R and SAB No. 107 when reviewing and updating assumptions. The
expected volatility is based upon historical volatility of the Company's stock
and other contributing factors. The expected term is based upon the contract
life with non-employees.
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
8.
|
Stock-Based
Compensation (cont'd)
|
The
assumptions made in calculating the fair values of options are as follows:
|
2006
|
2005
|
||||||
|
Black-Scholes
weighted average assumptions:
|
|||||||
|
Expected
dividend yield
|
0
|
0
|
|||||
|
Expected
volatility
|
100
|
%
|
100
|
%
|
|||
|
Risk
free interest rate
|
4.70%-5.00
|
%
|
4.54
|
%
|
|||
|
Expected
term (in years)
|
1-5
years
|
5
years
|
|||||
Pro
Forma Information under SFAS No. 123 for Periods Prior to Adoption of SFAS
No.
123R
The
following table illustrates the pro forma effect on net loss and loss per share
as if the fair value recognition provisions of SFAS No. 123 had been applied
to
all outstanding and unvested awards in the year ended December 31, 2005.
|
Year
Ended December 31, 2005
|
||||
|
Net
loss, as reported
|
$
|
(6,349,540
|
)
|
|
|
Add,
Stock-based employee compensation recorded under APB No. 25 intrinsic
share method included in reported net loss
|
-
|
|||
|
Deduct,
Stock-based employee compensation expense determined under fair
value-based method for all employee awards (no tax effect)
|
(638,918
|
)
|
||
|
Pro
forma net loss
|
$
|
(6,988,458
|
)
|
|
|
Net
loss per share:
|
||||
|
Basic
and diluted-as reported
|
$
|
(0.15
|
)
|
|
|
Basic
and diluted-pro forma
|
$
|
(0.17
|
)
|
|
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
8.
|
Stock-Based
Compensation (cont'd)
|
The
following table represents all of the Company's stock options granted, exercised
and cancelled during the year ended December 31, 2006 and 2005.
|
2006
|
2005
|
||||||||||||
|
Shares
Subject to Options
|
Weighted
Avg. Option Prices
|
Shares
Subject to Options
|
Weighted
Avg. Option Prices
|
||||||||||
|
Outstanding
at January 1
|
5,770,000
|
$
|
0.84
|
2,775,000
|
$
|
0.24
|
|||||||
|
Cancelled
due to repricing
|
-
|
-
|
(927,500
|
)
|
0.24
|
||||||||
|
Granted
due to repricing
|
-
|
-
|
927,500
|
0.80
|
|||||||||
|
Granted
|
1,165,000
|
1.31
|
3,810,000
|
1.01
|
|||||||||
|
Exercised
|
(61,705
|
)
|
0.24
|
(40,000
|
)
|
0.24
|
|||||||
|
Cancelled
|
(750,000
|
)
|
0.80
|
(775,000
|
)
|
0.24
|
|||||||
|
Outstanding
at December 31
|
6,123,295
|
$
|
0.94
|
5,770,000
|
$
|
0.84
|
|||||||
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
8.
|
Stock-Based
Compensation (cont'd)
|
|
Shares
Subject to Options
|
Weighted
Avg. Option Prices
|
Weighted
Average Remaining Contractual Term
|
Aggregated
Intrinsic Value
|
||||||||||
|
Outstanding
at December 31, 2006
|
6,123,295
|
$
|
0.94
|
8.0
years
|
$
|
-
|
|||||||
|
Exercisable
at December 31, 2006
|
3,035,628
|
$
|
0.85
|
7.6
years
|
$
|
-
|
|||||||
|
Shares
Subject to Options
|
Weighted
Avg. Option Prices
|
Weighted
Average Remaining Contractual Term
|
Aggregated
Intrinsic Value
|
||||||||||
|
Outstanding
at December 31, 2005
|
5,770,000
|
$
|
0.84
|
8.7
years
|
$
|
6,693,200
|
|||||||
|
Exercisable
at December 31, 2005
|
1,677,708
|
$
|
0.54
|
7.9
years
|
$
|
2,449,454
|
|||||||
A
total
of 61,705 and 40,000 options were exercised during the year ended December
31,
2006 and 2005, respectively. The intrinsic value of the options exercised was
$78,288 and $70,400 in 2006 and 2005, respectively.
As
of
December 31, 2006, there was $2,242,525 (2005- $2,933,431) of total unrecognized
compensation cost, net of estimated forfeitures, related to all unvested stock
options, which is expected to be recognized over a weighted average vesting
period of 1.8 years (2005- 2.2 years).
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
9.
|
Income
Taxes
|
The
components of deferred income taxes are as follows:
|
2006
|
2005
|
||||||
|
Deferred
income tax assets:
|
|||||||
|
Net
operating loss carryforwards
|
$
|
7,918,491
|
$
|
5,397,643
|
|||
|
Valuation
allowance
|
(7,918,491
|
) |
$
|
(5,397,643
|
) | ||
|
Deferred
income taxes
|
$
|
-
|
$
|
-
|
|||
The
Company has tax losses available to be applied against future years income.
Due
to the losses incurred in the current year and expected future operating
results, management determined that it is more likely than not that the deferred
tax asset resulting from the tax losses available for carryforward and stock
option compensation expense will not be realized through the reduction of future
income tax payments. Accordingly a 100% valuation allowance has been recorded
for deferred income tax assets.
As
of
December 31, 2006 and 2005, the Company had approximately $20,838,000 and
$14,204,000, respectively, of federal and state net operating loss carryforwards
available to offset future taxable income; such carryforwards expire in various
years through 2024.
|
10.
|
Commitments
and Contingencies
|
|
a)
|
The
Company has 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 terms of
the
agreement, ranging from 6 months to 24 months. The costs to be incurred
are estimated and are subject to revision. As of December 31, 2006,
the
total value of these agreements was approximately $1,800,000
(2005-$1,900,000) and the Company had made payments totaling $1,150,000
under the terms of the agreements as at December 31, 2006
(2005-$1,000,000). All of these agreements may be terminated by either
party upon appropriate notice as stipulated in the respective
agreements.
|
REXAHN
PHARMACEUTICALS, INC.
(A
Development Stage Company)
Notes
to
Financial Statements
December
31, 2006 and 2005
|
10.
|
Commitments
and Contingencies (cont’d)
|
|
b)
|
On
April 19, 2006, the Company executed definitive agreements with Future
Systems, Inc. ("FSI"), a Korean stock exchange (KOSDAQ) listed information
technology company based in Seoul, Korea. Pursuant to the agreements,
the
Company would transfer to FSI exclusive rights and a non-exclusive
license
to develop, manufacture, and sell products based on Rexahn’s RX-0201,
RX-0047 and RX-10100 drug candidates in certain territories for
approximately $35.8 million, and simultaneously, FSI would issue
and sell
4,326,854 shares of its common stock to the Company, representing
approximately 28% of FSI’s outstanding shares, after giving effect to the
subscription. The investment, of approximately $35.8 million, would
have
made the Company the largest single stockholder of FSI. In addition,
the
Company entered into an agreement with FSI and Core F.G. Co., Ltd.,
the
general partner of Triplewin Corporate Restructuring Partnership,
the
then-current majority shareholder of FSI, with respect to the management
of FSI in connection with redirecting FSI’s business focus to the
biopharmaceutical industry. Completion of the transactions was subject
to
customary closing conditions, including approval by FSI
shareholders. On June 8, 2006, the Company terminated the agreements
entered into with FSI and Core F.G. Co., Ltd., including a share
subscription agreement, an intellectual property assignment and license
agreement and a management agreement, providing for, among other
things,
the assignment and license by the Company to FSI of certain intellectual
property rights for the Company's drug candidates in specified markets
and
the acquisition by the Company of an ownership interest in FSI. The
termination followed a vote on the proposed transactions that was
not
approved by the FSI shareholders at a meeting in Seoul, Korea on
June 7,
2006.
|
|
c)
|
On
September 12, 2005, the Company and three of its key executives
entered
into employment agreements. Two of the three agreements expire
on
September 12, 2007 and result in an annual commitment of $360,000.
One
agreement expires on September 12, 2010 and results in an annual
commitment of $350,000.
|
|
d)
|
In
April 2004, the Company 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,
the Company also pays its allocable portion of real estate taxes
and
common area operating charges.
|
Minimum
future rental payments under this lease are as follows:
|
For
the years ended December 31
|
||||
|
2007
|
$
|
216,170
|
||
|
2008
|
222,655
|
|||
|
2009
|
112,972
|
|||
|
$
|
551,797
|
|||
|
e)
|
Regulation
by governmental authorities in the United States and other countries
constitutes a significant consideration in our product development,
manufacturing and marketing strategies. The Company expects that
all of
drug candidates will require regulatory approval by appropriate
governmental agencies prior to commercialization and will be subjected
to
rigorous pre-clinical, clinical, and post-approval testing, as
well as to
other approval processes by the FDA and by similar health authorities
in
foreign countries. United States federal regulations control the
ongoing
safety, manufacture, storage, labeling, record keeping, and marketing
of
all biopharmaceutical products intended for therapeutic purposes.
The
Company believes that it is in compliance in all material respects
with
currently applicable rules and regulations.
|
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders of
Rexahn
Pharmaceuticals, Inc.
Rockville,
Maryland
We
have
audited the accompanying balance sheets of Rexahn Pharmaceuticals, Inc. (a
development stage company) as of December 31, 2006 and 2005 and the related
statements of operations, stockholders' equity (deficit) and cash flows for
the
years ended December 31, 2006 and 2005 and the cumulative period from inception
(March 19, 2001) to December 31, 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable
basis
for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Rexahn Pharmaceuticals, Inc.
at
December 31, 2006 and 2005 and the results of its operations and its cash
flows
for the years then ended and the cumulative period from inception (March
19,
2001) to December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
|
/s/
Lazar Levine & Felix LLP
|
|
|
Lazar
Levine & Felix LLP
|
New
York,
New York
March
30,
2007
65
|
Item 8.
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
|
Not
applicable.
|
Item 8A.
|
Controls
and Procedures
|
Based
on
their most recent evaluation, which was completed as of the end of the period,
December, 2006, covered by this Annual Report on Form 10-KSB, the Company's
Chief Executive Officer and Chief Financial Officer believe the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) are effective to ensure that information required to be disclosed
by
the Company in this report is accumulated and communicated to the Company's
management, including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. During the last fiscal quarter to which this report relates, there
were no changes in the Company's internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation
and there were no corrective actions with regard to significant deficiencies
and
material weaknesses.
|
Item 8B.
|
Other
Information
|
None.
PART
III
|
Item 9.
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange
Act
|
The
following table sets forth the names, ages and positions of our directors and
executive officers:
|
Name
|
Age
|
Position
|
|
Dr.
Chang H. Ahn
|
55
|
Chairman
of the Board, Chief Executive Officer and Director
|
|
Dr.
Young-Soon Park
|
60
|
Director
|
|
Charles
Beever
|
54
|
Director
|
|
Kwang
Soo Cheong
|
45
|
Director
|
|
Y.
Michele Kang
|
47
|
Director
|
|
David
McIntosh
|
48
|
Director
|
|
Tae
Heum Jeong
|
36
|
Chief
Financial Officer, Secretary and
Director
|
Chang
H. Ahn.
Dr. Ahn
has served as Chairman of the Board, Chief Executive Officer and a Director
since May 2005. Dr. Ahn served as Chairman and Chief Executive Officer
of Rexahn, Corp from its incorporation in March 2001 to May 2005. From
1988 to 2001, Dr. Ahn held dual positions as both Expert Regulatory
Pharmacologist and Lab Head at the FDA's Center for Drug Evaluation and
Research. Prior to joining the FDA in 1988, Dr. Ahn carried out cancer
research at the National Cancer Institute, as well as at Emory University's
School of Medicine. In 2003 and 2004, Dr. Ahn organized and chaired the
U.S.-Korea Bio Business and Partnership Forum, for which Maryland State and
Montgomery County are partners. He also served as president of the Society
of
Biomedical Research from 2000 to 2003. Dr. Ahn holds a Ph.D. in
pharmacology from Ohio State University. He also holds two B.S. degrees in
pharmacy from Creighton University and Seoul National University. Dr. Ahn and
Inok Ahn are husband and wife.
Young-Soon
Park.
Dr. Park
has served as a director since May 2005. Dr. Park served as a director of
Rexahn, Corp from March 2001 to May 2005. She is the founder of Onnuri
Health Group and has served as its Chief Executive Officer and Chairman of
the
Board of Directors since 1992. She is also the Chairman of the Board of
Directors of Onnuri Pharmacy Welfare Association since 1997. She had served
as
the Chief Executive Officer and Chairman of Rexgene Biotech from 2000 until
2002. Dr. Park received a B.A. in pharmacy from Pusan University and a
Ph.D. in pharmacy from Wonkwang University.
Charles
Beever.
Mr.
Beever has served as a director since May 2006. He has been a partner and
Vice President of Booz Allen & Hamilton, Inc. since October 1993, and
served as staff member and Engagement Manager at Booz Allen Hamilton from
January 1984 to October 2003. Prior to joining Booz Allen Hamilton,
Mr. Beever served as Plant Production Manager from October 1981 to
January 1984, Industrial Engineering Manager from June 1979 to
October 1981 and Production Supervisor from July 1978 to
June 1979 at McGraw-Edison Company. Mr. Beever holds a B.A. in Economics
from Haverford College, where he was elected to Phi Beta Kappa, and an M.B.A.
from the Harvard Graduate School of Business Administration.
Kwang
Soo Cheong.
Dr. Cheong has served as a director since May 2006. He is a faculty
member at the Department of Finance of the Johns Hopkins University Carey
Business School (Assistant Professor: 2001-2005 & Associate Professor: 2006
to date). Dr. Cheong was an Assistant Professor of Economics at the
University of Hawaii from 1994 to 2001, and he was a lecturer at the Department
of Economics of Stanford University from 1993 to 1994. During the summer
of 1995, Dr. Cheong was a Visiting Fellow in the Taxation and Welfare Division
at the Korea Development Institute in Korea. Dr. Cheong holds a B.A. in
Economics and an M.A. in Economics from Seoul National University, and a Ph.D.
in Economics from Stanford University.
Y.
Michele Kang.
Ms.
Kang
has
served as a director since May 2006. She has been Vice President and
General Manager of Northrop Grumman Information Technology's Health Solutions
division since 2003; Vice President and Deputy General Manager, Global
Information Technology of Northrop Grumman Mission Systems from 2001 to 2003;
and Vice President, e-Business of Northrop Grumman Mission Systems from 2000
to
2001. She is a member of the eHealth Initiative Leadership Council and a member
of the steering committee of Connecting for Health. Prior to joining Northrop
Grumman, Ms. Kang was a partner in the Strategic Advisory Services group of
Ernst & Young LLP. Ms. Kang received a B.A. in Economics from the University
of Chicago and a Master's degree in Public and Private Management from the
Yale
School of Management.
David
McIntosh. Mr. McIntosh
has served as a director since May 2005. Mr. McIntosh served as a director
of Rexahn, Corp from March 2004 to May 2005. He has been a partner at
Mayer, Brown, Rowe & Maw LLP (law firm) since 2001. Mr. McIntosh was a
member of the United States House of Representatives, representing the 2nd
District of Indiana from 1995 to 2001. From 1993 to 1994, he was a director
of
the Hudson Institute Competitiveness Center. He served on President Bush's
Council on Competitiveness as Executive Director from 1989 to 1993. He also
served as the Special Assistant to President Reagan for Domestic Affairs from
1987 to 1989 and was the Special Assistant to the Attorney General of the United
States from 1986 to 1987. Mr. McIntosh received a B.A. from Yale College
and a J.D. from the University of Chicago Law School.
Tae
Heum Jeong.
Mr.
Jeong has served as Chief Financial Officer and Secretary since May 2005
and as a director since June 2005. Mr. Jeong served as Chief Financial
Officer of Rexahn, Corp from December 2002 to May 2005. From 1997 to
November 2002, Mr. Jeong served as a senior investment manager at
Hyundai Venture Investment Corporation, a venture capital firm where he managed
the biotech investment team. He was also a committee member of the Industrial
Development Fund of Korea's Ministry of Commerce, Industry and Energy from
2000
to 2002. Mr. Jeong holds a B.S. in chemistry and an M.S. specializing in
bio-medicinal chemistry, from Pohang University of Science and Technology
(POSTECH).
Board
Composition
Our
board
of directors is currently composed of seven members, of whom four have been
determined by the board to be "independent directors", as defined by the rules
of the Nasdaq Stock Market, as applicable and as may be modified or
supplemented.
Board
Committees
Our
board
of directors has the authority to appoint committees to perform certain
management and administration functions. In connection with the election of
the
new directors, the Board of Directors also established three committees of
the
Board and named the following directors to serve on those committees:
Audit
Committee
The
Audit
Committee, among other things:
|
·
|
appoints
or replaces and oversee our independent auditors and approves all
audit
engagement fees and terms;
|
|
·
|
preapproves
all audit (including audit-related) services, internal control-related
services and permitted non-audit services (including fees and terms
thereof) to be performed for us by our independent
auditors;
|
|
·
|
reviews
and discusses with our management and independent auditors significant
issues regarding accounting and auditing principles and practices
and
financial statement presentations;
|
|
·
|
reviews
and approves our procedures for the receipt, retention and treatment
of
complaints regarding accounting, internal accounting controls or
auditing
matters and the confidential, anonymous submission by our employees
of
concerns regarding accounting or auditing matters; and
|
|
·
|
reviews
and oversees our compliance with legal and regulatory
requirements.
|
Kwang
Soo
Cheong, Charles Beever, and Y. Michele Kang serve as members of our Audit
Committee. Dr. Cheong serves as Chair of the Audit Committee and as the Audit
Committee's audit committee expert. Each of the members meets the criteria
for
independence required by the Nasdaq Stock Market and Rule 10A-3 under the
Exchange Act.
Nominating
and Corporate Governance Committee
The
Nominating and Corporate Governance Committee, among other things:
|
·
|
reviews,
evaluates and seeks out candidates qualified to become Board
members;
|
|
·
|
reviews
committee structure and recommends directors for appointment to
committees;
|
|
·
|
develops,
reevaluates (not less frequently than every three years) and recommends
the selection criteria for Board and committee
membership;
|
|
·
|
establishes
procedures to oversee evaluation of our Board, its committees, individual
directors and management; and
|
|
·
|
develops
and recommends guidelines on corporate
governance.
|
Y.
Michele Kang, David McIntosh and Young Soon Park serve as members of our
Nominating and Corporate Governance Committee. Ms. Kang serves as Chair of
the
Nominating and Corporate Governance Committee. Each of the members meets the
criteria for independence required by the Nasdaq Stock Market.
The
Committee reviews, evaluates and seeks out candidates qualified to become Board
members, consistent with criteria approved by the Board, who may be submitted
by
Directors, officers, employees, shareholders and others for recommendation
to
the Board of Directors. In fulfilling this responsibility, the Committee shall
also consult with the Board of Directors and the chief executive officer
concerning director candidates. While we do not have in place formal procedures
by which shareholders may recommend director candidates to the Committee,
shareholders may communicate with the members of the Board of Directors,
including the Committee by writing to the Secretary of the Company at our
headquarters address. In addition, our amended By-Laws establish a procedure
with regard to shareholder proposals for the annual meeting of shareholders,
including nominations of persons for election to the board of
directors.
Compensation
Committee
The
Compensation Committee, among other things:
|
·
|
fixes
salaries of executive officers and reviews salary plans for other
executives in senior management
positions;
|
|
·
|
reviews
and makes recommendations with respect to the compensation and benefits
for non-employee directors, including through equity-based
plans;
|
|
·
|
evaluates
the performance of our CEO and other senior executives and assists
the
Board in developing and evaluating potential candidates for executive
positions; and
|
|
·
|
administers
our incentive compensation, deferred compensation and equity-based
plans
pursuant to the terms of the respective
plans.
|
David
McIntosh, Charles Beever, and Kwang Soo Cheong serve as members of our
Compensation Committee. Mr. McIntosh serves as Chairman of the Compensation
Committee. Each of the members meets the criteria for independence required
by
the Nasdaq Stock Market.
Code
of Ethics
We
have
not adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. We are in the process of reviewing a
code
of ethics with our attorneys and the independent board members and will adopt
one upon completion of discussions.
Section 16
Reports
We
believe that during fiscal 2006, our executive officers and directors and more
than 10% beneficial owners timely filed all forms required to be filed under
Section 16(a) of the Exchange Act.
|
Item 10.
|
Executive
Compensation
|
Executive
Compensation
The
following table sets forth the annual and long-term compensation, from all
sources, of the Chief Executive Officer of the Company and the other executive
officers of the Company for the fiscal year ended December 31, 2006. The
compensation described in this table does not include medical, group life
insurance or other benefits which are available generally to all of our salaried
employees.
Summary
Compensation Table
|
Name
and Principal Position(s)
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Non-Qualified
Deferred Compensation Earnings ($)
|
All
Other Compensation ($)
|
Total
($)
|
|||||||||||||||||||
|
Chang
H. Ahn
|
2006
|
$
|
330,769
|
-
|
-
|
$
|
183,000
|
-
|
-
|
-
|
$
|
513,769
|
||||||||||||||||
|
Chairman
of the Board and Chief Executive Officer
|
||||||||||||||||||||||||||||
|
Tae
Heum Jeong
|
2006
|
$
|
148,829
|
-
|
-
|
$
|
91,500
|
-
|
-
|
-
|
$
|
240,329
|
||||||||||||||||
|
Chief
Financial Officer
|
||||||||||||||||||||||||||||
|
George
F. Steinfels1
|
2006
|
$
|
125,273
|
-
|
-
|
$
|
91,500
|
-
|
-
|
-
|
$
|
216,773
|
||||||||||||||||
|
Former
Chief Business Officer and Senior Vice President, Clinical
Development
|
||||||||||||||||||||||||||||
|
1
|
Dr.
Steinfels resigned from all his positions with the Company in
September 2006.
|
Outstanding
Equity Awards at Fiscal Year-End
Shown
below is information with respect to (i) the unexercised options to
purchase Rexahn Pharmaceuticals common stock derived from options to purchase
Rexahn common stock granted to the named executive officers in fiscal year
2006
and prior years and held by them at December 31, 2006, after giving effect
to the Merger exchange ratio of five shares of Rexahn Pharmaceuticals common
stock for each share of Rexahn common stock, (ii) common stock that has not
vested and (iii) equity incentive plans awards for each named executive
officer outstanding as of the fiscal year ended December 31,
2006.
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexer-cised Options
(#) Exer-cisable1
|
Number
of Securities Underlying Unexer-cised Options
(#) Unexer-cisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested (#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested ($)
|
|||||||||||||||||||
|
Chang
H. Ahn
|
600,000
|
400,000
|
-
|
0.80
|
1/20/2015
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
Tae
Heum Jeong
|
150,000
|
-
|
-
|
0.24
|
8/5/2013
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
100,000
|
-
|
-
|
0.80
|
8/5/2013
|
||||||||||||||||||||||||
|
300,000
|
200,000
|
-
|
0.80
|
1/20/2015
|
||||||||||||||||||||||||
|
George
F. Steinfels2
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
1
|
Represents
option awards under the Company's Stock Option Plan which vest 30%,
30%
and 40% on the first, second and third anniversaries of the date
of
grant.
|
|
2
|
Dr.
Steinfels resigned from all his positions with the Company in
September 2006.
|
Stock
Option Plan
In
July 2003 the board of directors adopted, and in August 2003 our
stockholders approved, the Rexahn stock option plan. In connection with the
Merger, we assumed the plan and converted all outstanding options to purchase
Rexahn common stock into options to purchase Rexahn Pharmaceuticals common
stock. The number of shares subject to the converted options was multiplied
by
five and the exercise price per share was divided by five.
The
plan
permits grants to be made from time to time as non-qualified stock options
or
incentive stock options.
Administration.
The
stock
option plan is administered by the board of directors. In the alternative,
the
board may appoint a stock option committee to administer the plan on behalf
of
the board. The plan is currently administered by our board of directors. In
order to meet the requirements of the rules under Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), all future
grants under the plan will be made by a committee whose members are
"non-employee directors" as defined for purposes of Section 16 of the
Exchange Act and outside directors within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended.
Participation.
The
persons to whom grants are made under the plan will be selected from time to
time by the stock option committee in its sole discretion from among our
employees, officers, directors and consultants.
Shares
Subject to Stock Option Plan. The
plan
authorizes the issuance or delivery of an aggregate of 6,992,500 shares of
common stock. Shares of common stock subject to the unexercised, undistributed
or unearned portion of any terminated or forfeited grant under the plan will
be
available for further awards.
Stock
Options. The
plan
authorizes grants of stock options, which may be either incentive stock options
eligible for special tax treatment or non-qualified stock options. Incentive
stock options may be granted only to our employees.
Under
the
provisions of the plan authorizing the grant of stock options:
|
·
|
the
option price will be determined by the stock option committee; provided,
however, that the option price for an incentive stock option may
not be
less than 100% of the fair market value of the shares of our common
stock
on the date of grant (110% for grants to an optionee owning more
than 10%
of our total combined voting power);
|
|
·
|
the
term during which each stock option may be exercised will be determined
by
the stock option committee; provided, however, that incentive stock
options generally may not be exercised more than ten years from the
date
of grant (five years for grants to an optionee owning more than 10%
of our
total combined voting power); and
|
|
·
|
at
the time of exercise of a stock option the option price must be paid
in
full in cash or in shares of our common stock or in a combination
of cash
and shares of our common stock or by such other means as the stock
option
committee may determine.
|
All
grants made under the plan will be evidenced by a letter to the optionee,
together with the terms and conditions applicable to the grants, as determined
by the stock option committee consistent with the terms of the plan. These
terms
and conditions will include, among other things, a provision describing the
treatment of grants in the event of certain triggering events, such as a sale
of
a majority of the outstanding shares of our common stock, a merger or
consolidation in which we are not the surviving company, and termination of
an
optionee's employment, including terms relating to the vesting, time for
exercise, forfeiture or cancellation of a grant under such circumstances.
Under
the
plan, stock options may not be granted after August 5, 2013.
Tax
Matters. The
following is a brief summary of the material federal income tax consequences
of
benefits under the plan under present law and regulations:
|
(a)
|
Incentive
Stock Options. The
grant of an incentive stock option will not result in any immediate
tax
consequences to us or the optionee. An optionee will not realize
taxable
income, and we will not be entitled to any deduction, upon the timely
exercise of an incentive stock option, but the excess of the fair
market
value of the shares of our common stock acquired over the option
exercise
price will be includable in the optionee's "alternative minimum taxable
income" for purposes of the alternative minimum tax. If the optionee
does
not dispose of the shares of our common stock acquired within one
year
after their receipt, and within two years after the option was granted,
gain or loss realized on the subsequent disposition of the shares
of our
common stock will be treated as long-term capital gain or loss. Capital
losses of individuals are deductible only against capital gains and
a
limited amount of ordinary income. In the event of an earlier disposition,
the optionee will realize ordinary income in an amount equal to the
lesser
of (i) the excess of the fair market value of the shares of our
common stock on the date of exercise over the option exercise price
or
(ii) if the disposition is a taxable sale or exchange, the amount of
any gain realized. Upon such a disqualifying disposition, we will
be
entitled to a deduction in the same amount as the optionee realizes
such
ordinary income.
|
|
(b)
|
Non-qualified
Stock Options. In
general, the grant of a non-qualified stock option will not result
in any
immediate tax consequences to us or the optionee. Upon the exercise
of a
non-qualified stock option, generally the optionee will realize ordinary
income and we will be entitled to a deduction, in each case, in an
amount
equal to the excess of the fair market value of the shares of our
common
stock acquired at the time of exercise over the option exercise price.
|
Amendment,
Suspension or Termination of Stock Option Plan.
Our
board of directors may at any time amend, suspend or discontinue the plan and
the stock option committee may at any time alter or amend awards and award
agreements made thereunder to the extent permitted by law, provided that no
such
alteration or amendment will be effective without the approval of our
stockholders to the extent that such approval is necessary to comply
with any
tax or regulatory requirement applicable to the plan and no such alteration
and
amendment will impair the rights of any recipient of grants without such
recipient's consent. In the event of any change in or affecting the outstanding
shares of our common stock by reason of a stock dividend, stock split,
combination of shares or other similar event, our board of directors will make
such amendments to the plan and outstanding grants and award agreements, and
make such adjustments and take such actions as it deems appropriate and
equitable. In the event of any proposed change in control (as defined by the
plan), the stock option committee will take such action as it deems appropriate
and equitable to effectuate the purposes of the plan and to protect the
optionees, including, but not limited to, accelerating or changing the exercise
dates of stock options, payment of appropriate consideration for the
cancellation and surrender of stock options or if equity securities of any
other
corporation will be exchanged for outstanding shares of our common stock,
providing for stock options to become options with respect to such other equity
securities. For purposes of the plan, a change in control means the sale,
exchange or disposition of substantially all of our assets or any merger, share
exchange, consolidation or other reorganization or business combination in
which
we are not the surviving corporation or in which our stockholders become
entitled to receive cash, securities of our company other than voting common
stock or securities of another issuer.
Employment
Agreements
Chang
H. Ahn. Dr.
Ahn's
employment agreement dated September 12, 2005 provides that Dr. Ahn
will serve as Chief Executive Officer ("CEO") of the Company until
September 12, 2010, unless Dr. Ahn's employment is sooner terminated as
further described below. If Dr. Ahn's employment continues beyond
September 12, 2010, such employment will become "at-will," unless his
employment agreement is expressly extended.
Dr. Ahn
will be paid an annual base salary of $350,000, subject to periodic review
and
potential increase at the Board's sole discretion. During his employment, Dr.
Ahn will be eligible to receive an annual cash bonus, as determined by the
Board
in its sole discretion, not exceeding 75% of his annual base salary. In order
to
receive such cash bonus, Dr. Ahn must be actively employed by the Company on
the
date on which such cash bonus is scheduled to be paid to him. Dr. Ahn will
also
be eligible to receive options to purchase shares of the Company's stock, to
be
awarded in the Board's sole discretion under the Company's Stock Option Plan
(the "Stock Option Plan"). In addition, Dr. Ahn will be eligible for additional
bonus in the form of cash and/or stock that may be awarded in the Board's sole
discretion.
If
Dr.
Ahn suffers a "Disability" (as defined in his employment agreement), the Board,
in its sole discretion, may terminate the employment agreement immediately
upon
written notice to Dr. Ahn. The Board may terminate Dr. Ahn's employment with
or
without "Cause" (as defined in his employment agreement) or Dr. Ahn may
voluntarily terminate his employment, in each case, upon 30 days' written
notice.
If
the
Company terminates Dr. Ahn's employment without Cause (other than following
a
"Change of Control" (as defined in his employment agreement)), the Company
will
pay to Dr. Ahn (1) his then current base salary through the termination
date, (2) any accrued but unused vacation days as of the termination date,
(3) a pro-rata portion of Dr. Ahn's bonus for fiscal year in which the
termination occurs, assuming a bonus of 75% of his then current base salary,
(4) an amount equaling 6 months of his then current base salary, and
(5) continued coverage under the Company's health insurance plan for
18 months. If Dr. Ahn's employment is terminated by the Board without Cause
within the one-year period immediately following a Change of Control, the
Company will pay to Dr. Ahn the termination compensation and benefits subject
to
the conditions as described in clauses (1), (2), (3) and (5) of
the first sentence of this paragraph. In addition, the Company will pay to
Dr.
Ahn an amount equaling his then current base salary for the greater of the
remainder of the term of his employment under the employment agreement or a
period of one year. The payments and benefits to Dr. Ahn described in this
paragraph are subject to reimbursement by Dr. Ahn and reduction by any
compensation or benefits actually earned or received by Dr. Ahn as an employee
of or consultant to any other entity during the period for which Dr. Ahn
continues to receive salary payments post-termination, the requirement that
Dr.
Ahn, in good faith, seek other employment in a comparable position and otherwise
mitigate the Company's obligations and Dr. Ahn's execution of a customary
release in a form satisfactory to the Company.
Tae
Heum Jeong.
Mr.
Jeong's employment agreement dated September 12, 2005 provides that
Mr. Jeong will serve as Chief Financial Officer of the Company until
September 12, 2007, unless Mr. Jeong's employment is sooner terminated as
further described below. If Mr. Jeong's employment continues beyond
September 12, 2007, such employment will become "at-will," unless his
employment agreement is expressly extended.
Mr.
Jeong
will be paid an annual base salary of $160,000, subject to periodic review
and
potential increase at the Board's sole discretion. During his employment, Mr.
Jeong will be eligible to receive an annual cash bonus, as determined by the
CEO
in his sole discretion, in an amount not exceeding 50% of his annual base
salary. In order to receive such cash bonus, Mr. Jeong must be actively employed
by the Company on the date on which such cash bonus is scheduled to be paid
to
him. Mr. Jeong will also be eligible to receive options to purchase shares
of
the Company's stock, to be awarded in the Board's sole discretion under the
Stock Option Plan. In addition, Mr. Jeong will be eligible for additional bonus
in the form of cash and/or stock that may be awarded in the Board's sole
discretion.
The
circumstances under which Mr. Jeong's employment agreement may terminate and
the
related terms and conditions of any payments and benefits payable to Mr. Jeong
as a result of the termination are substantially similar to Dr. Ahn's employment
agreement, except that if the Company terminates Mr. Jeong's employment without
Cause (other than following a Change of Control), the Company will pay to Mr.
Jeong a pro-rata portion of Mr. Jeong's bonus for fiscal year in which the
termination occurs, assuming a bonus of 50% of his then current salary.
Mr.
Jeong
is restricted from soliciting employees or customers of the Company during
and
for 12 months after the employment period.
George
Steinfels.
Dr.
Steinfels' employment agreement dated September 12, 2005 provided that
Dr. Steinfels serve as Chief Business Officer of the Company until
September 12, 2007, unless Dr. Steinfels' employment is sooner terminated
as further described below. If Dr. Steinfels' employment continued beyond
September 12, 2007, such employment would become "at will," unless his
employment agreement was expressly extended. On September 1, 2006, George
Steinfels resigned from his positions with the Company.
Dr.
Steinfels was paid an annual base salary of $200,000, which was subject to
periodic review and potential increase at the Board's sole discretion. During
his employment, Dr. Steinfels was eligible to receive an annual cash bonus,
as
determined by the CEO in his sole discretion, in an amount not exceeding 50%
of
his annual base salary. In order to receive such cash bonus, Dr. Steinfels
must
have been actively employed by the Company on the date on which such cash bonus
was scheduled to be paid to him. Dr. Steinfels, during his employment, was
also
eligible to receive options to purchase shares of the Company's stock, to be
awarded in the Board's sole discretion under the Stock Option Plan. In addition,
Dr. Steinfels was eligible for additional bonus in the form of cash and/or
stock
that may have been awarded in the Board's sole discretion.
The
circumstances under which Dr. Steinfels employment agreement may terminate
and
the related terms and conditions of any payments and benefits payable to Dr.
Steinfels as a result of the termination were substantially similar to Mr.
Jeong's employment agreement. Dr. Steinfels resigned from all his positions
with
the Company in September 2006 and no additional amounts were paid in
connection with the termination of his employment agreement.
Dr.
Steinfels is restricted from soliciting employees or customers of the Company
during and for 12 months after the employment period.
To
the
extent that any amounts payable to Dr. Ahn, or Mr. Jeong described above
constitute an amount payable under a "nonqualified deferred compensation plan,"
as defined in Section 409A, following a "separation from service," as
defined in Section 409A, such payment will not be made until the date that
is six months following the executive's "separation from service," but only
if
the executive is then deemed to be a "specified employee" under
Section 409A.
To
the
extent that any amounts payable to Dr. Ahn, Mr. Jeong or Dr. Steinfels described
above constitute an amount payable under a "nonqualified deferred compensation
plan," as defined in Section 409A, following a "separation from service,"
as defined in Section 409A, such payment will not be made until the date
that is six months following the executive's "separation from service," but
only
if the executive is then deemed to be a "specified employee" under
Section 409A.
Director
Compensation
The
table
below sets forth information concerning the compensation of the directors of
the
Company for the fiscal year ended December 31, 2006.
Director
Compensation
|
Name
|
Fees
Earned Or Paid In Cash ($)
|
Stock
Awards ($)
|
Option
Awards ($) (1)
|
Non-Equity
Incentive Plan Compensation ($)
|
Non-qualified
Deferred Compensation Earnings
|
All
Other Compensation ($)
|
Total
($)
|
|||||||||||||||
|
Young-Soon
Park
|
$
|
1,000
|
-
|
$
|
39,754
|
-
|
-
|
-
|
$
|
40,754
|
||||||||||||
|
Charles
Beever
|
$
|
3,000
|
-
|
$
|
4,545
|
-
|
-
|
-
|
$
|
7,545
|
||||||||||||
|
Kwang
Soo Cheong
|
$
|
3,000
|
-
|
$
|
4,545
|
-
|
-
|
-
|
$
|
7,545
|
||||||||||||
|
Y. Michele
Kang
|
$
|
2,000
|
-
|
$
|
4,545
|
-
|
-
|
-
|
$
|
6,545
|
||||||||||||
|
David
McIntosh
|
$
|
4,000
|
-
|
$
|
36,556
|
-
|
-
|
-
|
$
|
40,556
|
||||||||||||
| (1) |
Director
Name
|
Aggregate
Number of
Option
Awards
at
Fiscal Year End
|
Option Exercise
Price
($)
|
Option
Expiration Date
|
||||||
|
Young-Soon
Park
|
220,000
|
$
|
3.00
|
9/12/2015
|
||||||
|
20,000
|
$
|
1.20
|
5/1/2016
|
|||||||
|
Charles
Beever
|
20,000
|
$
|
1.20
|
5/1/2016
|
||||||
|
Kwang
Soo Cheong
|
20,000
|
$
|
1.20
|
5/1/2016
|
||||||
|
Y.
Michele Kang
|
20,000
|
$
|
1.20
|
5/1/2016
|
||||||
|
David
McIntosh
|
125,000
|
$
|
0.80
|
4/20/2014
|
||||||
|
20,000
|
$
|
3.00
|
9/12/2015
|
|||||||
|
20,000
|
$
|
1.20
|
5/1/2016
|
|||||||
Our
non-employee director compensation policy is as
follows:
|
(a)
|
each
of the non-employee directors of the Company will receive 20,000
options
to purchase shares of the common stock of the Company for each year
he or
she serves on the Board; and
|
|
(b)
|
each
of the non-employee directors of the Company will receive an additional
board meeting fee of $1,000 for each meeting he or she participates
in.
|
On
May 1,
2006, each of our directors received 20,000 options to purchase shares of common
stock with an exercise price of $1.20 per share, the fair market value on the
date of grant. The options fully vest on May 1, 2007.
|
Item 11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information, as of December 31, 2006, about shares
of our common stock that may be issued upon the exercise of options, warrants
and rights granted to employees, consultants or directors under all of our
existing equity compensation plans.
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted
average exercise price of outstanding options, warrants
and rights
|
Number
of securities remaining available for future issuance under equity
compensation
plans
|
||||||||
|
Equity
compensation plans approved by stockholders
|
6,123,295
|
$
|
0.94
|
10,876,705
|
||||||
|
Equity
compensation plans not approved by stockholders
|
──
|
──
|
──
|
|||||||
|
Total
|
6,123,295
|
$
|
0.94
|
10,876,705
|
||||||
Security
Ownership of Certain Beneficial Owners
The
table
below sets forth the beneficial ownership of common stock as of
December 31, 2006 by the following individuals or entities:
|
·
|
each
person, or group of affiliated persons, known to us to own beneficially
own 5% or more of the outstanding common
stock;
|
|
·
|
each
director;
|
|
·
|
each
executive officer; and
|
|
·
|
all
of the directors and executive officers as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the Commission. Except
as indicated by footnote and subject to community property laws where
applicable, each person or entity named in the table has sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by him, her or it. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock that will be subject to options held by that person
that
are exercisable as of March 30, 2007, or will become exercisable within
60 days thereafter are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other
person.
|
Shares
of Rexahn Pharmaceuticals Common Stock Beneficially
Owned
|
||||
|
Name
of Beneficial Owner
|
Number
of Shares
|
Percentage
|
||
|
Directors
and Executive Officers:
|
||||
|
Chang
H. Ahn*
|
14,900,000(1)
|
29.62%
|
||
|
Charles
Beever*(2)
|
20,000
|
Less
than 1%
|
||
|
Kwang
Soo Cheong*(2)
|
20,000
|
Less
than 1%
|
||
|
Tae
Heum Jeong*
|
1,050,000(3)
|
2.09%
|
||
|
Y.
Michele Kang*(2)
|
20,000
|
Less
than 1%
|
||
|
David
McIntosh*
|
165,000(4)
|
Less
than 1%
|
||
|
Young-Soon
Park*
|
3,365,000(5)
|
6.69%
|
||
|
All
executive officers and directors as a group (7 persons)
|
19,540,000
|
38.84%
|
||
|
|
|
|||
|
Holders
of more than 5% of shares:
|
|
|
||
|
Rexgene
Biotech Co., Ltd.**
|
4,791,670(6)
|
9.52%
|
||
|
Chong
Kun Dang Pharmaceutical Corp.***
|
3,000,000(6)(7)
|
5.96%
|
||
|
KT&G
Corporation****
|
2,500,000(6)
|
4.97%
|
||
|
*
|
c/o
Rexahn Pharmaceuticals, Inc., 9620 Medical Center Drive, Rockville,
MD
20850.
|
|
**
|
9F
Wooyoung Venture Bldg. 1330-13, Seocho-dong, Seocho-gu, Seoul 137-070,
Korea.
|
|
***
|
368,3-ga,
Chungjeong-ro , Seodaemun-gu, Seoul 120-756,
Korea.
|
|
****
|
100
Pyongchon-dong, Daedeog-gu, Daejeon 306-130,
Korea.
|
|
(1)
|
Includes
Dr. Ahn’s options to purchase 600,000 shares of common stock that are
currently exercisable or exercisable within 60 days of May 1, 2007,
500,000 shares held by Dr. Ahn’s wife, Inok Ahn, and Mrs. Ahn’s options to
purchase 300,000 shares of common stock that are currently exercisable
or
exercisable within 60 days of March 30,
2007.
|
|
(2)
|
Charles
Beever, Kwang Soo Cheong and Y. Michele Kang became directors on
May 1,
2006.
|
|
(3)
|
Includes
Mr. Jeong’s options to purchase 550,000 shares of common stock that are
currently exercisable or exercisable within 60 days of March 30,
2007.
|
|
(4)
|
Includes
Mr. McIntosh’s options to purchase 165,000 shares common stock that
are currently exercisable or exercisable within 60 days of March
30,
2007.
|
|
(5)
|
Includes
Dr. Park's options to purchase 240,000 shares common stock that are
currently exercisable or exercisable within 60 days of March 30,
2007.
|
|
(6)
|
The
boards of directors of each of Rexgene, Chong Kun Dang and KT&G, each
a Korean corporation, have sole voting and sole investment power
as to the
shares owned by their respective
corporations.
|
|
(7)
|
Includes
750,000 shares of common stock held by Kyungbo Pharm, a subsidiary
of
Chong Kun Dang. Excludes 2,000,000 shares of common stock held by
Jang-Han
Rhee, Chief Executive Officer of Chong Kun Dang and a former director
of
Rexahn.
|
|
Item 12.
|
Certain
Relationships and Related Transactions; and Director
Independence
|
Related
Transactions
On
February 6, 2003, Rexahn entered into a research collaboration agreement
with Rexgene Biotech Co., Ltd. ("Rexgene"), the holder of approximately 10.32%
of outstanding common stock. Dr. Young-Soon Park, holder of approximately
19.93% of outstanding common stock and a director, served as the Chairman of
Rexgene Biotech until 2003.
Under
the
agreement we and Rexgene agreed to jointly develop and implement a research
and
development plan (including conducting clinical and animal trials in various
countries and exchanging data derived from such trials) in order to register
Archexin, one of our drug candidates, for sale and use in Asian countries.
We
contributed a license to technology relating to Archexin, and Rexgene
contributed $1,500,000 as initial contributions under the agreement. In
addition, Rexgene agreed to conduct clinical trials in Asian countries at its
own expense, and we agreed to conduct clinical and animal trials in the United
States and in non-Asian countries at our own expense. We and Rexgene also agreed
to share data, improvements, developments, discoveries and inventions resulting
from the agreement. Under the agreement, Rexgene also received an exclusive
license from us to exploit any results from the research development in Asian
countries, and we received an exclusive license to exploit any results from
the
research and development everywhere in non-Asian countries. Pursuant to the
terms of the agreement, Rexgene also agreed to pay us 3% of the profits derived
from the sale of Archexin in Asian countries. The agreement, if not earlier
terminated by either us or Rexgene, will terminate on the expiration of the
patents resulting from the agreement, or if no such patents are granted, 20
years from February 6, 2003.
On
September 3, 2003, we entered into a joint research and development
agreement with Chong Kun Dang Pharmaceutical Corp. ("CKD"), the holder of
approximately 6.96% of outstanding common stock.
Under
the
agreement, we and CKD agreed to cooperate in the research and development of
a
variety of new pharmaceutical compounds for human use in their own capacities.
Each of CKD and us has performed and will continue to perform research,
development and other obligations under the agreement at its own expense. CKD
and Rexahn equally own all information, data, discoveries and all other results,
either patentable or non-patentable, made or developed in connection with or
arising out of the agreement. All profits derived from or in connection with
the
agreement will be allocated to CKD and us in proportion to relative
contributions based on certain ratios, which vary depending upon a particular
research and development phase during which the profits are earned. The
agreement, if not earlier terminated by either us or CKD, will last until the
expiration of any intellectual property rights pertaining to information, data,
discoveries and all other results made or developed in connection with or
arising out of the agreement.
Director
Independence
Charles
Beever, Kwang Soo Cheong, Y. Michele Kang and David McIntosh, serve as
independent directors under the applicable listing standards of the Nasdaq
Stock
Market, as may be modified or supplemented. John Holaday, a former director,
served as an independent directors during 2006 under the applicable listing
standards of the Nasdaq Stock Market.
|
Item 13.
|
Exhibits
|
|
Exhibit Number
|
Exhibit Description
|
|
3.1.
|
Amended
and Restated Certificate of Incorporation, filed as Appendix G to the
Company's Definitive Proxy Statement on Schedule 14A (File No.
000-50590) dated April 29, 2004, is incorporated herein by
reference.
|
|
3.2.
|
Amended
and Restated Bylaws, filed as Appendix H to the Company's Definitive
Proxy Statement on Schedule 14A (File No. 000-50590) dated
April 29, 2004, is incorporated herein by
reference.
|
|
4.1.
|
Specimen
Certificate for the Company's Common Stock, par value $.0001 per
share, filed as Exhibit 4.3 to the Company's Registration Statement
on Form S-8 (File No. 333-129294 ) dated October 28, 2005, is
incorporated herein by reference.
|
|
*10.1.1.
|
Rexahn
Pharmaceuticals, Inc. Stock Option Plan, as amended, filed as
Exhibit 4.4 to the Company's Registration Statement on Form S-8
(File No. 333-129294 ) dated October 28, 2005, is incorporated herein
by reference.
|
|
*10.1.2.
|
Form
of Stock Option Grant Agreement for Employees, filed as Exhibit 4.5.1
to the Company's Registration Statement on Form S-8 (File No.
333-129294 ) dated October 28, 2005, is incorporated herein by
reference.
|
|
*10.1.3.
|
Form
of Stock Option Grant Agreement for Non-Employee Directors and
Consultants, filed as Exhibit 4.5.2 to the Company's Registration
Statement on Form S-8 (File No. 333-129294 ) dated October 28,
2005, is incorporated herein by reference.
|
|
*10.2.
|
Employment
Agreement, dated September 12, 2005, by and between Rexahn
Pharmaceuticals, Inc. and C. H. Ahn, filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on September 12,
2005, is incorporated herein by reference.
|
|
*10.3.
|
Employment
Agreement, dated September 12, 2005, by and between Rexahn
Pharmaceuticals, Inc. and T. H. Jeong, filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on September 12,
2005, is incorporated herein by reference.
|
|
*10.4
|
Employment
Agreement, dated September 12, 2005, by and between Rexahn
Pharmaceuticals, Inc. and G. Steinfels, filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on September 12,
2005, is incorporated herein by reference.
|
|
10.5.
|
Research
Collaboration Agreement dated February 6, 2003 by and between Rexahn
Pharmaceuticals, Inc. and Rexgene Biotech Co., Ltd, filed as Exhibit
10.5
to the Company's Annual Report on Form 10-KSB the fiscal year ended
December 31, 2005, is incorporated herein by reference.
|
|
10.6.
|
Revaax
License Agreement, dated February 8, 2005, by and between Rexahn
Pharmaceuticals, Inc. and Revaax Pharmaceuticals LLC, filed as Exhibit
10.6 to the Company's Annual Report on Form 10-KSB for the fisal year
ended December 31, 2005, is incorporated herein by
reference.
|
|
23.
|
Consent
of Lazar, Levine & Felix, LLP, independent registered public
accounting firm.
|
|
24.
|
Power
of Attorney.
|
|
31.1.
|
Certification
of Chief Executive Officer of Periodic Report Pursuant to Pursuant
to
Rule 13a-15(e) or Rule 15d-15(e).
|
|
31.2.
|
Certification
of Chief Financial Officer of Periodic Report Pursuant to Pursuant
to
Rule 13a-15(e) or
Rule 15d-15(e).
|
80
|
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.
|
_______________________
|
*
|
Management
contract or compensation plan or arrangement.
|
|
Item 14.
|
Principal
Accountant Fees and
Services
|
The
following table presents fees for professional audit services rendered by Lazar
Levine & Felix LLP for the audits of the Company's annual financial
statements for the years ended December 31, 2006 and 2005,
respectively.
|
2006
|
2005
|
||||||
|
Audit
Fees
|
$
|
77,500
|
1 |
$
|
61,000
|
||
|
Audit-Related
Fees
|
—
|
—
|
|||||
|
Tax
Fees
|
—
|
—
|
|||||
|
All
Other Fees
|
—
|
—
|
|||||
|
1
|
Audit
Fees relate to the audit of the Company's financial statements and
reviews
of certain financial statements included in the Company's quarterly
reports on Form 10-QSB. The amount shown represents the maximum fees
for
such services.
|
Our
Audit
Committee reviews all audit fees at least annually.
SIGNATURES
In
accordance with the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the issuer has duly caused
this
report to be signed on its behalf by the undersigned, thereunto duly authorized
on this 2nd day of April, 2007.
|
REXAHN
PHARMACEUTICALS, INC.
|
|||
|
By:
|
/s/
Chang H. Ahn
|
||
|
Chang
H. Ahn
|
|||
|
Chairman
and Chief Executive Officer
|
|||
In
accordance with the requirement of the Securities Exchange Act of 1934, this
report has been signed on the 2nd day of April, 2007 by the following
persons on behalf of the issuer and in the capacities indicated:
|
Name
|
Title
|
|
|
Chang
H. Ahn*
|
Chairman
and Chief Executive Officer
|
|
|
Chang
H. Ahn
|
||
|
Tae
Heum Jeong*
|
Chief
Financial Officer, Secretary and Director
|
|
|
Tae
Heum Jeong
|
||
|
Young-Soon
Park*
|
Director
|
|
|
Young-Soon
Park
|
||
|
David
McIntosh*
|
Director
|
|
|
David
McIntosh
|
||
|
Charles
Beever*
|
Director
|
|
|
Charles
Beever
|
||
|
Kwang
Soo Cheong*
|
Director
|
|
|
Kwang
Soo Cheong
|
||
|
Y.
Michele Kang*
|
Director
|
|
|
Y.
Michele Kang
|
|
*
By:
|
/s/ Tae
Heum Jeong
|
|
|
Tae
Heum Jeong, Attorney-in-Fact**
|
||
**
By
authority of the power of attorney filed as Exhibit 24 hereto.
EXHIBIT INDEX
|
Exhibit Number
|
Exhibit Description
|
Page
|
|
3.1.
|
Amended
and Restated Certificate of Incorporation, filed as Appendix G to the
Company's Definitive Proxy Statement on Schedule 14A (File No.
000-50590) dated April 29, 2004, is incorporated herein by
reference.
|
|
|
3.2.
|
Amended
and Restated Bylaws, filed as Appendix H to the Company's Definitive
Proxy Statement on Schedule 14A (File No. 000-50590) dated
April 29, 2004, is incorporated herein by reference.
|
|
|
4.1.
|
Specimen
Certificate for the Company's Common Stock, par value $.0001 per
share, filed as Exhibit 4.3 to the Company's Registration Statement
on Form S-8 (File No. 333-129294 ) dated October 28, 2005, is
incorporated herein by reference.
|
|
|
*10.1.1.
|
Rexahn
Pharmaceuticals, Inc. Stock Option Plan, as amended, filed as
Exhibit 4.4 to the Company's Registration Statement on Form S-8
(File No. 333-129294 ) dated October 28, 2005, is incorporated herein
by reference.
|
|
|
*10.1.2.
|
Form
of Stock Option Grant Agreement for Employees, filed as Exhibit 4.5.1
to the Company's Registration Statement on Form S-8 (File No.
333-129294 ) dated October 28, 2005, is incorporated herein by
reference.
|
|
|
*10.1.3.
|
Form
of Stock Option Grant Agreement for Non-Employee Directors and
Consultants, filed as Exhibit 4.5.2 to the Company's Registration
Statement on Form S-8 (File No. 333-129294 ) dated October 28,
2005, is incorporated herein by reference.
|
|
|
*10.2.
|
Employment
Agreement, dated September 12, 2005, by and between Rexahn
Pharmaceuticals, Inc. and C. H. Ahn, filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on September 12,
2005, is incorporated herein by reference.
|
|
|
*10.3.
|
Employment
Agreement, dated September 12, 2005, by and between Rexahn
Pharmaceuticals, Inc. and T. H. Jeong, filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on September 12,
2005, is incorporated herein by reference.
|
|
|
*10.4
|
Employment
Agreement, dated September 12, 2005, by and between Rexahn
Pharmaceuticals, Inc. and G. Steinfels, filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on September 12,
2005, is incorporated herein by reference.
|
|
|
10.5.
|
Research
Collaboration Agreement dated February 6, 2003 by and between Rexahn
Pharmaceuticals, Inc. and Rexgene Biotech Co., Ltd, filed as Exhibit
10.5
to the Company's Annual Report on Form 10-KSB the fiscal year ended
December 31, 2005, is incorporated herein by
reference.
|
|
|
10.6.
|
Revaax
License Agreement, dated February 8, 2005, by and between Rexahn
Pharmaceuticals, Inc. and Revaax Pharmaceuticals LLC, filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-KSB for the
fiscal
year ended December 31, 2005, is incorporated herein by
reference.
|
|
|
Consent
of Lazar, Levine & Felix, LLP, independent registered public
accounting firm.
|
|
Exhibit Number
|
Exhibit Description
|
Page
|
|
Power
of Attorney.
|
||
|
Certification
of Chief Executive Officer of Periodic Report Pursuant to Pursuant
to
Rule 13a-15(e) or Rule 15d-15(e).
|
||
|
Certification
of Chief Financial Officer of Periodic Report Pursuant to Pursuant
to
Rule 13a-15(e) or Rule 15d-15(e).
|
||
|
Certification
of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350.
|
||
|
Certification
of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350.
|
_______________________
|
*
|
Management
contract or compensation plan or arrangement.
|