REXAHN PHARMACEUTICALS, INC. - FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Rexahn Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

Commission File No.: 001-34079

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

15245 Shady Grove Road, Suite 455

Rockville, MD 20850

(Address of principal executive offices, including zip code)

Telephone: (240) 268-5300

(Registrant’s telephone number, including area code)

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

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

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

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

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 95,237,656 shares of common stock outstanding as of May 9, 2011.

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

TABLE OF CONTENTS

			Page

PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

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

	2)	Condensed Statement of Operations (unaudited) for the three months ended March 31, 2011 and 2010 and cumulative from March 19, 2001 (inception) to March 31, 2011	4

	3)	Condensed Statement of Cash Flows (unaudited) for the three months ended March 31, 2011 and 2010 and cumulative from March 19, 2001 (inception) to March 31, 2011	5

	4)	Notes to Condensed Financial Statements (unaudited)	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37

Item 3	Quantitative and Qualitative Disclosures About Market Risk		46

Item 4	Controls and Procedures		46

PART II	OTHER INFORMATION

Item 1	Legal Proceedings		47

Item 1A	Risk Factors		47

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 3	Defaults Upon Senior Securities		47

Item 4	(Removed and Reserved)		47

Item 5	Other Information		47

Item 6	Exhibits		47

SIGNATURES			48

TABLE OF CONTENTS

PART I Financial Information

Item 1 Financial Statements

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Condensed Balance Sheet

	March 31, 2011 (unaudited)				December 31, 2010
ASSETS
Current Assets:
Cash and cash equivalents		$	20,513,075			$	12,340,239
Marketable securities (note 4)			2,450,260				2,451,620
Research tax credit receivable			—				145,513
Prepaid expenses and other current assets (note 5)			725,122				706,649
Note receivable – current portion (note 6)			28,023				28,023

Total Current Assets			23,716,480				15,672,044

Restricted Cash Equivalents (note 18)			3,359,456				401,893

Note Receivable (note 6)			11,676				18,682

Equipment, Net (note 7)			109,438				123,565

Total Assets		$	27,197,050			$	16,216,184
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses (note 8)		$	2,939,634			$	1,820,900

Deferred Revenue (note 9)			881,250				900,000

Other Liabilities (note 10)			128,005				133,117

Warrant Liabilities (note 15)			6,114,800				2,966,710

Total Liabilities			10,063,689				5,820,727
Commitments and Contingencies (note 18)
Stockholders’ Equity (note 13):
Preferred stock, par value $0.0001, 100,000,000 authorized shares, none issued and outstanding			—				—
Common stock, par value $0.0001, 500,000,000 authorized shares, 95,251,861 (2010 – 84,175,504) issued and outstanding 95,237,656 (2010 – 84,160,849)			9,525				8,418
Additional paid-in capital			67,331,770				56,157,452
Accumulated other comprehensive loss			(3,700	)			(2,340	)
Accumulated deficit during the development stage			(50,175,824	)			(45,739,663	)
Treasury stock, 14,205 shares, at cost			(28,410	)			(28,410	)

Total Stockholders’ Equity			17,133,361				10,395,457

Total Liabilities and Stockholders’ Equity		$	27,197,050			$	16,216,184

See the notes accompanying the condensed financial statements.

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Condensed Statement of Operations

(Unaudited)

							Cumulative
							from March 19,
							2001
	For the Three Months Ended March 31,						(Inception) to
	2011			2010			March 31, 2011
				(Restated)
Revenues:
Research	$	18,750		$	18,750		$	618,750

Expenses:
General and administrative		1,109,172			1,056,465			24,908,339
Research and development		2,736,277			491,122			23,229,794
Patent fees		72,514			52,734			1,627,492
Depreciation and amortization		14,127			11,547			609,594

Total Expenses		3,932,090			1,611,868			50,375,219

Loss from Operations		(3,913,340	)		(1,593,118	)		(49,756,469	)

Other Income (Expense)
Realized loss on marketable securities		—			—			(9,341	)
Interest income		42,471			22,014			1,354,540
Interest expense		—			—			(301,147	)
Other income		—			—			56,047
Unrealized loss on fair value of warrants		(467,625	)		(6,560,205	)		(1,569,970	)
Unrealized gain on fair value of put feature on common stock		—			97,713			2,315,539
Financing expense		(97,667	)		—			(640,023	)
Beneficial conversion feature		—			—			(1,625,000	)
Total Other Income (Expense)		(522,821	)		(6,440,478	)		(419,355	)

Net Loss Before Provision for Income Taxes		(4,436,161	)		(8,033,596	)		(50,175,824	)

Provision for Income Taxes		—			—			—

Net Loss	$	(4,436,161	)	$	(8,033,596	)	$	(50,175,824	)

Net loss per share, basic and diluted	$	(0.05	)	$	(0.11	)

Weighted average number of shares outstanding, basic and diluted		86,251,682			72,271,780

See the notes accompanying the condensed financial statements.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Condensed Statement of Cash Flows

(Unaudited)

	For the Three Months Ended March 31,						Cumulative From March 19, 2001 (Inception) to March 31,
	2011			2010			2011
				(Restated)
Cash Flows from Operating Activities:
Net loss	$	(4,436,161	)	$	(8,033,596	)	$	(50,175,824	)
Adjustments to reconcile net loss to net cash used in operating activities:
Beneficial conversion feature		—			—			1,625,000
Compensatory stock		—			366,000			2,129,877
Depreciation and amortization		14,127			11,547			609,594
Stock option compensation		201,988			195,378			5,141,010
Amortization of deferred revenue		(18,750	)		(18,750	)		(618,750	)
Note receivable		7,007			—			(39,698	)
Realized losses on marketable securities		—			—			9,341
Unrealized loss on fair value of warrants		467,625			6,560,205			1,569,970
Unrealized gain on fair value of put feature on common stock		—			(97,713	)		(2,315,539	)
Financing expense		97,667			—			640,023
Amortization of deferred lease incentive		(5,000	)		(5,000	)		(35,000	)
Deferred lease expenses		(112	)		12,420			63,005
Loss on impairment of intangible assets		—			—			286,132
Changes in assets and liabilities:
Prepaid expenses and other current assets		(18,473	)		(170,988	)		(725,122	)
Research tax credit receivable		145,513			—			—
Accounts payable and accrued expenses		1,118,734			131,452			2,939,634
Net Cash Used in Operating Activities		(2,425,835	)		(1,049,045	)		(38,896,347	)

Cash Flows from Investing Activities:
Restricted cash equivalents		(2,957,563	)		116,233			(3,359,456	)
Purchase of equipment		—			(1,270	)		(548,948	)
Purchase of marketable securities		—			—			(13,123,960	)
Proceeds from sales of marketable securities		—			—			10,660,659
Payment of licensing fees		—			—			(356,216	)
Net Cash (Used in) Provided by Investing Activities		(2,957,563	)		114,963			(6,727,921	)
Cash Flows from Financing Activities:
Issuance of common stock and units, net of issuance costs		13,220,273			—			55,805,574
Proceeds from exercise of stock options		18,000			21,240			128,842
Proceeds from exercise of stock warrants		317,961			1,297,001			3,581,337
Proceeds from long-term debt		—			—			5,150,000
Proceeds from research contribution		—			—			1,500,000
Purchase of treasury stock		—			—			(28,410	)
Net Cash Provided by Financing Activities		13,556,234			1,318,241			66,137,343
Net Increase in Cash and Cash Equivalents		8,172,836			384,159			20,513,075
Cash and Cash Equivalents - beginning of period		12,340,239			7,298,032			—
Cash and Cash Equivalents - end of period	$	20,513,075		$	7,682,191		$	20,513,075

See the notes accompanying the condensed financial statements.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Condensed Statement of Cash Flows (continued)

(Unaudited)

	For the Three Months Ended March 31,				Cumulative From March 19, 2001 (Inception) to March 31,
	2011		2010		2011
			(Restated)
Supplemental Cash Flow Information
Interest paid	$	—	$	—	$	301,147
Non-cash financing and investing activities:
Warrants issued	$	2,924,333	$	—	$	11,054,427
Put feature on common stock issued	$	—	$	—	$	4,954,738
Dilutive issuances of common stock	$	—	$	—	$	2,639,199
Warrant liability extinguishment from exercise of warrants	$	243,868	$	1,301,700	$	6,180,660
Leasehold improvement incentive	$	—	$	—	$	100,000
Settlement of lawsuit	$	—	$	—	$	43,953

See the notes accompanying the condensed financial statements.

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

1.	Operations and Organization

Operations

Rexahn Pharmaceuticals, Inc. (the “Company”, “Rexahn Pharmaceuticals”), a Delaware corporation, is a development stage biopharmaceutical company dedicated to the discovery, development and commercialization of innovative treatments for cancer, central nervous system (“CNS”) disorders, sexual dysfunction and other medical needs. The Company had an accumulated deficit of $50,175,824 at March 31, 2011 and anticipates incurring losses through the remainder of fiscal 2011 and beyond. The Company has not yet generated commercial sales revenue and has been able to fund its operating losses to date through the sale of its common stock, warrants exercisable for common stock, units, issuance of long-term debt, and proceeds from reimbursed research and development costs. Management has the capability of managing the Company’s operations within existing cash available by reducing research and development activities.

Basis of Presentation

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

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.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

2. Prior Period Adjustment

The financial statements of the Company for the three months ended March 31, 2010 have been restated as a result of management’s determination that the Company had misclassified warrants issued to investors through offerings occurring in December 2007, March 2008, June 2009 and October 2009. The warrants were previously reported as equity, but further review by management concluded that these warrants should have been classified as liabilities at inception due to provisions within the warrant agreements, and should be reported at fair value at the balance sheet date.

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

The restatement had no effect on the Company’s cash, loss from operations or net cash used in operating activities for the three months ended March 31, 2010. After reviewing the circumstances leading up to the restatement, management believes that the errors were inadvertent and unintentional. In addition, following the discovery of these errors, the Company began implementing procedures intending to strengthen its internal control processes and prevent a recurrence of these errors.

The effects of the restatement on the Company’s statement of operations and cash flows for the three months ended March 31, 2010 is as follows:

STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010
	As previously reported			Effect of Restatement			As restated

Unrealized loss on fair value of warrants	$	—		$	(6,560,205	)	$	(6,560,205	)
Unrealized gain on fair value of put feature on common stock		—			97,713			97,713
Total other income (expense)		22,014			(6,462,492	)		(6,440,478	)
Net loss before provision for income taxes		(1,571,104	)		(6,462,492	)		(8,033,596	)
Net loss		(1,571,104	)		(6,462,492	)		(8,033,596	)
Net loss per share, basic and diluted		(0.02	)		(0.09	)		(0.11	)

STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2010
	As previously reported			Effect of Restatement			As restated
Net loss	$	(1,571,104	)	$	(6,462,492	)	$	(8,033,596	)
Unrealized gain on fair value of put feature on common stock		—			(97,713	)		(97,713	)
Unrealized loss on fair value of warrants		—			6,560,205			6,560,205
Net cash used in operating activities		(1,049,045	)		—			(1,049,045	)

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

3. Recent Accounting Pronouncements Affecting the Company

Fair Value Measurements

In January 2010, the FASB issued guidance which requires, in both interim and annual financial statements, for assets and liabilities that are measured at fair value on a recurring basis disclosures regarding the valuation techniques and inputs used to develop those measurements. It also requires separate disclosures of significant amounts transferred in and out of Level 1 and Level 2 fair value measurements and a description of the reasons for the transfers. This guidance is effective for the Company beginning on January 1, 2011 and is required to be applied prospectively to new or significantly modified revenue arrangements.

Milestone Method of Revenue Recognition

In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones, and each milestone should be evaluated individually to determine if it is substantive. This guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010, with early adoption permitted. The Company believes that there is no current impact to the financial statements.

4.	Marketable Securities

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

Securities available-for-sale	Cost Basis		Gross Unrealized Losses			Fair Value
March 31, 2011:
State and municipal obligations	$	2,453,960	$	(3,700	)	$	2,450,260

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

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

4.	Marketable Securities (cont’d)

Amortized cost and fair value at March 31, 2011 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the Company may redeem certain securities at par.

Maturity	Cost Basis		Gross Unrealized Losses			Fair Value
1 year or less	$	503,960	$	(3,700	)	$	500,260
10 years or more		1,950,000		—			1,950,000

	$	2,453,960	$	(3,700	)	$	2,450,260

5. Prepaid Expenses and Other Current Assets

	March 31, 2011		December 31, 2010

Deposits on contracts	$	631,112	$	564,074
Other assets		94,010		142,575

	$	725,122	$	706,649

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

6.	Note Receivable

On June 16, 2010, Amarex, LLC (“Amarex”) executed a note payable to the Company in settlement of a contract dispute. The Company settled the case with Amarex for $100,000 less a balance owed of $43,953. The principal sum of the note was $56,047, and is included in other income in the Company’s statement of operations. Monthly payments of $2,335 began on September 1, 2010 and will continue until August 1, 2012 at which time the balance is expected to be paid in full. The note does not bear interest. Pursuant to the note, Amarex shall pay a late charge of five percent (5%) of any past due installment payments if any installment payment is not paid within 10 days of its due date. As of March 31, 2011, all payments were made as scheduled.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

6.	Note Receivable (cont’d)

As of March 31, 2011, the principal amortization of the note is shown below:


Principal Amortization	Expected Payment
Within 1 year	$	28,023
1 year to Maturity Date (August 1, 2012)		11,676

	$	39,699

7. Equipment, Net

	March 31, 2011			December 31, 2010

Furniture and fixtures	$	32,169		$	32,169
Office equipment		77,032			77,032
Lab and computer equipment		429,415			429,415
Leasehold improvements		110,713			110,713

Total fixed assets		649,329			649,329
Less: Accumulated depreciation		(539,891	)		(525,764	)

Net carrying amount	$	109,438		$	123,565

Depreciation expense was $14,127 and $11,547 for the three months ended March 31, 2011 and 2010, respectively.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

8.	Accounts Payable and Accrued Expenses

	March 31, 2011		December 31, 2010

Trade payables	$	878,051	$	487,527
Accrued expenses		817,199		18,466
Accrued research and development contract costs		1,129,339		1,239,233
Payroll liabilities		115,045		73,674

	$	2,939,634	$	1,820,900

9. Deferred Revenue

In 2003, the Company entered into a collaborative research agreement with Rexgene Biotech Co., Ltd. (“Rexgene”), a shareholder. Rexgene is engaged in the development of pharmaceutical products in Asia and has agreed to assist the Company with the research, development and clinical trials necessary for registration of the Company’s drug candidate, Archexin, in Asia. This agreement provides Rexgene with exclusive rights to license, sublicense, make, have made, use, sell and import Archexin in Asia. A one-time contribution to the joint development and research of Archexin 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 $18,750 was included in revenues for the three months ended March 31, 2011 and 2010. The remaining $881,250 and $900,000 at March 31, 2011 and December 31, 2010, respectively, is reflected as deferred revenue on the balance sheet. The contribution is being used in the cooperative funding of the costs of development of Archexin. Royalties of 3% of net sales of licensed products will become payable to the Company on a quarterly basis once commercial sales of Archexin begin in Asia. The product is still under development and commercial sales in Asia are not expected to begin until at least 2012. Under the terms of the agreement, Rexgene does not receive royalties on Company net sales in the U.S.

10. Other Liabilities

Deferred Lease Incentive

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

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

10. Other Liabilities (cont’d)

The following table sets forth the deferred lease incentive:


	March 31, 2011			December 31, 2010

Deferred lease incentive	$	100,000		$	100,000
Less accumulated amortization		(35,000	)		(30,000	)

Balance	$	65,000		$	70,000

Deferred Office Lease Expense

The office lease agreement, discussed above, requires an initial annual base rent of $76,524 with annual increases over the next five years. The Company recognizes rental expense on a straight-line basis over the term of the lease, which resulted in a deferred rent liability of $63,005 and $63,117 as of March 31, 2011 and December 31, 2010, respectively.

11.	Comprehensive Loss

The Company’s accumulated other comprehensive loss as of March 31, 2011 and December 31, 2010 was $3,700 and $2,340, which is computed as the difference between the cost and fair value of the Company’s marketable securities as of the balance sheet date. The total comprehensive loss for the three months ended March 31, 2011 and 2010 was $4,437,159 and $8,033,596, respectively.

12.	Net Loss per Common Share

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding and excluding any potential dilution. Diluted loss per common share is also computed by dividing net loss by the weighted average number of common shares outstanding, but also reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that would then share in earnings, but such calculation excludes common shares in treasury. Basic and diluted loss per common share are identical for all periods presented as potentially dilutive securities of the Company have been excluded from the calculation of the diluted net loss per common share because the inclusion of such securities would be anti-dilutive. As of March 31, 2011 and December 31, 2010, there were stock options and warrants to acquire 16,718,937 and 13,701,378 shares of our common stock, respectively, which were the potentially dilutive securities of the Company.

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REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock

The following transactions occurred from March 19, 2001 (inception) to March 31, 2011:

a)	On May 10, 2001, the Company issued 3,600,000 shares of common stock to the Company’s founders for cash of $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 stockholders described in b) (iii) and e) transferred an aggregate of 1,268,332 shares of common stock to a voting trust. The trust allows for the unified voting of the stock by the trustees.

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

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

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

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

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

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

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

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

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

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

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

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

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

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

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

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

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

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

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

Gross Proceeds:	$	6,800,023

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

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

Allocated to expense:
Financing expense		(138,326	)

Total allocated gross proceeds:	$	6,800,023

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

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

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

Gross Proceeds:	$	900,001

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

Allocated to common stock and additional paid-in capital		155,515
Total allocated gross proceeds:	$	900,001

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

aa)

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

ab)

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

ac)

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

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

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

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

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

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

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

Gross Proceeds:	$	3,000,000

Allocated to liabilities:
Warrant liabilities		3,451,194

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

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

Total allocated gross proceeds:	$	3,000,000

ad)

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

ae)

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

af)

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

ag)

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

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

Gross Proceeds:	$	5,000,000

Allocated to liabilities:
Warrant liabilities		1,114,627

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

Allocated to expense:
Financing expense		(101,693	)

Total allocated gross proceeds:	$	5,000,000

ah)

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

ai)

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

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

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

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

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

aj)

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

ak)

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

al)

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

am)

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

an)

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

ao)

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

Gross Proceeds:	$	10,000,000

Allocated to liabilities:
Warrant liabilities		1,980,880

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

Allocated to expense:
Financing expense		(180,080	)

Total allocated gross proceeds:	$	10,000,000

ap)

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

aq)

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

ar)

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

as)

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

at)

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

au)

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

13.	Common Stock (cont’d)

av)

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

aw)

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

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

Gross Proceeds:	$	10,000,000

Allocated to liabilities:
Warrant liabilities		2,924,333

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

Allocated to expense:
Financing expense		(97,667	)

Total allocated gross proceeds:	$	10,000,000

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

14. Stock-Based Compensation

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

For grants to non-employee consultants of the Company after September 12, 2005, the vesting period is between one to three years, subject to the fulfillment of certain conditions in the individual stock option grant agreements, or 100% upon the occurrence of certain events specified in the individual stock option grant agreements. Options authorized for issuance under the Plan total 17,000,000 after giving effect to an amendment to the Plan approved at the Annual Meeting of the Stockholders of the Company on June 2, 2006. At March 31, 2011, 8,385,000 shares of common stock were available for issuance.

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

Accounting for Employee Awards

The Company’s results of operations for the three months ended March 31, 2011 and 2010 include share-based employee compensation expense totaling $150,246 and $116,270 respectively. Such amounts have been included in the statement of operations in general and administrative and research and development expenses. No income tax benefit has been recognized in the statement of operations for share-based compensation arrangements as the Company has provided for a 100% valuation allowance on its deferred tax assets.

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

Accounting for Non-Employee Awards

Stock compensation expenses related to non-employee options were $51,742 and $79,108 for the three months ended March 31, 2011 and 2010, respectively. Such amounts have been included in the statement of operations in general and administrative and research and development expenses.

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

14.	Stock-Based Compensation (cont’d)

Summary of Stock Compensation Expense Recognized

Total stock-based compensation recognized by the Company in the three months ended March 31, 2011 and 2010, and the period from inception (March 19, 2001) to March 31, 2011, is as follows:

	Three Months Ended March 31,				Cumulative from March 19, 2001
	2011		2010		(Inception) to March 31, 2011
Statement of operations line item:
General and administrative:
Payroll	$	126,202	$	100,886	$	2,119,718
Consulting and other professional fees		35,649		75,444		795,606
Research and development:
Payroll		24,044		15,384		900,340
Consulting and other professional fees		16,093		3,664		1,325,346

Total	$	201,988	$	195,378	$	5,141,010

Summary of Stock Option Transactions

There were 130,000 stock options granted at an exercise price of $1.84 with a fair value of $180,326 during the three months ended March 31, 2011. There were 375,000 stock options granted at an exercise price of $1.33 with a fair value of $304,043 during the three months ended March 31, 2010.

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

14.	Stock-Based Compensation (cont’d)

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


	Three Months Ended March 31,

	2011			2010

Black-Scholes weighted average assumptions
Expected dividend yield		0	%		0	%
Expected volatility		101	%		107	%
Risk free interest rate		2.29	%		2.4%-4.1	%
Expected term (in years)	5 years			1 - 5 years

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

	2011					2010

	Shares Subject to Options			Weighted Avg. Exercise Price		Shares Subject to Options			Weighted Avg. Exercise Prices
Outstanding at
January 1		8,076,795		$	1.02		7,715,795		$	0.98
Granted		130,000			1.84		375,000			1.33
Exercised		(75,000	)		0.24		(48,000	)		0.44
Cancelled		(89,000	)		1.16		—			—

Outstanding at March 31		8,042,795		$	1.03		8,042,795		$	1.01

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

14. Stock-Based Compensation (cont’d)

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

	Shares Subject to Options		Weighted Avg. Exercise Prices		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2011		8,042,795	$	1.03	5.2 years	$	2,440,797

Exercisable at March 31, 2011		6,792,795	$	1.01	4.7 years	$	2,239,447

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

Exercisable at December 31, 2010		6,762,795	$	1.00	4.8 years	$	2,023,980

The total intrinsic value of the options exercised was $94,250 and $54,660 respectively, for the three months ended March 31, 2011 and 2010, respectively. The weighted average fair value of the options vested was $0.79 and $1.03 for the three months ended March 31, 2011 and 2010, respectively.

A summary of the Company’s unvested shares as of March 31, 2011 and changes during the three months ended March 31, 2011 is presented below:

	2011
	Subject to Options			Weighted Average Fair Value at Grant Date
Unvested at January 1, 2011		1,314,000		$	0.77
Granted		130,000		$	1.39
Vested		(105,000	)	$	0.79
Cancelled		(89,000	)	$	0.90

Unvested at March 31, 2011		1,250,000		$	0.81

As of March 31, 2011 and December 31, 2010, there was $639,816 and $685,636 of total unrecognized compensation cost, respectively, related to all unvested stock options, which is expected to be recognized over a weighted average vesting period of 1.2 years and 1.4 years, respectively.

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

15. Warrants

As of March 31, 2011, warrants to purchase 8,676,142 shares were outstanding, having exercise prices ranging from $1.00 to $1.90 and expiration dates ranging from August 8, 2013 to September 30, 2016.

	2011						2010
	Number of warrants			Weighted average exercise price			Number of warrants			Weighted average exercise price
Balance, January 1		5,624,583		$	1.48			8,575,243		$	1.10
Issued during the period		3,541,666		$	1.50			—		$	—
Exercised during the period		(333,959	)	$	(0.95	)		(1,197,001	)	$	(1.08	)
Expired during the period		(156,148	)	$	(0.82	)		—		$	—

Balance, March 31		8,676,142		$	1.53			7,378,242		$	1.10

At March 31, 2011 and December 31, 2010, the average remaining contractual life of the outstanding warrants was 4.1 years and 3.4 years, respectively.

The warrants, which were issued to investors in the December 2007, March 2008, May 2009, October 2009, June 2010 and March 2011 offerings, contain a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer, or share exchange). If a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a non-public company, then the warrant holder has the option to receive cash, equal to the fair value of the remaining unexercised portion of the warrant. Due to this contingent redemption provision, the warrants require liability classification in accordance with ASC 480, “Distinguishing Liabilities from Equity,” (“ASC 480”) and are recorded at fair value. In addition, these warrants are not indexed to the Company’s stock, and therefore also require liability classification under ASC 815, “Derivatives and Hedging,” (ASC 815).

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

Significant assumptions are determined as follows:

Trading market values—published trading market values;

Exercise price—Stated exercise price;

Term—remaining contractual term of the warrant;

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

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

15.	Warrants (cont’d)

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

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

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

Fair Values:	March 31, 2011		December 31, 2010		Transaction Date
December 18, 2007 financing	$	—	$	—	$	1,392,476
March 20, 2008 financing		—		123,558		190,917
June 5, 2009 financing:
Series I warrants		—		—		707,111
Series II warrants		—		—		1,315,626
Series III warrants		942,666		751,022		1,306,200
Warrants to placement agent		84,545		69,032		122,257
October 23, 2009 financing:
Warrants to institutional investors		937,095		694,377		1,012,934
Warrants to placement agent		10,881		111,241		101,693
June 30, 2010 financing		1,215,280		1,217,480		1,980,880
March 31, 2011 financing:
Warrants to institutional investors		2,826,666		—		2,826,666
Warrants to placement agent		97,667		—		97,667
Total:	$	6,114,800	$	2,966,710	$	11,054,427

Warrants issued to the placement agents in the December 18, 2007 and June 30, 2010 financings are included with the warrants to investors as they have identical exercise prices and terms. Warrants issued to the placement agents in the June 5, 2009, October 23, 2009 and March 31, 2011 offerings have different exercise prices and terms than the warrants issued to the investors and are therefore disclosed separately.

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

15.	Warrants (cont’d)

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

Number of Shares indexed:	March 31, 2011		December 31, 2010		Transaction Date
December 18, 2007 financing		—		—		1,078,579
March 20, 2008 financing		—		281,065		128,572
June 5, 2009 financing:
Series I warrants		—		—		2,222,222
Series II warrants		—		—		1,866,666
Series III warrants		1,555,555		1,555,555		1,555,555
Warrants to placement agent		132,143		132,143		142,857
October 23, 2009 financing:
Warrants to institutional investors		1,228,333		1,228,333		2,125,334
Warrants to placement agent		18,445		227,487		245,932
June 30, 2010 financing		2,200,000		2,200,000		2,200,000
March 31, 2011 financing:
Warrants to institutional investors		3,333,333		—		3,333,333
Warrants to placement agent		208,333		—		208,333
Total:		8,676,142		5,624,243		15,107,383

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

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

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

15.	Warrants (cont’d)

June 5, 2009 financing:	March 31, 2011			December 31, 2010			Transaction Date
Trading market prices	$	1.18		$	1.12		$	1.14
Estimated future volatility		100	%		94-100	%		100	%
Dividend		—			—			—
Estimated future risk-free rate		2.25	%		1.84-4.18	%		0.63-4.31	%
Equivalent volatility		87	%		72-73	%		103-117	%
Equivalent risk-free rate		0.58-0.59	%		0.52	%		0.20-1.44	%

October 23, 2009 financing:	March 31, 2011			December 31, 2010			Transaction Date
Trading market prices	$	1.18		$	1.12		$	0.69
Estimated future volatility		100	%		100	%		100	%
Dividend		—			—			—
Estimated future risk-free rate		1.32-2.25	%		1.84	%		2.63-3.80	%
Equivalent volatility		79-90	%		65-74	%		98-99	%
Equivalent risk-free rate		0.41-0.67	%		0.38-0.58	%		0.93-1.16	%

June 30, 2010 financing:	March 31, 2011			December 31, 2010			Transaction Date
Trading market prices	$	1.18		$	1.12		$	1.43
Estimated future volatility		99	%		67	%		100	%
Dividend		—			—			—
Estimated future risk-free rate		2.25	%		1.84	%		1.78	%
Equivalent volatility		87	%		89	%		98	%
Equivalent risk-free rate		0.58	%		0.52	%		0.59	%

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

TABLE OF CONTENTS

REXAHN PHARMACEUTICALS, INC.

(A Development Stage Company)

Notes to Condensed Financial Statements

(Unaudited)

15.	Warrants (cont’d)

Changes in the fair value of the warrant liabilities, carried at fair value, as reported as “unrealized gain (loss) on fair value of warrants” in the statement of operations:

		Three Months Ended March 31, 2011				Three Months Ended March 31, 2010 (Restated)				Cumulative from March 19, 2001 (Inception) to March 31, 2011
December 18, 2007 financing		$	—			$	(1,678,319

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REXAHN PHARMACEUTICALS, INC. - FORM 10-Q - May 9, 2011