Delaware		11-3516358
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Large accelerated filer	☐		Accelerated filer	☑
Non-accelerated filer	☐		Smaller reporting company	☐
			Emerging growth company	☐

PART I.

Financial Information

Item 1.

Financial Statements

REXAHN PHARMACEUTICALS, INC.

Condensed Balance Sheet

(Unaudited)

		September 30, 2018				December 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents		$	4,591,722			$	8,899,154
Marketable securities			7,974,010				17,931,941
Prepaid expenses and other current assets			1,154,898				1,304,541
Total Current Assets			13,720,630				28,135,636
Security Deposits			30,785				30,785
Equipment, Net			123,480				121,460
Total Assets		$	13,874,895			$	28,287,881
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	3,331,646			$	3,233,926
Deferred Research and Development Arrangement			-				375,000
Other Liabilities			29,850				56,724
Warrant Liabilities			4,101,504				7,853,635
Total Liabilities			7,463,000				11,519,285
Commitments and Contingencies (note 14)
Stockholders’ Equity:
Preferred stock, par value $0.0001, 10,000,000 authorized shares, none issued and outstanding			-				-
Common stock, par value $0.0001, 75,000,000 and 50,000,000 authorized shares, 31,751,939 and 31,725,114 issued and outstanding			3,175				3,173
Additional paid-in capital			158,008,879				157,141,021
Accumulated other comprehensive loss			(29,487	)			(56,886	)
Accumulated deficit			(151,570,672	)			(140,318,712	)
Total Stockholders’ Equity			6,411,895				16,768,596
Total Liabilities and Stockholders’ Equity		$	13,874,895			$	28,287,881

(See accompanying notes to the condensed financial statements)

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REXAHN PHARMACEUTICALS, INC.

Condensed Statement of Operations

(Unaudited)

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Revenues:		$	-			$	-			$	-			$	-
Expenses:
General and administrative			1,795,952				1,574,323				5,192,122				5,004,832
Research and development			2,887,955				2,644,999				10,379,081				7,451,656
Total Expenses			4,683,907				4,219,322				15,571,203				12,456,488
Loss from Operations			(4,683,907	)			(4,219,322	)			(15,571,203	)			(12,456,488	)
Other Income (Expense)
Interest income			55,153				60,750				198,362				135,329
Other income			-				-				368,750				-
Unrealized (loss) gain on fair value of warrants			(710,065	)			3,120,500				3,752,131				(9,047,831	)
Financing expense			-				-				-				(333,050	)
Total Other Income (Expense)			(654,912	)			3,181,250				4,319,243				(9,245,552	)
Net Loss Before Provision for Income Taxes			(5,338,819	)			(1,038,072	)			(11,251,960	)			(21,702,040	)
Provision for income taxes			-				-				-				-
Net Loss		$	(5,338,819	)		$	(1,038,072	)		$	(11,251,960	)		$	(21,702,040	)
Net loss per share, basic and diluted		$	(0.17	)		$	(0.04	)		$	(0.35	)		$	(0.83	)
Weighted average number of shares outstanding, basic and diluted			31,751,450				28,459,316				31,742,531				26,121,160

(See accompanying notes to the condensed financial statements)

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REXAHN PHARMACEUTICALS, INC.

Condensed Statement of Comprehensive Loss

(Unaudited)

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Net Loss		$	(5,338,819	)		$	(1,038,072	)		$	(11,251,960	)		$	(21,702,040	)
Unrealized gain (loss) on available-for-sale securities			35,468				11,740				27,399				(7,843	)
Comprehensive Loss		$	(5,303,351	)		$	(1,026,332	)		$	(11,224,561	)		$	(21,709,883	)

(See accompanying notes to the condensed financial statements)

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REXAHN PHARMACEUTICALS, INC.

Condensed Statement of Cash Flows

(Unaudited)

		For the Nine Months Ended September 30,
		2018				2017
Cash Flows from Operating Activities:
Net loss		$	(11,251,960	)		$	(21,702,040	)
Adjustments to reconcile net loss to net cash used in operating activities:
Compensatory stock			22,650				31,200
Depreciation and amortization			37,204				30,963
Amortization of premiums and discounts on marketable securities, net			35,110				40,578
Stock-based compensation			845,210				790,006
Amortization and termination of deferred research and development arrangement			(375,000	)			(56,250	)
Unrealized (gain) loss on fair value of warrants			(3,752,131	)			9,047,831
Financing expense			-				333,050
Amortization of deferred lease incentive			(9,332	)			(9,333	)
Deferred lease expenses			(17,542	)			(8,314	)
Changes in assets and liabilities:
Prepaid expenses and other assets			149,643				(669,087	)
Accounts payable and accrued expenses			97,720				456,277
Net Cash Used in Operating Activities			(14,218,428	)			(11,715,119	)
Cash Flows from Investing Activities:
Purchase of equipment			(39,224	)			(21,369	)
Purchase of marketable securities			-				(15,008,660	)
Redemption of marketable securities			9,950,220				8,720,000
Net Cash Provided by (Used In) Investing Activities			9,910,996				(6,310,029	)
Cash Flows from Financing Activities:
Issuance of common stock and units, net of issuance costs			-				9,241,271
Proceeds from exercise of stock warrants			-				5,354,093
Proceeds from exercise of stock options			-				77,500
Net Cash Provided by Financing Activities			-				14,672,864
Net Decrease in Cash and Cash Equivalents			(4,307,432	)			(3,352,284	)
Cash and Cash Equivalents – beginning of period			8,899,154				11,578,473
Cash and Cash Equivalents - end of period		$	4,591,722			$	8,226,189
Supplemental Cash Flow Information
Non-cash financing and investing activities:
Warrants issued		$	-			$	4,107,488
Warrant liability extinguishment from exercise of warrants		$	-			$	8,052,594

(See accompanying notes to the condensed financial statements)

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

1.	Operations and Organization

Operations

Rexahn Pharmaceuticals, Inc. (the “Company”), a Delaware corporation, is a biopharmaceutical company whose principal operations are the discovery and development of innovative treatments for cancer.

Liquidity and Going Concern

Accounting Standards Codification (“ASC”) 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASC 205-40”), requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.

As of September 30, 2018, the Company had cash, cash equivalents and marketable securities of approximately $12.6 million, working capital of approximately $10. 4 million and an accumulated deficit of approximately $151. 6 million, and anticipates incurring losses through fiscal year 2018 and beyond.  The Company has incurred negative cash flow from operations since inception and not yet generated commercial revenues.  The Company believes that its cash, cash equivalents, and marketable securities at September 30, 2018 and the proceeds received from its completed registered direct public offering in October 2018, will be sufficient to fund current operations through the third quarter of 2019 and that the Company would require additional capital to fund operations beyond that point.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date these financial statements are issued.

To meet its needs, the Company intends to raise additional capital through equity financings, collaborations, or partnerships. Under ASC 205-40, management’s plans must be approved before the date the financial statements are issued to be considered probable of being effectively implemented, and the future receipt of potential funding is not considered probable at this time because none of the Company’s current plans have been finalized at the time of filing this Quarterly Report on Form 10-Q. Accordingly, substantial doubt is deemed to exist about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

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 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 (“U.S. GAAP”) 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 September 30, 2018 and December 31, 2017 and of the results of operations, and comprehensive loss for the three and nine months ended September 30, 2018 and 2017 and cash flows for the nine months ended September 30, 2018 and 2017 have been included.  Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of results that may be expected for any other interim period or the full fiscal year ending December 31, 2018. The accompanying unaudited condensed 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 for the year ended December 31, 2017 (the “2017 Form 10-K”).  Information included in the condensed balance sheet as of December 31, 2017 has been derived from the Company’s audited financial statements for the year ended December 31, 2017 included in the 2017 Form 10-K.   The unaudited condensed financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 these 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.

Notes to Condensed Financial Statements

(Unaudited)

2.	Recent Accounting Pronouncements Affecting the Company

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle is that a company should recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services and provides a revenue recognition framework in accordance with this principle.  On August 12, 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 by one year to December 15, 2017 for annual reporting periods beginning after that date and interim periods therein.  The Company adopted this guidance for the quarterly reporting period ended March 31, 2018, using the modified retrospective method.  As the Company does not have revenue contracts, the adoption of this guidance did not have a material impact on the operating results of the Company, there were no significant changes to disclosures, and there was no cumulative adjustment to the opening balance of retained earnings as of January 1, 2018.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires an entity to recognize assets and liabilities arising from leases on the balance sheet and to provide additional disclosures about leasing arrangements.  ASU 2016-02 will be effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact the adoption of this guidance will have on its financial statements.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

3.	Marketable Securities

Marketable securities are considered “available-for-sale” in accordance with FASB Accounting Standards Codification (“ASC”) 320, “Debt and Equity Securities,” and thus are reported at fair value in the Company’s accompanying balance sheet, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity.  Amounts reclassified out of accumulated other comprehensive income (loss) into realized gains and losses are accounted for on the basis of specific identification and are included in other income or expense in the statement of operations.  The Company classifies such investments as current on the balance sheet as the investments are readily marketable and available for use in current operations.

The following table shows the Company’s marketable securities’ adjusted cost, gross unrealized gains and losses, and fair value by significant investment category as of September 30, 2018 and December 31, 2017:

		September 30, 2018
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Corporate Bonds		$	8,003,497			$	-			$	(29,487	)		$	7,974,010

		December 31, 2017
		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Commercial Paper		$	3,241,005			$	-			$	(2,505	)		$	3,238,500
Corporate Bonds			14,747,822				-				(54,381	)			14,693,441
Total Marketable Securities		$	17,988,827			$	-			$	(56,886	)		$	17,931,941

The Company typically invests in highly-rated securities, with the primary objective of minimizing the potential risk of principal loss.  As of September 30, 2018, the Company had six corporate bonds with an aggregate fair value of $5,974,460 and unrealized losses of $26,899 that have been unrealized losses for less than 12 months, and two corporate bonds with an aggregate fair value of $1,999,550 and unrealized losses of $2,588 that have been unrealized losses for greater than 12 months.  The Company does not intend to sell its marketable securities in an unrealized loss position.  Based upon these securities’ fair value relative to the cost, high ratings, and volatility of fair value, the Company considers the declines in market value of its marketable securities to be temporary in nature, does not consider any of its investments other-than-temporarily impaired, and anticipates that it will recover the entire amortized cost basis.

As of September 30, 2018, all of the Company’s marketable securities are due to mature in less than one year.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

4.	Prepaid Expenses and Other Current Assets

		September 30, 2018				December 31, 2017
Deposits on contracts		$	520,677			$	793,940
Prepaid expenses and other current assets			634,221				510,601
		$	1,154,898			$	1,304,541

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

5.	Equipment, Net

		September 30, 2018				December 31, 2017
Furniture and fixtures		$	82,686			$	82,686
Office and computer equipment			159,489				171,724
Lab equipment			447,653				445,134
Leasehold improvements			131,762				133,762
Total equipment			821,590				833,306
Less: Accumulated depreciation and amortization			(698,110	)			(711,846	)
Net carrying amount		$	123,480			$	121,460

6.	Accounts Payable and Accrued Expenses

		September 30, 2018				December 31, 2017
Trade payables		$	1,298,168			$	895,638
Accrued expenses			103,000				95,416
Accrued research and development contract costs			1,252,445				1,435,109
Payroll liabilities			678,033				807,763
		$	3,331,646			$	3,233,926

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited )

7.	Deferred Research and Development Arrangement

Rexgene Biotech Co., Ltd.

In 2003, the Company entered into a collaborative research agreement with Rexgene Biotech Co., Ltd. (“Rexgene”), a stockholder.  Rexgene agreed to assist the Company with the research, development and clinical trials necessary for registration of the Company’s drug candidate RX-0201 (Archexin®) in Asia.  In accordance with the agreement, Rexgene paid the Company a one-time fee of $1, 500,000 in 2003.  The agreement provided that it would expire upon the later of (i) 20 years after the date of the agreement or (ii) the expiration of the patents relating to RX-0201.  The amortization reduced research and development expenses for the periods presented.  The payment from Rexgene was used in the cooperative funding of the costs of development of RX-0201.

On February 5, 2018, the Company and NEXT BT Co. Ltd., (“Next BT”) the successor in interest to Rexgene, terminated the agreement. In exchange for Next BT terminating its rights to RX-0201 in Asia, the Company agreed to pay Next BT a royalty in the low single digits of any net sales of RX-0201 the Company makes in Asia and 50% of the Company’s licensing revenue related to the licensing of RX-0201 in Asia, up to an aggregate of $5,000,000.  Upon termination of the agreement, the unamortized deferred research and development arrangement liability of $368,750 was eliminated and recognized as other income.

The Company historically used 20 years as its basis for recognition and accordingly, for the nine months ended September 30, 2018, research and development expenses were reduced by $6,250 for the period beginning January 1, 2018 up to the agreement’s termination.  For the three and nine months ended September 30, 2017, $18,750 and $56,250, respectively was reduced from research and development expenses.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

8.	Other Liabilities

Deferred Lease Incentive

In accordance with the Company’s office lease agreement, as amended and further discussed in Note 14, the Company has been granted leasehold improvement allowances from the lessor 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 accounted for the benefit of the leasehold improvement allowance as a reduction of rental expense over the term of the office lease.

The following table sets forth the cumulative deferred lease incentive:

		September 30, 2018				December 31, 2017
Deferred lease incentive		$	154,660			$	154,660
Less accumulated amortization			(145,327	)			(135,995	)
Balance		$	9,333			$	18,665

Deferred Office Lease Expense

The lease agreement, as amended, provided for an initial annual base rent with annual increases over the lease term.  The Company recognizes rental expense on a straight-line basis over the term of the lease, which resulted in a deferred rent liability of $20,517 and $38,059 as of September 30, 2018 and December 31, 2017, respectively.

9.	Net Loss per Common Share

Basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period.  Diluted loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding, plus the number of common share equivalents that would be dilutive.  As of September 30, 2018, and December 31, 2017, there were stock options, restricted stock units and warrants to acquire, in the aggregate, 9, 534,122 and 8,961,140 shares of the Company’s common stock, respectively, that are potentially dilutive. However diluted loss per share is the same as basic loss per share for all periods presented because the inclusion of common share equivalents would be anti-dilutive.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

10.	Common Stock

The following transactions occurred during the nine months ended September 30, 2018:

Authorized Shares

On August 30, 2018, the Company’s shareholders approved an increase in the Company’s authorized shares of stock from 50,000,000 to 75,000,000.

Compensatory Shares

During the nine months ended September 30, 2018, the Company issued 15,000 shares to a privately held investor relations firm in exchange for investor relations services.  The aggregate market value of the stock issued was $22,650.

Restricted Stock Units

During the nine months ended September 30, 2018, the Company issued 11,825 shares resulting from the vesting of restricted stock units (“RSUs”).

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

11.	Stock-Based Compensation

As of September 30, 2018, the Company had 2, 599,038 options to purchase common stock and 35,475 RSUs outstanding.

At the Company’s Annual Meeting of Shareholders held on June 10, 2013, the Company’s shareholders voted to approve the Rexahn Pharmaceuticals, Inc. 2013 Stock Option Plan (the “2013 Plan”).  Under the 2013 Plan, the Company grants equity awards to key employees, directors and consultants of the Company. At the Company’s Annual Meeting held on June 9, 2016, the Company’s shareholders voted to approve an amendment and restatement of the 2013 Plan, including to provide for awards of restricted stock and restricted stock units.  The Company initially reserved 1,700,000 shares of common stock for issuance pursuant to the 2013 Plan, and on April 11, 2017, the Company’s shareholders approved an increase of 1,700,000 shares of common stock reserved for issuance pursuant to the 2013 Plan. As of September 30, 2018, there were 2, 287,038 options and 35,475 RSUs outstanding under the 2013 Plan, and 1, 064,912 shares were available for issuance.

On August 5, 2003, the Company established a stock option plan (the “2003 Plan”).  Under the 2003 Plan, the Company granted stock options to key employees, directors and consultants of the Company.  With the adoption of the 2013 Plan, no new stock options may be issued under the 2003 Plan, but previously issued options under the 2003 Plan remain outstanding until their expiration.  As of September 30, 2018, there were 300,000 options outstanding under the 2003 Plan.

In March 2016, the Company granted to a third party an option to purchase up to 12,000 shares of the Company’s common stock.  These were the only Company stock options outstanding as of September 30, 2018 that were not issued pursuant to the 2013 Plan or the 2003 Plan.

Accounting for Awards

Stock-based compensation expense is the estimated fair value of options and RSUs granted amortized on a straight-line basis over the requisite vesting service period for the entire portion of the award. Total stock-based compensation recognized by the Company for the three and nine months ended September 30, 2018 and 2017 is as follows:

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Statement of operations line item:
General and administrative		$	188,920			$	184,914			$	579,924			$	580,812
Research and development			92,562				42,700				265,286				209,194
Total		$	281,482			$	227,614			$	845,210			$	790,006

No income tax benefit has been recognized in the statement of operations for stock-based compensation arrangements as the Company has provided for a 100% valuation allowance on its deferred tax assets.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

Summary of Stock Option Transactions

There were 8 60,307 stock options granted at exercise prices ranging from $1. 46 to $2.29 with an aggregate fair value of $ 1,089,851 during the nine months ended September 30, 2018.  There were 483,260 stock options granted at exercise prices ranging from $1.84 to $6.18 with an aggregate fair value of $ 738,937 during the nine months ended September 30, 2017.

For the majority of the grants to employees, the vesting period is 25% on the first anniversary of the grant date and, thereafter, one thirty-sixth of the remaining option vests in equal installments on the first business day of each month until fully vested.  Options generally expire ten years from the date of grant. For the majority of grants to non-employee consultants of the Company, the vesting period is between one and three years, subject to the fulfillment of certain conditions in the individual stock agreements, or 100% upon the occurrence of certain events specified in the individual stock agreements.

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 ASC 718, “Compensation-Stock Compensation,” and Staff Accounting Bulletin No. 107 (“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.

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

		Nine Months Ended September 30,
		2018				2017
Black-Scholes assumptions
Expected dividend yield			0	%			0	%
Expected volatility			69-72	%			69-79	%
Risk-free interest rate			2.3-2.8	%			1.8-2.0	%
Expected term (in years)		5.5-6 years				5.5-6 years

A summary of stock option activity for the nine months ended September 30, 2018 is as follows:

		Number of Options				Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding, January 1, 2018			1,814,231			$	5.33		7.1 years		$	53,883
Granted			860,307			$	1.96
Exercised			-			$	-
Expired			(25,000	)		$	21.78
Cancelled			(50,500	)		$	5.16
Outstanding, September 30, 2018			2,599,038			$	4.06		7.5 years		$	50,870
Exercisable, September 30, 2018			1,345,721			$	5.71		6.1 years		$	-

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

There were no stock options exercised during the three and nine months ended September 30, 2018 or for the three months ended September 30, 2017.  The total intrinsic value of options exercised was $97,872 for the nine months ended September 30, 2017.  The weighted average fair value of the options granted was $1.27 and $1.53 for the nine months ended September 30, 2018 and 2017, respectively.

A summary of the Company’s unvested options as of September 30, 2018 and changes during the nine months ended September 30, 2018 is presented below:

	2018
		Number of Options				Weighted Average Fair Value at Grant Date
Unvested at January 1, 2018			727,543			$	2.39
Granted			860,307			$	1.27
Vested			(334,533	)		$	2.89
Cancelled			-			$	-
Unvested at September 30, 2018			1,253,317			$	1.49

As of September 30, 2018, there was $ 1,494,158 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average vesting period of 2. 5 years.

Summary of Restricted Stock Unit Transactions

The Company began granting RSUs to employees in 2017.  The fair value of an RSU award is the closing price of the Company’s common stock on the date of grant.

A summary of RSU activity for the nine months ended September 30, 2018 is as follows:

		Number of RSUs				Weighted Average Grant Date Fair Value
Outstanding, January 1, 2018			47,300			$	1.84
Granted			-			$	-
Vested and Released			(11,825	)		$	1.84
Cancelled			-			$	-
Outstanding, September 30, 2018			35,475			$	1.84

As of September 30, 2018, there was $51, 512 of total unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average vesting period of 2. 4 years.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

12.

Warrants

As of September 30, 2018, warrants to purchase up to 6,899,609 shares were outstanding, having exercise prices ranging from $2.85   to $12. 80 and expiration dates ranging from October 16, 2018 to April 17, 20 23 .

		2018								2017
		Number of warrants				Weighted average exercise price				Number of warrants				Weighted average exercise price
Balance, January 1			7,099,609			$	4.55				5,452,691			$	4.92
Issued during the period			-			$	-				1,696,970			$	4.01
Exercised during the period			-			$	-				(1,861,195	)		$	3.51
Expired during the period			(200,000	)		$	5.90				-			$	-
Balance, September 30			6,899,609			$	4.51				5,288,466			$	5.13

At September 30, 2018, the weighted average remaining contractual life of the outstanding warrants was 3. 4 years.

The warrants issued to investors in the November 2015, March 2016 and September 2016 offerings contain a provision for net cash settlement in the event of a fundamental transaction (contractually defined to include a merger, sale of substantially all assets, tender offer or share exchange).  Pursuant to the November 2015, March 2016, and September 2016 warrants, if a fundamental transaction occurs, then the warrant holder has the option to receive cash, equal to the fair value of the remaining unexercised portion of the warrant.  The June 2017 and October 2017 warrants contain a provision that allows the holder to opt for cash settlement in a fundamental transaction that was approved by, or required to be approved by, the board of directors of the Company. All of the Company’s outstanding warrants provide the holder the option as to the type of consideration received if the holders of common stock receive an option as to their consideration. In addition, all of the Company’s outstanding warrants contain a cashless exercise provision that is exercisable only in the event that a registration statement is not effective. That provision may not be operative if an effective registration statement is not available because an exemption under the U.S. securities laws may not be available to issue unregistered shares.  As a result, net cash settlement may be required, and the warrants require liability classification.

ASC 820, “Fair Value Measurements and Disclosures,” 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 were 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 that 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; and

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

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

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. Because the Company is not yet achieving positive cash flow, management believes the probability of a fundamental transaction occurring over the term of the warrant is unlikely and therefore estimates the probability of entering into a fundamental transaction to be 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 significant unobservable inputs used in the fair value measurement of the warrants include management’s estimate of the probability that a fundamental transaction may occur in the future.  Significant increases (decreases) in the probability of occurrence would result in a significantly higher (lower) fair value measurement.

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

Warrant Issuance:		Fair Value as of:
		September 30, 2018				December 31, 2017
July 2013 Investor Warrants		$	-			$	8,762
October 2013 Investor Warrants			-				26,288
January 2014 Investor Warrants			-				29,257
November 2015 Investor Warrants			399,278				1,260,050
November 2015 Placement Agent Warrants			591				2,936
March 2016 Investor Warrants			296,462				697,554
September 2016 Investor Warrants			592,513				1,054,083
June 2017 Investor Warrants			1,059,522				1,981,864
June 2017 Placement Agent Warrants			115,769				221,591
October 2017 Investor Warrants			1,476,646				2,305,552
October 2017 Placement Agent Warrants			160,723				265,698
Total:		$	4,101,504			$	7,853,635

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

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

Warrant Issuance		Number of Shares indexed as of:
		September 30, 2018				December 31, 2017
July 2013 Investor Warrants			-				200,000
October 2013 Investor Warrants			231,732				231,732
January 2014 Investor Warrants			476,193				476,193
November 2015 Investor Warrants			1,250,001				1,250,001
November 2015 Placement Agent Warrants			3,334				3,334
March 2016 Investor Warrants			607,806				607,806
September 2016 Investor Warrants			805,000				805,000
June 2017 Investor Warrants			1,515,152				1,515,152
June 2017 Placement Agent Warrants			181,818				181,818
October 2017 Investor Warrants			1,632,654				1,632,654
October 2017 Placement Agent Warrants			195,919				195,919
Total:			6,899,609				7,099,609

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

		September 30, 2018				December 31, 2017
Trading market prices		$	1.78			$	2.02
Estimated future volatility			101	%			104	%
Dividend			-				-
Estimated future risk-free rate			3.02-3.04	%			2.14-2.45	%
Equivalent volatility			49-76	%			85-104	%
Equivalent risk-free rate			1.10-2.70	%			1.30-1.89	%

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

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

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Expired and Fully Exercised Warrants		$	-			$	7,306			$	-			$	(855,010	)
July 2013 Investor Warrants			-				125,686				8,762				(55,362	)
October 2013 Investor Warrants			-				135,683				26,288				(102,608	)
January 2014 Investor Warrants			-				177,900				29,257				(125,148	)
November 2015 Investor Warrants			5,971				797,688				860,772				(1,304,350	)
November 2015 Placement Agent Warrants			211				1,691				2,345				(366,694	)
March 2016 Investor Warrants			(38,943	)			356,472				401,092				(2,873,309	)
September 2016 Investor Warrants			(109,915	)			506,353				461,570				(4,807,246	)
June 2017 Investor Warrants			(178,869	)			894,076				922,342				1,277,485
June 2017 Placement Agent Warrants			(22,518	)			117,645				105,822				164,411
October 2017 Investor Warrants			(331,671	)			-				828,906				-
October 2017 Placement Agent Warrants			(34,331	)			-				104,975				-
Total:		$	(710,065	)		$	3,120,500			$	3,752,131			$	(9,047,831	)

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

13.	Income Taxes

No provision for federal and state income taxes was required for the three and nine months ended September 30, 2018 and 2017 due to the Company’s operating losses and increased deferred tax asset valuation allowance.  At September 30, 2018 and December 31, 2017, the Company had unused net operating loss carry-forwards of approximately $142,488,000 and $ 127,877 ,000 respectively.  Some of this amount may be subject to annual limitations under certain provisions of the Internal Revenue Code related to “changes in ownership.”

As of September 30, 2018 and December 31, 2017, the deferred tax assets related to the aforementioned carry-forwards have been fully offset by valuation allowances, because significant utilization of such amounts is not presently expected in the foreseeable future.

Deferred tax assets and valuation allowances consist of:

		September 30, 2018				December 31, 2017
Net Operating Loss Carryforwards		$	39,897,000			$	35,805,000
Stock Compensation Expense			1,558,000				1,458,000
Book tax differences on assets and liabilities			209,000				365,000
Valuation Allowance			(41,664,000	)			(37,628,000	)
Net Deferred Tax Assets		$	-			$	-

The Company files income tax returns in the U.S. federal and Maryland state jurisdictions.  Tax years for fiscal 2015 through 2017 are open and potentially subject to examination by the federal and Maryland state taxing authorities.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

14.	Commitments and Contingencies

a)

The Company has contracted with various vendors for services, with terms that require payments over the terms of the agreements, usually ranging from two to 36 months. The costs to be incurred are estimated and are subject to revision. As of September 30, 2018, the total estimated cost to complete these agreements was approximately $6,980,000.  All of these agreements may be terminated by either party upon appropriate notice as stipulated in the respective agreements.

b)

On June 22, 2009, the Company entered into a License Agreement with Korea Research Institute of Chemical Technology (“KRICT”) to acquire the rights to all intellectual property related to quinoxaline-piperazine derivatives that were synthesized under a Joint Research Agreement.  The initial license fee was $100,000, all of which was paid as of December 31, 2009.  The agreement with KRICT calls for a one-time milestone payment of $1,000,000 within 30 days after the first achievement of marketing approval of the first commercial product arising out of or in connection with the use of KRICT’s intellectual property.  As of September 30, 2018, the milestone has not occurred.

c)

Office Space Lease

On June 5, 2009, the Company entered into a commercial lease agreement for 5,466 square feet of office space in Rockville, Maryland.  The lease was amended on June 7, 2013 to extend the term until June 30, 2019.

On July 26, 2014 the lease was amended to add 1,727 square feet of office space for a term beginning on September 1, 2014 and ending on August 31, 2015. The lease of additional space was subsequently renewed through June 30, 2019. Under the lease agreement, the Company pays its allocable portion of real estate taxes and common area operating charges.

Rent paid under the Company’s lease during the three months ended September 30, 2018 and 2017 was $ 53,850 and $5 2,172 , respectively, and rent paid during the nine months ended September 30, 2018 and 2017 was $1 59,247 and $1 53,968 respectively.

Laboratory Lease

On April 20, 2015, the Company signed a five-year lease agreement for 2,552 square feet of laboratory space commencing on July 1, 2015 and ending on June 30, 2020.  Under the lease agreement, the Company pays its allocable portion of real estate taxes and common area operating charges. Rent paid under this lease during the three months ended September 30, 2018 and 2017 was $ 16,732 and $ 16,244, respectively, and rent paid during the nine months ended September 30, 2018 and 2017 was $49,221 and $47,787, respectively.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

Future rental payments over the next five years for all leases are as follows:

For the remaining three months ending December 31:	2018		$	70,806
For the year ending December 31:	2019			176,080
	2020			34,468
	Total		$	281,354

d)

The Company has established a 401(k) plan for its employees.  The Company has elected to match 100% of the first 3% of an employee’s compensation plus 50% of an additional 2% of the employee’s deferral. Expense related to this matching contribution aggregated to $ 29,425 and $3 1,453 for the three months ended September 30, 2018 and 2017, respectively, and $ 99,702 and $ 92,203 for the nine months ended September 30, 2018 and 2017, respectively.

e)

In July 2013, the Company entered into an exclusive license agreement with the University of Maryland, Baltimore for a novel drug delivery platform, Nano-Polymer Drug Conjugate Systems.  As of September 30, 2018, no development milestones have occurred.

f)

In October 2013, the Company signed an exclusive license agreement with the Ohio State Innovation Foundation, for a novel oligonucleotide drug delivery platform, Lipid-Coated Albumin Nanoparticle.  The agreement requires the Company to make payments to the Ohio State Innovation Foundation if any products from the licensed delivery platform achieve development milestones.  As of September 30, 2018, no development milestones have occurred.

g)

On February 5, 2018, the Company and Next BT terminated the research collaboration agreement between the Company and Rexgene. In exchange for Next BT terminating its rights to RX-0201 in Asia, the Company agreed to pay Next BT a royalty in the low single digits of any net sales of RX-0201 the Company makes in Asia and 50% of the Company’s licensing revenue related to licensing of RX-0201 in Asia, up to an aggregate of $5,000,000.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

15.	Fair Value Measurements

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs.  ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels are described below:

Level 1 Inputs		—		Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company;
Level 2 Inputs		—		Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3 Inputs		—		Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.

The following tables present assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.  There have been no changes in the methodologies used at September 30, 2018 and December 31, 2017.

de

Fair Value Measurements at September 30, 2018
Assets:		Total				Level 1				Level 2				Level 3
Corporate Bonds		$	7,974,010			$	-			$	7,974,010			$	-
Liabilities:
Warrant Liabilities		$	4,101,504			$	-			$	-			$	4,101,504

Fair Value Measurements at December 31, 2017
Assets:		Total				Level 1				Level 2				Level 3
Commercial Paper			3,238,500				-				3,238,500				-
Corporate Bonds			14,693,441				-				14,693,441				-
Total Assets:		$	17,931,941			$	-			$	17,931,941			$	-
Liabilities:
Warrant Liabilities		$	7,853,635			$	-			$	-			$	7,853,635

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

The fair value of the Company’s Level 2 marketable securities is determined by using quoted prices from independent pricing services that use market data for comparable securities in active or inactive markets.  A variety of data inputs, including benchmark yields, interest rates, known historical trades and broker dealer quotes are used with pricing models to determine the quoted prices.

The fair value methodology for the warrant liabilities is disclosed in Note 12.

The carrying amounts reported in the financial statements for cash and cash equivalents (Level 1), and accounts payable and accrued expenses approximate fair value because of the short-term maturity of these financial instruments.

The following table sets forth a reconciliation of changes for the nine months ended September 30, 2018 and 2017 in the fair value of the liabilities classified as Level 3 in the fair value hierarchy:

		Warrant Liabilities
Balance at January 1, 2018		$	7,853,635
Additions			-
Unrealized gains, net			(3,752,131	)
Transfers out of level 3			-
Balance at September 30, 2018		$	4,101,504

		Warrant Liabilities
Balance at January 1, 2017		$	1,573,366
Additions			4,107,488
Unrealized losses, net			9,047,831
Transfers out of level 3			(8,052,594	)
Balance at September 30, 2017		$	6,676,091

Additions consist of the fair value of warrant liabilities upon issuance.  Transfers out of Level 3 for warrant liabilities consist of warrant exercises, where the liability is converted to additional paid-in capital upon exercise.  The Company’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstance that caused the transfer.

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REXAHN PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

16.	Collaboration Agreement

On August 16, 2018, the Company entered into a clinical trial collaboration and supply agreement (the “Collaboration Agreement”) with Merck Sharp & Dohme B.V. (“Merck”) to conduct a Phase 2 clinical trial to evaluate the safety and efficacy of the combination of RX-5902 with Merck’s anti-PD‑1 therapy, KEYTRUDA® (pembrolizumab), in patients with metastatic triple negative breast cancer (TNBC). Under the terms of the Collaboration Agreement, the Company will sponsor the clinical trial and Merck will supply the Company with KEYTRUDA for use in the trial at no cost to the Company. The Collaboration Agreement provides that the Company and Merck will jointly own clinical data generated from the clinical trial.

17.	Subsequent Event

On October 19, 2018, the Company closed a registered direct offering of 5,769,231 shares of common stock and warrants to purchase up to 5,769,231 shares of common stock, resulting in gross proceeds to the Company of approximately $7,500,000.  The common stock and warrants were sold in units, consisting of a share of common stock and a warrant to purchase a share of common stock, at a price of $1.30 per unit, with an exercise price for the warrants of $1.67 per share .  The warrants will become exercisable April 19, 2019 and will remain exercisable through April 19, 2024.  The Company also issued warrants to purchase up to 346,154 shares of the Company’s common stock, at an exercise price of $1.625 per share, to designees of the placement agent in the offering.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

The following discussion should be read in conjunction with the unaudited condensed financial statements and notes thereto set forth in Item 1 of this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties.  We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.  In this Quarterly Report on Form 10-Q, words such as “believe”, “estimate”, “expect”, “anticipate”, “will”, “may”, “intend” and other similar expressions, are intended to identify forward-looking statements.  We caution that forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors that are, in many instances, beyond our control.  Actual results, performance or achievements may differ materially from those contemplated, expressed or implied by the forward-looking statements.

Although we believe that the expectations reflected in our forward-looking statements are reasonable as of the date we make them, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to:

·

our understandings and beliefs regarding the role of certain biological mechanisms and processes in cancer;

·

our drug candidates being in early stages of development, including in pre-clinical development;

·

our ability to initially develop drug candidates for orphan indications to reduce the time-to-market and take advantage of certain incentives provided by the U.S. Food and Drug Administration;

·

our ability to transition from our initial focus on developing drug candidates for orphan indications to candidates for more highly prevalent indications;

·

our ability to successfully and timely complete clinical trials for our drug candidates in clinical development;

·

uncertainties related to the timing, results and analyses related to our drug candidates in pre-clinical development;

·

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

·

our reliance on third-party contract research organizations and other investigators and collaborators for certain research and development services;

·

our ability to maintain or engage third-party manufacturers to manufacture, supply, store and distribute supplies of our drug candidates for our clinical trials;

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·

our ability to form strategic alliances and partnerships with pharmaceutical companies and other partners for sales and marketing of certain of our product candidates;

·

demand for and market acceptance of our drug candidates;

·

the scope and validity of our intellectual property protection for our drug candidates and our ability to develop our candidates without infringing the intellectual property rights of others;

·

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

·

our ability to continue as a going concern; and

·

other risks and uncertainties, including those set forth herein and in our Annual Report on Form 10-K for the year ended December 31, 2017 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.

We are a clinical stage biopharmaceutical company dedicated to the discovery and development of innovative treatments for cancer. Our mission is to improve the lives of cancer patients by developing next-generation cancer therapies that are designed to maximize efficacy while minimizing the toxicity and side effects traditionally associated with cancer treatment. Our pipeline features two oncology product candidates in Phase 2 clinical development and additional compounds in pre-clinical development. Our strategy is to continue building a significant pipeline of innovative oncology product candidates that we intend to commercialize with partners. Our clinical stage drug candidates in active development are RX-3117 and RX-5902 (Supinoxin™).

·

RX-3117 is a novel, oral, small molecule nucleoside compound.  Once intracellularly activated (phosphorylated) by the enzyme UCK2, it is incorporated into the DNA or RNA of cells and inhibits both DNA and RNA synthesis, which induces apoptotic cell death of tumor cells.  Because UCK2 is overexpressed in multiple human tumors, but has a very limited presence in normal tissues, RX-3117 offers the potential for a targeted anti-cancer therapy with an improved efficacy and safety profile, and we believe it has therapeutic potential in a broad range of cancers, including pancreatic, bladder, colon, and lung cancer.  In January 2018, we reported final data from a Phase 2a clinical trial of RX-3117 in patients with relapsed or refractory metastatic pancreatic cancer.  In this trial, encouraging progression free survival and evidence of tumor shrinkage were observed in patients with metastatic pancreatic cancer that was resistant to gemcitabine and who had failed on multiple prior treatments. RX-3117 is currently the subject of a Phase 2a clinical trial in combination with Abraxane® (paclitaxel protein-bound) in patients newly diagnosed with metastatic pancreatic cancer.  The second stage of this clinical trial began in May 2018, and in October 2018, we released preliminary data illustrating the combined administration of RX-3117 and Abraxane, appears safe and well tolerated and showed evidence of clinical activity.  In February 2018 updated safety and efficacy data from the ongoing two-stage Phase 2a clinical trial of RX-3117 in advanced urothelial (bladder) cancer were reported. In this trial, encouraging progression free survival and evidence of tumor shrinkage were observed in patients with advanced bladder cancer who had failed on multiple prior treatments including immunotherapy and gemcitabine.  RX-3117 has received “orphan drug designation” from the U.S. Food and Drug Administration (“FDA”) and from the European Commission for pancreatic cancer.  Orphan drug designation in the U.S. provides tax incentives for clinical research and a waiver from user fees under certain circumstances. In addition, an orphan drug generally receives seven years of exclusivity in the U.S. after approval for a designated use, during which time, the FDA generally cannot approve another product with the same active moiety for the same indication.

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·

RX-5902 is a potential first-in-class small molecule inhibitor of phosphorylated-p68, a protein that we believe plays a key role in cancer cell growth, progression and metastasis through its interaction with beta-catenin.  Phosphorylated p68, which is highly expressed in cancer cells, but not in normal cells, results in up-regulation of cancer-related genes and a subsequent proliferation of cancer cells and tumor growth.  RX-5902 selectively blocks the interaction of phosphorylated p68 with beta-catenin, thereby decreasing the proliferation or growth of cancer cells in preclinical models.  In addition, multiple pre-clinical models suggest that RX-5902 enhances the efficacy of immunotherapy. We have evaluated RX-5902 in a Phase 1 dose escalation study in patients with a diverse range of metastatic, treatment-refractory tumors, including breast, ovarian, colorectal, and neuro-endocrine tumors.  In February 2017, we initiated a Phase 2a clinical trial of RX-5902 in patients with metastatic triple negative breast cancer (“TNBC”). Preliminary data on this trial announced in June 2018 showed five of the first 10 evaluable patients exhibited clinical response and indicated that RX-5902 was well tolerated in the study.  As of October 12, 2018, 17 patients have been enrolled in the trial, with 13 of these patients evaluable and six showing a clinical response.  In August 2018, we entered into a collaboration with Merck Sharp & Dohme B.V. (“Merck”) to evaluate the combination of RX-5902 and Merck’s anti-PD-1 therapy, Keytruda® (pembrolizumab) in a Phase 2 trial in patients with metastatic triple negative breast cancer.

·

RX-0201 is a potential best-in-class, potent inhibitor of the protein kinase Akt-1, which we believe plays a critical role in cancer cell proliferation, survival, angiogenesis, metastasis and drug resistance.  RX-0201 is the subject of a research and development collaboration with Zhejiang Haichang Biotechnology Co., Ltd (“Haichang”) for the development of RX-0201 to conduct certain pre-clinical and clinical activities through completion of a Phase 2a proof-of-concept clinical trial in hepatocellular carcinoma (“HCC”) and pursuant to which the parties will share any downstream licensing fees and royalties paid by third parties in connection with the further development and commercialization of RX-0201 for the treatment of HCC.  RX-0201 has received orphan drug designation from the FDA for renal cell carcinoma (“RCC”), glioblastoma, ovarian cancer, stomach cancer and pancreatic cancer.  In February 2018, in response to the changing treatment landscape for metastatic RCC over the past two years with the approval of new therapies by the FDA, we announced plans to discontinue the internally funded programs of RX-0201 and ceased enrolling patients in a Phase 2a proof-of-concept clinical trial of RX-0201 in patients with metastatic RCC.

Since our inception, our efforts and resources have been focused primarily on developing our pharmaceutical technologies, raising capital and recruiting personnel.  We have no product sales to date, and we will not generate 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 and public financings, and licensing and collaboration agreements with our strategic investors and partners.

Recently Issued Accounting Standards

See Note 2, “Recent Accounting Pronouncements Affecting the Company,” in the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements.

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2018 and September 30, 2017

Total Revenues

We had no revenues for the three and nine months ended September 30, 2018 or 2017.

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, investor relations, and general legal activities.

General and administrative expenses increased approximately $222,000, or 14.1%, to $1,796,000 for the three months ended September 30, 2018 from $1,574,000 for the three months ended September 30, 2017.  General and administrative expenses increased approximately $187,000, or 3.7% to $5,192,000 for the nine months ended September 30, 2018 from $5,005,000 for the nine months ended September 30, 2017.  The increase for the three and nine months ended September 30, 2018 was primarily attributable to increased professional fees and shareholder meeting costs.

Research and Development Expenses

Research and development expenses increased approximately $243,000, or 9.2%, to $2,888,000 for the three months ended September 30, 2018, from $2,645,000 for the three months ended September 30, 2017.  The increase is primarily attributable to an increase in clinical trial costs and patient enrollments from the advancement of our RX-3117 and RX-5902 clinical trials.  Research and development expenses increased approximately $2,927,000, or 39.3%, to $10,379,000 for the nine months ended September 30, 2018, from $7,452,000 for the nine months ended September 30, 2017, partially due to increases in drug manufacturing costs.  During the nine months ended September 30, 2018, we incurred approximately $2,514,000 of drug manufacturing costs, compared to approximately $1,324,000 for the nine months ended September 30, 2017.  The increase is also attributable to an increased clinical trial costs.  During the nine months ended September 30, 2018, we incurred approximately $4,293,000 in clinical trial costs, compared to approximately $3,013,000 for the nine months ended September 30, 2017.

The table below summarizes the approximate amounts incurred in each of our research and development projects for the three and nine months ended September 30, 2018 and 2017:

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Project Candidates:
RX-3117		$	1,405,900			$	1,245,500			$	5,002,800			$	3,134,000
RX-5902			632,200				492,000				2,496,200				1,189,800
RX-0201			82,100				123,200				399,100				422,000
Preclinical, Personnel and Overhead			767,755				784,299				2,480,981				2,705,856
Total Research and Development Expenses		$	2,887,955			$	2,644,999			$	10,379,081			$	7,451,656

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Interest Income

Interest income decreased approximately $6,000 or 9.2% for the three months ended September 30, 2018 compared to the same period in 2017.  Interest income increased approximately $63,000 or 46.6% for the nine months ended September 30, 2018 compared to the same period in 2017.  The increase for the nine months ended September 30, 2018 was primarily attributable to higher interest rates on cash and cash equivalents and marketable securities for the nine months ended September 30, 2018 compared to the same period in 2017.

Other Income

During the nine months ended September 30, 2018, we recorded approximately $369,000 of other income related to the termination of our collaborative agreement with NEXT BT Co. Ltd, the successor in interest to Rexgene Biotech Co., Ltd.  See Note 7, “Deferred Research and Development Arrangement,” in the Notes to Condensed Financial Statements for a discussion of the termination of this agreement.

Unrealized (Loss) Gain on Fair Value of Warrants

Our warrants are recorded as liabilities at fair value, and the warrants are valued using a lattice model.  Changes in the fair value of warrants are recorded as an unrealized gain or loss in our statement of operations.  During the three months ended September 30, 2018 and 2017, we recorded unrealized (losses) gains on the fair value of our warrants of approximately ($710,000) and $3,121,000.  During the nine months ended September 30, 2018 and 2017, we recorded unrealized gains (losses) on the fair value of our warrants of approximately $3,752,000 and $(9,048,000).  Estimating fair values of warrants requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the warrants due to related changes to external market factors.  The large unrealized loss for the nine months ended September 30, 2017 primarily resulted from a significant increase in the stock price of the underlying common stock at September 30, 2017 compared to December 31, 2016.  An increase in volatility of the common stock during that period also had an impact on the large unrealized loss for the nine months ended September 30, 2017.

Financing Expense

We incurred approximately $333,000 in financing expenses during the nine months ended September 30, 2017 related to our registered direct offering in June 2017.  We did not incur financing expenses during the three months ended September 30, 2017 or the three and nine months ended September 30, 2018.

Net Loss

As a result of the above, net loss for the three and nine months ended September 30, 2018 was approximately $5,339,000 and $11,252,000, or $0.17 and $0.35 per share, respectively, compared to approximately $1,038,000 and $21,702,000, or $0.04 and $0.83 per share, respectively, for the three and nine months ended September 30, 2017, respectively.  As previously discussed, included in the net loss for the three and nine months ended September 30, 2017 are non-cash charges of approximately $3,121,000 and ($9,048,000) in unrealized gains (losses) on the fair value of warrants, compared to unrealized (losses) gains of (710,000) and 3,752,000 for the three and nine months ended September 30, 2018, respectively.

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Research and Development Projects

Research and development costs are expensed as incurred.  These costs 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 (“CROs”), 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 that have no alternative future uses are expensed as incurred.  Our research and development programs are related to our oncology drug candidates.  As we expand our clinical studies, we expect to 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, RX-3117 and RX-5902, is uncertain, 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 any.  If these projects are not completed as planned, our results of operations and financial condition would be negatively affected.

RX-3117

  RX-3117 is a novel, investigational oral small molecule nucleoside compound.  We believe RX-3117 has therapeutic potential in a broad range of cancers including pancreatic, bladder, cervical, non-small cell lung cancer and colon cancer.  We are evaluating RX-3117 in combination with Abraxane in Phase 2a proof-of-concept clinical trial in patients with newly diagnosed with metastatic pancreatic cancer, as well as a Phase 2a trial in patients with advanced bladder cancer.

Expenses related to RX-3117 increased during the three and nine months ended September 30, 2018 compared to the same periods in 2017 due to increased clinical trial and patient enrollments resulting from the progression of our pancreatic and bladder cancer clinical trials, as well as manufacturing costs for new campaigns. We expect that expenses related to RX-3117 will remain flat for the remainder of 2018 compared to the three months ended September 30, 2018 and decrease compared to the nine months ended September 30, 2018 as we expect drug manufacturing costs to comparatively decrease due to the completion of manufacturing campaigns.

RX-5902

RX-5902 is a potential first-in-class small molecule inhibitor of phosphorylated p68, a protein that we believe plays a key role in cancer growth, progression and metastasis through its interaction with beta-catenin. Phosphorylated p68 results in up-regulation of cancer-related genes and a subsequent proliferation of cancer cells and tumor growth.  In February 2017, we initiated a Phase 2a clinical study of RX-5902 in patients with metastatic TNBC.

Expenses related to RX-5902 increased during the three and nine months ended September 30, 2018 compared to the same periods in 2017.  The increase is primarily attributable to increased clinical trial costs for the Phase 2a study, as well as increased manufacturing costs for new manufacturing campaigns.  We expect that expenses related to RX-5902 will slightly decrease in the remainder of 2018 compared to the three and nine months ended September 30, 2018 as we expect drug manufacturing costs to decrease as manufacturing campaigns are completed.

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RX-0201

RX-0201 is a potential best-in-class, potent inhibitor of the protein kinase Akt-1, which we believe plays a critical role in cancer cell proliferation, survival, angiogenesis, metastasis and drug resistance.  RX-0201 is the subject of a research and development collaboration with Haichang for the development of RX-0201 to conduct certain pre-clinical and clinical activities through completion of a Phase 2a proof-of-concept clinical trial in HCC.

Expenses related to RX-0201 slightly decreased during the three and nine months ended September 30, 2018 compared to the same periods in 2017.  We expect that expenses related to RX-0201 will remain flat for the remainder of 2018 compared to the three and nine months ended September 30, 2018 as we wind down our Phase 2a clinical trial of RX-0201 in patients with metastatic RCC.

Pre-clinical Pipeline

Expenses related to our pre-clinical candidates decreased for the three and nine months ended September 30, 2018 compared to the same periods in 2017 primarily as a result of decreased research activities.  We expect that expenses related to our pre-clinical pipeline will remain flat for the remainder of 2018 compared to the three and nine months ended September 30, 2018 as we continue testing and development.

Research and Development Process

We have engaged third-party CROs and other investigators and collaborators, such as universities medical institutions and other life science companies, to conduct our pre-clinical studies, toxicology studies and clinical trials.  Engaging third party contract research organizations is typical practice in our industry. However, relying on such organizations means that the clinical trials and other studies described above are being conducted at external locations and that the completion of these trials and studies is not within our direct control. Trials and studies may be delayed due to circumstances outside our control, and such delays may result in additional expenses for us.

Liquidity and Capital   Resources

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.  We will need to raise additional capital through public or private equity or debt offerings or through arrangements with strategic partners or other sources in order to continue to develop our drug candidates.  There can be no assurance that additional capital will be available when needed or on terms satisfactory to us, if at all.  We believe that our cash, cash equivalents, and marketable securities will be sufficient to fund current operations through the third quarter of 2019, and we would require additional capital to fund operations beyond that point.  These conditions raise substantial doubt about our ability to continue as a going concern within one year from the date these financial statements are issued.

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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.

Cash Flows

Cash used in operating activities was approximately $14,218,000 for the nine months ended September 30, 2018.  The operating cash flows during the nine months ended September 30, 2018 reflect a net loss of $11,252,000, an unrealized gain on the fair value of warrants of $3,752,000, and a net increase of cash components of working capital and non-cash charges totaling $786,000.  Cash used in operating activities was approximately $11,715,000 for the nine months ended September 30, 2017.  The operating cash flows during the nine months ended September 30, 2017 reflect our net loss of $21,702,000, offset by an unrealized loss on the fair value of warrants of $9,048,000 and a net increase of cash components of working capital and other non-cash charges totaling $939,000.

Cash provided by investing activities was approximately $9,911,000 for the nine months ended September 30, 2018, which consisted of $9,950,000 from the redemption of marketable securities, offset by $39,000 from the purchase of equipment.  Cash used in investing activities was approximately $6,310,000 for the nine months ended September 30, 2017, which consisted of $15,009,000 and $21,000 for the purchases of marketable securities and equipment, respectively, offset by $8,720,000 from the redemption of marketable securities.

There was no cash provided by financing activities for the nine months ended September 30, 2018.  Cash provided by financing activities was approximately $14,673,000 for the nine months ended September 30, 2017, which consisted of $9,241,000 from our registered direct public offering in June 2017, and $5,354,000 and $78,000 from the exercise of stock warrants and options, respectively.

After September 30, 2018, we closed a registered direct offering of 5,769,231 shares of common stock and warrants to purchase up to 5,769,231 shares of common stock, resulting in gross proceeds to us of approximately $7,500,000.

Contractual Obligations

We have a variety of contractual obligations, as more fully described in our 2017 Form 10-K.  These obligations include, but are not limited to, contractual obligations in connection with license agreements (including related milestone payments), lease payments, employee compensation and incentive program expenses, and contracts with various vendors for services.  As of September 30, 2018, the total estimated cost to complete our contracts with vendors for research and development services was approximately $6,980,000 under the terms of the applicable agreements.  All of these agreements may be terminated by either party upon appropriate notice as stipulated in the respective agreements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or holdings in variable interest entities.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

For quantitative and qualitative disclosures about market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in our 2017 Form 10-K.  Our exposures to market risk have not changed materially since December 31, 2017.

Item 4.

Controls and Procedures.

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC’s”) rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. Other Information

Item 1A.

Risk Factors.

Investing in our stock involves a high degree of risk.  You should carefully consider the following discussion of risk factors, in its entirety . In addition to the other information set forth in this report, you should carefully consider the factors set forth in the Risk Factors section of our 2017 Form 10-K, as well as other information contained in the 2017 Form 10-K and in other reports we file with the SEC.

Our ability to continue as a going concern will require us to raise additional capital to fund our current operations, which may be unavailable on acceptable terms, or at all.

We have incurred negative cash flow from operations since we started our business and have an accumulated deficit.  Based on our current levels of operating expenses, we believe that our cash, cash equivalents and marketable securities at September 30, 2018 and the proceeds received from our completed registered direct public offering in October 2018 will be sufficient to fund current operations through the third quarter of 2019 and that we would require additional capital to fund operations beyond that point.  These conditions raise substantial doubt about our ability to continue as a going concern, as discussed in Note 1, “Operations and Organization,” in the Notes to Condensed Financial Statements.  Our ability to continue as a going concern in the near term is largely dependent on our ability to obtain additional capital, and over time will be impacted by our ability to attain operating efficiencies, control expenditures, and, ultimately, to generate revenue.  However, no assurance can be given that additional financing will be available, or, if available, will be on terms acceptable to us.  Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Pursuant to a consulting agreement, we issued 7,500 shares of common stock during the three months September 30, 2018 to a privately held investor relations firm in consideration for investor relations services.  The shares of common stock were not registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the exemption from registration requirements provided by Section 4(a)(2) of the Securities Act, as a transaction not involving a public offering.

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Item 6.

Exhibits.

Exhibit No.		Description
4.1		Form of Warrant, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 19, 2018 is herein incorporated by reference
10.1		Form of Securities Purchase Agreement, dated October 17, 2018, by and between Rexahn Pharmaceuticals, Inc. and the purchasers identified on the signature pages thereto, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 19, 2018, is incorporated herein by reference.
10.2		Clinical Trial Collaboration and Supply Agreement, dated August 13, 2018, by and between Merck Sharp & Dohme B.V., and Rexahn Pharmaceuticals, Inc.*
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) / 15d-14(a)
31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) / 15d-14(a)
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from Rexahn Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q, formatted in Extensible Business Reporting Language (“XBRL”): (i) Condensed Balance Sheet; (ii) Condensed Statement of Operations; (iii) Condensed Statement of Comprehensive Loss; (iv) Condensed Statement of Cash Flows; and (v) Notes to the Financial Statements.

*	Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		REXAHN PHARMACEUTICALS, INC.
		(Registrant)
	By:	/s/ Peter D. Suzdak
Date: November 2, 2018		Peter D. Suzdak
		Chief Executive Officer (principal executive officer)
	By:	/s/ Douglas J. Swirsky
Date: November 2, 2018		Douglas J. Swirsky
		President and Chief Financial Officer (principal financial and accounting officer)

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