UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington, D.C.
20549
 
 FORM
10-Q
 (Mark One)
 þ
              
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Quarterly Period Ended September 30,
  2008
 
 or
 o
              
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Transition Period from 
      to
  
 Commission
File Number: 001-33004
  
 
 Opexa
Therapeutics, Inc.
 (Exact
name of registrant as specified in its charter)
    Texas
              
              2635
      North Crescent Ridge Drive
                The Woodlands, Texas
      77381
              
              76-0333165(State
      or other jurisdiction ofIncorporation
      or organization)
              
              (Address
      of principal executiveoffices
      and zip code)
              
              (I.R.S. EmployerIdentification
      No.)
   (281)
272-9331
 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 þ 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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
accelerated filer o                                                                                                                                Accelerated
filer   o
 Non-accelerated
filer   o(Do not check if a smaller reporting
company)                                                    Smaller
reporting company  þ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes o   No
þ
 
 As of
October 21, 2008, there were 12,263,558 shares of the issuer’s Common Stock
outstanding.
  
   OPEXA
THERAPEUTICS, INC.
 (A
development stage company)
 
 For
the Quarter Ended September 30, 2008
 
 INDEX
 
 PART I – FINANCIAL
      INFORMATION
              PageItem 1.
              Financial StatementsUnaudited Balance Sheets as of September 30, 2008 and
      December 31, 2007
              1Unaudited Statements of Expenses:
                For the three and nine months ended September 30, 2008 and
      2007 and from
                Inception (January 22, 2003) through September 30,
      2008
              2Unaudited Statements of Cash Flows:
                For the nine months ended September 30, 2008 and 2007 and
      from Inception
                (January 22, 2003) through September 30,
    2008
              3Notes to Unaudited Financial Statements
              5Item 2.
              Management’s Discussion and Analysis of Condition and
      Results of Operations
              9Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              12Item 4.
              Controls and Procedures
              12PART
      II – OTHER INFORMATIONItem 1.
              Legal Proceedings
              13Item 1A.
              Risk Factors
              13Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              14Item 3.
              Defaults Upon Senior Securities
              14Item 4.
              Submission of Matters to a Vote of Security
      Holders
              14Item 5.
              Other Information
              15Item 6.
              Exhibits
              15Signatures
  
 
 PART
I - FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 OPEXA
THERAPEUTICS, INC.
 (a
development stage company)
 BALANCE SHEETS
 (unaudited)
  September
      30,
                
                
                December
      31,2008
                
                
                2007AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                4,044,082
                
                
                $
                2,645,482Other
      current assets
                
                
                180,240
                
                
                
                355,266Total
      current assets
                
                
                4,224,322
                
                
                
                3,000,748Property
      & equipment, net of accumulated depreciationof
      $789,766 and $614,079 respectively
                
                
                1,225,905
                
                
                
                1,370,647Total
      assets
                
                $
                5,450,227
                
                
                $
                4,371,395Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
                
                $
                819,723
                
                
                $
                938,442Accounts
      payable - related parties
                
                
                134,597
                
                
                
                54,091Accrued
      expenses
                
                
                1,050,480
                
                
                
                1,022,461Current
      maturity of loan payable
                
                
                63,912
                
                
                
                60,360Total
      current liabilities
                
                
                2,068,712
                
                
                
                2,075,354Long
      term liabilities:Loan
      payable
                
                
                116,131
                
                
                
                162,456Total
      liabilities
                
                
                2,184,843
                
                
                
                2,237,810Commitments
      and contingencies
                
                
                -
                
                
                
                -Stockholders'
      equity:Preferred
      stock, no par value, 10,000,000 shares authorized,none
      issued and outstanding
                
                
                -
                
                
                
                -Common
      stock, $0.50 par value, 100,000,000 shares authorized,12,263,558
      and 6,696,784 shares issued and outstanding
                
                
                6,131,738
                
                
                
                3,348,351Additional
      paid in capital
                
                
                84,713,562
                
                
                
                76,498,054Deficit
      accumulated during the development stage
                
                
                (87,579,916
                )
                
                
                (77,712,820
                )Total
      stockholders' equity
                
                
                3,265,384
                
                
                
                2,133,585Total
      liabilities and stockholders' equity
                
                $
                5,450,227
                
                
                $
                4,371,395
  See
accompanying notes to consolidated financial statements
  1
  OPEXA
THERAPEUTICS, INC.
 (a
development stage company)
 STATEMENTS OF EXPENSES
 Three
and nine months ended September 30, 2008 and 2007 and the
 Period
from January 22, 2003 (Inception) to September 30, 2008
 (unaudited)
  Three
      Months
                
                
                Three
      Months
                
                
                Nine
      Months
                
                
                Nine
      Months
                
                
                InceptionEnded
                
                
                Ended
                
                
                Ended
                
                
                Ended
                
                
                throughSeptember
      30,
                
                
                September
      30,
                
                
                September
      30,
                
                
                September
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008Research
      and development
                
                $
                2,429,258
                
                
                
                3,189,256
                
                
                $
                7,134,786
                
                
                
                10,148,930
                
                
                $
                60,892,323General
      and administrative
                
                
                660,814
                
                
                
                842,079
                
                
                
                2,668,511
                
                
                
                2,557,609
                
                
                
                20,293,286Depreciation
      and amortization
                
                
                58,826
                
                
                
                50,446
                
                
                
                175,896
                
                
                
                149,371
                
                
                
                694,106Loss
      on disposal of assets
                
                
                -
                
                
                
                -
                
                
                
                116
                
                
                
                4,034
                
                
                
                495,617Operating
      loss
                
                
                (3,148,898
                )
                
                
                (4,081,781
                )
                
                
                (9,979,309
                )
                
                
                (12,859,944
                )
                
                
                (82,375,332
                )Interest
      income
                
                
                23,681
                
                
                
                102,292
                
                
                
                92,885
                
                
                
                423,086
                
                
                
                1,346,711Other
      income
                
                
                -
                
                
                
                -
                
                
                
                34,901
                
                
                
                -
                
                
                
                106,904Gain
      on extinguishment of debt
                
                
                -
                
                
                
                1,612,440
                
                
                
                -
                
                
                
                1,612,440
                
                
                
                1,612,440Interest
      expense
                
                
                (4,553
                )
                
                
                (4,731
                )
                
                
                (15,573
                )
                
                
                (10,875
                )
                
                
                (8,270,639
                )Net
      loss
                
                $
                (3,129,770
                )
                
                $
                (2,371,780
                )
                
                $
                (9,867,096
                )
                
                $
                (10,835,293
                )
                
                $
                (87,579,916
                )Basic
      and diluted loss per share
                
                $
                (0.28
                )
                
                $
                (0.35
                )
                
                $
                (0.99
                )
                
                $
                (1.62
                )
                
                
                N/AWeighted
      average shares outstanding
                
                
                11,370,527
                
                
                
                6,696,784
                
                
                
                9,977,831
                
                
                
                6,696,784
                
                
                
                N/A
 
 See
accompanying notes to consolidated financial statements
  2
   OPEXA
THERAPEUTICS, INC.
 (a
development stage company)
 STATEMENTS OF CASH FLOWS
 Nine
months ended September 30, 2008 and 2007 and the
 Period
from January 22, 2003 (Inception) to September 30, 2008
 (unaudited)
  InceptionNine
      Months Ended
                
                
                throughSeptember
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008Cash
      flows from operating activitiesNet
      loss
                
                $
                (9,867,096
                )
                
                $
                (10,835,293
                )
                
                $
                (87,579,916
                )Adjustments
      to reconcile net loss to net cashused
      in operating activitiesStock
      payable for acquired research and development
                
                
                -
                
                
                
                -
                
                
                
                112,440Stock
      issued for acquired research and development
                
                
                -
                
                
                
                -
                
                
                
                26,286,589Stock
      issued for services
                
                
                68,561
                
                
                
                -
                
                
                
                1,929,961Stock
      issued for debt in excess of principal
                
                
                -
                
                
                
                -
                
                
                
                109,070Amortization
      of discount on notes payable dueto
      warrants and beneficial conversion feature
                
                
                -
                
                
                
                -
                
                
                
                6,313,205Realized
      gain on marketable securities
                
                
                -
                
                
                
                25,912
                
                
                
                -Gain
      on extinguishment of debt
                
                
                -
                
                
                
                (1,612,440
                )
                
                
                (1,612,440
                )Depreciation
                
                
                175,896
                
                
                
                149,371
                
                
                
                694,106Debt
      financing costs
                
                
                -
                
                
                
                -
                
                
                
                365,910Option
      expense
                
                
                1,675,891
                
                
                
                2,086,911
                
                
                
                13,700,814Loss
      on disposition of fixed assets
                
                
                116
                
                
                
                4,034
                
                
                
                495,617Changes
      in:Marketable
      securities
                
                
                -
                
                
                
                2,926,184
                
                
                
                -Prepaid
      and other expenses
                
                
                175,026
                
                
                
                87,164
                
                
                
                (596,913
                )Accounts
      payable
                
                
                (38,213
                )
                
                
                358,018
                
                
                
                504,679Accrued
      expenses
                
                
                28,019
                
                
                
                656,065
                
                
                
                923,826Net
      cash used in operating activities
                
                
                (7,781,800
                )
                
                
                (6,154,074
                )
                
                
                (38,353,052
                )Cash
      flows from investing activitiesPurchase
      of property & equipment
                
                
                (31,270
                )
                
                
                (147,782
                )
                
                
                (1,337,741
                )Net
      cash used in investing activities
                
                
                (31,270
                )
                
                
                (147,782
                )
                
                
                (1,337,741
                )Cash
      flows from financing activitiesCommon
      stock sold for cash, net of offering costs
                
                
                9,254,443
                
                
                
                -
                
                
                
                35,764,180Common
      stock repurchased and canceled
                
                
                -
                
                
                
                -
                
                
                
                (325
                )Proceeds
      from debt
                
                
                -
                
                
                
                137,286
                
                
                
                8,102,199Repayments
      on notes payable
                
                
                (42,773
                )
                
                
                (11,045
                )
                
                
                (131,179
                )Net
      cash provided by financing activities
                
                
                9,211,670
                
                
                
                126,241
                
                
                
                43,734,875Net
      change in cash and cash equivalents
                
                
                1,398,600
                
                
                
                (6,175,615
                )
                
                
                4,044,082Cash
      and cash equivalents at beginning of period
                
                
                2,645,482
                
                
                
                12,019,914
                
                
                
                -Cash
      and cash equivalents at end of period
                
                $
                4,044,082
                
                
                $
                5,844,299
                
                
                $
                4,044,082
  3
 
 Cash
      paid for:Income
      tax
                
                $
                -
                
                
                $
                -
                
                
                $
                -Interest
                
                
                15,573
                
                
                
                16,103
                
                
                
                42,714NON-CASH
      TRANSACTIONSIssuance
      of common stock to Sportan shareholders
                
                
                -
                
                
                
                -
                
                
                
                147,733Issuance
      of common stock for accrued interest
                
                
                -
                
                
                
                -
                
                
                
                525,513Conversion
      of notes payable to common stock
                
                
                -
                
                
                
                -
                
                
                
                6,407,980Conversion
      of accrued liabilities to common stock
                
                
                -
                
                
                
                -
                
                
                
                197,176Conversion
      of accounts payable to note payable
                
                
                -
                
                
                
                -
                
                
                
                93,364Discount
      on convertible notes relating to:-
      warrants
                
                
                -
                
                
                
                -
                
                
                
                3,309,790-
      beneficial conversion feature
                
                
                -
                
                
                
                -
                
                
                
                1,715,973-
      stock attached to notes
                
                
                -
                
                
                
                -
                
                
                
                1,287,440Reclassification
      of derivative liabilities
                
                
                -
                
                
                
                6,656,677
                
                
                
                -
  See
accompanying notes to consolidated financial statements
  4
  OPEXA
THERAPEUTICS, INC.
 (a
development stage company)
 NOTES TO FINANCIAL STATEMENTS
 (unaudited)
 
 
 Note
1.  Basis of Presentation
 
 The
accompanying unaudited interim financial statements of Opexa Therapeutics, Inc.,
a development stage company, have been prepared in accordance with accounting
principles generally accepted in the United States of America and the rules of
the Securities and Exchange Commission and should be read in conjunction with
the audited financial statements and notes thereto contained in Opexa’s latest
Annual Report filed with the SEC on Form 10-K. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year.  Notes to the financial statements that would
substantially duplicate the disclosure contained in the audited financial
statements for the most recent fiscal year as reported in Form 10-K, have been
omitted.
 
 Note
2.  Going Concern
 
 Opexa
incurred a net loss of approximately $9.9 million for the nine months ended
September 30, 2008 and has an accumulated deficit of approximately $87.6
million.  The cash balance of approximately $4.0 million as of
September 30, 2008 is not sufficient to fund our operations for the next twelve
months if we are to execute our operating plan including completing our analysis
of our Phase IIb clinical trial of Tovaxin® for the
treatment of multiple sclerosis (“MS”), conducting the open label extension of
our Phase IIb clinical trial of Tovaxin and continuing with the development of
Tovaxin. These conditions raise substantial doubt as to Opexa’s ability to
continue as a going concern. Management continues to seek means to raise
additional capital through sales of equity and/or partnering arrangements
related to our technology.  The financial statements do not include
any adjustments that might be necessary if Opexa is unable to continue as a
going concern.
 
 Note
3.   Marketable Securities
 
 Opexa
considers all highly liquid investments with an original maturity of three
months or less, when purchased, to be cash equivalents. Investments with
maturities in excess of three months but less than one year are classified as
short-term investments and are stated at fair market value.
 
 At
September 30, 2008, Opexa invested approximately $4.0 million in a money market
account with an average market yield of 2.8%. Interest income of $92,885 was
recognized for the nine months ended September 30, 2008 in the statements of
expenses.  As of September 30, 2008, the Company held no auction rate
securities.
 
 Note
4.  Commitments and Contingencies
 
 In
September 2006, Opexa entered into an Individual Project Agreement (IPA) with
PharmaNet, LLC (PharmaNet), a contract research organization focused on managing
central nervous system clinical trials.  Pursuant to such IPA,
PharmaNet, LLC will provide Opexa with services in connection with its Phase IIb
clinical trial. Under the terms of the IPA, Opexa is required to advance
funds for investigator grants, professional fees and out of pocket
expenses.  In March 2008, PharmaNet agreed to waive the investigator
grant advance requirement and in return Opexa will pay the invoice in full
within 30 days of receipt.  In June 2008, PharmaNet agreed to revise
the professional fee advance to $233,000 to be applied 1/8th per
month to invoices for the months of May through December
2008.  PharmaNet will continue to hold a $60,000 advance for
out-of-pocket expenses.  At the conclusion of the program, advance
balances remaining will be applied to outstanding invoices.  These
advances are treated as prepaid items and included in the other current assets
section of the balance sheet. As of September 30, 2008, the advance balance to
PharmaNet, LLC was $114,568.
 
 In July
2007, Opexa entered into a seconded amended and restated license agreement with
the University of Chicago that requires Opexa to make milestone payments of up
to $1,350,000 if certain late stage clinical trial and FDA approval milestones
are achieved.  Opexa has determined that these payments are not
probable at this time and thus no liability has been recorded as of September
30, 2008.
  5
  Note
5.  Loan Payable
 
 Loan
payable consists of an equipment line of $250,000 with Wells Fargo Bank of which
$180,042 was outstanding as of September 30, 2008. This loan has an interest
rate of 7.61% per annum, matures in May 2011 and is secured by Opexa’s furniture
and equipment purchased with the loan proceeds.  Payments are due and
payable monthly on the same day of each month until maturity.
 
 Note
6.  Equity
 
 In
February, 2008, Opexa entered into an Underwriting Agreement with MDB Capital
Group LLC, for itself and as representative of several underwriters, relating to
the public offering of 3,500,000 shares of Opexa’s common stock and 3,500,000
Series E warrants, each warrant to purchase one share of common stock at an
exercise price of $2.00 per share. Pursuant to the Underwriting Agreement, Opexa
granted the underwriters a 30-day option to purchase up to an additional 525,000
shares of common stock and 525,000 warrants to cover over-allotments. The
closing for the sale of shares of common stock and warrants took place in
February 2008. The underwriters exercised their over-allotment option as to the
warrants only, and Opexa sold an aggregate of 3,500,000 shares and 4,025,000
warrants.
 
 The public
offering price for each share was $2.00, and the public offering price for each
warrant was $0.15. Each share and each warrant was sold to the underwriters at
the public offering price of each security less an underwriting discount of 10%.
The Company received approximately $7.6 million in gross proceeds from the
offering.  The Company also paid the underwriters 1% of the gross
proceeds of the offering (excluding the over-allotment option) as an expense
allowance.  The net proceeds to Opexa, after underwriter discounts,
commissions and other expenses, was approximately $6.4 million.  As
additional compensation, the Company issued warrants to the underwriter to
purchase 350,000 shares of common stock at a price of $2.40 per share and an
option to acquire 350,000 Series E warrants at a price of $0.18 per Series E
warrant.
 
 On August
11, 2008, Opexa closed a financing transaction  in which Opexa issued
2,003,874 shares of its common stock and warrants to purchase 2,003,874 shares
of Opexa’s common stock (the “Unit”) for gross proceeds of approximately $3.0
million  to certain institutional and accredited investors (the
“Transaction”).   The net proceeds to Opexa, after offering
costs, was approximately $2.9 million. The purchase price paid by non-affiliate
investors was $1.48 for each Unit and with regard to affiliate investors was
$1.655 for each Unit. The warrants expire in four years, are first exercisable
after six months of the closing of the Transaction and are exercisable at $1.78
per share. The shares are exercisable on a cashless basis. If Opexa fails
to register, achieve effectiveness of registration or maintain effectiveness of
registration of shares underlying the warrants and shares, they are required to
make certain liquidated damage payments of 1% of the offering per month for
every month in default with a maximum of 6%. 2,003,874 warrants were issued to
investors in connection with the Transaction. Opexa evaluated the application of
FASB Staff Positions FSP EITF 00-19-2 “Accounting for Registration Payment
Arrangements”, which addresses an issuer’s accounting for registration payment
arrangements, and determined that the warrants issued in the Transaction should
be classified as equity.  In addition, Opexa accounts for registration
rights agreement penalties as contingent liabilities, applying the accounting
guidance of Financial Accounting Standard No. 5, “Accounting for Contingencies”
(“FAS 5”). This accounting is consistent with views established by the FASB
Staff Positions FSP EITF 00-19-2. Accordingly, Opexa recognizes the damages when
it becomes probable that they will be incurred and amounts are reasonably
estimable. No liability has been recorded.
 
 No
commissions or fees to placement agents were paid in connection with the
Transaction.
 
 Note
7.  Options
 
 Share-based
Compensation:
  The June
2004 Compensatory Stock Option Plan authorizes the issuance of various forms of
stock-based awards, including incentive and non-statutory stock options, stock
purchase rights, stock appreciation rights, and restricted and unrestricted
stock awards.  A total of 2,300,000 shares are authorized to be issued
under the Plan through June, 2014.  At September 30, 2008, 1,674,475
shares were issued.
 
 The
Company accounts for share-based compensation, including options and nonvested
shares, according to the provisions of SFAS No. 123R, "Share Based
Payment". During the three and nine-month periods ended September 30, 2008,
the Company recognized share-based compensation expense of approximately $0.3
million and $1.7 million respectively. Activity in options and restricted
stock during the nine-month period ended September 30, 2008 and related
balances outstanding as of that date are reflected below.  The
weighted average fair value per share of options granted to employees for the
nine-month period ended September 30, 2008 was approximately
$0.92.
  6
  A summary
of share-based compensation activity for the nine-month period ended
September 30, 2008 is presented below:
  Number
      of
                  Shares
                
                
                Weighted
      Average
                  Exercise
      Price
                
                
                Weighted
      Average Remaining
                  Contract
      Term
                
                
                Intrinsic
      ValueOutstanding
      at January 1, 2008
                
                
                1,039,525
                
                
                $
                9.31Granted
                
                
                703,300
                
                
                
                1.12Exercised
                
                
                -
                
                
                
                -Forfeited
      or canceled
                
                
                (68,350
                )
                
                
                8.17Outstanding
      at September 30, 20081
                
                
                1,674,475
                
                
                $
                5.92
                
                
                
                7.73
                
                
                
                -Exercisable
      at September 30, 2008
                
                
                1,017,861
                
                
                $
                8.21
                
                
                
                6.73
                
                
                
                -
  Stock
Option Activity:
 
 Stock
option awards issued by the Company have a ten year life and have various
vesting dates that range from partial vesting upon date of grant to full vesting
on a specified date, quarterly vesting on the anniversary date of hire and
quarterly vesting on the anniversary date of grant. The Company estimates the
fair value of stock options using the Black-Scholes option-pricing model and
records the compensation expense ratably over the service period.
 
 The fair
values of stock options granted during the nine months ended September 30, 2008
and 2007 were estimated using the following assumptions:
  Nine
      Months Ended
                  September
      30, 2008
                
                Nine
      Months Ended
                  September
      30, 2007Expected
      Volatility
                
                115.28%
      - 116.51%
                
                95.36%
      - 103.91%Expected
      term
                
                6
      years
                
                5 -
      6 yearsRisk
      free rate
                
                3.07%
      - 3.73%
                
                4.20%
      - 5.07%Expected
      dividends
                
                0.00%
                
                0.00%
 Restricted
Stock:
 
 The
Company grants restricted stock to employees and directors that entitle the
holders to receive shares of the Company’s common stock upon the fulfillment of
certain service and/or performance conditions.  The fair value of
restricted stock is based on the market price of the Company’s stock on the date
of grant and is recorded as compensation expense ratably over the service
period.
 
 A summary
of restricted stock activity for the nine months ended September 30, 2008
follows:
  Restricted
      Stock
              
              Number
      of
                SharesNonvested
      at January 1, 2008
              
              
              -Granted
              
              
              62,900Vested
              
              
              (25,700
              )Forfeited
              
              
              -Nonvested
      at September 30, 2008
              
              
              37,200
  7
 Note
8.  Warrants
 
 In
connection with the closing of our February 2008 public offering of common
shares, the investors were issued five-year warrants to purchase up to an
aggregate of 4,025,000 shares of our common stock, at an initial exercise
price of $2.00 per share and a market price of $0.15 per warrant was used to
assign fair value of the warrants for a total fair value of
$603,750.
 
 As
additional compensation, the Company issued warrants to the underwriter to
purchase 350,000 shares of common stock at a price of $2.40 per share and an
option to acquire 350,000 Series E warrants at a price of $0.18 per Series E
warrant.  The estimated fair value of the underwriter warrants was
$319,436 and was calculated using the Black-Scholes valuation model. The
following assumptions were used: (i) no expected dividends, (ii) risk
free interest rate of 2.93%, (iii) expected volatility of 97.67%, and
(iv) expected life of 3 years.
 
 The fair
value of warrants granted in the first quarter of 2008 was included in
additional paid-in capital along with the proceeds from issuance of common
stock.
 
 In
connection with the closing of our August 2008 private financing of common
shares, the investors were issued four-year warrants to purchase up to an
aggregate of 2,003,874 shares of our common stock, at an initial exercise
price of $1.78 per share. The warrants expire in four years, are first
exercisable after six months of the closing of the Transaction and are
exercisable on a cashless basis. $1,976,457 fair value was assigned to the
Series F Warrants and was included in additional paid-in capital along with the
proceeds from issuance of common stock.
  8
 
 Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
 
 The
following discussion of our financial condition and results of operations should
be read in conjunction with the accompanying financial statements and the
related footnotes thereto.
  Forward-Looking
Statements
 
 Some of
the statements contained in this report discuss future expectations, contain
projections of results of operations or financial condition, or state other
"forward-looking" information. The words "believe," "intend," "plan," "expect,"
"anticipate," "estimate," "project," "goal" and similar expressions identify
such statement was made. These statements are subject to known and unknown
risks, uncertainties, and other factors that could cause the actual results to
differ materially from those contemplated by the statements. The forward-looking
information is based on various factors and is derived using numerous
assumptions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to the risks discussed in this and our other SEC
filings. We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements. Future events and actual results could differ materially from
those expressed in, contemplated by, or underlying such forward-looking
statements.
 
 The
following discussion and analysis of our financial condition is as of September
30, 2008.  Our results of operations and cash flows should be read in
conjunction with our unaudited financial statements and notes thereto included
elsewhere in this report and the audited financial statements and the notes
thereto included in our Form 10-K for the year ended December 31,
2007.
  Business
Overview
 
 Unless
otherwise indicated, we use “Opexa,” “the Company,” “we,” “our” and “us” in this
annual report to refer to the businesses of Opexa Therapeutics,
Inc.
  We are a
biopharmaceutical company developing autologous cellular therapies to treat
several major illnesses, including multiple sclerosis (MS) and diabetes. These
therapies are based on our proprietary T-cell and adult stem cell
technologies.  The information discussed related to our product
candidates is preliminary and investigative.  Our product candidates
are not approved by the Food and Drug Administration (FDA).
  Our lead
product, Tovaxin®, is a
T-cell based therapeutic vaccine for MS licensed from the Baylor College of
Medicine, which offers a unique and personalized approach to treating the
disease by inducing an immune response against the autoimmune myelin
peptide-reactive T-cells (MRTCs), which are believed to be responsible for the
initiation of the disease process.
  T-Cell
Therapy
  We have an
exclusive worldwide license from Baylor College of Medicine to an individualized
T-cell therapeutic vaccine, Tovaxin, which has recently been studied in a United
States (U.S.) FDA Phase IIb human clinical trial to evaluate its safety and
effectiveness in treating MS.
  MS is the
result of a person’s own T-cells attacking the myelin sheath that coats the
nerve cells of the central nervous system. Tovaxin consists of attenuated
patient-specific myelin reactive T-cells (MRTCs) against peptides from one or
more of the primary proteins on the surface of the myelin sheath (myelin basic
protein, proteolipid protein, and myelin oligodendrocyte glycoprotein).
Patient-specific MRTCs are expanded in culture with specific peptides identified
by our proprietary test of the patient’s peripheral blood. The cells are then
attenuated by gamma irradiation, and returned to the patient as a subcutaneous
injection. Although further testing is necessary, results from our initial human
trials appear to indicate that these attenuated T-cells cause an immune response
directed at the autoreactive T-cells in the patient’s body, resulting in a
reduction in the level of harmful T-cells.
  We believe
that our initial human trials suggest that Tovaxin safely induces the depletion
and regulation of MRTCs, possibly stabilizing the disease, reducing the
annualized relapse rate, and potentially improving the disability scores of
patients. Patients treated in a 10-subject, open-label Phase I/II dose
escalation clinical trial with Tovaxin have experienced minimal side effects and
the “per protocol” analysis of patients treated with Tovaxin achieved a 90%
reduction (p=0.0039) in annualized relapse rate (ARR). The group treated with
the mid dose (30-45 x 106
attenuated T-cells) achieved a 100% reduction in ARR. The Phase IIb trial was
conducted with the mid dose.
  9
  In a
one-year, 8-subject extension clinical trial of relapsing remitting and
secondary progressive  multiple sclerosis  subjects, the
“per-protocol” analysis of Tovaxin therapy achieved a 92% (p=0.0078) reduction
ARR in subjects who received two treatment doses of 30-45 x 106
attenuated T-cells eight weeks apart and were monitored for an additional 44
weeks. Subjects in the extension study had previously been treated an average of
approximately 5 years earlier at Baylor College of Medicine under the direction
of the inventor of Tovaxin Jingwu Zhang, M.D., Ph.D with an early version of the
T-cell vaccine.
 
 An
analysis of  the second year open-label clinical retreatment studies
of the “intent to treat” population of 22 patients who participated in the Phase
I/II studies  showed that, as a group, 73% remained relapse free after
two years and 86% demonstrated no worsening of disease (27% of these showed
sustained improvement). Additionally, there was an overall decrease in the ARR
of 82% (from 1.38 to 0.21 relapses/patient/year). Each of these endpoints was
compared to the patient’s own baseline reading, taken prior to enrollment in the
trials.
 
 We
recently completed a Phase IIb study in 150 patients in a multi-center,
randomized, double blind, and placebo-controlled study in patients with
relapsing remitting multiple sclerosis or clinically isolated syndrome. Top-line
results from the study demonstrated a positive trend in the reduction in
annualized relapse rate (ARR) for patients treated with Tovaxin as compared to
placebo.  However, this finding did not achieve statistical
significance.  In addition, the study did not achieve statistical
significance with its primary endpoint, the cumulative number of
gadolinium-enhanced brain lesions.
 
 Top-line
results from the study showed that Tovaxin-treated patients experienced an ARR
of 0.214 as compared to 0.339 for placebo-treated patients.  Despite
the low relapse rate in the placebo arm, this still represented a 37 percent
decrease in ARR for Tovaxin as compared to placebo in the general
population.  Additionally, in the group of patients who had an ARR
> 1 in the one year prior to study entry, Tovaxin demonstrated a 55 percent
reduction in ARR compared to placebo.
 
 The study
also demonstrated that Tovaxin was safe and well tolerated with no serious
adverse events related to treatment.  The most common adverse event
related to Tovaxin was mild injection site reaction. We believe that this
favorable safety profile may be an important advantage as patient compliance
represents a significant challenge due to serious side effects associated with
many currently available MS treatments.
  Stem
Cell Therapy
  We have
developed a proprietary adult stem cell technology to produce monocyte-derived
stem cells (MDSCs) from blood. These MDSCs can be derived from a patient’s
monocytes, expanded in our laboratories, and then administered to the same
patient. We believe that because this is an autologous therapy, there should be
no immunological problems. Normally, allogenic cells trigger host immune
responses and require the use of anti-rejection drugs.
  Our
multi-potent stem cell is derived from peripheral blood monocytes which when
cultured under defined conditions are able to further differentiate into several
cellular lineages. Molecular biology and cellular analysis studies have shown
that these MDSCs have specific markers that distinguish them from other stem
cells. In addition these studies have also shown a time-dependence for the
expression of these markers during the growth and differentiation of MDSCs.
In vitro experiments
with MDSCs have shown their capacity to differentiate as hematopoietic,
epithelial, endothelial, endocrine and neuronal cells. Our main focus is the
further development of this monocyte-derived stem cell technology as a platform
for the in vitro
generation of highly specialized cells for potential application in autologous
cell therapy for patients with diseases such diabetes mellitus and
cardiovascular disease.
  Other
Opportunities
  We may
conduct basic research to determine the potential use of stem cells and
differentiated cells in other indications, such as macular degeneration, stroke,
myocardial infarction, wound healing and Parkinson’s disease. We will attempt to
partner or sublicense some of these indications if they are not pursued for
internal development. For those indications where we believe we can participate
commercially, we also desire to partner in key commercial markets outside of the
U.S.
  Critical
Accounting Policies
  General
  Our
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. The Company’s significant accounting policies are disclosed in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007.  The Company has not materially changed its significant
accounting policies.
  10
  Results
of Operations and Financial Condition
  Three
Months Ended September 30, 2008 Compared with the Three Months Ended September
30, 2007
 
 Net Sales.We
recorded no sales for the three months ended September 30, 2008 and
2007.
  Research and Development Expenses.Research and development expense was approximately $2.4 million for the
three months ended September 30, 2008, compared to approximately $3.2 million
for the three months ended September 30, 2007. The decrease in expenses was
primarily due to a wind down of costs of conducting the Phase IIb clinical trial
for Tovaxin recorded in 2008 offset in part by costs associated with enrollment
of the one year Phase IIb extension study of Tovaxin.  We have made
and expect to continue to make substantial investments in research and
development in order to develop and market our technology.   We
expense research and development costs as incurred. Acquired research and
development that has no alternative future use is expensed when acquired.
Property, plant and equipment for research and development that has an
alternative future use is capitalized and the related depreciation is expensed.
We expect our research and development expense to increase as we continue to
invest in the development of our technology.
  General and Administrative Expenses.Our general and administrative expense was approximately $0.7 million for
the three months ended September 30, 2008, as compared to approximately $0.8
million, for the three months ended September 30, 2007.  The decrease
in expenses is primarily due to a decrease in stock compensation expense in the
current period. We anticipate increases in general and administrative expenses
as we continue to develop and expand our product platforms.
  Interest
Expense.  Interest expense was $4,553 for the three months
ended September 30, 2008, compared to $4,731 for the three months ended
September 30, 2007
  Interest
Income.  Interest income was $23,681 for the three months ended
September 30, 2008 compared to $102,292 for the three months ended September 30,
2007.  The decrease was due to the reduction in cash balances that
were available for investment in cash equivalent investments and a reduction in
interest rates.
  Net loss. We had a net loss
for the three months ended September 30, 2008, of approximately $3.1 million, or
$0.28 per share (basic and diluted), compared with a net loss of approximately
$2.4 million or $0.35 per share (basic and diluted), for the three months ended
September 30, 2007.
  Nine
Months Ended September 30, 2008 Compared with the Nine Months Ended September
30, 2007
  Net Sales.We
recorded no sales for the nine months ended September 30, 2008 and
2007.
  Research and Development Expenses.Research and development expense was approximately $7.1 million for the
nine months ended September 30, 2008, compared to approximately $10.1 million
for the nine months ended September 30, 2007. The decrease in expenses was
primarily due to a decrease in activities related to the Phase IIb clinical
trial for Tovaxin in 2008 as compared to 2007 and a reduction in stock
compensation expense recorded in 2008.
  General and Administrative Expenses.Our general and administrative expense was approximately $2.7 million for
the nine months ended September 30, 2008, as compared to approximately $2.6
million for the nine months ended September 30, 2007.  The increase in
expenses is primarily due to an increase in stock compensation expense during
the current period.
  Interest
Expense.  Interest expense was $15,573 for the nine months
ended September 30, 2008, compared to $10,875 for the nine months ended
September 30, 2007
  11
  Interest
Income.  Interest income was $92,885 for the nine months ended
September 30, 2008 compared to $423,086 for the nine months ended September 30,
2007.  The decrease was due to the reduction in cash balances that
were available for investment in cash equivalent investments and a reduction in
interest rates.
  Net loss. We had a net loss
for the nine months ended September 30, 2008, of approximately $9.9 million or
$0.99 per share (basic and diluted), compared with a net loss of approximately
$10.8 million or 1.62 per share (basic and diluted), for the nine months ended
September 30, 2007.
  Liquidity
and Capital Resources
  Changes in cash
flow.Cash used in operations for the nine month period ended
September 30, 2008 was approximately $7.8 million as compared to cash used by
operations of approximately $6.2 million for the nine months ended September 30,
2007. The increase in cash used in operations is primarily due to the maturity
of approximately $2.9 million in marketable securities in 2007 and its
reclassification to cash and cash equivalents.  Cash used in investing
activities for the nine month period ended September 30, 2008 was approximately
$31,000, as compared to approximately $148,000 for the nine months ended
September 30, 2007.  The decrease was due to a decrease in equipment
purchases. Cash provided from financing activities for the nine month period
ended September 30, 2008 was approximately $9.2 million,, as compared to
approximately $126,000 for the nine months ended September 30, 2007. The
increase was due to the proceeds from the February 2008 public offering and the
August 2008 private placement.
 
 Liquidity.  Historically,
we have financed its operations primarily from the sale of its debt and equity
securities.  As of September 30, 2008, we had cash and cash equivalents of
approximately $4.0 million.
  Our
financing activities generated approximately $9.3 million in net proceeds for
the nine months ended September 30, 2008 and resulted from the a public offering
in February 2008 of 3,500,000 shares of common stock at a price to the public of
$2.00 per share and 4,025,000 Series E warrants to purchase shares of common
stock exercisable at $2.00 per share at a price of $0.15 per warrant; and a
private placement in August 2008 in which 2,003,874 shares of common stock and
warrants to purchase 2,003,874 shares of common stock (the “Unit”) at an initial
exercise price of $1.78 per share were issued. The purchase price paid by
non-affiliate investors was $1.48 for each Unit and affiliate investors paid
$1.655 for each Unit.
  Our
current burn rate is approximately $900,000 per month.  Our capital
resources at September 30, 2008, will support our operations at current levels
through the fourth quarter of 2008.  We will need to raise additional
capital in the fourth quarter of 2008 to fund our business plan and support our
operations beyond the beginning of the first quarter of 2009.  As our
prospects for funding, if any, develop during the next quarter, we will assess
our business plan and make adjustments accordingly. We are actively seeking
strategic partnership or collaboration arrangements with companies for our
technologies. While we have successfully funded our operations to date by
attracting additional investors in our equity, there is no assurance that our
capital raising efforts will be able to attract additional necessary capital for
our operations. If we are unable to obtain additional funding for operations at
any time now or in the future, we may not be able to continue operations as
proposed, requiring us to modify our business plan, curtail various aspects of
our operations or cease operations.
  Off-Balance
Sheet Arrangements
 
 As of
September 30, 2008, we had no off-balance sheet arrangements.
  Recent
Accounting Pronouncements
 
 For the
period ended September 30, 2008, there were no other changes to our critical
accounting policies as identified in our annual report of Form 10-K for the year
ended December 31, 2007.
 
 Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
 
 Not Applicable.
 
 Item
4. Controls and Procedures.
  Disclosure
Controls and Procedures.
  12
  We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
to the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized, and reported within the
time periods specified by the Securities and Exchange Commission’s rules and
forms, and that information is accumulated and communicated to our management,
including our principal executive and principal financial officers (whom we
refer to in this periodic report as our Certifying Officers), as appropriate to
allow timely decisions regarding required disclosure. Our management evaluated,
with the participation of our Certifying Officers, the effectiveness of our
disclosure controls and procedures as of September 30, 2008, pursuant to
Rule 13a-15(b) under the Securities Exchange Act. Based upon that
evaluation, our Certifying Officers concluded that, as of September 30, 2008,
our disclosure controls and procedures were effective.
  Changes
in Internal Control Over Financial Reporting.
  There were
no changes in our internal control over financial reporting that occurred during
our most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.  We will continue to evaluate the effectiveness of internal
controls and procedures on an on-going basis.
 
 PART
II
  OTHER
INFORMATION
 
 Item 1.  Legal Proceedings.
 
 None.
 
 Item 1A.  Risk Factors.
 
 This Item
1A should be read in conjunction with “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2007.
  We
will need additional capital to conduct our operations and develop our products
and our ability to obtain the necessary funding is uncertain.
  We need to
obtain significant amounts of additional capital to develop our products and
continue our business.  The capital may come from many sources,
including equity and/or debt financings, license arrangements, grants and/or
strategic collaborative or partnership arrangements. As of September 30, 2008,
we had cash and cash equivalents of approximately $4.0 million. Our current burn
rate is approximately $900,000 per month. We will need to raise additional
capital to fund our working capital needs beyond early first quarter of 2009. We
must rely upon third-party debt, equity funding or collaboration or partnership
arrangements and we can provide no assurance that we will be successful in any
funding effort. The failure to raise such funds will necessitate the curtailment
or ceasing of operations and impact the conduct of our clinical
trials.
  We do not
have any committed sources of capital, although we have issued and outstanding
warrants that, if exercised, would result in an equity capital raising
transaction. Additional financing through strategic collaborations, public or
private equity financings, capital lease transactions or other financing sources
may not be available on acceptable terms, or at all. Additional equity
financings could result in significant dilution to our stockholders. Further, if
additional funds are obtained through arrangements with collaborative partners,
these arrangements may require us to relinquish rights to some of our
technologies, product candidates or products that we would otherwise seek to
develop and commercialize ourselves. If sufficient capital is not available, we
may be required to delay, reduce the scope of or eliminate one or more of our
programs, any of which could have a material adverse effect on our financial
condition or business prospects.
  We
have a “going-concern qualification” which may make capital raising more
difficult and may require us to scale back or cease operations.
  The report
of our independent auditors in respect of the 2007 fiscal year includes a going
concern qualification which indicates an absence of obvious or reasonably
assured sources of future funding that will be required by us to maintain
ongoing operations.  Although we have successfully funded Opexa, to
date, by attracting additional investors in our equity, there is no assurance
that our capital raising efforts will be able to attract the additional capital
needed to sustain our operations. The going concern qualification from our
auditors may make it more difficult for us to raise funds.   If
we are unable to obtain additional funding for operations, we may not be able to
continue operations as proposed, requiring us to modify our business plan,
curtail various aspects of our operations or cease operations.  In
such event, investors may lose a portion or all of their
investment.
  13
 Item 2.  Unregistered Sales of Equity Securities and Use
of Proceeds.
 
 On August
11, 2008, Opexa closed a financing transaction  in which Opexa issued
2,003,874 shares of its common stock and warrants to purchase 2,003,874 shares
of Opexa’s common stock for gross proceeds of approximately $3.0 million
(the”Unit”) to certain institutional and accredited investors (the
“Transaction”).   The purchase price paid by non-affiliate
investors was $1.48 for each Unit and with regard to the Affiliate Investors was
$1.655 for each Unit. The warrants expire in four years, are first exercisable
after nine months of the closing of the Transaction and are exercisable at $1.78
per share. The shares are exercisable on a cashless basis. If Opexa fails
to register, achieve effectiveness of registration or maintain effectiveness of
registration of shares underlying the warrants and shares, they are required to
make certain liquidated damage payments of 1% of the offering per month for
every month in default with a maximum of 6%.
  Item 3.  Defaults Upon Senior
Securities.
 
 None.
 
 Item 4.  Submission of Matters to a Vote of Security
Holders.
 
 (a)  Annual
Meeting of Shareholders.
 
 On
September 26, 2008 the Company held its 2008 Annual Meeting of Shareholders and
the shareholders approved several items detailed in the Proxy Statement
previously filed with the Commission.
 
 (b)  Election
of Board of Directors.
 
 The
following nominees were elected as directors by the shareholders at the 2008
Annual Meeting:
  Gregory
      H. Bailey
              
              Lorin
      J. RandallDavid
      Hung
              
              Michael
      S. RichmanDavid
      E. Jorden
              
              Scott
      B. SeamanDavid
      B. McWilliams
              
              Neil
      K. Warma
 (c)  Proposals
Voted Upon and Shareholder Vote.
 
 The
shareholders voted to (i) elect eight (8) Directors to the Company's Board of
Directors to hold office until the next annual meeting of shareholders or until
their respective successors are duly elected and qualified; (ii) amend the
Company’s  June 2004 Compensatory Stock Option Planto increase the number of
shares of common stock authorized for issuance under the Plan from a total of
1,200,000 shares  to a total of 2,300,000 shares; and (iii) ratify the
selection by the Audit Committee of Malone & Bailey, PC as the independent
auditors of the Company for the fiscal year ending December 31,
2008.  A total of 8,057,096 shares were voted representing 65.7% of
the outstanding shares.  The votes cast for and against each of the
above-described three proposals are listed in the tables below.
  Proposal
#1 - Election of Each of the Nominated Directors:
  Directors:
              For
              Against
              Abstain
              
              TotalsGregory
      H. Bailey
              8,041,279
              11,355
              4,462
              
              8,057,096David
      Hung
              8,041,541
              11,213
              4,342
              
              8,057,096David
      E. Jorden
              8,045,466
              7,158
              4,472
              
              8,057,096David
      B. McWilliams
              8,044,286
              9,353
              3,457
              
              8,057,096Lorin
      J. Randall
              8,045,596
              7,158
              4,342
              
              8,057,096Michael
      S. Richman
              8,045,596
              7,016
              4,484
              
              8,057,096Scott
      B. Seaman
              8,041,421
              11,213
              4,462
              
              8,057,096Neil
      K. Warma
              8,044,166
              8,888
              4,042
              
              8,057,096
  14
  Proposal
# 2 – Amendment to 2004 Compensatory Stock Option Plan:
  For
              Against
              Abstain
              
              Totals7,698,239
              344,705
              14,152
              
              8,057,096
  Proposal
#3 - Ratification of Appointment of Auditor:
  For
              Against
              Abstain
              
              Totals8,041,647
              828
              14,621
              
              8,057,096
 
 Item 5.  Other Information.
 
 None.
 
 Item 6.  Exhibits.
  Exhibit
      31.1*
              
              Chief
      Executive Officer Certification Pursuant to Section 13a-14 of the
      Securities Exchange ActExhibit
      31.2*
              
              Chief
      Financial Officer Certification Pursuant to Section 13a-14 of the
      Securities Exchange ActExhibit
      32.1*
              
              Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      theSarbanes-
      Oxley Act of 2002Exhibit
      32.2*
              
              Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      theSarbanes-
      Oxley Act of 2002*
              Filed
      herewith
 
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  OPEXA
      THERAPEUTICS, INC.Date:
      October 22, 2008
              
              By: /s/NEIL K.
      WARMANeil
      K. WarmaPresident
      and Chief Executive OfficerDate:
      October 22, 2008
              
              By: /s/LYNNE
      HOHLFELDLynne
      HohlfeldChief
      Financial Officer and Principal Accounting
  Officer
  15