NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three
Months and Nine Months Ended September 30, 2012 and 2011
1. Basis
of Presentation
The
condensed consolidated financial statements of Cortex Pharmaceuticals, Inc. (“Cortex”) and its wholly-owned subsidiary,
Pier Pharmaceuticals, Inc. (“Pier”) (collectively referred to herein as the “Company”, unless the context
indicates otherwise), at September 30, 2012 and for the three months and nine months ended September 30, 2012 and 2011, are unaudited.
In the opinion of management, all adjustments (including normal recurring adjustments) have been made that are necessary to present
fairly the financial position of the Company as of September 30, 2012, the results of its operations for the three months and
nine months ended September 30, 2012 and 2011, and its cash flows for the nine months ended September 30, 2012 and 2011. Operating
results for the interim periods presented are not necessarily indicative of the results to be expected for a full fiscal year.
The condensed balance sheet at December 31, 2011 has been derived from the Company’s audited financial statements.
The
statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles in the United States (“GAAP”) have been omitted pursuant
to such rules and regulations. These financial statements should be read in conjunction with the financial statements and other
information included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with
the SEC.
Certain
comparative figures in 2011 have been reclassified to conform to the current year’s presentation.
2. Organization
and Business Operations
Business
The
Company was formed to engage in the discovery, development and commercialization of innovative pharmaceuticals for the treatment
of neurological and psychiatric disorders. Since its formation in 1987, the Company has been engaged in the research and clinical
development of a class of compounds referred to as ampakines. By acting as positive allosteric modulators of AMPA glutamate receptors,
ampakines increase the excitatory effects of the neurotransmitter glutamate. Preclinical research suggested that these ampakines
might have therapeutic potential for the treatment of memory and cognitive disorders, depression, attention deficit disorder and
schizophrenia.
In
its early stages, the Company entered into a series of license agreements in 1993 and 1998 with the University of California Irvine
that granted the Company proprietary rights to certain chemical compounds that acted as ampakines and their therapeutic uses.
These agreements granted the Company, among other provisions, exclusive rights: (i) to practice certain patents and patent applications,
as defined in the license agreement, that were then held by the University of California Irvine; (ii) to identify, develop, make,
have made, import, export, lease, sell, have sold or offer for sale any related licensed products; and (iii) to grant sub-licenses
of the rights granted in the license agreements, subject to the provisions of the license agreements. In exchange, the Company
was required, among other terms and conditions, to pay the University of California Irvine a license fee, royalties, patent costs
and certain additional payments. Since the patents covered in the license agreements have begun to expire and the therapeutic
uses described in these patents are no longer germane to the Company’s new focus on respiratory disorders, the license agreements
have been terminated.
The
Company also owns patents and patent applications for certain families of chemical compounds that claim the chemical structures
and their use in the treatment of various disorders. These patents cover, among other compounds, the Company’s lead ampakines
CX 1739 and CX1942 and extend through at least 2028.
On
May 8, 2007, the Company entered into a license agreement, as amended, with the University of Alberta granting the Company exclusive
rights to practice patents held by the University of Alberta claiming the use of ampakines for the treatment of various respiratory
disorders. These patents, along with the Company's own patents claiming chemical structures, comprise the Company's principal
intellectual property supporting the Company's research and clinical development program in the use of ampakines for the treatment
of respiratory disorders. The Company has reported pre-clinical studies that indicated that several of its ampakines, including
CX717, CX1739 and CX1942, were efficacious in treating drug induced respiratory depression caused by opiates or certain anesthetics
without offsetting the analgesic effects of the opiates or the anesthetic effects of the anesthetics. In two clinical Phase 2
studies, one of which was published in a peer-reviewed journal, CX717, a predecessor compound to CX1739 and CX1942, antagonized
the respiratory depression produced by fentanyl, a potent narcotic, without affecting the analgesia produced by this drug. In
addition, the Company has conducted a Phase 2A clinical study in which patients with sleep apnea were administered CX1739, the
Company's lead compound. Preliminary results suggest that CX1739 might have use for the treatment of central and mixed sleep apnea,
but not obstructive sleep apnea.
In
order to expand the Company’s respiratory disorders program, on August 10, 2012, pursuant to an Agreement and Plan of Merger
by and among Pier, a privately-held corporation, Pier Acquisition Corp., a Delaware corporation (“Merger Sub”) and
a wholly-owned subsidiary of Cortex, and Cortex, Merger Sub merged with and into Pier (the “Merger”) and Pier became
a wholly-owned subsidiary of Cortex. Pier was formed in June 2007 (under the name SteadySleep Rx Co.) as a clinical stage pharmaceutical
company to develop a pharmacologic treatment for the respiratory disorder known as obstructive sleep apnea and had been engaged
in research and clinical development activities since formation.
Through
the merger, the Company gained access to an Exclusive License Agreement, as amended (the “License Agreement”), that
Pier had entered into with the University of Illinois on October 10, 2007. The License Agreement covered certain patents and patent
applications in the United States and other countries claiming the use of certain compounds referred to as cannabinoids for the
treatment of sleep related breathing disorders (including sleep apnea), of which dronabinol is a specific example of one type
of cannabinoid. Dronabinol is a synthetic derivative of the naturally occurring substance in the cannabis plant, otherwise known
as Δ9-THC (Δ9-tetrahydrocannabinol). Dronabinol is currently approved by the U. S. Food and Drug Administration and
is sold generically for use in refractory chemotherapy-induced nausea and vomiting, as well as for anorexia in patients with AIDS.
Pier’s business plan was to determine whether dronabinol would significantly improve subjective and objective clinical measures
in patients with obstructive sleep apnea. In addition, Pier intended to evaluate the feasibility and comparative efficacy of a
proprietary formulation of dronabinol.
The
License Agreement granted Pier, among other provisions, exclusive rights: (i) to practice certain patents and patent applications,
as defined in the License Agreement, that were then held by the University of Illinois; (ii) to identify, develop, make, have
made, import, export, lease, sell, have sold or offer for sale any related licensed products; and (iii) to grant sub-licenses
of the rights granted in the License Agreement, subject to the provisions of the License Agreement. In exchange, Pier was required
under the License Agreement, among other terms and conditions, to pay the University of Illinois a license fee, royalties, patent
costs and certain milestone payments.
The
License Agreement was terminated effective March 21, 2013 due to the Company’s failure to make a required payment and on
June 27, 2014, the Company entered into a new license agreement with the University of Illinois similar, but not identical, to
the License Agreement that had been terminated (see Note 11).
Going
Concern
The
Company’s unaudited condensed consolidated financial statements have been presented on the basis that it is a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has
incurred operating losses and negative operating cash flows since the 2011 fiscal year, including approximately $3,699,000 and
$1,790,000, respectively, for the nine months ended September 30, 2012, and incurred additional operating losses and negative
operating cash flows in the 2012 and 2013 fiscal years. Furthermore, the Company expects to continue to incur operating losses
and negative operating cash flows for several more years thereafter. As a result, management believes that there is substantial
doubt about the Company’s ability to continue as a going concern.
The
Company is currently, and has for some time, been in significant financial distress. It has limited cash resources and current
assets and has no ongoing source of revenue. On June 15, 2012, each of the Company’s executive officers at that time agreed
to defer 50% of their base salary, effective June 1, 2012, until the Company secured sufficient capital or certain corporate transactions
occurred, in an effort to preserve the Company’s financial resources. Since late 2012, the Company’s business activities
have been reduced to minimal levels, and the prior management of the Company, which was removed by an action of shareholders on
March 22, 2013, had retained bankruptcy counsel to assist it in preparations to file for liquidation under Chapter 7 of the United
States Bankruptcy Code. New management, which was appointed during March and April 2013, is currently in the process of evaluating
the status of numerous aspects of the Company’s existing business and obligations, including, without limitation, debt obligations,
financial requirements, intellectual property, licensing agreements, legal and patent matters and regulatory compliance.
The
Company does not expect to be able to pay its liabilities and fund its business activities going forward without raising additional
capital. As a result of the Company’s current financial situation, the Company believes that is has very limited access
to external sources of debt and equity financing. Accordingly, there can be no assurances that the Company will be able to secure
the additional financing required to fully fund its operating and debt service requirements. If the Company is unable to access
sufficient cash resources, the Company may be forced to discontinue its operations entirely and liquidate. From June 2013 through
March 2014, the Company’s Chairman and Chief Executive Officer advanced short-term loans to the Company aggregating $150,000
in order to meet its minimum operating needs. In March and April 2014, the Company sold 928.5 shares of its Series G Preferred
Stock for gross proceeds of $928,500 (see Note 11).
3. Summary
of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the financial statements of Cortex and Pier, its wholly-owned
subsidiary, from its August 10, 2012 acquisition date. Intercompany balances and transactions have been eliminated in consolidation.
Cash
Concentrations
The
Company’s cash balances may periodically exceed federally insured limits. The Company has not experienced a loss in such
accounts to date. The Company maintains its accounts with financial institutions with high credit ratings.
Cash
Equivalents
The
Company considers all highly liquid short-term investments with maturities of less than three months when acquired to be cash
equivalents.
Marketable
Securities
Marketable
securities are carried at fair value, with unrealized gains and losses, net of any tax, reported as a separate component of stockholders’
equity. The Company utilizes observable inputs based on quoted prices in active markets for identical assets to record the fair
value of its marketable securities. Authoritative guidance that establishes a framework for fair value for GAAP deems observable
inputs for identical assets as Level 1 inputs, the most reliable in the hierarchy of inputs for determining fair value measurements.
The
amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization
is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on short-term
investments are included in interest income. The cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in interest income.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents
and short-term investments. The Company limits its exposure to credit risk by investing its cash with high credit quality financial
institutions.
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below. Disclosure as to transfers into and out of Levels 1 and 2, and activity
in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
Furniture,
Equipment and Leasehold Improvements
Furniture,
equipment and leasehold improvements are recorded at cost and depreciated on a straight-line basis over the lesser of their estimated
useful lives, ranging from five to ten years, or the life of the lease, as appropriate.
License
Agreement
The
License Agreement with the University of Illinois has been presented at cost (based on the fair value ascribed to the License
Agreement in August 2012 as described in Note 4) and is being amortized on a straight-line basis over the remaining life of its
underlying patents of 172 months from the date of acquisition of August 10, 2012.
The
carrying value of the License Agreement is assessed for impairment at least annually. The Company performs an impairment assessment
at its year end or whenever events or circumstances indicate impairment may have occurred. The value of the License Agreement
was impaired at December 31, 2012 and the Company recorded a charge to operations of $3,321,678 at such date (see Note 11), which
will be reflected in the Company’s financial statements for the year ended December 31, 2012.
Long-Lived
Assets
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the total amount
of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from
the use of the asset and its eventual disposition is less than the asset’s carrying amount. The Company did not recognize
any significant impairment losses during any of the periods presented.
Revenue
Recognition
The
Company recognizes revenue when all four of the following criteria are met: (i) pervasive evidence that an arrangement exists;
(ii) delivery of the products and/or services has occurred; (iii) the amounts earned can be readily determined; and (iv) collectability
of the amounts earned is reasonably assured. Amounts received for upfront technology license fees under multiple-element arrangements
are deferred and recognized over the period of committed services or performance, if such arrangements require the Company’s
on-going services or performance.
The
Company records research grant revenues when the expenses related to the grant projects are incurred. Amounts received under research
grants are nonrefundable, regardless of the success of the underlying research, to the extent that such amounts are expended in
accordance with the approved grant project.
Employee
Stock Options and Stock-Based Compensation
All
share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based
on their fair values. For options granted during the nine months ended September 30, 2012 and 2011, the fair value of each option
award was estimated using the Black-Scholes option-pricing model and the following assumptions:
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Risk-free interest rate
|
|
|
0.30
|
%
|
|
|
2.80
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
176
|
%
|
|
|
107
|
%
|
Expected life
|
|
|
10
years
|
|
|
|
7
years
|
|
Expected
volatility is based on the historical volatility of the Company’s stock. The Company also uses historical data to estimate
the expected term of options granted and employee termination rates. The risk-free rate for periods within the expected useful
life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.
Stock
options and warrants issued to non-employees as compensation for services to be provided to the Company are accounted for based
upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly
determined. The Company recognizes this expense over the period in which the services are provided.
The
Company issues new shares to satisfy stock option and warrant exercises. There were no options exercised during the three months
and nine months ended September 30, 2012 and 2011.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes.
Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities. As of December 31, 2011, the Company had federal and California tax net
operating loss carryforwards of approximately $82,886,000 and $83,513,000, respectively. The difference between the federal and
California tax loss carryforwards was primarily attributable to the capitalization of research and development expenses for California
franchise tax purposes. The federal and California net operating loss carryforwards will expire at various dates from 2012 through
2031. The Company also had federal and California research and development tax credit carryforwards that totaled approximately
$2,093,000 and $1,146,000, respectively, at December 31, 2011. The federal research and development tax credit carryforwards will
expire at various dates from 2012 through 2031. The California research and development tax credit carryforward does not expire
and will carryforward indefinitely until utilized.
The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of
its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination
was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.
The
Company’s effective tax rate is different from the federal statutory rate of 35% due primarily to operating losses that
receive no tax benefit as a result of a valuation allowance recorded for such losses.
Pursuant
to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss and credit carryforwards may be limited
if a cumulative change in ownership of more than 50% occurs within any three-year period since the last ownership change. The
Company may have had a change in control under these Sections. However, the Company does not anticipate performing a complete
analysis of the limitation on the annual use of the net operating loss and tax credit carryforwards until the time that it projects
it will be able to utilize these tax attributes.
As
of December 31, 2011, the Company did not have any unrecognized tax benefits related to various federal and state income tax matters.
The
Company is subject to U.S. federal income tax as well as income tax of multiple state tax jurisdictions. The Company is currently
open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2010 through
2013. The Company and its subsidiary’s state income tax returns (prior to the Pier merger) are open to audit under the statute
of limitations for the years ended December 31, 2009 through 2013. The Company does not anticipate any material amount of unrecognized
tax benefits within the next 12 months.
The
Company is currently delinquent with respect to its U.S. federal and applicable states income tax filings for the year ended December
31, 2012, and no potential penalties, interest or other charges have been provided for in the Company’s financial statements
because no income was generated during those periods.
Research
and Development Costs
Costs
related to research and development activities are charged to operations in the period incurred.
Comprehensive
Income (Loss)
Components
of comprehensive income or loss, including net income or loss, are reported in the financial statements in the period in which
they are recognized. Comprehensive income or loss is defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss), including unrealized
gains and losses on investments, are reported net of any related tax effect to arrive at comprehensive income (loss). The Company
did not have any items of comprehensive income (loss) for the nine months ended September 30, 2012 or 2011.
Net
Loss per Share
The
Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as
the income (loss) available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted
EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants and
options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common
shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.
Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the respective periods. Basic and diluted loss per common share is the same for all periods presented because all warrants and
stock options outstanding are anti-dilutive.
At
September 30, 2012 and 2011, the Company excluded the outstanding securities summarized below, which entitle the holders thereof
to acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
Convertible preferred stock
|
|
|
3,679
|
|
|
|
3,679
|
|
Warrants
|
|
|
22,739,759
|
|
|
|
25,818,319
|
|
Stock options
|
|
|
17,425,024
|
|
|
|
11,586,891
|
|
Total
|
|
|
40,168,462
|
|
|
|
37,408,889
|
|
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, 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. Actual amounts
may differ from those estimates.
Recent
Accounting Pronouncements
In
May 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRSs. This guidance was issued to achieve common fair value measurement and disclosure requirements between
GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance
to include increased transparency around valuation inputs and investment categorization. The Company adopted the ASU effective
January 1, 2012. The adoption of this new guidance did not have any impact on the Company’s fair value measurements or the
Company’s financial statement presentation or disclosures.
In
June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This guidance
requires companies to present the components of net income and other comprehensive income either as one continuous statement or
as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement
of changes in stockholders’ equity. The guidance does not change the items, which must be reported in other comprehensive
income, how such items are measured or when they must be reclassified to net income. In addition, in December 2011, the FASB issued
an amendment which defers the requirement to present components of reclassifications of other comprehensive income on the face
of the income statement. The Company adopted the ASU effective January 1, 2012. Because this guidance impacts presentation only,
it did not have any impact on the Company’s consolidated financial statements.
In
September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.
This guidance simplifies how entities test goodwill for impairment and permits an entity to first assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis
for determining whether it is necessary to perform the two-step goodwill impairment test. The Company adopted the ASU effective
January 1, 2012. The adoption of this new guidance did not have any impact on the Company’s financial statement presentation
or disclosures.
In
December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.
This guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial
statements to understand the effect of those arrangements on its financial position. The guidance will be applied retrospectively
and is effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption
of this guidance to have any impact on its consolidated financial statement presentation or disclosures.
In
July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment. This guidance allows entities the option to first assess qualitative factors to determine whether it is
necessary to perform the quantitative impairment test. If the qualitative assessment indicates that it is more-likely-than-not
that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test
is required. Otherwise, no testing is required. The guidance is effective for the Company in the period beginning January 1, 2013.
The Company does not expect the adoption of this guidance to have any impact on its consolidated financial statement presentation
or disclosures.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
4. Merger
with Pier Pharmaceuticals, Inc.
The
Company acquired 100% of the issued and outstanding equity securities of Pier Pharmaceuticals, Inc. (“Pier”) effective
August 10, 2012 pursuant to an Agreement and Plan of Merger. In connection with the merger transaction with Pier, the Company
issued 58,417,895 newly issued shares of its common stock valued at $3,271,402 ($0.056 per share), based upon the closing price
of its common stock on such date. The Company’s common stock was issued to former Pier shareholders, convertible note holders,
warrant holders, option holders, and certain employees and vendors in satisfaction of their interests and claims. The common stock
issued by the Company represented approximately 41% of the Company’s outstanding common stock immediately following the
closing of the transaction.
Pier
was formed on June 25, 2007 as a closely-held clinical stage pharmaceutical company to develop a pharmacologic treatment for the
respiratory disorder known as obstructive sleep apnea and has been engaged in research and early clinical development activities
since formation. Pier was a development stage company, as it had not commenced any revenue-generating operations, did not have
any cash flows from operations, and was dependent on debt and equity funding to finance its operations.
On
October 10, 2007, Pier obtained the basis for its research and clinical development activities by entering into a License Agreement
with the University of Illinois. The License Agreement covered certain patents and patent applications in the United States and
other countries claiming the use of certain compounds referred to as cannabinoids for the treatment of breathing-related sleep
disorders (including sleep apnea), of which dronabinol is a specific example of one type of compound falling within this class.
Dronabinol is a synthetic derivative of the naturally occurring substance in the cannabis plant, otherwise known as Δ9-THC
(Δ9-tetrahydrocannabinol). Dronabinol is currently approved by the U.S. Food and Drug Administration and is sold generically
for use in refractory chemotherapy-induced nausea and vomiting, as well as for anorexia associated with weight loss in patients
with AIDS. Pier’s business plan was to determine whether dronabinol administration to humans would significantly improve
subjective and objective clinical measures in patients with obstructive sleep apnea. In addition, Pier intended to evaluate the
feasibility and comparative efficacy of a proprietary formulation of dronabinol.
The
License Agreement granted Pier, among other provisions, exclusive rights: (i) to practice certain patents and patent applications,
as defined in the License Agreement, that were then held by the University of Illinois; (ii) to identify, develop, make, have
made, import, export, lease, sell, have sold or offer for sale any related licensed products; and (iii) to grant sub-licenses
of the rights granted in the License Agreement, subject to the provisions of the License Agreement. In exchange, Pier was required
under the License Agreement to pay the University of Illinois a license fee, royalties, patent costs and certain milestone payments.
The
License Agreement was the basis for Pier’s research and development activities, and was Pier’s primary asset and its
only intellectual property asset. By providing the Company
with
the
means to expand its respiratory disorders program, the License Agreement was the central reason that Cortex entered into the merger
transaction with Pier in August 2012. The License Agreement was terminated effective March 21, 2013 due to the Company’s
failure to make a required payment (see Note 10).
Pursuant
to the terms of the transaction, the Company agreed to issue approximately 18,300,000 additional shares of its common stock to
Pier’s former shareholders as contingent consideration in the event that certain of the Company’s stock options and
warrants outstanding as of the date of the transaction were subsequently exercised. Nearly all of the Company’s stock options
and warrants outstanding as of the date of the transaction were out-of-the-money. In the event that such contingent shares were
issued, the ownership percentage of Pier’s former shareholders, following their receipt of such additional shares, could
not exceed their ownership percentage as of the initial transaction date. None of these contingent shares have been issued to
date. The Company has concluded that the issuance of such contingent consideration is remote, given the exercise prices of these
stock options and warrants, the Company’s distressed financial condition and capital requirements, and that these stock
options and warrants remain out-of-the-money and continue to expire as time passes. Accordingly, the Company considers the contingent
consideration to be functionally zero and has therefore not ascribed any value to such contingent consideration; if any such shares
are ultimately issued to the former Pier shareholders, the Company will recognize the fair value of such shares as a charge to
operations.
The Company agreed to
file a registration statement on Form S-1 under the Securities Act of 1933, as amended, with the SEC within ninety days after
the closing of the transaction covering the shares of common stock issued to the former Pier shareholders, as well as the contingent
shares, and to take certain other actions to maintain the effectiveness of such registration statement for a period not exceeding
three years. The Company has not filed this registration statement. The Agreement and Plan of Merger did not provide
for any financial penalties in the event that the Company failed to comply with the registration statement filing requirements.
The
Company accounted for the Pier transaction pursuant to ASC Topic 805, Business Combinations. The Company identified and evaluated
the fair value of the assets acquired. Based on the particular facts and circumstances surrounding the history and status of Pier,
including its business and intellectual property at the time of the merger transaction, the Company determined that the identifiable
intangible assets were comprised solely of contract-based intangible assets and consisted of the License Agreement, and that there
was no measurable goodwill.
The
following table summarizes the fair value of the assets acquired and liabilities assumed by the Company at the closing of the
Pier transaction on August 10, 2012.
Fair value of assets acquired:
|
|
|
|
|
Cash
|
|
$
|
23,208
|
|
Other current assets
|
|
|
698
|
|
Equipment
|
|
|
3,463
|
|
License agreement
|
|
|
3,411,157
|
|
Total assets acquired
|
|
$
|
3,438,526
|
|
|
|
|
|
|
Consideration transferred by the Company:
|
|
|
|
|
Fair value of common shares issued
|
|
$
|
3,271,402
|
|
Liabilities assumed
|
|
|
167,124
|
|
Total consideration paid
|
|
$
|
3,438,526
|
|
The
following pro forma operating data presents the results of operations for the three months and nine months ended September 30,
2012 and 2011, as if the merger had occurred on the first day of each period presented. Merger transaction costs incurred by both
Pier and the Company of $1,353,235 and $1,621,993 for the three months and nine months September 30, 2012, respectively, are not
included in the net loss below. The pro forma results are not necessarily indicative of the financial results that might have
occurred had the merger transaction actually taken place on the respective dates, or of future results of operations. Pro forma
information for the three months and nine months ended September 30, 2012 and 2011 is summarized as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
2,139
|
|
|
$
|
48,309
|
|
|
$
|
1,112,466
|
|
Net Loss
|
|
$
|
(731,783
|
)
|
|
$
|
(1,443,095
|
)
|
|
$
|
(2,806,572
|
)
|
|
$
|
(3,894,398
|
)
|
Net loss per common share - Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Weighted average common shares outstanding - Basic and diluted
|
|
|
144,041,558
|
|
|
|
79,708,197
|
|
|
|
144,041,558
|
|
|
|
79,708,197
|
|
As
a condition of the Pier transaction, positions for two of Cortex’s executive officers were eliminated and thus the severance
agreements for such executive officers were amended. As amended, the severance agreements provide for the grant of fully vested,
ten-year options to purchase up to a total of 5,166,668 shares of the Company’s common stock at an exercise price of $0.06
per share, which was in excess of the closing price of the Company’s common stock on the closing date of the Pier acquisition.
The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model was determined to be $310,000
($0.06 per share) and was charged to merger costs on August 10, 2012. The Black-Scholes option-pricing model utilized the following
inputs: exercise price per share-$0.06; stock price per share – $0.056; expected dividend yield – 0.00%; expected
volatility – 176%; average risk-free interest rate – 0.31%; expected life – 10 years. As amended, the severance
agreements also required the payment of $429,231 for various other amounts due the two executive officers. As of August 10, 2012,
these amounts were accrued and charged to merger costs. As a result of the management change that occurred on March 22, 2013,
these officers asserted claims against the Company (see Note 11).
Merger-related
costs for the three months and nine months ended September 30, 2012 are summarized as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2012
|
|
Direct merger costs
|
|
$
|
345,629
|
|
|
$
|
506,876
|
|
Merger-related severance and termination costs
|
|
|
739,231
|
|
|
|
739,231
|
|
Total
|
|
$
|
1,084,860
|
|
|
$
|
1,246,107
|
|
5. Note
Payable to Related Party
On
June 25, 2012, the Company borrowed 465,000,000 South Korean Won, (equivalent to approximately $400,000 US dollars) from and executed
a secured note payable to Samyang Optics Co., Inc. (“Samyang”), an approximately 20% stockholder of the Company at
that time. The note accrues simple interest at the rate of 12% per annum and has a maturity date of June 25, 2013, although Samyang
was permitted to demand early repayment of the promissory note on or after December 25, 2012. The Company has not made any payments
on the note, nor has Samyang made any demand for repayment. The note, including accrued interest, is currently due and payable.
The
promissory note is secured by collateral that represents a lien on certain patents owned by the Company, including composition
of matter patents for certain of the Company’s high impact ampakine compounds and the low impact ampakine compounds CX2007
and CX2076, and other related compounds. The security interest does not extend to the Company’s patent for its ampakine
CX1739 or to the patent for the use of ampakine compounds for the treatment of respiratory depression.
In
connection with this financing, the Company issued to Samyang two-year detachable warrants to purchase 4,000,000 shares of the
Company’s common stock at an exercise price of $0.056 per share. The warrants have a call right for consideration of $0.001
per share, in favor of the Company, to the extent that the weighted average closing price of the Company’s common stock
exceeds $0.084 per share for each of ten consecutive trading days, subject to certain circumstances. Additionally, an existing
license agreement with Samyang was expanded to include rights to ampakine CX1739 in South Korea for the treatment of sleep apnea
and respiratory depression. The warrants expired unexercised on June 25, 2014.
The
Company considered the face amount of the note payable as a fair approximation of its value. The Company used the Black-Scholes
option pricing model to estimate the fair value of the two-year detachable warrants to purchase 4,000,000 shares of the Company’s
common stock at an exercise price of $0.056 per share. The Company applied the relative fair value method to allocate the proceeds
from the borrowing to the note payable and the detachable warrants. The Company did not consider the expansion of the existing
license agreement with Samyang to have any significant value. Consequently, approximately 64% of the proceeds of the borrowing
were attributed to the debt instrument.
The
36% value attributed to the warrant is being amortized as additional interest expense over the life of the note. Additionally,
financing costs aggregating $21,370 incurred in connection with the transaction are also being amortized over the expected life
of the note. In that repayment could be demanded after six months, that period is being used as the expected life of the note
payable for amortization purposes.
Note
payable to Samyang consists of the following at September 30, 2012:
Principal amount of note payable
|
|
$
|
399,774
|
|
Accrued interest payable
|
|
|
13,080
|
|
Unamortized discount attributed to warrant
|
|
|
(67,162
|
)
|
Foreign currency translation
|
|
|
16,250
|
|
|
|
$
|
361,942
|
|
6. Furniture,
Equipment and Leasehold Improvements
Furniture,
equipment and leasehold improvements consist of the following at September 30, 2012 and December 31, 2011:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Laboratory equipment
|
|
$
|
2,583
|
|
|
$
|
59,822
|
|
Leasehold improvements
|
|
|
5,293
|
|
|
|
766,905
|
|
Furniture and equipment
|
|
|
93,664
|
|
|
|
170,447
|
|
Computers and software
|
|
|
170,579
|
|
|
|
173,675
|
|
|
|
|
272,119
|
|
|
|
1,170,849
|
|
Accumulated depreciation
|
|
|
(229,841
|
)
|
|
|
(1,303,967
|
)
|
|
|
$
|
42,278
|
|
|
$
|
66,882
|
|
During
the nine months ended September 30, 2012, the Company disposed of $894,067 of furniture, equipment and leasehold improvements,
including $834,016 of fully depreciated furniture, equipment and leasehold improvements, which consisted primarily of leasehold
improvements abandoned in connection with the downsizing of the Company’s operations.
In
March 2013, the Company vacated its operating facilities prior to the scheduled termination of the lease. Subsequently, the Company
received notice that it has been sued in the Superior Court of California by its former landlord seeking, among other things,
past due rent and reasonable attorney fees. On May 23, 2013, a settlement was reached wherein the Company agreed to relinquish
its security deposit in the amount of $29,545, transfer title to its remaining furniture, equipment and leasehold improvements,
and pay an additional $26,000 on or before September 30, 2013. The transfer of the Company’s furniture, equipment and leasehold
improvements resulted in a loss of $39,126, which, because the Company had substantially abandoned these assets prior to December
31, 2012, was charged to operations at December 31, 2012 (see Note 11).
7. Project
Advance
In
June 2000, the Company received $247,300 from the Institute for the Study of Aging (the “Institute”) to fund testing
of the Company’s ampakine CX516 in patients with mild cognitive impairment (“MCI”). Patients with MCI represent
the earliest clinically-defined group with memory impairment beyond that expected for normal individuals of the same age and education,
but such patients do not meet the clinical criteria for Alzheimer’s disease. During 2002 and 2003, the Company conducted
a double blind, placebo controlled clinical study with 175 elderly patients displaying MCI and issued a final report on June 21,
2004. CX516 did not improve the memory impairments observed in these patients.
Pursuant
to the funding agreement, if the Company complied with certain conditions, including the completion of the MCI clinical trial,
the Company would not be required to make any repayments unless and until the Company enters one of its ampakine compounds into
Phase III clinical trials for Alzheimer’s disease. Upon initiation of such clinical trials, repayment would include the
principal amount plus accrued interest computed at a rate equal to one-half of the prime lending rate. In the event of repayment,
the Institute may elect to receive the outstanding principal balance and any accrued interest thereon in shares of the Company’s
common stock. The conversion price for such form of repayment was initially set at $4.50 per share and is subject to adjustment
if the Company pays a dividend or distribution in shares of common stock, effects a stock split or reverse stock split, effects
a reorganization or reclassification of its capital stock, or effects a consolidation or merger with or into another corporation
or entity. Included in the condensed consolidated balance sheets is principal and accrued interest with respect to this funding
agreement in the amount of $328,995 and $323,779 at September 30, 2012 and December 31, 2011, respectively. The Company currently
has no plans to conduct the above mentioned Phase III Alzheimer’s study. The Company is currently in discussions with the
Institute to settle this obligation.
8. Stockholders’
Equity
Preferred
Stock
The
Company has authorized a total of 5,000,000 shares of preferred stock, par value $0.001 per share. As of September 30, 2012 and
December 31, 2011, 1,250,000 shares were designated as 9% Cumulative Convertible Preferred Stock (non-voting, “9% Preferred”);
37,500 shares were designated as Series B Convertible Preferred Stock (non-voting, “Series B Preferred”); 205,000
were designated as Series A Junior Participating Preferred Stock (non-voting, “Series A Junior Participating”) and
3,507,500 shares were undesignated and may be issued with such rights and powers as the Board of Directors may designate.
None
of the 9% Preferred shares or the Series A Junior Participating shares were outstanding during the nine months ended September
30, 2012 or the year ended December 31, 2011.
Series
B Preferred shares outstanding as of September 30, 2012 and December 31, 2011 consisted of 37,500 shares issued in a May 1991
private placement. Each share of Series B Preferred is convertible into approximately 0.09812 shares of common stock at an effective
conversion price of $6.795 per share of common stock, subject to adjustment under certain circumstances. As of September 30, 2012
and December 31, 2011, these shares of Series B Preferred outstanding are convertible into 3,679 shares of common stock. The Company
may redeem the Series B Preferred at a price of $0.6667 per share, an amount equal to its liquidation preference, at any time
upon 30 days prior notice.
On
March 14, 2014, the Company designated 1,700 shares of the previously undesignated shares of preferred stock as Series G Preferred
Stock (see Note 11).
Common
Stock and Common Stock Purchase Warrants
Under
the terms of the Company’s registered direct offering with several institutional investors in January 2007, the Company
sold an aggregate of 5,021,427 shares of its common stock and warrants to purchase 3,263,927 shares of its common stock. The warrants
had an exercise price of $1.66 per share and were exercisable on or before January 21, 2012. During the year ended December 31,
2007, the Company received approximately $443,000 from the partial exercise of such warrants. None of the remaining warrants to
purchase 2,996,927 shares of the Company’s common stock were exercised, and consequently, those warrants expired unexercised
in January 2012.
Under
the terms of the Company’s registered direct offering with several institutional investors in August 2007, the Company sold
an aggregate of 7,075,000 shares of its common stock and warrants to purchase 2,830,000 shares of its common stock. The warrants
had an exercise price of $2.64 per share and were exercisable on or before August 28, 2012. In addition, the Company issued warrants
to purchase an aggregate of 176,875 shares of its common stock to the placement agents in that offering. The placement agent warrants
had an exercise price of $3.96 per share and were also exercisable on or before August 28, 2012. None of those investor or placement
agent warrants were exercised, and consequently, those warrants to purchase 3,006,875 shares of the Company’s common stock
expired unexercised in August 2012.
In
connection with the registered direct offering of the Company’s 0% Series E Convertible Preferred Stock in April 2009, the
Company issued warrants to purchase an aggregate of 6,941,176 shares of its common stock to a single institutional investor. The
warrants had an exercise price of $0.3401 per share and were exercisable on or before October 17, 2012. In February 2010, the
exercise price of these warrants was reduced to $0.2721 in exchange for the investor’s consent and waiver with respect to
the Company’s completed financing transaction with Samyang in January 2010. The warrants were also subject to a call provision
in favor of the Company. The Company also issued warrants to purchase an additional 433,824 shares of the Company’s common
stock to the placement agent for that transaction. These warrants had an exercise price of $0.26 per share and were subject to
the same exercisability term as the warrants issued to the investor. None of those investor or placement agent warrants were exercised,
and consequently, those warrants to purchase 7,375,000 shares of the Company’s common stock expired unexercised in August
2012.
In
connection with the private placement of the Company’s Series F Convertible Preferred Stock in July 2009, the Company issued
warrants to purchase an aggregate of 6,060,470 shares of its common stock to a single institutional investor. The warrants had
an exercise price of $0.2699 per share and were exercisable on or before January 31, 2013. The Company also issued warrants to
purchase an additional 606,047 shares of the Company’s common stock to the placement agent for that transaction. These warrants
had an exercise price of $0.3656 per share and were subject to the same exercisability term as the warrants issued to the investor.
The warrants issued to the investor and the placement agent were subject to a call provision in favor of the Company. None of
those investor or placement agent warrants were exercised, and consequently, those warrants to purchase 6,666,517 shares of the
Company’s common stock expired unexercised in January 2013.
In
connection with the conversion of a promissory note issued to Samyang in June 2010, the Company issued to Samyang two-year warrants
to purchase 4,081,633 shares of the Company’s common stock at an exercise price of $0.206 per share. None of those warrants
were exercised, and consequently, those warrants to purchase 4,081,633 shares of the Company’s common stock expired unexercised
in June 2012.
In
October 2011, the Company completed a private placement of $500,000 in securities with Samyang Value Partners Co., Ltd., a wholly-owned
subsidiary of Samyang. The transaction included the issuance of 6,765,466 shares of the Company’s common stock and two-year
warrants to purchase an additional 1,691,367 shares of its common stock. The warrants had an exercise price of $0.1035 per share
and a call right in favor of the Company. None of those warrants were exercised, and consequently, those warrants to purchase
1,691,367 shares of the Company’s common stock expired unexercised in October 2013. Related to this private placement, the
Company and Samyang entered into a non-binding memorandum of understanding (“MOU”) regarding a potential license agreement
for rights to the ampakine CX1739 for the treatment of neurodegenerative diseases in South Korea. The MOU also provided Samyang
with rights of negotiation to expand its territory into other South East Asian countries, excluding Japan, Taiwan and China, and
to include rights to the high impact ampakine CX1846 for the potential treatment of neurodegenerative diseases. The related license
agreement was subsequently completed in January 2012.
In
connection with a private placement of debt on June 25, 2012, the Company issued to Samyang two-year detachable warrants to purchase
4,000,000 shares of the Company’s common stock at an exercise price of $0.056 per share. The warrants have a call right
for consideration of $0.001 per share, in favor of the Company, to the extent that the weighted average closing price of the Company’s
common stock exceeds $0.084 per share for each of ten consecutive trading days, subject to certain circumstances.
A
summary of common stock warrant activity for the nine months ended September 30, 2012 and the year ended December 31, 2011is presented
in the tables below.
|
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (in
Years)
|
|
Warrants
outstanding at December 31, 2010
|
|
|
|
24,126,952
|
|
|
$
|
0.74
|
|
|
|
|
|
Issued
|
|
|
|
1,691,367
|
|
|
|
0.10
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Warrants outstanding
at December 31, 2011
|
|
|
|
25,818,319
|
|
|
|
0.70
|
|
|
|
|
|
Issued
|
|
|
|
4,000,000
|
|
|
|
0.056
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
|
(10,085,435
|
)
|
|
|
0.82
|
|
|
|
|
|
Warrants
outstanding at September 30, 2012
|
|
|
|
19,732,884
|
|
|
$
|
0.22
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2011
|
|
|
|
25,818,319
|
|
|
$
|
0.70
|
|
|
|
|
|
Warrants
exercisable at September 30, 2012
|
|
|
|
19,732,884
|
|
|
$
|
0.22
|
|
|
|
0.60
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at September 30, 2012:
Exercise
Price
|
|
|
Warrants Outstanding (Shares)
|
|
|
Warrants Exercisable
(Shares)
|
|
|
Expiration Date
|
$
|
0.056
|
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
|
June 25, 2014
|
$
|
0.100
|
|
|
|
1,691,367
|
|
|
|
1,691,367
|
|
|
October 20, 2013
|
$
|
0.260
|
|
|
|
433,824
|
|
|
|
433,824
|
|
|
October 17,2012
|
$
|
0.270
|
|
|
|
6,941,176
|
|
|
|
6,941,176
|
|
|
October 17, 2012
|
$
|
0.270
|
|
|
|
6,060,470
|
|
|
|
6,060,470
|
|
|
January 31, 2013
|
$
|
0.370
|
|
|
|
606,047
|
|
|
|
606,047
|
|
|
January 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,732,884
|
|
|
|
19,732,884
|
|
|
|
Based
on a fair market value of $0.06 per share on September 30, 2012, the intrinsic value attributed to exercisable but unexercised
common stock warrants at September 30, 2012 was $16,000.
Stock
Option and Stock Purchase Plan
The
Company’s 1996 Stock Incentive Plan (the “1996 Plan”), which terminated pursuant to its terms on October 25,
2006, provided for the granting of options and rights to purchase up to an aggregate of 10,213,474 shares of the Company’s
authorized but unissued common stock to qualified employees, officers, directors, consultants and other service providers. Options
granted under the 1996 Plan generally vested over a three-year period, although some options granted to officers included more
accelerated vesting. Options previously granted under the 1996 Plan generally expire ten years from the date of grant, but some
options granted to consultants expire five years from the date of grant.
On
March 30, 2006, the Company’s Board of Directors approved the 2006 Stock Incentive Plan (the “2006 Plan”), which
subsequently was approved by the Company’s stockholders on May 10, 2006. Upon the approval of the 2006 Plan, no further
options were granted under the 1996 Plan. The 2006 Plan provides for the granting of options and rights to purchase up to an aggregate
of 9,863,799 shares of the Company’s authorized but unissued common stock (subject to adjustment under certain circumstances,
such as stock splits, recapitalizations and reorganization) to qualified employees, officers, directors, consultants and other
service providers.
Under
the 2006 Plan, the Company may issue a variety of equity vehicles to provide flexibility in implementing equity awards, including
incentive stock options, nonqualified stock options, restricted stock grants, stock appreciation rights, stock payment awards,
restricted stock units and dividend equivalents. The exercise price of stock options offered under the 2006 Plan must be at least
100% of the fair market value of the common stock on the date of grant. If the person to whom an incentive stock option is granted
is a 10% stockholder of the Company on the date of grant, the exercise price per share shall not be less than 110% of the fair
market value on the date of grant. Vesting and expiration provisions for options granted under the 2006 Plan are similar to those
under the 1996 Plan.
Subject
to any restrictions under federal or securities laws, the Chief Executive Officer may award stock options to new non-executive
officer employees and consultants, with a market value at the time of hire equivalent to up to 100% of the employee’s annual
salary or the consultant’s anticipated annual consulting fees. The Chief Executive Officer shall have the discretion to
increase or decrease such awards based on market and recruiting factors subject to a limit per person in each case of options
to purchase 50,000 shares. Additionally, on an annual basis, the Chief Executive Officer may grant continuing employees and consultants,
based upon performance and subject to meeting objectives, a stock option for that number of shares up to 40% of the employee’s
annual salary or the consultant’s annual fees, but not to exceed 50,000 shares per person per year. Any option grant exceeding
50,000 shares per person per year requires approval by the Compensation Committee of the Board of Directors or the full Board
of Directors. These options shall be granted with an exercise price equal to the fair market value of the Company’s common
stock on the date of issuance, have a ten-year term, vest annually over a three-year period from the dates of grant and have other
terms consistent with the 2006 Plan.
Under
the 2006 Plan, each non-employee director is automatically granted options to purchase 30,000 shares of common stock upon commencement
of service as a director and, each non-employee director is automatically granted additional options to purchase 30,000 shares
of common stock on the date of the first meeting of the Board of Directors for the relative calendar year. The nonqualified options
to non-employee directors have an exercise price equal to 100% of the fair market value of the common stock on the date of grant,
have a ten-year term and vest annually over a three-year period from the dates of grant.
On
August 3, 2012, fully vested, ten-year options to purchase a total of 2,195,000 shares of the Company’s common stock at
an exercise price of $0.06 per share, representing the closing price of the Company’s common stock on the date of issue,
were granted to directors of the Company for past services.
In
July and August 2012, pursuant to severance agreements amended in connection with the merger transaction with Pier, fully-vested,
ten-year options to purchase a total of 5,166,668 shares of the Company’s common stock at an exercise price of $0.06 per
share, which was in excess of the closing price of the Company’s common stock on the closing date of the merger, were granted
to two of the Company’s former executive officers.
The
Company is no longer making awards under the 2006 Plan and has adopted, with shareholder approval, the 2014 Equity, Equity-Linked
and Equity Derivative Incentive Plan (see Note 11).
As
of September 30, 2012, options to purchase an aggregate of 17,425,024 shares of common stock were exercisable under the Company’s
stock option plans. During the nine months ended September 30, 2012 and year ended December 31, 2011, the Company did not issue
any options to purchase shares of common stock with exercise prices below the fair market value of the common stock on the dates
of grant.
A
summary of stock option activity for the nine months ended September 30, 2012 and the year ended December 31, 2011 is presented
in the tables below.
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
Options
outstanding at December 31, 2010
|
|
|
$
|
12,141,640
|
|
|
$
|
1.39
|
|
|
|
|
|
Granted
|
|
|
|
180,000
|
|
|
|
0.13
|
|
|
|
|
|
Expired
|
|
|
|
(258,665
|
)
|
|
|
0.20
|
|
|
|
|
|
Forfeited
|
|
|
|
(1,262,119
|
)
|
|
|
1.59
|
|
|
|
|
|
Options outstanding
at December 31, 2011
|
|
|
|
10,800,856
|
|
|
|
1.38
|
|
|
|
|
|
Granted
|
|
|
|
7,361,668
|
|
|
|
0.06
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
|
(737,500
|
)
|
|
|
0.95
|
|
|
|
|
|
Options
outstanding at September 30, 2012
|
|
|
|
17,425,024
|
|
|
$
|
0.84
|
|
|
|
6.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2011
|
|
|
|
9,569,860
|
|
|
$
|
1.53
|
|
|
|
|
|
Options
exercisable at September 30, 2012
|
|
|
|
17,425,024
|
|
|
$
|
0.84
|
|
|
|
6.64
|
|
Since
all stock options outstanding were fully vested at September 30, 2012, there is no compensation expense to be recognized in future
periods.
The
exercise prices of common stock options outstanding and exercisable were as follows at September 30, 2012:
Exercise
Price
|
|
|
Options
Outstanding
(Shares)
|
|
|
Options
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
0.060
|
|
|
|
2,195,000
|
|
|
|
2,195,000
|
|
|
August 3, 2022
|
$
|
0.060
|
|
|
|
5,166,668
|
|
|
|
5,166,668
|
|
|
August 10, 2022
|
$
|
0.130
|
|
|
|
180,000
|
|
|
|
180,000
|
|
|
March 1, 2021
|
$
|
0.160
|
|
|
|
180,000
|
|
|
|
180,000
|
|
|
March 3,2021
|
$
|
0.170
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
May 26, 2020
|
$
|
0.200
|
|
|
|
2,413,000
|
|
|
|
2,413,000
|
|
|
August 22, 2019
|
$
|
0.290
|
|
|
|
181,000
|
|
|
|
181,000
|
|
|
June 5, 2019
|
$
|
0.540
|
|
|
|
850,000
|
|
|
|
850,000
|
|
|
January 18, 2018
|
$
|
0.540
|
|
|
|
4,630
|
|
|
|
4,630
|
|
|
December 19, 2017
|
$
|
0.710
|
|
|
|
18,075
|
|
|
|
18,075
|
|
|
February 28, 2013
|
$
|
0.720
|
|
|
|
17,824
|
|
|
|
17,824
|
|
|
March 31, 2013
|
$
|
0.750
|
|
|
|
437,500
|
|
|
|
437,500
|
|
|
December 16, 2016
|
$
|
0.800
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
February 11, 2013
|
$
|
0.860
|
|
|
|
180,000
|
|
|
|
180,0000
|
|
|
February 13, 2018
|
$
|
0.970
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
August 13, 2018
|
$
|
1.110
|
|
|
|
11,562
|
|
|
|
11,562
|
|
|
April 30, 2013
|
$
|
1.120
|
|
|
|
275,000
|
|
|
|
275,000
|
|
|
February 6, 2017
|
$
|
1.180
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
February 12, 2017
|
$
|
1.300
|
|
|
|
980,000
|
|
|
|
980,000
|
|
|
December 18, 2016
|
$
|
1.720
|
|
|
|
7,461
|
|
|
|
7,461
|
|
|
July 31, 2013
|
$
|
1.780
|
|
|
|
7,209
|
|
|
|
7,209
|
|
|
May 30, 2013
|
$
|
1.800
|
|
|
|
7,129
|
|
|
|
7,129
|
|
|
June 30, 2013
|
$
|
2.350
|
|
|
|
925,000
|
|
|
|
925,000
|
|
|
December 1, 2015
|
$
|
2.680
|
|
|
|
900,000
|
|
|
|
900,000
|
|
|
December 16, 2014
|
$
|
2.760
|
|
|
|
1,015,000
|
|
|
|
1,015,000
|
|
|
December 9, 2013
|
$
|
2.950
|
|
|
|
205,017
|
|
|
|
205,017
|
|
|
February 9, 2016
|
$
|
2.950
|
|
|
|
750,000
|
|
|
|
750,000
|
|
|
January 30, 2016
|
$
|
3.260
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
August 28, 2013
|
$
|
3.380
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
October 31, 2013
|
$
|
3.770
|
|
|
|
3,404
|
|
|
|
3,404
|
|
|
August 29, 2013
|
$
|
4.400
|
|
|
|
14,545
|
|
|
|
14,545
|
|
|
September 2, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,425,024
|
|
|
|
17,425,024
|
|
|
|
Based
on a fair market value of $0.06 per share on September 30, 2012, there were no exercisable in-the-money stock options as of September
30, 2012. The outstanding stock options had zero intrinsic value at September 30, 2012.
As
of September 30, 2012, the Company had reserved an aggregate of 3,679 shares for issuance upon conversion of the Series B Preferred;
19,732,884 shares for issuance upon exercise of warrants; 17,425,024 shares for issuance upon exercise of outstanding stock options;
and 2,055,136 shares for issuance upon exercise of stock options available for future grant pursuant to the 2006 Plan. The Company
expects to satisfy such stock obligations through the issuance of authorized but unissues share of common stock.
Stockholder
Rights Plan
On
February 5, 2002, the Company’s Board of Directors approved the adoption of a Stockholder Rights Plan to protect stockholder
interests against takeover strategies that may not provide maximum stockholder value. A dividend of one Right (each, a “Right”
and, collectively, the “Rights”) for each outstanding share of the Company’s common stock was distributed to
stockholders of record on February 15, 2002. The Stockholder Rights Plan and the related Rights terminated by their terms on February
15, 2012.
9. Related
Party Transactions
See
Notes 5 and 8 for a description of transactions with Samyang, a significant stockholder of the Company and a lender to the Company.
10. Commitments
and Contingencies
Pending
or Threatened Legal Actions and Claims
The
Company is periodically the subject of various pending and threatened legal actions and claims. In the opinion of management of
the Company, adequate provision has been made in the Company’s condensed consolidated financial statements with respect
to such matters.
Lease
Commitment
On
May 14, 2012, the Company executed a three-year lease for office space beginning June 1, 2012 at a monthly rate of $9,204. In
March 2013, the facility was vacated and the lease was terminated (see Note 11).
University
of Illinois Licensing Agreement
In
conjunction with the Company’s merger with Pier on August 10, 2012, the Company became a party to a Licensing Agreement
entered into on October 10, 2007 by Pier with the University of Illinois (the “License Agreement”) covering certain
patents and patent applications in the United States and other countries claiming the use of certain compounds referred to as
cannabinoids for the treatment of breathing-related sleep disorders (including sleep apnea), of which dronabinol is a specific
example of one type of compound falling within this class. The License Agreement granted Pier, among other provisions, exclusive
rights: (i) to practice certain patents and patent applications, as defined in the License Agreement, that were then held by the
University of Illinois; (ii) to identify, develop, make, have made, import, export, lease, sell, have sold or offer for sale any
related licensed products; and (iii) to grant sub-licenses of the rights granted in the License Agreement, subject to the provisions
of the License Agreement. In exchange, Pier was required under the License Agreement to pay the University of Illinois a license
fee, royalties, patent costs and certain milestone payments. The License Agreement was terminated effective March 21, 2013 due
to the Company’s failure to make a required payment (see Note 11).
University
of Alberta Agreement
On
May 8, 2007, the Company entered into a license agreement, as amended, with the University of Alberta granting the Company exclusive
rights to practice patents held by the University of Alberta claiming the use of ampakines for the treatment of various respiratory
disorders. In return, the Company agreed to pay the University of Alberta licensing fees, patent costs, milestone payments, royalties
on net sales and potential fees in the event the Company enters into a sub-license agreement with an outside party. The license
fees have been fully paid.
11. Subsequent
Events
Abandonment
of Lease and Settlement
In
March 2013, the Company vacated its operating facilities prior to the scheduled termination of its lease. Subsequently, the Company
received notice that it has been sued in the Superior Court of California by its former landlord seeking among other things, past
due rent and reasonable attorney fees, On May 23, 2013, a settlement was reached wherein the Company agreed to relinquish its
security deposit in the amount of $29,545, transfer title to its remaining furniture, equipment and leasehold improvements, and
to pay an additional $26,000 on or before September 30, 2013. The transfer of the Company’s furniture, equipment and leasehold
improvements resulted in a loss of $39,126, which, because the Company had substantially abandoned these assets prior to December
31, 2012, was charged to operations at December 31, 2012 (see Note 6).
Termination
of University of Illinois Licensing Agreement
On
March 22, 2013, the Company received a letter from the University of Illinois indicating that the License Agreement between the
University of Illinois and the Company had been terminated effective March 21, 2013 due to the Company’s failure to make
a required payment. The University of Illinois had previously notified the Company on February 19, 2013 of a default by the Company
under the License Agreement due to non-payment of a $75,000 milestone fee due December 31, 2012. Due to the Company’s failure
to cure the default within the 30-day cure period provided for in the License Agreement, the value of the License Agreement was
impaired at December 31, 2012 and the Company recorded a charge to operations of $3,321,678 at such date. On June 27, 2014, the
Company entered into a new license agreement with the University of Illinois that is similar, but not identical, to the License
Agreement that had been terminated.
Termination
of University of California Licensing Agreements
On
April 15, 2013, the Company received a letter from the University of California indicating that the license agreements between
the University of California and the Company had been terminated due to the Company’s failure to make certain payments necessary
to maintain the agreements.
Management
Changes
On
March 22, 2013, the Company received a written consent of stockholders holding a majority of the Company’s common stock
signed by Origin Ventures II LP, Illinois Emerging Technologies Fund, LP, Illinois Ventures LLC, Samyang Optics Ltd., Samyang
Value Partners Co., Ltd., Steven Chizzik, Kenneth M. Cohen, Peter Letendre, David W. Carley and Aurora Capital LLC (the “Written
Consent”) (i) removing Charles J. Casamento, M. Ross Johnson, John F. Benedik and Mark A. Varney from their positions as
directors of the Company and (ii) appointing each of Arnold S. Lippa, Ph.D. and Jeff E. Margolis to fill two of the vacancies
created, each to hold such office until the next annual meeting of the stockholders and until their successors have been duly
elected and qualified. The written consent did not remove Moogak Hwang, Ph.D. from the Board of Directors. Dr. Hwang continued
to serve as a director until his resignation from the Board of Directors effective September 30, 2013.
Following
the delivery of the Written Consent, the Board of Directors, acting by unanimous written consent dated March 22, 2013, removed
all officers of the Company and appointed Dr. Lippa, as Chairman of the Board, President and Chief Executive Officer and Mr. Margolis,
as Vice President, Treasurer and Secretary.
On
April 29, 2013, Robert N. Weingarten was subsequently appointed as a director, Vice President and Chief Financial Officer.
In
2012, Aurora Capital LLC provided investment banking services to Pier, a company that the Company acquired by merger on August
10, 2012. For those services, Aurora Capital LLC received 2,971,792 shares of the Company’s common stock in payment of its
fee of $194,950. Both Dr. Lippa and Mr. Margolis have indirect ownership interests in Aurora Capital LLC through interests held
in its members.
Working
Capital Advances
On
June 25, 2013, the Arnold Lippa Family Trust, an affiliate of Dr. Lippa, the Company’s Chairman and Chief Executive Officer,
began advancing funds to the Company in order to meet minimum operating needs. Such advances reached a maximum of $150,000 on
March 3, 2014 and were due on demand with interest at a rate per annum equal to the “Blended Annual Rate”, as published
by the U.S. Internal Revenue Service, approximately 0.22% for period outstanding. In March 2014, the Company repaid the working
capital advances, including accrued interest of $102, with the proceeds from the private placement of its Series G Preferred Stock
described below.
Series
G Preferred Stock Placement
On
March 14, 2014, the Company filed a Certificate of Designation, Preferences, Rights and Limitations, (the “Certificate of
Designation”) of its Series G Preferred Stock (“Series G Preferred Stock”) with the Secretary of State of the
State of Delaware to amend the Company’s certificate of incorporation. The number of shares designated as Series G Preferred
Stock is 1,700 (which shall not be subject to increase without the written consent of a majority of the holders of the Series
G Preferred Stock or as otherwise set forth in the Certificate of Designation). The initial Stated Value of each share of Series
G Preferred Stock is $1,000.
The
Company shall pay a stated dividend on the Series G Preferred Stock at a rate per share (as a percentage of the Stated Value per
share) of 1.5% per annum, payable quarterly within 15 calendar days of the end of each fiscal quarter of the Company, in duly
authorized, validly issued, fully paid and non-assessable shares of Series G Preferred Stock, which may include fractional shares
of Series G Preferred Stock.
The
Series G Preferred Stock shall be convertible, beginning 60 days after the last share of Series G Preferred Stock is issued in
the Private Placement, at the option of the holder, into common stock at the applicable conversion price, at a rate determined
by dividing the Stated Value of the shares of Series G Preferred Stock to be converted by the conversion price, subject to adjustments
for stock dividends, splits, combinations and similar events as described in the form of Certificate of Designation. The stated
value of the Series G Preferred Stock is $1,000 per share, and the initial conversion price is $0.0033. Accordingly, at the option
of the holder, each share of Series G Preferred Stock is convertible commencing on the date that is 60 calendar days after the
date on which the last share of Series G Preferred Stock is issued pursuant to a Purchase Agreement, into 303,030 shares of common
stock. In addition, the Company has the right to require the holders of the Series G Preferred Stock to convert such shares into
common stock under certain enumerated circumstances as set forth in the Certificate of Designation.
Upon
either (i) a Qualified Public Offering (as defined in the Certificate of Designation) or (ii) the affirmative vote of the holders
of a majority of the Stated Value of the Series G Preferred Stock issued and outstanding, all outstanding shares of Series G Preferred
Stock, plus all accrued or declared, but unpaid, dividends thereon, shall mandatorily be converted into such number of shares
of common stock determined by dividing the Stated Value of such Series G Preferred Stock (together with the amount of any accrued
or declared, but unpaid, dividends thereon) by the Conversion Price (as defined in the Certificate of Designation) then in effect.
If not earlier converted, the Series G Preferred Stock shall be redeemed by conversion on the two year anniversary of the date
the last share of Series G Preferred Stock is issued in the Private Placement at the then applicable Conversion Price.
Except
as described in the Certificate of Designation, holders of the Series G Preferred Stock will vote together with holders of the
Company common stock on all matters, on an as-converted to common stock basis, and not as a separate class or series (subject
to limited exceptions).
In
the event of any liquidation or winding up of the Company prior to and in preference to any Junior Securities (including common
stock), the holders of the Series G Preferred Stock will be entitled to receive in preference to the holders of the Company common
stock a per share amount equal to the Stated Value, plus any accrued and unpaid dividends thereon.
On
March 18, 2014, the Company entered into Securities Purchase Agreements with various accredited investors (the “Initial
Purchasers”), pursuant to which the Company sold an aggregate of 753.22 shares of its Series G Preferred Stock for a purchase
price of $1,000 per share, or an aggregate purchase price of $753,220. This financing represents the initial closing on a private
placement of up to $1,500,000 (the “Private Placement”). The Initial Purchasers in this tranche of the Private Placement
consisted of (i) Arnold S. Lippa, the Company’s Chairman, Chief Executive Officer and a member of the Company’s Board
of Directors, who invested $250,000, and (ii) new investors. Neither the Series G Preferred Stock nor the underlying shares of
common stock have any registration rights.
The
placement agents and selected dealers in connection with the initial tranche of the Private Placement received cash fees totaling
$3,955 as compensation and warrants totaling 5.6365% of the shares of common stock into which the Series G Preferred Stock may
convert, exercisable for five years at a price that is 120% of the conversion price at which the Series G Preferred Stock may
convert into the Company’s common stock. Aurora Capital LLC was one of the placement agents.
On
April 17, 2014, the Company entered into Securities Purchase Agreements with various accredited investors (together with the Initial
Purchasers, the “Purchasers”), pursuant to which the Company sold an aggregate of 175.28 shares of its Series G Preferred
Stock, for a purchase price of $1,000 per share, or an aggregate purchase price of $175,280. This was the second and final closing
on the Private Placement. The Purchasers in the second and final tranche of the Private Placement consisted of new investors and
non-management investors who had also invested in the first closing. One of the investors in this second and final closing was
an affiliate of an associated person of Aurora Capital LLC. Neither the Series G Preferred Stock nor the underlying shares of
common stock have any registration rights.
The
placement agents and selected dealers in connection with the second tranche of the Private Placement received cash fees of $3,465
as compensation and warrants totaling approximately 12% of the shares of common stock into which the Series G Preferred Stock
may convert, exercisable for five years at a price that is 120% of the conversion price at which the Series G Preferred Stock
may convert into the Company’s common stock.
The
stated value of the Series G Preferred Stock is $1,000 per share, and the initial conversion price is $0.0033. Accordingly, at
the option of the holder, each share of Series G Preferred Stock is convertible commencing on the date that is sixty calendar
days after the date on which the last share of Series G Preferred Stock is issued pursuant to a Purchase Agreement, into 303,030
shares of common stock. The aggregate of 928.5 shares of Series G Preferred Stock sold in the Private Placement are convertible
into a total of 281,363,634 shares of common stock. The Company had 144,041,558 shares of common stock, plus an additional 57,000,000
shares of common stock issued to management as described below, issued and outstanding immediately prior to the closing of the
Private Placement of Series G Preferred Stock described herein.
The
warrants that the placement agents and selected dealers received in connection with the Private Placement represent the right
to acquire 19,251,271 shares of common stock exercisable for five years at a price that is 120% of the conversion price at which
the Series G Preferred Stock may convert into the Company’s common stock.
Purchasers
in the Private Placement of the Series G Preferred Stock have executed written consents in favor of (i) approving and adopting
an amendment to the Company’s certificate of incorporation that increases the number of authorized shares of the Company
to 1,405,000,000, 1,400,000,000 of which are shares of common stock and 5,000,000 of which are shares of preferred stock, and
(ii) approving and adopting the Cortex Pharmaceuticals, Inc. 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan.
The
shares of Series G Preferred Stock were offered and sold without registration under the Securities Act of 1933, as amended, in
reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as provided in Rule 506(b) of Regulation D promulgated
thereunder. The shares of Series G Preferred Stock and the Company’s common stock issuable upon conversion of the shares
of Series G Preferred Stock have not been registered under the Securities Act or any other applicable securities laws, and unless
so registered, may not be offered or sold in the United States except pursuant to an exemption from the registration requirements
of the Securities Act.
Increase
in Authorized Common Shares
The
holders of the Series G Preferred Stock approved and adopted an amendment to increase the number of authorized shares of the Company
to 1,405,000,000, 1,400,000,000 of which are shares of common stock and 5,000,000 of which are shares of preferred stock. The
Company also sought, and on April 17, 2014 obtained by written consent, sufficient votes of the holders of its common stock, voting
as a separate class, to effect the amendment. A certificate of Amendment to the Company’s Certificate of Incorporation to
effect the increase in the authorized shares was filed with the Secretary of State of the State of Delaware on April 17, 2014.
2014
Equity, Equity-Linked and Equity Derivative Incentive Plan
In
connection with the Private Placement, the stockholders of the Company holding a majority of the votes to be cast on the issue
approved the adoption of the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan (the “Plan”),
which had been previously adopted by the Board of Directors of the Company, subject to stockholder approval. The Plan permits
the grant of options and restricted stock with respect to up to 105,633,002 shares of common stock, in addition to stock appreciation
rights and phantom stock, to directors, officers, employees, consultants and other service providers of the Company.
Awards
to Officers and Directors as Compensation
On
April 14, 2014, the Board of Directors of the Company awarded a total of 57,000,000 shares of common stock of the Company, including
awards of 15,000,000 shares to each of the Company’s three executive officers, who are also directors of the Company, and
12,000,000 shares to certain other parties, one of whom is an associated person of Aurora Capital LLC. These awards were made
under the Plan and were awarded as compensation for those individuals through March 31, 2014. None of the officers or directors
of the Company had received any cash compensation from the Company since joining the Company in March and April 2013.
On
July 17, 2014, the Board of Directors of the Company awarded stock options to purchase a total of 15,000,000 shares of common
stock of the Company to each of the Company’s three executive officers, who are also directors of the Company. The stock
options were awarded as compensation for those individuals through December 31, 2014. The awarded stock options vest in three
equal installments on July 17, 2014 (at issuance), September 30, 2014, and December 31, 2014, and expire on July 17, 2019. The
exercise price of the stock options of $0.05 per share was in excess of the closing market price of a share of the Company’s
common stock on the date of issuance. The Company believes and intends that a portion of the stock options awarded qualify as
incentive stock options under the Internal Revenue Code of 1986, as amended. The issuance of incentive stock awards is restricted
as to amount as set forth in the Plan, and the form of award of the awarded stock options reflects this intention and the limits
under the Plan.
Debt
Settlements
During
the first quarter of 2014, the Company executed settlement agreements with four former executives that resulted in the settlement
of potential claims totaling approximately $1,336,000 for a total of approximately $118,000 in cash, plus the issuance of options
to purchase 4,300,000 shares of common stock exercisable at $0.04 per share for periods ranging from five to ten years. In the
case of two of these former executives, the Company also agreed to formalize the issuance of options to purchase 5,166,668 shares
of common stock exercisable at $0.06 per share that had previously been reported as issued in August 2012, but that the former
executives claimed they had never received. In addition to other provisions, the settlement agreements included mutual releases.
During
the second quarter of 2014, the Company also executed settlement agreements with and paid judgments in respect to certain former
service providers that resulted in the settlement of potential claims totaling approximately $591,000 for a cost of approximately
$155,000 in cash, plus the issuance of options to purchase 1,250,000 shares of common stock exercisable at $0.04 per share for
a period five years. In addition to other provisions, the settlement agreements included mutual releases.
The
above described agreements resulted in the settlement of potential claims totaling approximately $1,927,000 for a cost of approximately
$273,000 in cash, plus the issuance of options to purchase 5,550,000 shares of common stock exercisable at $0.04 per share for
periods ranging from five to ten years. The Company continues to explore ways to reduce its indebtedness, and might in the future
enter additional settlements of potential claims, including, without limitation, those by other former executives or third party
creditors.
University
of Illinois 2014 Exclusive License Agreement
On
June 27, 2014, the Company entered into an Exclusive License Agreement (the “2014 License Agreement”) with the University
of Illinois (the “University”), which shall become effective upon the completion of certain conditions set forth in
the 2014 License Agreement, including (i) the payment by the Company of a $25,000 licensing fee, (ii) the payment by the Company
of certain outstanding patent costs (not to exceed $16,000), and (iii) the assignment to the University of certain rights the
Company holds in certain patent applications. In exchange for certain milestone and royalty payments, the 2014 License Agreement
grants the Company (i) exclusive rights to several issued and pending patents in numerous jurisdictions and (ii) the non-exclusive
right to certain technical information that is generated by the University in connection with certain clinical trials as specified
in the 2014 License Agreement, all of which relate to the use of cannabinoids for the treatment of sleep related breathing disorders.
The Company is developing dronabinol (Δ9-tetrahydrocannabinol), a cannabinoid, for the treatment of obstructive sleep apnea
(OSA), the most common form of sleep apnea.
The
Company previously conducted a 21 day, randomized, double-blind, placebo-controlled dose escalation Phase 2 clinical study in
22 patients with OSA, in which dronabinol produced a statistically significant reduction in the Apnea-Hypopnea Index (AHI), the
primary therapeutic end-point, and was observed to be safe and well tolerated. Dronabinol is currently under investigation, at
the University of Illinois and other centers, in a pivotal Phase 2 OSA clinical trial, fully funded by the National Institutes
of Health.
Dronabinol
is a Schedule III, controlled generic drug with a relatively low abuse potential that is approved by the FDA for the treatment
of AIDS-related anorexia and chemotherapy induced emesis. The use of dronabinol for the treatment of OSA is a novel indication
for an already approved drug and, as such, would only require approval by the FDA of a supplemental new drug application (sNDA).