PART
I
Item
1. Business
Since
its formation in 1987, the Company has engaged in the discovery, development and commercialization of innovative pharmaceuticals
for the treatment of neurological and psychiatric disorders. In 2011, however, we conducted a re-evaluation of our strategic focus
and determined that clinical development in the area of respiratory disorders, particularly sleep apneas and respiratory depression
produced by drugs and neural damage, provided the most cost-effective opportunities for potential rapid development and commercialization
of our compounds. As a result of our scientific discoveries and the acquisition of strategic, exclusive license agreements, we
believe we are now a leader in the discovery and development of innovative pharmaceuticals for the treatment of respiratory disorders.
There
is a substantial unmet need for new drug treatments for breathing disorders. According to a study commissioned by the American
Academy of Sleep Medicine, published in August 2016 (“AASM Commissioned Study”), there are approximately 29.4 million
adults with obstructive sleep apnea, of whom 5.9 million are diagnosed. Sleep apnea places a considerable burden on society and
the health care system because of its association with co-morbidities and adverse events ranging from vehicular (for example:
cars, trucks, trains, buses) and industrial accidents, and loss of productivity to increased risk of cardiopulmonary illness and
related death. According to the AASM Commissioned Study, the estimated overall cost of obstructive sleep apnea in the United States
in 2015 was $162 billion, of which $12.4 billion relates to diagnosis and treatment and the balance relates to all other categories.
No drugs currently are approved for the treatment of sleep apnea.
Even
in patients without sleep apneas, the use of drugs such as propofol, used as an anesthetic during surgery, and opioid analgesics
such as morphine and oxycodone, used during anesthesia and for the treatment of post-surgical and chronic pain, are well known
for producing respiratory depression which is a form of apnea. In fact, while respiratory depression is the leading cause of death
from the overdose of most classes of abused drugs, it also arises during normal, physician-supervised procedures such as surgical
anesthesia, post-operative analgesia and as a result of normal outpatient management of pain.
Although
opioid antagonists such as naloxone (Narcan) and nalmefene (Revex) can reverse respiratory depression associated with opioids,
they have several major shortcomings. First and foremost, these opioid antagonists do not reverse the respiratory depression produced
by other classes of drugs often given/taken either alone or in combination with opioids. Second, while these drugs reverse the
serious side effects of the opioids, they also dramatically reduce their analgesic effectiveness. Third, the side effects of opioid
antagonists are themselves serious and include seizures, agitation, convulsions, tachycardia, hypotension, nausea, and vomiting.
Furthermore,
respiratory depression can arise as a result of a number of other illnesses that involve neural and muscular disorders. For example,
certain spinal injuries can interfere with normal neural communication between the brain and the lungs resulting in reduced respiratory
capacity. Pompe Disease is an autosomal, recessive, metabolic disorder that damages muscle and nerve cells throughout the body.
One of the first symptoms is a progressive decrease in the strength of muscles such as the diaphragm and other muscles required
for breathing and respiratory failure is the most common cause of death. In both of these indications, symptomatic treatment for
the respiratory depression is severely lacking.
Accordingly,
there is a considerable need for pharmaco-therapeutic agents to (i) treat sleep apnea, (ii) prevent and reverse the respiratory
depression produced by different classes of drugs, and (iii) relieve the respiratory depression produced in a number of neurological
indications, such as spinal injury and Pompe Disease. The Company currently has two drug platforms, each with a clinical stage
compound directed at these needs.
Sleep
Apnea
Sleep
apnea is a serious disorder in which breathing repeatedly stops long enough to disrupt sleep, and temporarily decreases the amount
of oxygen and increases the amount of carbon dioxide in the blood. Apnea is defined by more than five periods per hour of ten
seconds or longer without breathing. The repetitive cessation of breathing during sleep has substantial impact on the affected
individuals. The disorder is associated with major co-morbidities including excessive daytime sleepiness and increased risk of
cardiovascular disease (such as hypertension, stroke and heart failure), diabetes and weight gain. Sleep apnea is often made worse
by central nervous system depressants such as opioids, benzodiazepines, barbiturates and alcohol. It is therefore important for
these patients to seek treatment.
The
most common type of sleep apnea is obstructive sleep apnea (“OSA”), which occurs by narrowing or collapse of the pharyngeal
airway during sleep. There is currently no approved pharmacotherapy, and the most common treatment is to use continuous positive
airway pressure (“CPAP”) delivered via a nasal or full-face mask, as long as patients are able to tolerate the treatment.
We believe that patient compliance with CPAP devices is extremely low. Alternative treatments include surgical intervention, dental
appliances, hypoglossal nerve stimulation (via surgical implant) and other physical interventions. Given the large patient population
and the limited treatment options, there is a very large opportunity for pharmacotherapy to treat this disorder.
Central
sleep apnea (“CSA”), a less frequently diagnosed type of sleep apnea, is caused by alterations in the brain mechanisms
responsible for maintaining normal respiratory drive. CSA is most frequently observed in patients taking chronic opioids and in
heart failure patients and is a major correlate for mortality in these patients. There are no therapeutic options for patients
with CSA; CPAP is contra-indicated for the treatment of CSA and no drugs are currently approved for this indication.
In
addition, many patients present with a pattern of sleep apnea that has both obstructive and central components.
Cannabinoids
RespireRx
is developing dronabinol, a synthetic derivative of a naturally occurring substance in the cannabis plant, otherwise known as
Δ9-THC or Δ9-tetrahydrocannabinol, for the treatment of OSA which is discussed above. OSA has been linked to increased
risk for hypertension, heart failure, depression, and diabetes. There are no approved drug treatments for OSA.
RespireRx
holds the exclusive world-wide license to a family of patents for the use of cannabinoids, a family of compounds found naturally
in the cannabis plant, including the synthetic cannabinoid dronabinol, in the treatment of sleep disordered breathing from the
University of Illinois at Chicago (“UIC”). In addition, RespireRx has several extensions and pending
applications that, if issued, will extend patent protection for over a decade. With approximately $5 million in funding from the
National Heart, Lung and Blood Institute of the National Institutes of Health, UIC completed a Phase 2B multi-center, double-blind,
placebo-controlled clinical trial of dronabinol in patients with OSA. Entitled
P
harmacotherapy of
A
pnea with
C
annabimimetic
E
nhancement (“PACE”), this study replicated an earlier Phase 2A RespireRx sponsored clinical trial and
demonstrated statistically significant improvements in respiration, daytime sleepiness, and patient satisfaction after administration
of dronabinol and is discussed in more detail below.
RespireRx
believes that the most direct route to commercialization is to proceed directly to a Phase 3 pivotal trial using the currently
available dronabinol formulation (2.5, 5 and 10 mg gel caps) and to then commercialize a RespireRx branded dronabinol capsule
(“RBDC”).
The
Company also believes that there are numerous opportunities for reformulation of dronabinol to produce a second generation proprietary,
branded product for the treatment of OSA with an improved profile. Therefore, simultaneously with its development of the RBDC,
RespireRx plans to develop a proprietary dronabinol formulation to optimize the dose and duration of action for treating OSA.
RespireRx
initiated its dronabinol program when it 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. Pier was formed in June 2007
(under the name SteadySleep Rx Co.) as a clinical stage pharmaceutical company to develop a pharmacologic treatment for OSA and
had been engaged in research and clinical development activities.
Prior
to the merger, Pier 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, the primary
therapeutic end-point, and was observed to be safe and well tolerated.
Through
the merger, RespireRx gained access to a 2007 Exclusive License Agreement (as amended, the “Old License”) that Pier
had entered into with the University of Illinois on October 10, 2007. The Old License covered certain patents and patent applications
in the United States and other countries claiming the use of cannabinoids, including dronabinol, for the treatment of sleep-related
breathing disorders (including sleep apnea).
Dronabinol
is a Schedule III, controlled generic drug with a relatively low abuse potential that is approved by the U.S. Food and Drug Administration
(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, the Company believes that it would only
require approval by the FDA of a 505(b)(2) new drug application, an efficient regulatory pathway.
The
Old License was terminated effective March 21, 2013, due to the Company’s failure to make a required payment. Subsequently,
current management opened negotiations with the University of Illinois, and as a result, the Company entered into a new license
agreement (the “2014 License Agreement”) with the University of Illinois on June 27, 2014, the material terms of which
were similar to the Old License.
Similar
to the Old License, the 2014 License Agreement grants the Company, among other provisions, exclusive rights: (i) to practice certain
patents and patent applications, as defined in the 2014 License Agreement, that are 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 2014 License Agreement, subject to the provisions of the 2014 License
Agreement. The Company is required under the 2014 License Agreement, among other terms and conditions, to pay the University of
Illinois a license fee, royalties, patent costs and certain milestone payments.
On
November 30, 2017, the Company announced the publication by the principal investigators, Dr. Phyllis Zee of Northwestern University
and Dr. David Carley of the University of Illinois at Chicago, in the peer-reviewed journal SLEEP, the official publication of
the Sleep Research Society, of the positive results of the potentially pivotal, PACE (Pharmacotherapy of Apnea by Cannabimimetic
Enhancement) Phase 2B OSA clinical trial, that was fully funded by the National Institutes of Health. The results from PACE were
published in the journal Sleep Vol. 41. No. 1, 2018. The results of the PACE clinical trial were previously presented by Dr. Carley
at the SLEEP 2017 annual meeting in June 2017. In the PACE trial, dronabinol significantly improved the primary outcome measures
of Apnea Hypopnea Index (“AHI”), daytime sleepiness as measured by the Epworth Sleepiness Scale (“ESS”),
and overall patient satisfaction as measured by the Treatment Satisfaction Questionnaire for Medications (“TSQM”).
The
recently completed PACE trial was a fully-blinded, two-center, Phase II, randomized placebo-controlled trial of dronabinol in
56 adult patients with moderate to severe OSA. By random assignment, 56 adult subjects with BMI<45, Epworth Sleepiness Scale
(ESS)>7 and PSG-documented AHI between 15 and 50 received either placebo (N=17), 2.5mg (N=19) or 10.0mg (N=20) of dronabinol
daily, one hour before bedtime for 6 weeks. Repeat in- laboratory PSG followed by maintenance of wakefulness (MWT) testing was
completed every 2-weeks during the treatment period. At each visit, the ESS and Treatment Satisfaction Questionnaire for Medications
also were completed.
Overall,
baseline AHI was 26.0±11.6 (SD) and this was equivalent among all treatment groups. In comparison to placebo, statistically
significant end of treatment declines in AHI were observed for both the 2.5 and 10 mg doses (-9.7±4.1, p=0.02 and -13.2±4.0,
p=0.001, respectively). Statistically significant declines in ESS were observed for subjects receiving 10 mg dronabinol (-4.0±0.8
units, p=0.001) but not those receiving 2.5 mg or placebo. Subjects receiving 10 mg dronabinol also expressed the greatest overall
satisfaction with treatment (p=0.02).
The
PACE trial enrolled 73 subjects of which 56 were evaluable with moderate to severe OSA who met all inclusion and exclusion criteria
for the study. At baseline, overall apnea/hypopnea index (AHI) was 25.9±11.3, Epworth Sleepiness Scale score (ESS) was
11.45±3.8, maintenance of wakefulness test (MWT) mean latency was 19.2±11.8 min, body mass index (BMI) was 33.4±5.4
kg/m2 and age was 53.6±9.0 years. Subjects were randomized to receive placebo, 2.5 mg or 10 mg dronabinol. Randomized subjects
completed daily self-administration of study drug for 6 weeks, and returned to the laboratory every 2 weeks for overnight polysomnography
(PSG), physical examination, and completion of clinical study procedures.
Subjects
receiving 10mg/day of dronabinol expressed the highest overall satisfaction with treatment (p=0.04). In comparison to placebo,
dronabinol dose-dependently reduced AHI by 10.7±4.4 (p=0.02) and 12.9±4.3 (p=0.003) events/hour at doses of 2.5
and 10 mg/day, respectively. Dronabinol at 10 mg/day reduced ESS score by -3.8±0.8 points from baseline (p<0.0001) and
by -2.3±1.2 points in comparison to placebo (p=0.05). Body weights, MWT sleep latencies, gross sleep architecture and overnight
oxygenation parameters were unchanged from baseline in any treatment group. The number and severity of adverse events, and treatment
adherence (0.3±0.6 missed doses/week) were equivalent among all treatment groups.
Drug-induced
Respiratory Depression or Drug-induced apnea
Drug-induced
respiratory depression (“RD”) or drug-induced apnea is a life-threatening condition caused by a variety of depressant
drugs, including analgesic, hypnotic, and anesthesia medications. We believe that RD is a leading cause of death from the overdose
of some classes of abused drugs, yet it also arises during normal, physician-supervised procedures such as surgical anesthesia
and post-operative pain management. For example, in the hospital setting, anesthetics such as propofol are well known for their
propensity to produce RD, particularly when combined with opioids. According to data from the National Center for Health Statistics,
48 million surgical inpatient procedures were performed in the United States in 2009. It is notable that, according to the HealthGrades
Inc. Patient Safety in American Hospitals Study released in 2011, post-operative respiratory failure produces the third highest
number of patient safety events, the fourth highest mortality rate, and the second largest overall excess cost to the Medicare
system, when compared to other patient safety indicators. The Company believes that, in these patients, the major risk factor
for the appearance of RD is a history of sleep apnea.
In
the hospital setting, one of the most serious complications of patient-controlled analgesia is RD and, despite nurses’ vigilance,
adverse events associated with opioids continue to increase. Drug-induced RD is associated with a high mortality rate relative
to other adverse drug events. In post-surgical patients taking opioids for pain management, sleep apnea is a major risk factor
for the occurrence of RD. If patients with sleep apnea are receiving combination therapies, they are at even higher risk for complications
and extended hospital stays.
Outside
the hospital, the primary risk factor for RD is the use of a single opioid in large doses or concomitant use of opioids and sedative
agents. Whether due to normal outpatient pain management, or as a result of substance abuse, RD has been reported to be the leading
cause of death from drug overdose, with the drug overdose death rate tripling since 1991. In patients chronically consuming opioids,
CSA is a major correlate for overdose and most likely represents an early and sensitive form of opioid induced RD. In August 2017,
the Centers for Disease Control and Prevention (“CDC”) reported that approximately 42,000 people died in 2016 from
opioid overdoses, including prescription opioids and illegally made fentanyl and heroin. The CDC reported that the common prescription
drugs involved in overdoses were methadone, oxycodone (such as OxyContin®) and hydrocodone (such as Vicodin®). In 2016,
the CDC reported that 40% of all US opioid deaths involved a prescription opioid. There were 13,000 heroin deaths in 2015. There
are two types of fentanyl, pharmaceutical fentanyl used to manage acute and chronic pain and non-pharmaceutical fentanyl that
is illicitly manufactured and is often mixed with heroin or cocaine. The CDC also reported that most of the increases in fentanyl
deaths involved the illicit fentanyl and not the pharmaceutical fentanyl.
Drug
Abuse
On
January 19, 2016, the Company announced that that it had reached an agreement with the Medications Development Program of the
National Institute of Drug Abuse (“NIDA”) to conduct research on the Company’s ampakine compounds CX717 and
CX1739. The agreement was entered into as of October 19, 2015, and on January 14, 2016, the Company and NIDA approved the proposed
protocols, allowing research activities to commence. NIDA is evaluating the compounds using pharmacologic, pharmacokinetic and
toxicologic protocols to determine the potential effectiveness of the ampakines for the treatment of drug abuse and addiction.
The Company retains all intellectual property as well as proprietary and commercialization rights to the Company’s compounds.
Initial studies focus on cocaine and methamphetamine addiction and abuse and are contracted to outside testing facilities and/or
government laboratories, with all costs paid by NIDA. In experiments conducted by NIDA, CX717 antagonized the stimulatory effects
of methamphetamine. NIDA is in the process of testing CX717 on the interoceptive effects (determinants of addiction liability)
of both cocaine and methamphetamine in models of drug discrimination in rats.
Ampakines
RespireRx
is developing a class of proprietary compounds known as ampakines, a term used to designate their actions as positive allosteric
modulators of the alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid (“AMPA”) glutamate receptor. Ampakines
are small molecule compounds that enhance the excitatory actions of the neurotransmitter, glutamate at the AMPA receptor complex,
which mediates most excitatory transmission in the central nervous system (“CNS”). These drugs do not have agonistic
or antagonistic properties but instead modulate the receptor rate constants for transmitter binding, channel opening, and desensitization
Through
an extensive translational research effort from the cellular level through Phase 2 clinical trials, the Company has developed
a family of ampakines, including CX717, CX1739 and CX1942 that have clinical application in the treatment of CNS-driven respiratory
disorders, neurobehavioral disorders, spinal cord injury, neurological diseases, and orphan indications. In particular, we are
addressing CNS-driven respiratory disorders that affect millions of people, but for which there are few treatment options and
no drug therapies, including opioid induced respiratory disorders, such as apnea (transient cessation of breathing) and hypopnea
(transient reduction in breathing). When these symptoms become severe, as in opioid overdose, they are the primary cause of opioid
lethality. In addition, we are developing our ampakines for the treatment of disordered breathing and motor impairment resulting
from spinal cord injury.
Early
preclinical and clinical research suggested that these ampakines might have therapeutic potential for the treatment of memory
and cognitive disorders, depression, attention deficit disorder and schizophrenia. Given our current focus on respiratory disorders,
we may seek to partner, out-license or sell our rights to the use of ampakine compounds for the treatment of neurological and
psychiatric indications, as we focus on the development of our compounds for the treatment of breathing disorders.
The
early ampakines discovered by the Company, Eli Lilly and Company, and others were ultimately abandoned due to the presence of
undesirable side effects, particularly convulsive activity. Subsequently, Company scientists discovered a new, chemically distinct
series of molecules termed “low impact” as opposed to the “high impact” designation given to the earlier
compounds. While these low impact compounds share many pharmacological properties with the high impact compounds, they do not
produce convulsive effects in animals. These low impact compounds do not bind to the same molecular site as the high impact compounds
and, as a result, do not produce the undesirable electrophysiological and biochemical effects that lead to convulsive activity.
The
Company owns patents and patent applications for certain families of chemical compounds that claim the chemical structures, their
actions as ampakines and their use in the treatment of various disorders. Patents claiming a family of chemical structures, including
CX1739 and CX1942, as well as their use in the treatment of various disorders, extend through at least 2028. Additional patents
claiming a family of chemical structures, including CX717, as well as their use in the treatment of various disorders, expired
in 2017 in the U.S. and will expire in 2018 internationally. The Company is developing potential market exclusivity strategies
for CX717 which may include new patent applications and identifying market opportunities and strategies that may provide exclusivity
without patents.
In
order to broaden the use of the Company’s ampakine technology into the area of respiratory disorders, on May 8, 2007, the
Company entered into a license agreement, as subsequently 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, including drug induced respiratory depression. These patents extend through at least 2028 and, 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 obtained preclinical results indicating that several of its low impact ampakines, including CX717, CX1739 and CX1942,
were able to antagonize the respiratory depression caused by opioids, barbiturates and anesthetics without offsetting the analgesic
effects of the opioid or the sedative effects of the anesthetics. Dr. John Greer, faculty member of the Department of Physiology,
Perinatal Research Centre, and Women & Children’s Health Research Institute at the University of Alberta, has shown
that these ampakine effects are due to a direct action on neurons in pre-Botzinger’s complex, a brain stem region responsible
for regulating respiratory drive.
After
several Phase 1 and 2 studies to demonstrate safety and tolerability, the first of these low impact compounds, CX717, was tested
in two Phase 2A clinical studies to determine its ability to antagonize the respiratory depressant effects of fentanyl, a potent
opioid analgesic. In both of these studies, one of which was published in a peer-reviewed journal, CX717 antagonized the respiratory
depression produced by fentanyl without altering the analgesia produced by this drug.
Despite
the loss in 2017 and impending loss in 2018, of U.S. patents and international patents claiming composition-of-matter and certain
non-respiratory uses for CX717, the Company believes that CX717 stills retains considerable value as a potential, commercial product,
for the following reasons. The Company owns or controls patents claiming the use of CX717 for the treatment of various respiratory
disorders that are in effect in the United States and elsewhere at least through 2028, and additional method of treatment patents
are planned and are being prepared. Long term preclinical safety studies have been completed and are sufficient to support chronic
dosing of CX717 in humans for six months. In nine Phase 1 and Phase 2 clinical studies, CX717 was safe and well tolerated. CX717
has demonstrated the ability to antagonize the respiratory effects of fentanyl, a potent opioid, in two clinical trials, demonstrating
target site engagement as well as proof of principle. Promising results also have been observed in clinical trials of attention
deficit hyperactivity disorder and cognition. Finally, while CX717 was put on temporary clinical hold by the FDA due to potential
neurotoxicity, this hold was completely removed and the Company was allowed to re-initiate clinical trials. This lifting of the
clinical hold resulted from the Company obtaining what it believes to be conclusive data showing that the presumed neurotoxicity
observed after administration of very high doses of CX717 results from a post-mortem artifact. On December 18, 2017, the Company
announced that a paper detailing the neurobiologic safety of CX717 had been accepted for publication by Toxicological Sciences,
the Journal of the American Society of Toxicology. The paper, co-authored by RespireRx scientists in conjunction with expert pathologists
from around the country who contributed to an extensive neuropathology research program, presents clear scientific evidence that
vacuoles that were discovered upon histological evaluation of brain tissue samples from animals treated with high doses of CX717,
and which halted the company’s promising CX717 clinical development effort, were actually an artifact of tissue processing
rather than a toxic drug effect.
In
several Phase 1 clinical studies, the Company’s present lead ampakine, CX1739, has demonstrated good safety and tolerability
after single doses up to 1200 mg for seven days, as well as two doses per day of 600 mg each for ten days. Pharmacokinetic
results to date from the volunteers who have taken CX1739 show that drug absorption over the range of 50 mg to 1200 mg was linear
and predictable, with an approximate half-life of 8 hours.
The
Company filed an IND with the FDA in September 2015 to conduct a randomized, double-blind, placebo-controlled, crossover, Phase
2A study of CX1739 (300 mg) versus placebo, followed by dose escalation of CX1739 to 600 and 900 mg, with open-label administration
of the IV opioid remifentanil in approximately 18 healthy subjects to assess the ability of CX1739 to antagonize the respiratory
depressive effect of remifentanil without altering the analgesic effect of the opioid. The clinical protocol was designed to evaluate
the safety and efficacy of CX1739 to antagonize respiratory depression in two models of opioid use and abuse. During REMI-INFUSION,
a model of chronic (steady state) opioid use, respiration, pain, pulmometry, and safety were measured during a 30-minute intravenous
infusion of remifentanil that produced stable blood levels. During REMI-BOLUS, a model of acute, intravenous opioid overdose,
a single, intravenous bolus injection of remifentanil was administered at a dose calculated to achieve significant respiratory
depression.
On
each study day, REMI-BOLUS was initiated with an intravenous, bolus injection of remifentanil 3 hours after subjects received
either placebo or CX1739. Respiration was measured for 20 minutes and then compared to the baseline respiration recorded 5 minutes
prior to the bolus injection. REMI-INFUSION was initiated 3.5 hours after placebo or CX1739, with an intravenous infusion protocol
designed to maintain stable remifentanil blood levels and calculated to produce approximately 50% respiratory depression. The
ClinicalTrials.gov identifier is NCT02735629.
The
commencement of this clinical trial was subject to the resolution of two deficiencies raised by the FDA in its clinical hold letter
issued in November 2015, which were satisfactorily resolved in early 2016. As a result, the FDA removed the clinical hold on the
Company’s IND for CX1739 on February 25, 2016, thus allowing for the initiation of the clinical trial. In March 2016, upon
Institutional Review Board approval, the trial was initiated at the Duke Clinical Research Unit, Duke University Medical Center,
Durham NC. The dosing and data acquisition phase of the clinical trial was completed in June 2016 and the clinical trial was formally
completed on July 11, 2016.
On
September 12, 2016, the Company announced preliminary top-line analysis of safety and efficacy data from this clinical trial.
On October 3, 2016, the Company discovered an error in the preliminary data reported to it and accordingly, on October 4, 2016,
the Company issued a press release retracting the efficacy data contained in the September 12, 2016 press release. On December
15, 2016, the Company announced the corrected results of the trial, and presented the re-analyzed data, as follows.
During
REMI-INFUSION, the model of chronic opioid use, CX1739 antagonized the respiratory rate depression produced by remifentanil, with
statistically significant effects observed at 300 mg (p<.005) and 900 mg (p<.001). The antagonism produced by the 600 mg
dose did not achieve statistical significance. This lack of a linear, dose response effect is not unusual in early stage clinical
trials. During this period, CX1739 did not alter the analgesic and sedative effects of remifentanil. During REMI-BOLUS, the model
of IV opioid overdose, CX1739 treatment did not prevent respiratory depression, or improve time to recovery at any of the doses
tested.
Overall,
CX1739 was found to be safe and well tolerated, both prior to and during administration of remifentanil. Treatment-related adverse
events (“AEs”) for the various doses of CX1739 were mild, with an incidence comparable to that reported for placebo.
The great majority of AEs occurred after remifentanil administration, including nausea and vomiting, which are common side effects
associated with opioid administration.
In
addition to CX1739, the Company is developing CX1942, a soluble ampakine, as an injectable formulation in a hospital or surgical
setting to be used in conjunction with opioids and anesthetics either during or after surgery. Animal studies conducted in collaboration
with investigators at the University of Florida and funded by a Small Business Innovation Research contract from the National
Institute of Drug Abuse have indicated that CX1942 injected intravenously, intramuscularly or subcutaneously can reverse the respiratory
depression produced by fentanyl. Such data will be used to develop an injectable formulation with the flexibility to be administered
via different routes.
As
part of its preclinical research program, the Company, through Dr. John Greer, Chairman of the RespireRx Scientific Advisory Board,
has engaged in research collaborations with a number of academic institutions. As part of its collaborative program with Dr. David
Fuller of the University of Florida, studies with RespireRx’s ampakines have determined that these compounds improve breathing
in animal models of spinal cord injury and Pompe Disease.
Development
Goals
To
achieve our short-and long-term development goals, as well as to provide for our day-to-day operations, we will need additional
capital, the availability of which is subject to uncertainly. Should sufficient financing be available, the Company’s short-term
development goals consist of the following:
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1.
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The
Company intends to have a pre-IND meeting with the FDA in order to identify a Phase 3 plan, a clear pathway for the commercial
development of dronabinol for the treatment of OSA, which also may include a request for some form of an accelerated review.
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2.
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After
establishing a clear development strategy, the Company intends to execute a Phase 3 clinical study of dronabinol for the treatment
of OSA.
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3.
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The
Company intends to initiate a multi-center clinical trial investigating the ability of CX717 or CX1739 to improve breathing
in patients with spinal cord injury. Assuming FDA allowance and appropriate approvals by institutional review boards, we
intend to have this study conducted at the University of Miami, the University of Florida, the Detroit Medical Center and
the Detroit Veterans Administration Hospital.
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4.
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Upon
issuance of the final clinical report of the CX1739 Phase 2A trial, the Company intends to seek FDA allowance to conduct a
Phase 2 clinical trial investigating the safety and efficacy of CX1739 in chronic opioid patients who have central apnea.
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The
Company believes that these goals can be achieved in a timely and cost-effective manner. To meaningfully advance any of the above
goals, however, the Company must secure sufficient additional financing or enter into one or more arrangements with strategic
partner(s). Although the Company is engaged in a number of discussions with potential strategic partners and is periodically involved
in financing activities, the Company has not entered into a strategic partnership and does not have sufficient financing resources
to pursue these goals, and can provide no assurance that available or future sources of financing or a strategic partner will
be secured to enable the Company to pursue or achieve these goals.
See
“Risk Factors—
Risks related to our business—
We will need additional capital in the near term and
the future and, if such capital is not available on terms acceptable to us or available to us at all, we may need to scale back
our research and development efforts and may be unable to continue our business operations.”
Competition
The
pharmaceutical industry is characterized by intensive research efforts, rapidly advancing technologies, intense competition and
a strong emphasis on proprietary therapeutics. Our competitors include many companies, research institutes and universities that
are working in a number of pharmaceutical or biotechnology disciplines to develop therapeutic products similar to those we are
currently investigating. Most of these competitors have substantially greater financial, technical, manufacturing, marketing,
distribution and/or other resources than we do. In addition, many of our competitors have experience in performing human clinical
trials of new or improved therapeutic products and obtaining approvals from the FDA and other regulatory agencies. We have no
experience in conducting and managing later-stage clinical testing or in preparing applications necessary to obtain regulatory
approvals. We expect that competition in this field will continue to intensify.
Regulation
The
FDA and other similar agencies in foreign countries have substantial requirements for therapeutic products. Such requirements
often involve lengthy and detailed laboratory, clinical and post-clinical testing procedures and are expensive to complete. It
often takes companies many years to satisfy these requirements, depending on the complexity and novelty of the product. The review
process is also extensive, which may delay the approval process further. Failure to comply with applicable FDA or other requirements
may subject a company to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending
applications, a clinical hold, warning letters, recall or seizure of products, partial or total suspension of production, withdrawal
of the product from the market, injunctions, fines, civil penalties or criminal prosecution.
FDA
approval is required before any new drug or dosage form, including the new use of a previously approved drug, can be marketed
in the United States. Other similar agencies in foreign countries also impose substantial requirements.
The
process of developing drug candidates normally begins with a discovery process of potential candidates that are then initially
tested in
in vitro
and
in vivo
non-human animal (preclinical) studies which include, but are not limited to toxicity
and other safety related studies, pharmacokinetics, pharmacodynamics and ADME (absorption, distribution, metabolism, excretion).
Once sufficient preclinical data are obtained, a company must submit an IND and receive authorization from the FDA in order to
begin clinical trials in the United States. Successful drug candidates then move into human studies that are characterized generally
as Phase 1, Phase 2 and Phase 3. Phase 1 studies seeking safety and other data normally utilize healthy volunteers. Phase 2 studies
utilize one or more prospective patient populations and are designed to establish safety and preliminary measures of efficacy.
Sometimes studies may be referred to as Phase 2A and 2B depending on the size of the patient population. Phase 3 studies are large
trials in the targeted patient population, performed in multiple centers, often for longer periods of time and are designed to
establish statistically significant efficacy as well as safety in the larger population. Most often the FDA and similar regulatory
agencies in other countries require two confirmatory Phase 3 or pivotal studies. Upon completion of both the preclinical and clinical
phases, an NDA (New Drug Application) is filed with the FDA or a similar filing is made to the regulatory authority in other countries.
NDA filings are extensive and include the data from all prior studies. These filings are reviewed by the FDA and, only if approved,
may the company or its partners commence marketing of the new drug in the United States.
There
also are variations of these procedures. For example, companies seeking approval for new indications for an already approved drug
may choose to pursue an abbreviated approval process such as the filing for an NDA under Section 505(b)(2). Another example
would be a Supplementary NDA (“SNDA”). A third example would be an Abbreviated NDA (“ANDA”)
claiming bio-equivalence to an already approved drug and claiming the same indications such as in the case of generic drugs. Other
opportunities allow for accelerated review and approval based upon several factors, including potential fast-track status
for serious medical conditions and unmet medical needs, potential breakthrough therapy designation of the drug for serious conditions
where preliminary evidence shows that the drug may show substantial improvement over available therapy or orphan designation (generally,
an orphan indication in the United States is one with a patient population of less than 200,000).
As
of yet, we have not obtained any approvals to market our products. Further, we cannot assure you that the FDA or other regulatory
agency will grant us approval for any of our products on a timely basis, if at all. Even if regulatory clearances are obtained,
a marketed product is subject to continual review, and later discovery of previously unknown problems may result in restrictions
on marketing or withdrawal of the product from the market. See “Risk Factors—
Risks related to our business—
We
are at an early stage of development and we may not be able to successfully develop and commercialize our products and technologies.”
Manufacturing
We
have no experience or capability to either manufacture bulk quantities of the new compounds that we develop, or to produce finished
dosage forms of the compounds, such as tablets or capsules. We rely, and presently intend to continue to rely, on the manufacturing
and quality control expertise of contract manufacturing organizations or current and prospective corporate partners. There is
no assurance that we will be able to enter into manufacturing arrangements to produce bulk quantities of our compounds on favorable
financial terms. There is, however, substantial availability of both bulk chemical manufacturing and dosage form manufacturing
capability throughout the world that we believe we can readily access. See “Risk Factors—
Risks
related to our business—
We are at an early stage of development and we may not be able to successfully develop and commercialize
our products and technologies” for a discussion of certain risks related to the development and commercialization of our
products.
Marketing
We
have no experience in the marketing of pharmaceutical products and do not anticipate having the resources to distribute and broadly
market any products that we may develop. We will therefore continue to seek commercial development arrangements with other pharmaceutical
companies for our proposed products for those indications that require significant sales forces to effectively market. In entering
into such arrangements, we may seek to retain the right to promote or co-promote products for certain of the orphan drug indications
in North America. We believe that there is a significant expertise base for such marketing and sales functions within the pharmaceutical
industry and expect that we could recruit such expertise if we choose to directly market a drug. See “Risk Factors—
Risks
related to our business—
We are at an early stage of development and we may not be able to successfully develop and commercialize
our products and technologies” for a discussion of certain risks related to the marketing of our products.
Employees
As
of December 31, 2017 and as of the date of filing of this Annual Report on Form 10-K, the Company employed four people (all officers),
three of whom were full time. The Company also engages certain contractors who provide substantial services to the Company. In
February 2017, one employee (officer), the Company’s Chief Financial Officer resigned, and his responsibilities were subsequently
assigned to one of the remaining officers.
Technology
Rights
University
of Illinois License Agreement
Through
the merger with Pier, the Company gained access to the Old License that Pier had entered into with the University of Illinois
on October 10, 2007. The Old License 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. The Old License was terminated effective March
21, 2013 due to the Company’s failure to make a required payment.
On
June 27, 2014, the Company entered into the 2014 License Agreement with the Board of Trustees of the University of Illinois that
was similar, but not identical, to the Old License. In exchange for certain milestone and royalty payments, patent costs and license
fees, the 2014 License Agreement grants the Company (i) exclusive rights to several issued and pending patents, and (ii) the non-exclusive
right to certain technical information that is generated by the University of Illinois 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 for the treatment of OSA, the most common form of sleep apnea.
University
of Alberta License Agreement and Research Agreement
On
May 8, 2007, the Company entered into a license agreement, as subsequently 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. The Company agreed to pay the University of Alberta a licensing fee and a patent issuance fee,
which were paid, and prospective payments consisting of a royalty on net sales, sublicense fee payments, maintenance payments
and milestone payments. The prospective maintenance payments commence on the enrollment of the first patient into the first Phase
2B clinical trial and increase upon the successful completion of the Phase 2B clinical trial. As the Company does not at this
time anticipate scheduling a Phase 2B clinical trial in the near term, no maintenance payments to the University of Alberta are
currently due and payable, nor are any expected to be due in the near future.
On
January 12, 2016, the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of
ampakines at a variety of dosage and formulation levels in the potential treatment of Pompe Disease, apnea of prematurity
and spinal cord injury, as well as to conduct certain electrophysiological studies to explore the ampakine mechanism of action
for central respiratory depression. The Company agreed to pay the University of Alberta total consideration of approximately CAD$146,000
(approximately US$108,000), consisting of approximately CAD$85,000 (approximately US$63,000) of personnel funding in cash in four
installments during 2016, to provide approximately CAD$21,000 (approximately US$16,000) in equipment, to pay patent costs of CAD$20,000
(approximately US$15,000), and to underwrite additional budgeted costs of CAD$20,000 (approximately US$15,000). As of December
31, 2017, the Company had recorded amounts payable in respect to this Research Contract of US$16,207 (CAD$21,222) which amount
was paid in US dollars on January 24, 2018. The conversion to US dollars above utilizes an exchange rate of approximately US$0.76
for every CAD$1.00.
The
University of Alberta received matching funds through a grant from the Canadian Institutes of Health Research in support of this
research. The Company retains the rights to research results and any patentable intellectual property generated by the research.
Dr. John Greer, Ph.D., faculty member of the Department of Physiology, Perinatal Research Centre, and Women & Children’s
Health Research Institute at the University of Alberta, collaborated on this research. The studies were completed in 2016. Any
patentable intellectual property developed in the Research Agreement will be covered by the existing license agreement described
above.
University
of California, Irvine License Agreements
The
Company entered into a series of license agreements in 1993 and 1998 with the University of California, Irvine (“UCI”)
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 UCI; (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. The Company was required, among other terms and conditions,
to pay UCI a license fee, royalties, patent costs and certain additional payments.
Under
such license agreements, the Company was required to make minimum annual royalty payments of approximately $70,000. The Company
was also required to spend a minimum of $250,000 per year to advance the ampakine compounds until the Company began to market
an ampakine compound. At December 31, 2012, the Company was not in compliance with its minimum annual payment obligations and
believed that this default constituted a termination of the license agreements. On April 15, 2013, the Company received a letter
from UCI indicating that the license agreements between UCI and the Company had been terminated due to the Company’s failure
to make certain payments required to maintain the agreements. Since the patents covered in these license agreements had begun
to expire and the therapeutic uses described in these patents were no longer germane to the Company’s new focus on respiratory
disorders, the loss of these license agreements is not expected to have a material impact on the Company’s current drug
development programs. In the opinion of management, the Company has made adequate provision for any liability relating to this
matter in its financial statements at December 31, 2017 and 2016.
Research
and Development Expenses
The
Company invested $1,731,565 and $3,176,197 in research and development in 2017 and 2016, respectively. Of those amounts,
$633,088 and $1,646,092 were incurred with related parties in 2017 and 2016 respectively. See our consolidated financial statements
for the years ended December 31, 2017 and 2016 included in this Annual Report on Form 10-K.
Item
1A. Risk Factors
In
addition to the other matters set forth in this Annual Report on Form 10-K, our continuing operations and the price of our common
stock are subject to the following risks:
Risks
related to our business
Our
independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
In
its audit opinion issued in connection with our balance sheets as of December 31, 2017 and 2016 and our statements of operations,
stockholders’ equity (deficiency), and cash flows for the years ended December 31, 2017 and 2016, our independent registered
public accounting firm has expressed substantial doubt about our ability to continue as a going concern given our limited working
capital, recurring net losses and negative cash flows from operations. The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments
in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue
in existence. While we have relied principally in the past on external financing to provide liquidity and capital resources for
our operations, we can provide no assurance that cash generated from our operations together with cash received in the future
from external financing, if any, will be sufficient to enable us to continue as a going concern.
We
have a history of net losses; we expect to continue to incur net losses and we may never achieve or maintain profitability.
Since
our formation on February 10, 1987 through the end of our most recent fiscal year ended December 31, 2017, we have generated only
minimal operating revenues. For the fiscal year ended December 31, 2017, our net loss was $4,291,483 and as of December
31, 2017, we had an accumulated deficit of $161,802,262. For the year ended December 31, 2016, our net loss was $9,229,760 and
as of December 31, 2016, we had an accumulated deficit of $157,510,779. We have not generated any revenue from product sales to
date, and it is possible that we will never generate revenues from product sales in the future. Even if we do achieve significant
revenues from product sales, we expect to continue to incur significant net losses over the next several years. As with other
biotechnology companies, it is possible that we will never achieve profitable operations.
We
will need additional capital in the near term and the future and, if such capital is not available on terms acceptable to us or
available to us at all, we may need to scale back our research and development efforts and may be unable to continue our business
operations.
We
will require substantial additional funds to advance our research and development programs and to continue our operations, particularly
if we decide to independently conduct later-stage clinical testing and apply for regulatory approval of any of our proposed products,
and if we decide to independently undertake the marketing and promotion of our products. Additionally, we may require additional
funds in the event that we decide to pursue strategic acquisitions of or licenses for other products or businesses. Based on our
operating plan as of December 31, 2017, we estimated that our existing cash resources will not be sufficient to meet our requirements
for 2018. We also need additional capital in the near term to fund on-going operations including basic operations. Additional
funds may come from the sale of common equity, preferred equity, convertible preferred equity or equity-linked securities, debt,
including debt convertible into equity, or may result from agreements with larger pharmaceutical companies that include the license
or rights to the technologies and products that we are currently developing, although there is no assurance that we will secure
any such funding or other transaction in a timely manner, or at all.
Our
cash requirements in the future may differ significantly from our current estimates, depending on a number of factors, including:
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the
results of our clinical trials;
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the
time and costs involved in obtaining regulatory approvals;
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the
costs of setting up and operating our own marketing and sales organization;
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the
ability to obtain funding under contractual and licensing agreements;
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the
costs involved in obtaining and enforcing patents or any litigation by third parties regarding intellectual property;
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the
costs involved in meeting our contractual obligations including employment agreements; and
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our
success in entering into collaborative relationships with other parties.
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To
finance our future activities, we may seek funds through additional rounds of financing, including private or public equity or
debt offerings and collaborative arrangements with corporate partners. We may also seek to exchange or restructure some of our
outstanding securities to provide liquidity, strengthen our balance sheet and provide flexibility. We cannot say with any certainty
that these measures will be successful, or that we will be able to obtain the additional needed funds on reasonable terms, or
at all. The sale of additional equity or convertible debt securities could result in additional and possibly substantial dilution
to our stockholders. If we issued preferred equity or debt securities, these securities could have rights superior to holders
of our common stock, and such instruments entered into in connection with the issuance of securities could contain covenants that
will restrict our operations. We might have to obtain funds through arrangements with collaborative partners or others that may
require us to relinquish rights to our technologies, product candidates or products that we otherwise would not relinquish. If
adequate funds are not available in the future, as required, we could lose our key employees and might have to further delay,
scale back or eliminate one or more of our research and development programs, which would impair our future prospects. In addition,
we may be unable to meet our research spending obligations under our existing licensing agreements and may be unable to continue
our business operations.
Our
product opportunities rely on licenses from research institutions and if we lose access to these technologies or applications,
our business could be substantially impaired.
Through
the merger with Pier, the Company gained access to a 2007 Exclusive License Agreement (as amended, the “Old License”),
that Pier had entered into with the University of Illinois on October 10, 2007. The Old License 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 FDA and is sold generically for use in
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
Old License 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 the 2014 License Agreement with the University of Illinois that was similar, but not identical,
to the Old License that had been terminated. If we are unable to comply with the terms of the 2014 License Agreement, such as
required payments thereunder, the 2014 License Agreement might be terminated.
On
May 8, 2007, the Company entered into a license agreement with The Governors of the University of Alberta, as subsequently 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. The Company agreed to pay the University of Alberta a
licensing fee and a patent issuance fee, which were paid, and prospective payments consisting of a royalty on net sales, sublicense
fee payments, maintenance payments and milestone payments. The prospective maintenance payments commence on the enrollment of
the first patient into the first Phase 2B clinical trial and increase upon the successful completion of the Phase 2B clinical
trial. As the Company does not at this time anticipate scheduling a Phase 2B clinical trial in the near term, no maintenance payments
are currently due and payable nor are expected to be due in the near future, to the University of Alberta in connection with the
license agreement.
Under
our agreements with The Regents of the University of California, we had exclusive rights to certain ampakine compounds for all
applications for which the University had patent rights, other than endocrine modulation. The license securing these rights has
since been terminated.
We
are at an early stage of development and we may not be able to successfully develop and commercialize our products and technologies.
The
development of cannabinoid products and ampakine products is subject to the risks of failure commonly experienced in the development
of products based upon innovative technologies and the expense and difficulty of obtaining approvals from regulatory agencies.
Drug discovery and development is time consuming, expensive and unpredictable. On average, only one out of many thousands of chemical
compounds discovered by researchers proves to be both medically effective and safe enough to become an approved medicine. All
of our proposed products are in the preclinical or early clinical stage of development and will require significant additional
funding for research, development and clinical testing, which may not be available on favorable terms or at all, before we are
able to submit them to any of the regulatory agencies for clearances for commercial use.
The
process from discovery to development to regulatory approval can take several years and drug candidates can fail at any stage
of the process. Late stage clinical trials often fail to replicate results achieved in earlier studies. Historically, in our industry
more than half of all compounds in development failed during Phase 2 trials and 30% failed during Phase 3 trials. We cannot assure
you that we will be able to complete successfully any of our research and development activities including those described above
under PART I. Item 1. Business-Development Goals.
Even
if we do complete them, we may not be able to market successfully any of the products or be able to obtain the necessary regulatory
approvals or assure that healthcare providers and payors will accept our products. We also face the risk that any or all of our
products will not work as intended or that they will be unsafe, or that, even if they do work and are safe, that our products
will be uneconomical to manufacture and market on a large scale. Due to the extended testing and regulatory review process required
before we can obtain marketing clearance, we do not expect to be able to commercialize any therapeutic drug for several years,
either directly or through our corporate partners or licensees.
We
may not be able to enter into the strategic alliances necessary to fully develop and commercialize our products and technologies,
and we will be dependent on our strategic partners if we do.
We
are seeking pharmaceutical company partners to participate with us in the development of major indications for the cannabinoids
and ampakine compounds. These agreements would potentially provide us with additional funds in exchange for exclusive or non-exclusive
license or other rights to the technologies and products that we are currently developing. Competition between biopharmaceutical
companies for these types of arrangements is intense. We cannot give any assurance that our discussions with candidate companies
will result in an agreement or agreements in a timely manner, or at all. Additionally, we cannot assure you that any resulting
agreement will generate sufficient revenues to offset our operating expenses and longer-term funding requirements.
If
our third-party manufacturers’ facilities do not follow current good manufacturing practices, our product development and
commercialization efforts may be harmed.
There
are a limited number of manufacturers that operate under the FDA’s and European Union’s good manufacturing practices
regulations and are capable of manufacturing products like those we are developing. Third-party manufacturers may encounter difficulties
in achieving quality control and quality assurance and may experience shortages of qualified personnel. A failure of third-party
manufacturers to follow current good manufacturing practices or other regulatory requirements and to document their adherence
to such practices may lead to significant delays in the availability of products for commercial use or clinical study, the termination
of, or hold on, a clinical study, or may delay or prevent filing or approval of marketing applications for our products. In addition,
we could be subject to sanctions, including fines, injunctions and civil penalties. Changing manufacturers may require additional
clinical trials and the revalidation of the manufacturing process and procedures in accordance with FDA mandated current good
manufacturing practices and would require FDA approval. This revalidation may be costly and time consuming. If we are unable to
arrange for third-party manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete
development or marketing of our products.
Our
ability to use our net operating loss carry forwards will be subject to limitations upon a change in ownership, which could reduce
our ability to use those loss carry forwards following any change in Company ownership.
Generally,
a change of more than 50% in the ownership of a Company’s stock, by value, over a three-year period constitutes an ownership
change for U.S. federal income tax purposes. An ownership change may limit our ability to use our net operating loss carry forwards
attributable to the period prior to such change. We have sold or otherwise issued shares of our common stock in various transactions
sufficient to constitute an ownership change, including the issuance of the Series G 1.5% Convertible Preferred Stock (as defined
below), and the issuance of convertible notes and warrants, some of which have been converted or exercised, as well as the issuance
of additional shares of our Common Stock and warrants. As a result, if we earn net taxable income in the future, our ability to
use our pre-change net operating loss carry forwards to offset U.S. federal taxable income will be subject to limitations, which
would restrict our ability to reduce future tax liability. Future shifts in our ownership, including transactions in which we
may engage, may cause additional ownership changes, which could have the effect of imposing additional limitations on our ability
to use our pre-change net operating loss carry forwards.
Risks
related to our industry
If
we fail to secure adequate intellectual property protection, it could significantly harm our financial results and ability to
compete.
Our
success will depend, in part, on our ability to obtain and maintain patent protection for our products and processes in the United
States and elsewhere. We have filed and intend to continue to file patent applications as we need them. However, additional patents
that may issue from any of these applications may not be sufficiently broad to protect our technology. Also, any patents issued
to us or licensed by us may be designed around or challenged by others, and if such design or challenge is effective, it may diminish
our rights and negatively affect our financial results.
If
we are unable to obtain and maintain sufficient protection of our proprietary rights in our products or processes prior to or
after obtaining regulatory clearances, our competitors may be able to obtain regulatory clearance and market similar or competing
products by demonstrating at a minimum the equivalency of their products to our products. If they are successful at demonstrating
at least the equivalency between the products, our competitors would not have to conduct the same lengthy clinical tests that
we have or will have conducted.
We
also rely on trade secrets and confidential information that we protect by entering into confidentiality agreements with other
parties. Those confidentiality agreements could be breached, and our remedies may be insufficient to protect the confidential
information. Further, our competitors may independently learn our trade secrets or develop similar or superior technologies. To
the extent that our consultants, key employees or others apply technological information independently developed by them or by
others to our projects, disputes may arise regarding the proprietary rights to such information or developments. We cannot assure
you that such disputes will be resolved in our favor.
We
may be subject to potential product liability claims. One or more successful claims brought against us could materially affect
our business and financial condition.
The
clinical testing, manufacturing and marketing of our products may expose us to product liability claims. We have never been subject
to a product liability claim, and we require each patient in our clinical trials to sign an informed consent agreement that describes
the risks related to the trials, but we cannot assure you that the coverage limits of our insurance policies will be adequate
or that one or more successful claims brought against us would not have a material adverse effect on our business, financial condition
and result of operations. Further, if one of our cannabinoid or ampakine compounds is approved by the FDA for marketing, we cannot
assure you that adequate product liability insurance will be available, or if available, that it will be available at a reasonable
cost. Any adverse outcome resulting from a product liability claim could have a material adverse effect on our business, financial
condition and results of operations.
We
face intense competition, and our competitors may develop products that are superior to those we are developing.
Our
business is characterized by intensive research efforts. Our competitors include many companies, research institutes and universities
that are working in a number of pharmaceutical or biotechnology disciplines to develop therapeutic products similar to those we
are currently investigating. Most of these competitors have substantially greater financial, technical, manufacturing, marketing,
distribution and/or other resources than we do. In addition, many of our competitors have experience in performing human clinical
trials of new or improved therapeutic products and obtaining approvals from the FDA and other regulatory agencies. We have no
experience in conducting and managing later-stage clinical testing or in preparing applications necessary to obtain regulatory
approvals. Accordingly, it is possible that our competitors may succeed in developing products that are safer or more effective
than those that we are developing and/or may obtain FDA approvals for their products faster than we can. We expect that competition
in this field will continue to intensify.
We
may be unable to recruit and retain our senior management and other key technical personnel on whom we are dependent.
We are highly dependent
upon senior management and key technical personnel and currently do not carry any insurance policies on such persons. In particular,
we are highly dependent on Arnold S. Lippa, Ph.D., our Chief Scientific Officer and Executive Chairman (and formerly our President
and Chief Executive Officer) James S. Manuso, Ph.D., our President and Chief Executive Officer since 2015 who succeeded
Dr. Lippa in those roles, Jeff E. Margolis, our Vice President, Treasurer and Secretary, and Richard Purcell, our Senior Vice
President of Research and development. Competition for qualified employees among pharmaceutical and biotechnology companies is
intense. The loss of any of our senior management or other key employees, or our inability to attract, retain and motivate the
additional or replacement highly-skilled employees and consultants that our business requires, could substantially hurt our business
prospects. Additionally, in February 2017, Robert N. Weingarten resigned as our Chief Financial Officer and member of our Board
of Directors, although he remains a consultant to the Company. Jeff E. Margolis has been appointed Chief Financial Officer. There
can be no assurance that we will be able to attract and retain a qualified long-term replacement for Mr. Weingarten.
The
regulatory approval process is expensive, time consuming, uncertain and may prevent us from obtaining required approvals for the
commercialization of some of our products.
The
FDA and other similar agencies in foreign countries have substantial requirements for therapeutic products. Such requirements
often involve lengthy and detailed laboratory, clinical and post-clinical testing procedures and are expensive to complete. It
often takes companies many years to satisfy these requirements, depending on the complexity and novelty of the product. The review
process is also extensive, which may delay the approval process even more.
As
of yet, we have not obtained any approvals to market our products. Further, we cannot assure you that the FDA or other regulatory
agency will grant us approval for any of our products on a timely basis, if at all. Even if regulatory clearances are obtained,
a marketed product is subject to continual review, and later discovery of previously unknown problems may result in restrictions
on marketing or withdrawal of the product from the market.
Risks
related to capital structure
Our
stock price may be volatile and our common stock could decline in value.
The
market price of securities of life sciences companies in general has been very unpredictable. The range of sales prices of our
common stock for the fiscal years ended December 31, 2017 and 2016, as quoted on the OTC QB, was $0.80 to $4.20 and $1.50 to $12.34,
respectively as adjusted for our 325-to-1 reverse stock split, effective September 1, 2016. The following factors, in addition
to factors that affect that market generally, could significantly affect our business, and the market price of our common stock
could decline:
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competitors
announcing technological innovations or new commercial products;
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competitors’
publicity regarding actual or potential products under development;
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regulatory
developments in the United States and foreign countries;
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developments
concerning proprietary rights, including patent litigation;
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public
concern over the safety of therapeutic products; and
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changes
in healthcare reimbursement policies and healthcare regulations.
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Our
common stock is thinly traded and you may be unable to sell some or all of your shares at the price you would like, or at all,
and sales of large blocks of shares may depress the price of our common stock.
Our
common stock has historically been sporadically or “thinly-traded,” meaning that the number of persons interested
in purchasing shares of our common stock at prevailing prices at any given time may be relatively small or nonexistent. As a consequence,
there may be periods of several days or more when trading activity in shares of our common stock is minimal or non-existent, as
compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales
without an adverse effect on share price. This could lead to wide fluctuations in our share price. You may be unable to sell your
common stock at or above your purchase price, which may result in substantial losses to you. Also, as a consequence of this lack
of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price
of shares of our common stock in either direction. The price of shares of our common stock could, for example, decline precipitously
in the event a large number of share of our common shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on its share price.
There
is a large number of shares of the Company’s common stock that may be issued or sold, and if such shares are issued or sold,
the market price of our common stock may decline.
As
of December 31, 2017, we had 3,065,261 shares of our common stock outstanding.
If all warrants and options
outstanding as of December 31, 2017 are exercised prior to their expiration, up to 5,460,582 additional shares of our common
stock could become freely tradable. The issuance of such shares would dilute the interests of the current stockholders and sales
of substantial amounts of common stock in the public market could adversely affect the prevailing market price of our common stock
and could also make it more difficult for us to raise funds through future offerings of common stock.
In
2014, we issued shares of our Series G 1.5% Convertible Preferred
Stock, which were convertible into shares of our common stock (see Note 6 to our consolidated financial statements for
the years ended December 31, 2017 and 2016). On November 5, December 9 and December 31, 2014, and again on February 2, 2015 we
issued convertible notes and warrants that are convertible and exercisable, respectively, into shares of our common stock
(see Note 6 to our consolidated financial statements for the years ended December 31, 2017 and 2016). We may in the future
issue additional equity or equity-based securities. All of our Series G 1.5% Convertible Preferred Stock had converted to common
stock by April 17, 2016, and some of our convertible notes and related warrants have converted into or been exercised for common
stock, and any unexercised warrants associated with our unconverted convertible notes have expired. As of December 31, 2017, however,
there were remaining outstanding convertible notes totaling $374,646 of principal and accrued interest that may convert into 32,941
shares of common stock. If we issue additional equity or equity-based securities, the number of shares of our common stock outstanding
could increase substantially, which could adversely affect the prevailing market price of our common stock and could also make
it more difficult for us to raise funds through future offerings of common stock.
Our
charter document may prevent or delay an attempt by our stockholders to replace or remove management.
Certain
provisions of our restated certificate of incorporation, as amended, could make it more difficult for a third party to acquire
control of our business, even if such change in control would be beneficial to our stockholders. Our restated certificate of incorporation,
as amended, allows the Board of Directors of the Company, referred to as the Board or Board of Directors, to issue, as of December
31, 2017, up to 5,000,000 shares of preferred stock, with characteristics to be determined by the board, without stockholder
approval. The ability of our Board of Directors to issue additional preferred stock may have the effect of delaying or preventing
an attempt by our stockholders to replace or remove existing directors and management.
If
our common stock is determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common
stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.
In
addition, our common stock may be subject to the so-called “penny stock” rules. The United States Securities and Exchange
Commission (“SEC”) has adopted regulations that define a “penny stock” to be any equity security that
has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities
exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice
requirements on broker-dealers, subject to certain exceptions. If our common stock is determined to be a “penny stock,”
a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or
dispose of our common stock on the secondary market.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
As
of December 31, 2017, the Company did not own any real property or maintain any leases with respect to real property. The Company
periodically contracts for services provided at the facilities owned by third parties and may, from time-to-time, have
employees who work in these facilities.
Item
3. Legal Proceedings
By
letter dated February 5, 2016, the Company received a demand from a law firm representing a professional services vendor of the
Company alleging an amount due and owing for unpaid services rendered. On January 18, 2017, following an arbitration proceeding,
an arbitrator awarded the vendor the full amount sought in arbitration of $146,082. Additionally, the arbitrator granted the vendor
attorneys’ fees and costs of $47,937. All such amounts have been accrued at December 31, 2017.
We
are periodically subject to various pending and threatened legal actions and claims. See Note 9 to our consolidated financial
statements for the years ended December 31, 2017 and 2016—Commitments and Contingencies—
Pending or
Threatened Legal Actions and Claims
for details regarding these matters.
Item
4. Mine Safety Disclosures
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our
common stock is quoted on the OTC QB, under the symbol “RSPI” (and prior to the Company’s name change in
December 2015, under the symbol “CORX”). The following table presents quarterly information on the high and low closing
prices of the common stock furnished by the OTC QB for the fiscal years ended December 31, 2017 and 2016. The quotations on
the OTC QB reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent
actual transactions. The prices shown in the table below have been conformed to reflect the Company’s 325-to-1 reverse
stock split, which was effective September 1, 2016.
|
|
High
|
|
|
Low
|
|
Fiscal
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
2.10
|
|
|
$
|
0.80
|
|
Third
Quarter
|
|
|
2.00
|
|
|
|
0.95
|
|
Second
Quarter
|
|
|
3.79
|
|
|
|
1.80
|
|
First
Quarter
|
|
|
4.20
|
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
4.25
|
|
|
$
|
1.50
|
|
Third
Quarter
|
|
|
12.01
|
|
|
|
3.00
|
|
Second
Quarter
|
|
|
8.12
|
|
|
|
4.97
|
|
First
Quarter
|
|
|
12.34
|
|
|
|
3.31
|
|
As
of December 31, 2017, there were 90 stockholders of record of our common stock, and approximately 1,200 beneficial owners.
The high and low sales prices for our common stock on December 29, 2017, as quoted on the OTC QB market, were 1.35
and $1.03, respectively.
We
have never paid cash dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. The
payment of dividends, if any, will be determined by the Board in light of conditions then existing, including our financial condition
and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant
by the Board.
During
the fiscal year ended December 31, 2017, we did not repurchase any of our securities. During the fiscal year ended December 31,
2016, we did not repurchase any of our securities, except in connection with our 325-to-1 reverse stock split in which we provided
cash in lieu of issuing fractional shares, for a total of $1,298 in the aggregate.
Item
6. Selected Financial Data
Not
applicable to smaller reporting companies.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis should be read in conjunction with the audited financial statements and notes related thereto
appearing elsewhere in this document. Throughout this section, references to number of shares, share price and exercise price
have generally been conformed to reflect the effects of the Company’s 325-to-1 reverse stock split, effective September
1, 2016.
Overview
Since
its formation in 1987, RespireRx Pharmaceuticals Inc. (“RespireRx”) has been engaged in the research and clinical
development of a class of compounds referred to as ampakines, which act to enhance the actions of the excitatory neurotransmitter
glutamate at AMPA glutamate receptors. Several ampakines, in both oral and injectable form, now are being developed by the Company
for the treatment of a variety of breathing disorders, particularly sleep apneas and respiratory depression produced by drugs
and neural damage.
This
focus on respiratory disorders provided the impetus for RespireRx’s acquisition of, Pier Pharmaceuticals, Inc. (“Pier”)
in August 2012. The acquisition of Pier added the dronabinol cannabinoid program for obstructive sleep apnea described below.
The
Company underwent a change in management in March 2013, and since then the Company’s current management has continued this
strategic focus, including seeking the capital to fund such efforts. As a result of the Company’s scientific discoveries
and the acquisition of strategic, exclusive license agreements, management believes that the Company is now a leader in the discovery
and development of innovative pharmaceuticals for the treatment of respiratory disorders.
There
is a substantial unmet need for new drug treatments for breathing disorders. According to a study commissioned by the American
Academy of Sleep Medicine, published in August 2016 (“AASM Commissioned Study”), there are approximately 29.4 million
adults with obstructive sleep apnea, of which 5.9 million are diagnosed. Sleep apnea places a considerable burden on society and
the health care system because of its association with co-morbidities and adverse events ranging from vehicular (for example:
cars, trucks, trains, buses) and industrial accidents, loss of productivity to increased risk of cardiopulmonary illness and related
death. According to the AASM Commissioned Study, the estimated overall cost of obstructive sleep apnea in the United States in
2015 was $162 billion, of which $12.4 billion relates to diagnosis and treatment and the balance relates to all other categories.
No drugs currently are approved for the treatment of sleep apnea.
Even
in patients without sleep apneas, the use of drugs such as propofol, used as an anesthetic during surgery, and opioid analgesics
such as morphine and oxycodone, used during anesthesia and for the treatment of post-surgical and chronic pain, are well known
for producing respiratory depression which is a form of apnea. In fact, while respiratory depression is the leading cause of death
from the overdose of most classes of abused drugs, it also arises during normal, physician-supervised procedures such as surgical
anesthesia, post-operative analgesia and as a result of normal outpatient management of pain.
Although
opioid antagonists such as naloxone (Narcan) and nalmefene (Revex) can reverse respiratory depression associated with opioids,
they have several major shortcomings. First and foremost, these opioid antagonists do not reverse the respiratory depression produced
by other classes of drugs often given/taken either alone or in combination with opioids. Second, while these drugs reverse the
serious side effects of the opioids, they also dramatically reduce their analgesic effectiveness. Third, the side effects of opioid
antagonists are themselves serious and include seizures, agitation, convulsions, tachycardia, hypotension, nausea, and vomiting.
Furthermore,
respiratory depression can arise as a result of a number of other illnesses that involve neural and muscular disorders. For example,
certain spinal injuries can interfere with normal neural communication between the brain and the lungs resulting in reduced respiratory
capacity. Pompe Disease is an autosomal, recessive, metabolic disorder that damages muscle and nerve cells throughout the body.
One of the first symptoms is a progressive decrease in the strength of muscles such as the diaphragm and other muscles required
for breathing and respiratory failure is the most common cause of death. In both of these indications, symptomatic treatment for
the respiratory depression is severely lacking.
Accordingly,
there is a considerable need for pharmaco-therapeutic agents to (i) treat sleep apnea, (ii) prevent and reverse the respiratory
depression produced by different classes of drugs, and (iii) relieve the respiratory depression produced in a number of neurological
indications, such as spinal injury and Pompe Disease. The Company currently has two drug platforms, each with a clinical stage
compound directed at these needs.
Sleep
Apnea
Sleep
apnea is a serious disorder in which breathing repeatedly stops long enough to disrupt sleep, and temporarily decreases the amount
of oxygen and increases the amount of carbon dioxide in the blood. Apnea is defined by more than five periods per hour of ten
seconds or longer without breathing. The repetitive cessation of breathing during sleep has substantial impact on the affected
individuals. The disorder is associated with major co-morbidities including excessive daytime sleepiness and increased risk of
cardiovascular disease (such as hypertension, stroke and heart failure), diabetes and weight gain. Sleep apnea is often made worse
by central nervous system depressants such as opioids, benzodiazepines, barbiturates and alcohol. It is therefore important for
these patients to seek therapy.
The
most common type of sleep apnea is obstructive sleep apnea (“OSA”), which occurs by narrowing or collapse of the pharyngeal
airway during sleep. There is currently no approved pharmacotherapy, and the most common treatment is to use continuous positive
airway pressure (“CPAP”) delivered via a nasal or full-face mask, as long as patients are able to tolerate the treatment.
We believe that patient compliance with CPAP devices is extremely low. Alternative treatments include surgical intervention, dental
appliances, hypoglossal nerve stimulation (via surgical implant) and other physical interventions. Given the large patient population
and the limited treatment options, there is a very large opportunity for pharmacotherapy to treat this disorder.
Central
sleep apnea (“CSA”), a less frequently diagnosed type of sleep apnea, is caused by alterations in the brain mechanisms
responsible for maintaining normal respiratory drive. CSA is most frequently observed in patients taking chronic opioids and in
heart failure patients and is a major correlate for mortality in these patients. There are no therapeutic options for patients
with CSA; CPAP is contra-indicated for the treatment of CSA and no drugs are currently approved for this indication.
In
addition, many patients present with a pattern of sleep apnea that has both obstructive and central components.
Cannabinoids
RespireRx
is developing dronabinol, a synthetic derivative of a naturally occurring substance in the cannabis plant, otherwise known as
Δ9-THC or Δ9-tetrahydrocannabinol, for the treatment of OSA, a serious respiratory disorder that impacts an estimated
30 million people in the United States. OSA has been linked to increased risk for hypertension, heart failure, depression, and
diabetes, and has an annual economic cost of $162 billion according to the American Academy of Sleep Medicine. There are no approved
drug treatments for OSA.
RespireRx
holds the exclusive world-wide license to a family of patents for the use of cannabinoids, a family of compounds found naturally
in the cannabis plant, including the synthetic cannabinoid dronabinol, in the treatment of sleep disordered breathing from the
University of Illinois at Chicago (“UIC”). In addition, RespireRx has several extensions and pending applications
that, if issued, will extend patent protection for over a decade. With approximately $5 million in funding from the National Heart,
Lung and Blood Institute of NIH, UIC recently completed a Phase 2B multi-center, double-blind, placebo-controlled clinical trial
of dronabinol in patients with OSA. Entitled
P
harmacotherapy of
A
pnea with
C
annabimimetic
E
nhancement
(“PACE”), this study replicated an earlier Phase 2A RespireRx sponsored clinical trial and demonstrated statistically
significant improvements in respiration, daytime sleepiness, and patient satisfaction after administration of dronabinol. The
results from PACE were published in the journal Sleep Vol. 41. No. 1, 2018.
RespireRx
believes that the most direct route to commercialization is to proceed directly to a Phase 3 pivotal trial using the currently
available dronabinol formulation (2.5, 5 and 10 mg gel caps) and to then commercialize a RespireRx branded dronabinol capsule
(RBDC).
The
Company also believes that there are numerous opportunities for reformulation of dronabinol to produce a second generation proprietary,
branded product for the treatment of OSA with an improved profile. Therefore, simultaneous with its development of the RBDC, RespireRx
plans to develop a proprietary dronabinol formulation to optimize the dose and duration of action for treating OSA.
RespireRx
initiated its dronabinol program when it acquired 100% of the issued and outstanding equity securities of Pier effective August
10, 2012 pursuant to an Agreement and Plan of Merger. Pier was formed in June 2007 (under the name SteadySleep Rx Co.) as a clinical
stage pharmaceutical company to develop a pharmacologic treatment for OSA and had been engaged in research and clinical development
activities.
Prior
to the merger, Pier 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, the primary
therapeutic end-point, and was observed to be safe and well tolerated.
Through
the merger, RespireRx gained access to a 2007 Exclusive License Agreement (as amended, the “Old
License”) that Pier had entered into with the University of Illinois on October 10, 2007. The Old License covered certain
patents and patent applications in the United States and other countries claiming the use of cannabinoids, including dronabinol,
for the treatment of sleep-related breathing disorders (including sleep apnea).
Dronabinol
is a Schedule III, controlled generic drug with a relatively low abuse potential that is approved by the U.S. Food and Drug Administration
(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, the Company believes that it would only
require approval by the FDA of a 505(b)(2) new drug application, an efficient regulatory pathway.
The
Old License was terminated effective March 21, 2013, due to the Company’s failure to make a required payment. Subsequently,
current management opened negotiations with the University of Illinois, and as a result, the Company entered into a new license
agreement (the “2014 License Agreement”) with the University of Illinois on June 27, 2014, the material terms of which
were similar to the Old License.
Similar
to the Old License, the 2014 License Agreement grants the Company, among other provisions, exclusive rights: (i) to practice certain
patents and patent applications, as defined in the 2014 License Agreement, that are 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 2014 License Agreement, subject to the provisions of the 2014 License
Agreement. The Company is required under the 2014 License Agreement, among other terms and conditions, to pay the University of
Illinois a license fee, royalties, patent costs and certain milestone payments.
The
recently completed PACE trial is described in more detail below in
Recent Developments
.
Drug-induced
Respiratory Depression or Drug-induced apnea
Drug-induced
respiratory depression (“RD”) or drug-induced apnea is a life-threatening condition caused by a variety of depressant
drugs, including analgesic, hypnotic, and anesthesia medications. We believe that RD is a leading cause of death from the overdose
of some classes of abused drugs, yet it also arises during normal, physician-supervised procedures such as surgical anesthesia
and post-operative pain management. For example, in the hospital setting, anesthetics such as propofol are well known for their
propensity to produce RD, particularly when combined with opioids. According to data from the National Center for Health Statistics,
48 million surgical inpatient procedures were performed in the United States in 2009. It is notable that, according to the HealthGrades
Inc. Patient Safety in American Hospitals Study released in 2011, post-operative respiratory failure produces the third highest
number of patient safety events, the fourth highest mortality rate, and the second largest overall excess cost to the Medicare
system, when compared to other patient safety indicators. The Company believes that, in these patients, the major risk factor
for the appearance of RD is a history of sleep apnea.
In
the hospital setting, one of the most serious complications of patient-controlled analgesia is RD and, despite nurses’ vigilance,
adverse events associated with opioids continue to increase. Drug-induced RD is associated with a high mortality rate relative
to other adverse drug events. In post-surgical patients taking opioids for pain management, sleep apnea is a major risk factor
for the occurrence of RD. If patients with sleep apnea are receiving combination therapies, they are at even higher risk for complications
and extended hospital stays.
Outside
the hospital, the primary risk factor for RD is the use of a single opioid in large doses or concomitant use of opioids and sedative
agents. Whether due to normal outpatient pain management, or as a result of substance abuse, RD has been reported to be the leading
cause of death from drug overdose, with the drug overdose death rate tripling since 1991. In patients chronically consuming opioids,
CSA is a major correlate for overdose and most likely represents an early and sensitive form of opioid induced RD. In August 2017,
the Centers for Disease Control and Prevention (CDC) reported that approximately 42,000 people died in 2016 from opioid overdoses,
including prescription opioids and illegally made fentanyl and heroin. The CDC reported that the common prescription drugs involved
in overdoses were methadone, oxycodone (such as OxyContin®) and hydrocodone (such as Vicodin®). In 2016, the CDC reported
that 40% of all US opioid deaths involved a prescription opioid. There were 13,000 heroin deaths in 2015. There are two types
of fentanyl, pharmaceutical fentanyl used to manage acute and chronic pain and non-pharmaceutical fentanyl that is illicitly manufactured
and is often mixed with heroin or cocaine. The CDC also reported that most of the increases in fentanyl deaths involved the illicit
fentanyl and not the pharmaceutical fentanyl.
Drug
Abuse
On
January 19, 2016, the Company announced that that it had reached an agreement with the Medications Development Program of the
National Institute of Drug Abuse (“NIDA”) to conduct research on the Company’s ampakine compounds CX717 and
CX1739. The agreement was entered into as of October 19, 2015, and on January 14, 2016, the Company and NIDA approved the proposed
protocols, allowing research activities to commence. NIDA is evaluating the compounds using pharmacologic, pharmacokinetic and
toxicologic protocols to determine the potential effectiveness of the ampakines for the treatment of drug abuse and addiction.
The Company retains all intellectual property as well as proprietary and commercialization rights to the Company’s compounds.
Initial studies focus on cocaine and methamphetamine addiction and abuse, and are contracted to outside testing facilities
and/or government laboratories, with all costs paid by NIDA. In experiments conducted by NIDA, CX717 antagonized the stimulatory
effects of methamphetamine. NIDA is in the process of testing CX717 on the interoceptive effects (determinants of addiction liability)
of both cocaine and methamphetamine in models of drug discrimination in rats.
Ampakines
RespireRx
is developing a class of proprietary compounds known as ampakines, a term used to designate their actions as positive allosteric
modulators of the alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid (“AMPA”) glutamate receptor. Ampakines
are small molecule compounds that enhance the excitatory actions of the neurotransmitter, glutamate at the AMPA receptor complex,
which mediates most excitatory transmission in the central nervous system (“CNS”). These drugs do not have agonistic
or antagonistic properties but instead modulate the receptor rate constants for transmitter binding, channel opening, and desensitization
Through
an extensive translational research effort from the cellular level through Phase 2 clinical trials, the company has developed
a family of ampakines, including CX717, CX1739 and CX1942 that have clinical application in the treatment of CNS-driven respiratory
disorders, neurobehavioral disorders, spinal cord injury, neurological diseases, and orphan indications. In particular, we are
addressing CNS-driven respiratory disorders that affect millions of people, but for which there are few treatment options and
no drug therapies, including opioid induced respiratory disorders, such as apnea (transient cessation of breathing) and hypopnea
(transient reduction in breathing). When these symptoms become severe, as in opioid overdose, they are the primary cause of opioid
lethality. In addition, we are developing our ampakines for the treatment of disordered breathing and motor impairment resulting
from spinal cord injury.
Early
preclinical and clinical research suggested that these ampakines might have therapeutic potential for the treatment of memory
and cognitive disorders, depression, attention deficit disorder and schizophrenia. Given our current focus on respiratory disorders,
we may seek to partner, out-license or sell our rights to the use of ampakine compounds for the treatment of neurological and
psychiatric indications, as we focus on the development of our compounds for the treatment of breathing disorders.
The
early ampakines discovered by the Company, Eli Lilly and Company, and others were ultimately abandoned due to the presence of
undesirable side effects, particularly convulsive activity. Subsequently, Company scientists discovered a new, chemically distinct
series of molecules termed “low impact” as opposed to the “high impact” designation given to the earlier
compounds. While these low impact compounds share many pharmacological properties with the high impact compounds, they do not
produce convulsive effects in animals. These low impact compounds do not bind to the same molecular site as the high impact compounds
and, as a result, do not produce the undesirable electrophysiological and biochemical effects that lead to convulsive activity.
The
Company owns patents and patent applications for certain families of chemical compounds that claim the chemical structures, their
actions as ampakines and their use in the treatment of various disorders. Patents claiming a family of chemical structures, including
CX1739 and CX1942, as well as their use in the treatment of various disorders, extend through at least 2028. Additional patents
claiming a family of chemical structures, including CX717, as well as their use in the treatment of various disorders, expired
in 2017 in the U.S. and will expire in 2018 internationally. The Company is developing potential market exclusivity strategies
for CX717 which may include new patent applications and identifying market opportunities and strategies that may provide exclusivity
without patents.
In
order to broaden the use of the Company’s ampakine technology into the area of respiratory disorders, on May 8, 2007, the
Company entered into a license agreement, as subsequently 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, including drug induced respiratory depression. These patents extend through at least 2028 and, 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 obtained preclinical results indicating that several of its low impact ampakines, including CX717, CX1739 and CX1942,
were able to antagonize the respiratory depression caused by opioids, barbiturates and anesthetics without offsetting the analgesic
effects of the opioid or the sedative effects of the anesthetics. Dr. John Greer, faculty member of the Department of Physiology,
Perinatal Research Centre, and Women & Children’s Health Research Institute at the University of Alberta, has shown
that these ampakine effects are due to a direct action on neurons in pre-Botzinger’s complex, a brain stem region responsible
for regulating respiratory drive.
After
several Phase 1 and 2 studies to demonstrate safety and tolerability, the first of these low impact compounds, CX717, was tested
in two Phase 2A clinical studies to determine its ability to antagonize the respiratory depressant effects of fentanyl, a potent
opioid analgesic. In both of these studies, one of which was published in a peer-reviewed journal, CX717 antagonized the respiratory
depression produced by fentanyl without altering the analgesia produced by this drug.
The
Company owns patents and patent applications for certain families of chemical compounds that claim the chemical structures, their
actions as ampakines and their use in the treatment of various disorders. Patents claiming a family of chemical structures, including
CX1739 and CX1942, as well as their use in the treatment of various disorders extend through at least 2028. Additional patents
claiming a family of chemical structures, including CX717, as well as their use in the treatment of various disorders, expired
in 2017 in the U.S. and will expire in 2018 internationally, though certain patents regarding the use of these chemical structures
extend through 2028.
Recent
Developments
PACE
Clinical Trial with Dronabinol
On
November 30, 2017, the Company announced the publication by the principal investigators, Dr. Phyllis Zee of Northwestern University
and Dr. David Carley of the University of Illinois at Chicago, in the peer-reviewed journal SLEEP, the official publication of
the Sleep Research Society, of the positive results of the potentially pivotal, PACE (Pharmacotherapy of Apnea by Cannabimimetic
Enhancement) Phase 2B OSA clinical trial, that was fully funded by the National Institutes of Health. The results from PACE were
published in the journal Sleep Vol. 41. No. 1, 2018. The results of the PACE clinical trial were previously presented by Dr. Carley
at the SLEEP 2017 annual meeting in June 2017. In the PACE trial, dronabinol significantly improved the primary outcome measures
of Apnea Hypopnea Index (“AHI”), daytime sleepiness as measured by the Epworth Sleepiness Scale (“ESS”),
and overall patient satisfaction as measured by the Treatment Satisfaction Questionnaire for Medications (“TSQM”).
The
recently completed PACE trial was a fully-blinded, two-center, Phase II, randomized placebo-controlled trial of dronabinol in
56 adult patients with moderate to severe OSA. By random assignment, 56 adult subjects with BMI<45, Epworth Sleepiness Scale
(ESS)>7 and PSG-documented AHI between 15 and 50 received either placebo (N=17), 2.5mg (N=19) or 10.0mg (N=20) of dronabinol
daily, one hour before bedtime for 6 weeks. Repeat in- laboratory PSG followed by maintenance of wakefulness (MWT) testing was
completed every 2-weeks during the treatment period. At each visit, the ESS and Treatment Satisfaction Questionnaire for Medications
also were completed.
Overall,
baseline AHI was 26.0±11.6 (SD) and this was equivalent among all treatment groups. In comparison to placebo, statistically
significant end of treatment declines in AHI were observed for both the 2.5 and 10 mg doses (-9.7±4.1, p=0.02 and -13.2±4.0,
p=0.001, respectively). Statistically significant declines in ESS were observed for subjects receiving 10 mg dronabinol (-4.0±0.8
units, p=0.001) but not those receiving 2.5 mg or placebo. Subjects receiving 10 mg dronabinol also expressed the greatest overall
satisfaction with treatment (p=0.02).
The
PACE trial enrolled 73 subjects of which 56 were evaluable with moderate to severe OSA who met all inclusion and exclusion criteria
for the study. At baseline, overall apnea/hypopnea index (AHI) was 25.9±11.3, Epworth Sleepiness Scale score (ESS) was
11.45±3.8, maintenance of wakefulness test (MWT) mean latency was 19.2±11.8 min, body mass index (BMI) was 33.4±5.4
kg/m2 and age was 53.6±9.0 years. Subjects were randomized to receive placebo, 2.5 mg or 10 mg dronabinol. Randomized subjects
completed daily self-administration of study drug for 6 weeks, and returned to the laboratory every 2 weeks for overnight polysomnography
(PSG), physical examination, and completion of clinical study procedures.
Subjects
receiving 10mg/day of dronabinol expressed the highest overall satisfaction with treatment (p=0.04). In comparison to placebo,
dronabinol dose-dependently reduced AHI by 10.7±4.4 (p=0.02) and 12.9±4.3 (p=0.003) events/hour at doses of 2.5
and 10 mg/day, respectively. Dronabinol at 10 mg/day reduced ESS score by -3.8±0.8 points from baseline (p<0.0001) and
by -2.3±1.2 points in comparison to placebo (p=0.05). Body weights, MWT sleep latencies, gross sleep architecture and overnight
oxygenation parameters were unchanged from baseline in any treatment group. The number and severity of adverse events, and treatment
adherence (0.3±0.6 missed doses/week) were equivalent among all treatment groups.
CX1739
Clinical Trial
The
Company filed an IND with the FDA in September 2015 to conduct a randomized, double-blind, placebo-controlled, crossover, Phase
2A study of CX1739 (300 mg) versus placebo, followed by dose escalation of CX1739 to 600 and 900 mg, with open-label administration
of the IV opioid remifentanil in approximately 18 healthy subjects to assess the ability of CX1739 to antagonize the respiratory
depressive effect of remifentanil without altering the analgesic effect of the opioid. The clinical protocol was designed to evaluate
the safety and efficacy of CX1739 to antagonize respiratory depression in two models of opioid use and abuse. During REMI-INFUSION,
a model of chronic (steady state) opioid use, respiration, pain, pulmometry, and safety were measured during a 30-minute intravenous
infusion of remifentanil that produced stable blood levels. During REMI-BOLUS, a model of acute, intravenous opioid overdose,
a single, intravenous bolus injection of remifentanil was administered at a dose calculated to achieve significant respiratory
depression.
On
each study day, REMI-BOLUS was initiated with an intravenous, bolus injection of remifentanil 3 hours after subjects received
either placebo or CX1739. Respiration was measured for 20 minutes and then compared to the baseline respiration recorded 5 minutes
prior to the bolus injection. REMI-INFUSION was initiated 3.5 hours after placebo or CX1739, with an intravenous infusion protocol
designed to maintain stable remifentanil blood levels and calculated to produce approximately 50% respiratory depression. The
ClinicalTrials.gov identifier is NCT02735629.
The
commencement of this clinical trial was subject to the resolution of two deficiencies raised by the FDA in its clinical hold letter
issued in November 2015, which were satisfactorily resolved in early 2016. As a result, the FDA removed the clinical hold on the
Company’s IND for CX1739 on February 25, 2016, thus allowing for the initiation of the clinical trial. In March 2016, upon
Institutional Review Board approval, the trial was initiated at the Duke Clinical Research Unit, Duke University Medical Center,
Durham NC. The dosing and data acquisition phase of the clinical trial was completed in June 2016 and the clinical trial was formally
completed on July 11, 2016.
On
September 12, 2016, the Company announced preliminary top-line analysis of safety and efficacy data from this clinical trial.
On October 3, 2016, the Company discovered an error in the preliminary data reported to it and accordingly, on October 4, 2016,
the Company issued a press release retracting the efficacy data contained in the September 12, 2016 press release. On December
15, 2016, the Company announced the corrected results of the trial, and presented the re-analyzed data, as follows.
During
REMI-INFUSION, the model of chronic opioid use, CX1739 antagonized the respiratory rate depression produced by remifentanil, with
statistically significant effects observed at 300 mg (p<.005) and 900 mg (p<.001). The antagonism produced by the 600 mg
dose did not achieve statistical significance. This lack of a linear, dose response effect is not unusual in early stage clinical
trials. During this period, CX1739 did not alter the analgesic and sedative effects of remifentanil. During REMI-BOLUS, the model
of IV opioid overdose, CX1739 treatment did not prevent respiratory depression, or improve time to recovery at any of the doses
tested.
Overall,
CX1739 was found to be safe and well tolerated, both prior to and during administration of remifentanil. Treatment-related adverse
events (“AEs”) for the various doses of CX1739 were mild, with an incidence comparable to that reported for placebo.
The great majority of AEs occurred after remifentanil administration, including nausea and vomiting, which are common side effects
associated with opioid administration.
The
study was conducted at the Duke Clinical Research Unit of the Duke Clinical Research Institute. The ClinicalTrials.gov identifier
is NCT02735629.
The
Company intends to initiate a multi-center clinical trial investigating the ability of CX717 or CX1739 to improve breathing in
patients with spinal cord injury. Assuming FDA allowance and appropriate approvals by institutional review boards, we intend
to have this study conducted at the University of Miami, the University of Florida, the Detroit Medical Center and the Detroit
Veterans Administration Hospital.
Upon
issuance of the final clinical report of the CX1739 Phase 2A trial, the Company intends to seek FDA allowance to conduct a Phase
2 clinical trial investigating the safety and efficacy of CX1739 in chronic opioid patients who have central apnea.
National
Institute of Drug Abuse Agreement
On
January 19, 2016, the Company announced that that it had reached an agreement with the Medications Development Program of the
National Institute of Drug Abuse (“NIDA”) to conduct research on the Company’s ampakine compounds CX717 and
CX1739. The agreement was entered into as of October 19, 2015, and on January 14, 2016, the Company and NIDA approved the proposed
protocols, allowing research activities to commence. NIDA is evaluating the compounds using pharmacologic, pharmacokinetic and
toxicologic protocols to determine the potential effectiveness of the ampakines for the treatment of drug abuse and addiction.
The Company retains all intellectual property as well as proprietary and commercialization rights to the Company’s compounds.
Initial studies focus on cocaine and methamphetamine addiction and abuse, and are contracted to outside testing facilities and/or
government laboratories, with all costs paid by NIDA. In experiments conducted by NIDA, CX717 antagonized the stimulatory effects
of methamphetamine. NIDA is in the process of testing CX717 on the interoceptive effects (determinants of additions liability)
of both cocaine and methamphetamine in models of drug discrimination in rats.
Research
Contract with the University of Alberta
On
January 12, 2016, the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of
ampakines at a variety of dosage and formulation levels in the potential treatment of Pompe Disease, apnea of prematurity and
spinal cord injury, as well as to conduct certain electrophysiological studies to explore the ampakine mechanism of action for
central respiratory depression. The Company agreed to pay the University of Alberta total consideration of approximately CAD$146,000
(approximately US$108,000), consisting of approximately CAD$85,000 (approximately US$63,000) of personnel funding in cash in four
installments during 2016, to provide approximately CAD$21,000 (approximately US$16,000) in equipment, to pay patent costs of CAD$20,000
(approximately US$15,000), and to underwrite additional budgeted costs of CAD$20,000 (approximately US$15,000). As of December
31, 2017, the Company had recorded amounts payable in respect to this Research Contract of US$16,207 (CAD$21,222) which amount
was paid in US dollars on January 24, 2018. The conversion to US dollars above utilizes an exchange rate of approximately US$0.76
for every CAD$1.00.
The
University of Alberta received matching funds through a grant from the Canadian Institutes of Health Research in support of this research.
The Company retains the rights to research results and any patentable intellectual property generated by the research. Dr.
John Greer, Ph.D., Chairman of the Company’s Scientific Advisory Board and faculty member of the Department of
Physiology, Perinatal Research Centre, and Women & Children’s Health Research at the University of Alberta,
collaborated on this research. The studies were completed in 2016. Any patentable intellectual property developed in the
Research Agreement will be covered by the existing license agreement.
Common
Stock and Warrant Financings
1
st
2017 Unit Offering
On August 29, 2017, September
27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017, December 21, 2017, December
22, 2017 and December 29, 2017 the Company sold units to investors in the 2
nd
2017 Unit Offering for aggregate gross
proceeds of $404,500, with each unit consisting of one share of the Company’s common stock and one common stock purchase
warrant to purchase one share of the Company’s common stock. Units were sold for $1.00 per unit and the warrants issued
in connection with the units are exercisable through September 29, 2022 at a fixed price $1.10 per share of the Company’s
common stock. The warrants contain a cashless exercise provision and certain blocker provisions preventing exercise if the investor
would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a result of such exercise.
The warrants are also subject to redemption by the Company at $0.001 per share upon ten (10) days written notice if the Company’s
common stock closes at 250% or more of the unit purchase price for any five (5) consecutive trading days. The investors in the
offering were not affiliates of the Company. Investors also received an unlimited number of piggy-back registration rights.
Investors also received an unlimited number of exchange rights, which are options and not obligations, to exchange such investor’s
entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting solely of
convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only
into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing” as in the 1
st
2017 Unit Offering). These exchange rights were effective until the earlier of:
(i) the completion of any number of subsequent financings aggregating at least $15 million gross proceeds to the Company, or (ii)
December 30, 2017 and therefore have expired. The dollar amount used to determine the amount invested or exchanged into the subsequent
financing would have been 1.2 times the amount of the original investment. Under certain circumstances, the ratio might have been
1.4 instead of 1.2. The exchange right did not permit the investors to exchange into a debt offering or into redeemable preferred
stock, therefore, unlike the 2
nd
2016 Unit Offering, the 2
nd
2017 Unit Offering resulted in the issuance
of permanent equity.
The
Company evaluated whether the warrants or the exchange rights met criteria to be accounted for as a derivative in accordance with
Accounting Standard Codification Topic (ASC) 815 and determined that the derivative criteria were not met. Therefore, the Company
determined no bifurcation and separate valuation was necessary and that the warrants and exchange right should be accounted for
with the host instrument. The closing market prices of the Company’s common stock on March 10, 2017 and March 28, 2017 were
$4.05 and $3.80 respectively. In connection with this transaction, Aurora Capital LLC (“Aurora”) served as a placement
agent and earned $20,000 fees and 8,000 placement agent common stock warrants associated with the closing of the 1
st
2017
Unit Offering. The fees were unpaid as of December 31, 2017 and have been accrued in accounts payable and accrued expenses and
charged against Additional paid-in capital as of March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017.
The placement agent common stock warrants were valued at $27,648 and were accounted for in Additional paid-in capital as of March
31, 2017 and remain valued at that amount as of December 31, 2017.
On
July 26, 2017, the Company’s Board approved an offering of securities conducted via private placement (the “2
nd
2017 Unit Offering” as described below) that, because of the terms of the 2
nd
2017 Unit Offering as compared
to the terms of the 2
nd
2016 Unit offering as well as the 1
st
2017 Unit Offering, resulted in an exchange
of all outstanding units from each of the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering
for new equity securities of the Company into the 2
nd
2017 Unit Offering by all of the investors in the 2
nd
2016 Unit Offering and all of the investors in the 1
st
2017 Unit Offering.
2
nd
2017 Unit Offering
On
August 29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017,
December 21, 2017, December 22, 2017 and December 29, 2017 the Company sold units to investors in the 2
nd
2017 Unit
Offering for aggregate gross proceeds of $404,500, with each unit consisting of one share of the Company’s common stock
and one common stock purchase warrant to purchase one share of the Company’s common stock. Units were sold for $1.00 per
unit and the warrants issued in connection with the units are exercisable through September 29, 2022 at a fixed price $1.10 per
share of the Company’s common stock. The warrants contain a cashless exercise provision and certain blocker provisions preventing
exercise if the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a
result of such exercise. The warrants are also subject to redemption by the Company at $0.001 per share upon ten (10) days written
notice if the Company’s common stock closes at 250% or more of the unit purchase price for any five (5) consecutive trading
days. The investors in the offering were not affiliates of the Company. Investors also received an unlimited number of
piggy-back registration rights. Investors also received an unlimited number of exchange rights, which are options and not obligations,
to exchange such investor’s entire investment (and not less than the entire investment) into one or more subsequent equity
financings (consisting solely of convertible preferred stock or common stock or units containing preferred stock or common stock
and warrants exercisable only into preferred stock or common stock) that would be considered as “permanent equity”
under United States Generally Accepted Accounting Principles and the rules and regulations of the United States Securities and
Exchange Commission, and therefore classified as stockholders’ equity, and excluding any form of debt or convertible debt
(each such financing a “Subsequent Equity Financing” as in the 1
st
2017 Unit Offering). These exchange
rights were effective until the earlier of: (i) the completion of any number of subsequent financings aggregating at least $15
million gross proceeds to the Company, or (ii) December 30, 2017 and therefore have expired. The dollar amount used to determine
the amount invested or exchanged into the subsequent financing would have been 1.2 times the amount of the original investment.
Under certain circumstances, the ratio might have been 1.4 instead of 1.2. The exchange right did not permit the investors to
exchange into a debt offering or into redeemable preferred stock, therefore, unlike the 2
nd
2016 Unit Offering, the
2
nd
2017 Unit Offering resulted in the issuance of permanent equity.
The
Company evaluated whether the warrants or the exchange rights met criteria to be accounted for as a derivative in accordance with
Accounting Standard Codification Topic (ASC) 815, and determined that the derivative criteria were not met. Therefore, the Company
determined no bifurcation and separate valuation was necessary and the warrants and exchange right should be accounted for with
the host instrument. The closing market prices of the Company’s common stock on August 29, 2017, September 27, 2017, September
28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017, December 21, 2017, December 22, 2017 and December
29, 2017 were $1.00, $1.40, $1.40, $1.50, $0.80, $1.05, $1.45, $1.51, $1.45 and $1.14 respectively. There was no placement agent
and therefore no fees associated with the 2
nd
2017 Unit Offering.
The terms of the 2
nd
2017 Unit Offering, as compared to the terms of the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering,
were such that all of the units from each of the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering were
exchanged into securities of the 2
nd
2017 Unit Offering. Because the 1
st
2017 Unit Offering and the 2
nd
2017 Unit Offering were both originally accounted for as equity, a reclassification similar to the 2
nd
2016 Unit
Offering was not required.
The
shares of common stock and warrants in each of the private placements discussed above were offered and sold without registration
under the Securities Act of 1933, as amended (the “Securities Act”) 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. None of the shares of common
stock issued as part of the units, the warrants, the common stock issuable upon exercise of the warrants or any warrants issued
to a qualified referral source have 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.
Going
Concern
The
Company’s 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 net losses
of $4,291,483 and $9,229,760 and negative operating cash flows of $697,009 and $1,328,684 for the fiscal years ended December
31, 2017 and 2016, respectively, had a stockholders’ deficiency of $4,355,384 at December 31, 2017, and expects to continue
to incur net losses and negative operating cash flows for at least the next few years. As a result, management has concluded that
there is substantial doubt about the Company’s ability to continue as a going concern, and the Company’s independent
registered public accounting firm, in its report on the Company’s consolidated financial statements for the year ended December
31, 2017, has expressed 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. Current management is continuing to address various aspects of the Company’s
operations and obligations, including, without limitation, debt obligations, financing requirements, intellectual property, licensing
agreements, legal and patent matters and regulatory compliance, and has continued to raise new debt and equity capital to fund
the Company’s business activities.
In
January 2016, the Company’s Chief Executive Officer and Chief Scientific Officer each advanced an additional $52,600 to
the Company for working capital purposes under secured short-term promissory notes payable aggregating $105,200 and three year
warrants exercisable into 18,400 shares of Common Stock in the aggregate.
During
April and May 2016, the Company entered into Note Exchange Agreements with certain note holders representing an aggregate of $303,500
of principal amount of the Notes (out of a total of $579,500 of original principal amount of the Notes). Pursuant to the Note
Exchange Agreements, an aggregate of $344,483, which included accrued interest of $40,983, of the Notes were exchanged (together
with original warrants to purchase 26,681 shares of the Company’s common stock, New Warrants to purchase 14,259 shares of
the Company’s common stock, and the payment of an aggregate of $232,846 in cash) into a total of 101,508 shares of the Company’s
common stock. None of the Notes had previously been converted into shares of the Company’s common stock.
During
April and May 2016, the Company also entered into Unit Exchange Agreements with certain warrant holders who had acquired units
in connection with the Second Amended and Restated Common Stock and Warrant Purchase Agreement on August 28, 2015, September 28,
2015 or November 2, 2015. The Unit Exchange Agreements provided for the warrant holders to exchange (i) existing warrants to purchase
an aggregate of 217,187 shares of the Company’s common stock, plus (ii) an aggregate of $529,394 in cash, in return for
(i) an aggregate of 108,594 shares of the Company’s common stock with a total market price of $728,859 (average $6.7275
per share), and (ii) new warrants to purchase an aggregate of 108,594 shares of the Company’s common stock with an exercise
price of $4.8750 per share, exercisable for cash or on a cashless basis through the original expiration date of September 30,
2020.
In
September 2016, the Company’s Chief Executive Officer and Chief Scientific Officer each advanced an additional $25,000 to
the Company for working capital purposes under secured short-term promissory notes payable aggregating $50,000 and three year
warrants exercisable into 10,155 shares of common stock in the aggregate.
On
December 29, 2016 and December 30, 2016, the Company sold units comprised of one share of Common Stock and one Common Stock Purchase
Warrant to purchase one share of Common Stock in a private placement (“2
nd
2016 Unit Offering”) for gross
proceeds of $185,000. The per unit purchase price was $1.42. The warrant exercise price was $1.562 per share of Common Stock.
The warrants were exercisable until December 31, 2021. The warrants had a cashless exercise provision, “blocker” provisions
similar to those described above and may be redeemed or called by the Company for a price of $0.001 per share if the closing price
of the Company’s Common Stock is equal to or greater than 200% of the unit purchase price or $2.82 for five consecutive
trading days. The Company has had the right to call or redeem these warrants several times since issuance, but has chosen not
to do so through the date of the issuance of this Form 10-K. Investors in the 2
nd
2016 Unit Offering had an exchange
right, that under certain circumstances permitted such investors to exchange their investment in the 2
nd
2016 Unit
Offering into subsequent financings until December 30, 2017 with an exchange ratio of 1.2 times the amount invested in the 2
nd
2016 Unit Offering and under certain circumstances, a ratio of 1.4.
On
March 10, 2017 and March 28, 2017, the Company sold units to investors in the 1
st
2017 Unit Offering for aggregate
gross proceeds of $350,000, with each unit consisting of one share of the Company’s common stock and one common stock purchase
warrant to purchase one share of the Company’s common stock. Units were sold for $2.50 per unit and the warrants issued
in connection with the units are exercisable through December 31, 2021 at a fixed price $2.75 per share of the Company’s
common stock. The warrants contain a cashless exercise provision and certain blocker provisions preventing exercise if
the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a result of such
exercise. The warrants were also subject to redemption by the Company at $0.001 per share upon ten (10) days written notice if
the Company’s common stock closes at 200% or more of the unit purchase price for any five (5) consecutive trading days.
The investors were not affiliates of the Company. Investors received an unlimited number of piggy-back registration rights. Investors
also received an unlimited number of exchange rights, which are options and not obligations, to exchange such investor’s
entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting solely of
convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only
into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion of any number of subsequent
financings aggregating at least $15 million gross proceeds to the Company, or (ii) December 30, 2017. The dollar amount used to
determine the amount invested or exchanged into the subsequent financing would have been 1.2 times the amount of the original
investment. Under certain circumstances, the ratio might have been 1.4 instead of 1.2. The exchange right did not permit the investors
to exchange into a debt offering or into redeemable preferred stock. In connection with this transaction, Aurora Capital LLC (“Aurora”)
served as a placement agent and earned $20,000 of cash fees and 8,000 placement agent common stock warrants associated with the
closing of 1
st
2017 Unit Offering. The cash fees were unpaid as of December 31, 2017.
On
July 26, 2017, the Company’s Board approved the “2
nd
2017 Unit Offering. The terms of the 2
nd
2017 Unit Offering as compared to the terms of the 1
st
2017 Unit Offering were such, that it resulted in an exchange
of units from the 1
st
2017 Unit Offering for new equity securities and warrants of the Company in the 2
nd
2017 Unit Offering by the Company by all of the investors in the 1
st
2017 Unit Offering.
On
August 29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017,
December 21, 2017, December 22, 2017 and December 29, 2017 the Company sold units to investors in the 2
nd
2017 Unit
Offering for aggregate gross proceeds of $404,500, with each unit consisting of one share of the Company’s common stock
and one common stock purchase warrant to purchase one share of the Company’s common stock (2
nd
2017 Unit Offering).
Units were sold for $1.00 per unit and the warrants issued in connection with the units are exercisable through September 29,
2022 at a fixed price $1.10 per share of the Company’s common stock. The warrants contain a cashless exercise provision
and certain blocker provisions preventing exercise if the investor would beneficially own more than 4.99% of the Company’s
outstanding shares of common stock as a result of such exercise. The warrants are also subject to redemption by the Company at
$0.001 per share upon ten (10) days written notice if the Company’s common stock closes at 250% or more of the unit purchase
price for any five (5) consecutive trading days. Investors were not affiliates of the Company. Investors also received an unlimited
number of piggy-back registration rights. Investors received an unlimited number of exchange rights, which were options and not
obligations, to exchange such investor’s entire investment (and not less than the entire investment) into one or more subsequent
equity financings (consisting solely of convertible preferred stock or common stock or units containing preferred stock or common
stock and warrants exercisable only into preferred stock or common stock) that would be considered as “permanent equity”
under United States Generally Accepted Accounting Principles and the rules and regulations of the United States Securities and
Exchange Commission, and therefore classified as stockholders’ equity, and excluding any form of debt or convertible debt
(each such financing a “Subsequent Equity Financing”). These exchange rights were effective until the earlier of:
(i) the completion of any number of subsequent financings aggregating at least $15 million gross proceeds to the Company, or (ii)
December 30, 2017, and have therefore expired. The dollar amount used to determine the amount invested or exchanged into
the subsequent financing would have been 1.2 times the amount of the original investment. Under certain circumstances, the ratio
might have been 1.4 instead of 1.2. The exchange right did not permit the investors to exchange into a debt offering or into redeemable
preferred stock. There was no placement agent and therefore no fees associated with the 2
nd
2017 Unit Offering.
The
terms of the 2
nd
2017 Unit Offering as compared to the terms of the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering, has resulted in an exchange of all of the units from each of the 2
nd
2016 Unit Offering and
the 1
st
2017 Unit Offering into equity securities and warrants of the 2
nd
2017 Unit Offering.
The
Company is continuing its efforts to raise additional capital in order to be able to pay its liabilities and fund its business
activities on a going forward basis, including an increase in the Company’s research and development activities. As a result
of the Company’s current financial situation, the Company has limited access to external sources of debt and equity financing.
Accordingly, there can be no assurances that the Company will be able to secure additional financing in the amounts necessary
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.
Recent
Accounting Pronouncements
In
August 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2017-12
—Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard is intended
to improve and simplify accounting rules around hedge accounting. The new standard refines and expands hedge accounting for both
financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented,
both on the face of the financial statements and in the footnotes, for investors and analysts. The new standard takes effect for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, for public companies and for fiscal
years beginning after December 15, 2019 (and interim periods for fiscal years beginning after December 15, 2020), for private
companies. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard.
The
adoption of ASU 2017-12 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11 (ASU 2017-11), Earnings Per Share (Topic 260): Distinguishing
Liabilities from Equity (Topic 480): Derivatives and Hedging (Topic 815). The relevant section for the Company is Tock 815 where
it pertains to accounting for certain financial instruments with down round features. Until the issuance of this ASU, financial
instruments with down round features required fair value measurement and subsequent changes in fair value were recognized in earnings.
As a result of the ASU, financial instruments with down round features are no longer treated as a derivative liability measured
at fair value. Instead, when the down round feature is triggered, the effect is treated as a dividend and as a reduction of income
available to common shareholders in basic earnings per share. For public entities, the ASU is effective for fiscal years beginning
after December 15, 2018. Early adoption is permitted including adoption in an interim period. The adoption of ASU 2017-11 is not
expected to have any impact on the Company’s financial statement presentation or disclosures.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718).” The amendments in
in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following
are met: (i) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the
modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method
is used) of the original award immediately before the original award is modified, (ii) the vesting conditions of the modified
award are the same as the vesting conditions of the original award immediately before the original award is modified and (iii)
the classification off the modified award as an equity instrument or a liability instrument is the same as the classification
of the original award immediately before the original award is modified. The amendments in this update are effective for annual
periods beginning after December 15, 2017 and for interim periods within those annual periods and are not expected to have any
impact on the Company’s financial statement presentation or disclosures.
In
April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing.” The amendments in this update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts
with Customers (Topic 606), which we are required to apply for annual and interim periods beginning after December 15, 2017. Management’s
current analysis is that the new guidelines currently will not substantially impact our revenue recognition. The adoption of the
ASU is not expected to have any impact on the Company’s financial statement presentation or disclosure.
In
March 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09), Compensation – Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requires, among other things, that all income tax effects
of awards be recognized in the statement of operations when the awards vest or are settled. ASU 2016-09 also allows for an employer
to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting
and allows for a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for fiscal years beginning
after December 15, 2016 and therefore is effective for this annual period. The adoption of ASU 2016-09 has not had a significant
impact on the Company’s 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.
Concentration
of Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents.
The Company limits its exposure to credit risk by investing its cash with high credit quality financial institutions.
The
Company’s research and development efforts and potential products rely on licenses from research institutions and if the
Company loses access to these technologies or applications, its business could be substantially impaired.
Under
a patent license agreement with The Governors of the University of Alberta, the Company has exclusive rights to the use of certain
ampakine compounds to prevent and treat respiratory depression induced by opioid analgesics, barbiturates and anesthetic and sedative
agents.
On
May 8, 2007, the Company entered into a license agreement, as subsequently 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. The Company agreed to pay the University of Alberta a licensing fee and a patent issuance fee,
which were paid, and prospective payments consisting of a royalty on net sales, sublicense fee payments, maintenance payments
and milestone payments. The prospective maintenance payments commence on the enrollment of the first patient into the first Phase
2B clinical trial and increase upon the successful completion of the Phase 2B clinical trial. As the Company does not at this
time anticipate scheduling a Phase 2B clinical trial, no maintenance payments are currently due and payable to the University
of Alberta. In addition, no other prospective payments are currently due and payable to the University of Alberta.
Through
the merger with Pier, the Company gained access to the Old License that Pier had entered into with the University of Illinois
on October 10, 2007. The Old License 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 FDA 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 OSA. In addition, Pier intended to evaluate the feasibility and comparative
efficacy of a proprietary formulation of dronabinol. The Old License 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 the 2014 License Agreement with the University
of Illinois, the material terms of which were similar to the Old License that had been terminated. If the Company is unable to
comply with the terms of the 2014 License Agreement, such as required payments thereunder, the Company risks the 2014 License
Agreement being terminated.
Critical
Accounting Policies and Estimates
The
Company prepared its consolidated financial statements in accordance with accounting principles generally accepted in the United
States of America. The preparation of these consolidated financial statements requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates
the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors
that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different
assumptions or conditions.
The
following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s
consolidated financial statements.
Convertible
Notes Payable and Related Warrants
The
Company accounted for the beneficial conversion features with respect to the sale of the convertible notes and the issuance of
the warrants in 2015 and 2016 in accordance with ASC 470-20, Accounting for Debt with Conversion and Other Options.
The
Company considered the face value of the convertible notes to be representative of their fair value. The Company determined the
fair value of the warrants based on the Black-Scholes option-pricing model. The relative fair value method generated respective
fair values for each of the convertible notes and the warrants of approximately 50% for the convertible notes and approximately
50% for the warrants. Once these values were determined, the fair value of the warrants and the fair value of the beneficial conversion
feature (which were calculated based on the effective conversion price) were recorded as a reduction to the face value of the
promissory note obligation. As a result, this aggregate debt discount reduced the carrying value of the convertible notes to zero
at each issuance date. The excess amount generated from this calculation was not recorded, as the carrying value of a convertible
note cannot be reduced below zero. The aggregate debt discount is being amortized as interest expense over the original term of
the convertible notes. The difference between the amortization of the debt discount calculated based on the straight-line method
and the effective yield method was not material.
The
cash fees paid to placement agents and for legal costs were deferred and capitalized as deferred offering costs and are being
amortized to interest expense over the original term of the convertible notes on the straight-line method. The placement agent
warrants were considered as an additional cost of the offering and were included in deferred offering costs at fair value. The
difference between the amortization of the deferred offering costs calculated based on the straight-line method and the effective
yield method was not material.
On
August 13, 2015, the Company elected to extend the maturity date of the convertible notes to September 15, 2016. As a consequence
of this election, under the terms of the convertible notes, the Company was required to issue to convertible note holders additional
warrants (the “New Warrants”). In connection with the extension of the maturity date of the convertible notes, the
Board of Directors of the Company determined to extend the termination date of the original warrants (the “Old Warrants”),
so that they were coterminous with the new maturity date of the convertible notes.
The
Company reviewed the guidance in ASC 405-20, Extinguishment of Liabilities, and determined that the notes had not been extinguished.
The Company therefore concluded that the guidance in ASC 470-50, Modifications and Extinguishments, should be applied, which states
that if the exchange or modification is not to be accounted for in the same manner as a debt extinguishment, then the fees shall
be associated with the replacement or modified debt instrument and, along with any existing unamortized premium or discount, amortized
as an adjustment of interest expense over the remaining term of the replacement or modified debt instrument using the interest
method.
With
regard to the modification of the convertible notes and the issuance of the New Warrants, the Company deferred the debt modification
costs over the remaining term of the extended notes. The Company accounted for such costs as a discount to the notes and amortized
such costs to interest expense over the extended term of the notes on the straight-line method. The difference between the amortization
of these costs calculated based on the straight-line method and the effective yield method was not material.
With
regard to the extension of the Old Warrants, the Company deferred the debt modification costs over the remaining term of the extended
convertible notes. The Company accounted for such costs as a discount to the notes and amortized such costs to interest expense
over the extended term of the convertible notes on the straight-line method. The difference between the amortization of these
costs calculated based on the straight-line method and the effective yield method was not material.
The
closing market price of the Company’s common stock on the extension date of September 15, 2015 was $10.075 per share, as
compared to the fixed conversion price of the convertible notes and the fixed exercise price of both the Old Warrants and the
New Warrants of $11.375 per share. The Company has accounted for the beneficial conversion features with respect to the extension
of the convertible notes and the extension of the Old Warrants and the issuance of the New Warrants in accordance with ASC 470-20,
Accounting for Debt with Conversion and Other Options.
The
Company considered the face value of the convertible notes, plus the accrued interest thereon, to be representative of their fair
value. The relative fair value method generated respective fair values for each of the convertible notes, including accrued interest,
and the New Warrants and extension of the Old Warrants, of approximately 55% for the convertible notes, including accrued interest,
and approximately 45% for the New Warrants and extension of the Old Warrants. Once these values were determined, the fair value
of the New Warrants and extension of the Old Warrants and the fair value of the beneficial conversion feature (which were calculated
based on the effective conversion price) were recorded as a reduction to the face value of the convertible note obligation. The
aggregate debt discount is being amortized as interest expense over the extended term of the convertible notes. The difference
between the amortization of the debt discount calculated based on the straight-line method and the effective yield method was
not material.
Note
Exchange Agreements and Unit Exchange Agreements
See
Note 3 to our consolidated financial statements for the years ended December 31, 2017 and 2016 for information on our “Note
Exchange Agreements” and “Unit Exchange Agreements.”
Research
Grants
The
Company recognizes revenues from research grants as earned based on the percentage-of-completion method of accounting and issues
invoices for contract amounts billed based on the terms of the grant agreement. Revenues recorded under research grants in excess
of amounts earned are classified as unearned grant revenue liability in the Company’s consolidated balance sheet. Grant
receivable reflects contractual amounts due and payable under the grant agreement. Payments of grants receivable
are based on progress reports provided to the grant provider by the Company.
Research
grants are generally funded and paid through government or institutional programs. Amounts received under research grants are
nonrefundable, regardless of the success of the underlying research project, to the extent that such amounts are expended in accordance
with the approved grant project.
Stock-Based
Compensation
The
Company periodically issues common stock and stock options to officers, directors and consultants for services rendered. Such
issuances vest and expire according to terms established at the issuance date of each grant.
The
Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for
equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock-based
payments to consultants by determining the value of the stock compensation based upon the measurement date at either (a) the date
at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments
is complete.
Stock
grants, which are generally time vested, are measured at the grant date fair value and charged to operations ratably over the
vesting period.
Stock
options granted to members of the Company’s Scientific Advisory Board and to outside consultants are revalued each reporting
period until vested to determine the amount to be recorded as an expense in the respective period. As the stock options vest,
they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the
value on the date of vesting.
The
fair value of stock options is determined utilizing the Black-Scholes option-pricing model, and is affected by several variables,
the most significant of which are the life of the equity award, the exercise price of the security as compared to the fair market
value of the common stock on the grant date, and the estimated volatility of the common stock over the term of the equity award.
Estimated volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the time of grant. The fair value of common stock is determined by reference
to the quoted market price of the Company’s common stock.
Stock
options and warrants issued to non-employees as compensation for services to be provided to the Company or in settlement of debt
are accounted for based upon the fair value of the services provided or the estimated fair value of the stock option or warrant,
whichever can be more clearly determined. Management utilizes the Black-Scholes option-pricing model to determine the fair value
of the stock options and warrants issued by the Company. The Company recognizes this expense over the period in which the services
are provided.
The
Company recognizes the fair value of stock-based compensation in general and administrative costs and in research and development
costs, as appropriate, in the Company’s consolidated statements of operations. The Company issues new shares of common stock
to satisfy stock option exercises.
Research
and Development Costs
Research
and development costs consist primarily of fees paid to consultants and outside service providers and organizations (including
research institutes at universities), patent fees and costs, and other expenses relating to the acquisition, design, development
and testing of the Company’s treatments and product candidates.
Research
and development costs incurred by the Company under research grants are expensed as incurred over the life of the underlying contracts,
unless the terms of the contract indicate that a different expensing schedule is more appropriate.
The
Company reviews the status of its research and development contracts on a quarterly basis.
License
Agreements
Obligations
incurred with respect to mandatory payments provided for in license agreements are recognized ratably over the appropriate period,
as specified in the underlying license agreement, and are recorded as liabilities in the Company’s consolidated balance
sheet, with a corresponding charge to research and development costs in the Company’s consolidated statement of operations.
Obligations incurred with respect to milestone payments provided for in license agreements are recognized when it is probable
that such milestone will be reached, and are recorded as liabilities in the Company’s consolidated balance sheet, with a
corresponding charge to research and development costs in the Company’s consolidated statement of operations. Payments of
such liabilities are made in the ordinary course of business.
Patent
Costs
Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on
the Company’s research efforts and any related patent applications, all patent costs, including patent-related legal and
filing fees, are expensed as incurred.
Results
of Operations
The
Company’s consolidated statements of operations as discussed herein are presented below.
|
|
Years
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,515,846
|
|
|
|
5,295,683
|
|
Research
and development
|
|
|
1,731,565
|
|
|
|
3,176,207
|
|
Total
operating expenses
|
|
|
4,247,411
|
|
|
|
8,471,890
|
|
Loss
from operations
|
|
|
(4,247,411
|
)
|
|
|
(8,471,890
|
)
|
Gain
on settlements with service providers
|
|
|
-
|
|
|
|
1,076
|
|
Fair
value of inducement cost to effect exchange of convertible notes
|
|
|
-
|
|
|
|
(188,274
|
)
|
Interest
income
|
|
|
-
|
|
|
|
8
|
|
Interest
expense
|
|
|
(102,225
|
)
|
|
|
(586,346
|
)
|
Foreign
currency transaction gain
|
|
|
58,153
|
|
|
|
15,666
|
|
Net
loss
|
|
|
(4,291,483
|
)
|
|
|
(9,229,760
|
)
|
Adjustment
related to Series G 1.5% Convertible Preferred Stock:
|
|
|
|
|
|
|
|
|
Dividends
on Series G 1.5% Convertible Preferred Stock
|
|
|
-
|
|
|
|
(1,165
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(4,291,483
|
)
|
|
$
|
(9,230,295
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted
|
|
$
|
(1.77
|
)
|
|
$
|
(4.95
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
2,418,271
|
|
|
|
1,864,045
|
|
Years
Ended December 31, 2017 and 2016
Revenues
.
The Company had no research grant revenues or other revenues during the years ended December 31, 2017 and December 31, 2016.
General
and Administrative
. For the year ended December 31, 2017, general and administrative expenses were $2,515,846, a decrease
of $2,779,837, as compared to $5,295,683 for the year ended December 31, 2016. The decrease in general and administrative expenses
for the year ended December 31, 2017, as compared to the year ended December 31, 2016, is primarily due to decreases of $2,227,310
in stock-based compensation, $198,811 in administrative salaries and employee benefits and Board of Directors fees, $209,560
in corporate legal expenses and $59,820 in investor relations expenses. There were also decreases in accounting
and consulting costs, offset by increases in insurance and a number of other smaller offsetting increases and decreases.
Stock-based
compensation costs included in general and administrative expenses were $1,164,538 for the year ended December 31, 2017, as compared
to $3,391,848 for the year ended December 31, 2016. Salaries, employee benefits and board fees included in general and administrative
expenses were $696,445 for the year ended December 31, 2017, as compared to $895,256 for the year ended December 31, 2016. The
net change reflects the effects of the termination of employment of the Company’s former Chief Financial Officer in February
2017, partially offset by the increase in base compensation of the officer taking over the Chief Financial Officer responsibilities.
It also reflects of the gain experienced by the Company upon the forgiveness of accrued compensation by certain officers,
a former officer and the independent members of the Board of Directors, partially offset by the value of options granted to those
individuals on the same date.
The
Company experienced a net benefit of $59,338 when, on December 9, 2017, certain officers, one former officer, two
independent members of the Board of Directors and two vendors forgave $1,861,221 of compensation, benefits and other expenses
and received, on the same date, options valued at $1,801,883.
In
addition, during 2017, the Company experienced an increase in the costs of directors and officers liability insurance and general
office insurance.
Research
and Development
. For the year ended December 31, 2017, research and development expenses were $1,731,565, a decrease of $1,444,642,
as compared to $3,176,207 for the year ended December 31, 2016. The decrease in research and development expenses for the year
ended December 31, 2017, as compared to the year ended December 31, 2016, is primarily a result of a $580,325 decrease in stock-based
compensation and a $566,222 decrease in research contract related expenses, most of which is related to the CX1739 clinical
trial at Duke University School of Medicine, a $264,426 decrease in research and development expenses at other research institutes
and vendors, as well as a $42,572 decrease in patent legal and other fees.
The
Company experienced a net benefit of $25,742 when, on December 9, 2017, an officer whose compensation and related benefit expenses
that are included in research and development expenses forgave $807,497 of such compensation and related expenses, and
received in exchange options valued at $781,755.
Interest
Expense
. During the year ended December 31, 2017, interest expense was $102,225 (including $15,220 to related parties), a
decrease of $484,121, as compared to $586,346 (including $151,958 to related parties) for the year ended December 31, 2016. The
decrease in interest expense resulted primarily from the exchanges of certain convertible notes for common stock.
Foreign
Currency Transaction Gain
. Foreign currency transaction gain was $58,153 for the year ended December 31, 2017, as compared
to a foreign currency transaction gain of $15,666 for the year ended December 31, 2016. The foreign currency transaction gain
relates to the $399,774 loan from SY Corporation Co., Ltd., formerly known as Samyang Optics Co. Ltd., made in June 2012, which
is denominated in the South Korean Won.
Net
Loss
. For the year ended December 31, 2017, the Company incurred a net loss of $4,291,483, as compared to a net loss of
$9,229,760 for the year ended December 31, 2016.
Dividends
on Series G 1.5% Convertible Preferred Stock
. There were no dividends on the Series G 1.5% Convertible Preferred Stock for
the year ended December 31, 2017, as compared to dividends of $1,165 for the year ended December 31, 2016. On April 17,
2016, all remaining previously unconverted outstanding shares of Series G 1.5% Convertible Preferred Stock were automatically
and mandatorily redeemed by conversion into shares of common stock at a conversion price of $1.0725 per share.
Net
Loss Attributable to Common Stockholders
. For the year ended December 31, 2017, the Company incurred a net loss attributable
to common stockholders of $4,291,483, as compared to a net loss attributable to common stockholders of $9,230,925 for the year
ended December 31, 2016.
Liquidity
and Capital Resources
The
Company’s 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 net losses
of $4,291,483 and $9,229,760 and negative operating cash flows of $697,009 and $1,328,684 for the fiscal years ended December
31, 2017 and 2016, respectively, had a stockholders’ deficiency of $4,355,384 at December 31, 2017, and expects to continue
to incur net losses and negative operating cash flows for at least the next few years. As a result, management has concluded that
there is substantial doubt about the Company’s ability to continue as a going concern, and the Company’s independent
registered public accounting firm, in its report on the Company’s consolidated financial statements for the year ended December
31, 2017, has expressed substantial doubt about the Company’s ability to continue as a going concern.
At
December 31, 2017, the Company had a working capital deficit of $4,373,443, as compared to a working capital deficit of $5,493,377
at December 31, 2016, reflecting an increase in working capital (a decrease in working capital deficit) of $1,119,934 for the
year ended December 31, 2017. The decrease in the working capital deficit during the year ended December 31, 2017 is comprised
primarily of a decrease in accrued compensation and related expenses of $1,465,259 arising primarily by the forgiveness described
above partially offset by increases in accounts payable and accrued expenses of $427,284, and a net decrease of other current
liabilities of $139,095 (inclusive of accrued interest), partially offset by net decrease of $11,827 in current prepaid expenses.
At
December 31, 2017, the Company had cash aggregating $84,902, as compared to $92,040 at December 31, 2016, reflecting a decrease
in cash of $7,138 for the year ended December 31, 2017. The decrease in cash at December 31, 2017 was primarily the result
of principal amounts of short-term notes repaid of $64,629 and $697,009 of cash used in operating activities, partially
offset by $ 754,500 of cash raised in financing activities.
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. Current management is continuing to address numerous aspects of the Company’s
operations and obligations, including, without limitation, debt obligations, financing requirements, intellectual property, licensing
agreements, legal and patent matters and regulatory compliance, and has continued to raise new debt and equity capital to fund
the Company’s business activities.
From
January 8, 2016 through June 30, 2016, the Company sold units comprised of one share of Common Stock and one Common Stock
Purchase Warrant to purchase two shares of Common Stock in a private placement (“1
st
2016 Unit
Offering”). The per unit purchase price was $7.2085 and the warrant exercise price is $7.93. The warrants are
exercisable until January 31, 2021. The warrants have a cashless exercise provision and certain “blocker”
provisions that prevent or postpone exercise if such exercise would cause the investor to own more than 4.99% of the shares
of Common Stock of the Company offer exercise. Gross proceeds were $307,985. In connection with the 1
st
2016 Unit
Offering, 43,003 shares of Common Stock were issued and 86,005 warrants to purchase Common Stock were issued. No fees were
paid to qualified referral sources in connection with the 1
st
2016 Unit Offering.
On
December 29, 2016 and December 30, 2016, the Company sold units comprised of one share of Common Stock and one Common Stock Purchase
Warrant to purchase one share of Common Stock in a private placement (“2
nd
2016 Unit Offering”) for gross
proceeds of $185,000. The per unit purchase price was $1.42. The warrant exercise price was $1.562 per share of Common Stock.
The warrants were exercisable until December 31, 2021. The warrants had a cashless exercise provision, “blocker” provisions
similar to those described above and may be redeemed or called by the Company for a price of $0.001 per share if the closing price
of the Company’s Common Stock is equal to or greater than 200% of the unit purchase price or $2.82 for five consecutive
trading days. The Company had the right to call or redeem these warrants several times since issuance but has chosen not to do
so. Investors in the 2
nd
2016 Unit Offering had an exchange right, that under certain circumstances permitted such
investors to exchange their investment in the 2
nd
2016 Unit Offering into subsequent financings until December 30,
2017 with an exchange ratio of 1.2 times the amount invested in the 2
nd
2016 Unit Offering and under certain circumstances,
a ratio of 1.4.
The
exchange right permitted the investors to exchange into a subsequent debt offering. The Company accounts for non-permanent equity
as a liability and such portion of that liability due or to be outstanding for one year or less as a current liability. The Company
determined that until the earlier of the completion of aggregate subsequent financings of at least $15 million or December 30,
2017, because the exchange right permitted an exchange into a subsequent debt instrument, this financing should be accounted for
as non-permanent equity and had therefore classified the total amount of the gross proceeds of the offering as a current liability
as of December 31, 2016. In 2017, all of the investors in the 2
nd
2016 Unit Offering exchanged into the 2
nd
2017 Unit Offering described below, which was an equity offering at which time the Company determined than any further
exchanges into anything other than a permanent equity offering was highly unlikely and reclassified the $185,000 from a current
liability to permanent equity. As of December 31, 2017, investors in the 2
nd
2016 Unit Offering had no further exchange
rights.
On March 10, 2017 and
March 28, 2017, the Company sold units to investors in the 1
st
2017 Unit Offering for aggregate gross proceeds of $350,000,
with each unit consisting of one share of the Company’s common stock and one common stock purchase warrant to purchase one
share of the Company’s common stock. Units were sold for $2.50 per unit and the warrants issued in connection with the units
were exercisable through December 31, 2021 at a fixed price $2.75 per share of the Company’s common stock. The warrants
contained a cashless exercise provision and certain blocker provisions preventing exercise if the investor would beneficially
own more than 4.99% of the Company’s outstanding shares of common stock as a result of such exercise. The warrants were
also subject to redemption by the Company at $0.001 per share upon ten (10) days written notice if the Company’s common
stock closed at 200% or more of the unit purchase price for any five (5) consecutive trading days. The investors in the offering
were not affiliates of the Company. Investors also received an unlimited number of piggy-back registration rights. Investors
also received an unlimited number of exchange rights, which were options and not obligations, to exchange such investor’s
entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting solely of
convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only
into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion of any number of subsequent
financings aggregating at least $15 million gross proceeds to the Company, or (ii) December 30, 2017. The dollar amount used to
determine the amount invested or exchanged into the subsequent financing was 1.2 times the amount of the original investment.
Under certain circumstances, the ratio might have been 1.4 instead of 1.2. The exchange right did not permit the investors to
exchange into a debt offering or into redeemable preferred stock, therefore, unlike the 2
nd
2016 Unit Offering, the
2017 Unit Offering resulted in the issuance of permanent equity.
The
Company evaluated whether the warrants or the exchange rights met criteria to be accounted for as a derivative in accordance with
Accounting Standard Codification Topic (ASC) 815 and determined that the derivative criteria were not met. Therefore, the Company
determined no bifurcation and separate valuation was necessary and that the warrants and exchange right should be accounted for
with the host instrument. The closing market prices of the Company’s common stock on March 10, 2017 and March 28, 2017 were
$4.05 and $3.80 respectively. In connection with this transaction, Aurora Capital LLC (“Aurora”) served as a placement
agent and earned $20,000 fees and 8,000 placement agent common stock warrants associated with the closing of 1
st
2017 Unit Offering. The fees were unpaid as of December 31, 2017 and have been accrued in accounts payable and accrued
expenses and charged against Additional paid-in capital as of March 31, 2017, June 30, 2017 and September 30, 2017 and December
31, 2017. The placement agent common stock warrants were valued at $27,648 and were accounted for in Additional paid-in capital
as of March 31, 2017 and remain valued at that amount as of December 31, 2017.
On
July 26, 2017, the Company’s Board approved the 2
nd
2017 Unit Offering, an offering of securities conducted via
private placement that, because of the terms of the 2
nd
2017 Unit Offering as compared to the terms of the 2
nd
2016 Unit offering as well as the 1
st
2017 Unit Offering, resulted in an exchange of all outstanding units
from each of the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering for new equity securities
of the Company into the 2
nd
2017 Unit Offering by all of the investors in the 2
nd
2016 Unit Offering and
all of the investors in the 1
st
2017 Unit Offering.
On
August 29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017,
December 21, 2017, December 22, 2017 and December 29, 2017 the Company sold units to investors in the 2
nd
2017 Unit
Offering for aggregate gross proceeds of $404,500, with each unit consisting of one share of the Company’s common stock
and one warrant to purchase one share of the Company’s common stock. Units were sold for $1.00 per unit and the warrants
issued in connection with the units are exercisable through September 29, 2022 at a fixed price $1.10 per share of the Company’s
common stock. The warrants contain a cashless exercise provision and certain blocker provisions preventing exercise if the investor
would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a result of such exercise.
The warrants are also subject to redemption by the Company at $0.001 per share upon ten (10) days written notice if the Company’s
common stock closes at 250% or more of the unit purchase price for any five (5) consecutive trading days. The investors in the
offering were not affiliates of the Company. Investors received an unlimited number of piggy-back registration rights. Investors
also received an unlimited number of exchange rights, which are options and not obligations, to exchange such investor’s
entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting solely of
convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only
into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion of any number of subsequent
financings aggregating at least $15 million gross proceeds to the Company, or (ii) December 30, 2017, and therefore have expired.
The dollar amount used to determine the amount invested or exchanged into the subsequent financing would have been 1.2 times the
amount of the original investment. Under certain circumstances, the ratio might have been 1.4 instead of 1.2. The exchange right
did not permit the investors to exchange into a debt offering or into redeemable preferred stock, therefore, unlike the 2
nd
2016 Unit Offering, the 2
nd
2017 Unit Offering resulted in the issuance of permanent equity.
The
Company evaluated whether the warrants or the exchange rights met criteria to be accounted for as a derivative in accordance with
Accounting Standard Codification Topic (ASC) 815, and determined that the derivative criteria were not met. Therefore, the Company
determined no bifurcation and separate valuation was necessary and the warrants and exchange right should be accounted for with
the host instrument. The closing market prices of the Company’s common stock on August 29, 2017, September 27, 2017, September
28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017, December 21, 2017, December 22, 2017 and December
29, 2017 were $1.00, $1.40, $1.40, $1.50, $0.80, $1.05, $1.45, $1.51, $1.45 and $1.14 respectively. There was no placement agent
and therefore no fees associated with the 2
nd
2017 Unit Offering.
The terms of the 2
nd
2017 Unit Offering, as compared to the terms of the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering,
were such that all of the units from each of the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering were
exchanged into securities of the 2
nd
2017 Unit Offering. Because the 1
st
2017 Unit Offering and the 2
nd
2017 Unit Offering were both originally accounted for as equity, a reclassification similar to the 2
nd
2016 Unit
Offering was not required.
The
shares of common stock and warrants in each of the private placements discussed above were offered and sold without registration
under the Securities Act of 1933, as amended (the “Securities Act”) 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. None of the shares of common
stock issued as part of the units, the warrants, the common stock issuable upon exercise of the warrants or any warrants issued
to a qualified referral source. have 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.
The
Company is continuing its efforts to raise additional capital in order to be able to pay its liabilities and fund its business
activities on a going forward basis and regularly evaluates various measures to satisfy the Company’s liquidity needs, including
developing agreements with collaborative partners and seeking to exchange or restructure some of the Company’s outstanding
securities. As a result of the Company’s current financial situation, the Company has limited access to external sources
of debt and equity financing. Accordingly, there can be no assurances that the Company will be able to secure additional financing
in the amounts necessary 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.
Operating
Activities
. For the year ended December 31, 2017, operating activities utilized cash of $697,009, as compared to utilizing
cash of $1,328,684 for the year ended December 31, 2016, to support the Company’s ongoing operations, including legal and
accounting fees and costs related to the preparation of financial statements and SEC filings, research and development activities,
patent fees and related legal costs, and settlement agreements.
Investing
Activities
. The Company did not generate cash from investing activities in 2017 or 2016.
Financing
Activities
. For the year ended December 31, 2017, financing activities generated cash of $689,871 comprised of $754,500 from
the sale of units comprised of common stock and warrants and which was partially offset by principal paid on short-term notes
of $64,629. For the year ended December 31, 2016, financing activities generated $494,985 from the sale of units comprised of
common stock and warrants, $762,240 from warrant exchanges, $155,200 from notes payable to officers, partially offset by cash
used to pay principal amounts of short-term notes payable of $39,602, cash paid in lieu of the issuance of fractional shares associated
with the reverse stock split of $1,298 and fees associated with financings of $4,000.
Principal
Commitments
Employment
Agreements
On
August 18, 2015, the Company entered into an employment agreement with Dr. James S. Manuso to be its new President and Chief Executive
Officer. In connection therewith, and in addition to other provisions, the Board of Directors of the Company awarded Dr. Manuso
stock options to purchase a total of 261,789 shares of common stock, of which options for 246,154 shares were granted pursuant
to the Company’s 2015 Plan and options for 15,635 shares were granted pursuant to the Company’s 2014 Plan. The stock
options vested 50% on August 18, 2015 (at issuance), 25% on February 18, 2016, and 25% on August 18, 2016, and will expire on
August 18, 2025. The exercise price of the stock options was established on the grant date at $6.4025 per share, which is equal
to the simple average of the most recent four full trading weeks, weekly Volume Weighted Average Prices (“VWAPs”)
of the Company’s common stock price immediately preceding the date of grant as reported by the OTC markets, as compared
to the closing market price of the Company’s common stock on August 18, 2015 of $7.02 per share. The aggregate grant date
fair value of these stock options calculated pursuant to the Black-Scholes option-pricing model was $1,786,707. Additional information
with respect to other provisions of the employment agreement is provided in the Company’s Consolidated Financial Statements
at Note 9.
On
August 18, 2015, the Company also entered into employment agreements with Dr. Arnold S. Lippa, its new Chief Scientific Officer,
Robert N. Weingarten, its Vice President and Chief Financial Officer, and Jeff E. Margolis, its Vice President, Treasurer and
Secretary. In connection therewith, and in addition to other provisions, the Board of Directors of the Company awarded to each
of those officers stock options to purchase a total of 30,769 shares of common stock pursuant to the Company’s 2015 Plan.
The stock options vested 25% on December 31, 2015, 25% on March 31, 2016, 25% on June 30, 2016, and 25% on September 30, 2016,
and will expire on August 18, 2022. The exercise price of the stock options was established on the grant date at $6.4025 per share,
which is equal to the simple average of the most recent four full trading weeks, weekly VWAPs of the Company’s common stock
price immediately preceding the date of grant as reported by the OTC Markets, as compared to the closing market price of the Company’s
common stock on August 18, 2015 of $7.0200 per share. The aggregate grant date fair value of these stock options calculated pursuant
to the Black-Scholes option-pricing model was $609,000. During the years ended December 31, 2016 and 2015, the Company recorded
charges to operations of $569,222 and $1,223,772, respectively, with respect to these stock option and the stock options issued
to Dr. Manuso described in the prior paragraph. Additional information with respect to other provisions of the employment agreement
is provided in the Company’s Consolidated Financial Statements at Note 9.
In
February 2017, Robert N. Weingarten resigned as the Company’s Vice President and Chief Financial Officer and resigned as
a member of the Company’s Board of Directors. The Board of Directors accepted Mr. Weingarten’s resignation and appointed
Mr. Margolis to the additional title of Chief Financial Officer. Other than the additional title and responsibilities, there were
no changes to Mr. Margolis’ compensation arrangements at that time. Mr. Weingarten remains a consultant to the Company.
Jeff
E. Margolis’ employment agreement was amended effective July 1, 2017 and he was named Chief Financial Officer (no longer
interim). The employment agreement amendment called for payment in three installments in cash of the $60,000 bonus granted on
June 30, 2015. A minimum of $15,000 was to be payable in cash as follows: (a) $15,000 payable in cash upon the next closing (after
July 1, 2017) of any financing in excess of $100,000 (b) $15,000 payable by the end of the following month assuming cumulative
closings (beginning with the closing that triggered (a)) in excess of $200,000 and (c) $30,000 payable in cash upon the next closing
of any financing in excess of an additional $250,000
.
The conditions of (a), (b) and (c) above
were met as of December 31, 2017, however Mr. Margolis has waived the Company’s obligation to make any payments of the cash
bonus until the Board of Directors of the Company determines that sufficient capital has been raised by the Company or is otherwise
available to fund the Company’s operations on an ongoing basis. Obligations through September 30, 2017 were forgiven by
Mr. Margolis as described below.
On
March 31, 2016, the Board of Directors of the Company awarded stock options for a total of 523,075 shares of common stock in various
quantities to twelve individuals who are members of management, the Company’s Scientific Advisory Board, independent members
of the Board of Directors, or outside service providers pursuant to the Company’s 2015 Plan. The stock options vested 25%
on each of March 31, 2016, June 30, 2016, September 30, 2016, and December 31, 2016, and will expire on March 31, 2021. The exercise
price of the stock options was established on the grant date at $7.3775 per share, which was the closing market price of the Company’s
common stock on such date. The aggregate grant date fair value of these stock options, as calculated pursuant to the Black-Scholes
option-pricing model, was $3,774,000. During the three months and nine months ended September 30, 2016, the Company recorded a
charge to operations of $844,650 and $2,686,800, respectively, with respect to these stock options.
On
September 12, 2016, the Company entered into an agreement for consulting services, which provided for the payment of a fee through
the grant of a non-qualified stock option to purchase a total of 2,608 shares of common stock pursuant to the Company’s
2015 Plan. The stock option was fully vested on the date of grant and will expire on September 12, 2021. The exercise price of
the stock option was established on the grant date at $5.7500 per share, which was the closing market price of the Company’s
common stock on the date of grant. The aggregate grant date fair value of the stock option, calculated pursuant to the Black-Scholes
option-pricing model, was $14,384, which was charged to operations on the date of grant.
On
January 17, 2017, the Board of Directors further increased the number of shares that may be issued under the 2015 Plan to 3,038,461
shares of the Company’s common stock. On December 9, 2017, the Board of Directors further increased the number of shares
that may be issued under the 2015 Plan to 6,985,260 shares of the Company’s common stock.
On
January 17, 2017, the Board of Directors of the Company awarded stock options for a total of 395,000 shares of Common Stock in
various quantities to seventeen individuals or their designees pursuant to the Company’s 2015 Plan. The individuals are
members of management, the Company’s Scientific Advisory Board, independent members of the Board of Directors or outside
service providers. The stock options vested 25% on the date of the grant, and will vest 50% on March 31, 2017 and 25% on June
30, 2017, and are exercisable for five years at $3.90 per share of Common Stock.
On
July 26, 2017, the Company granted Jeff E. Margolis, 25,000 non-qualified stock options from the 2015 Plan, all of which vested
by December 31, 2017. The options have an exercise price of $2.00 per share and expire on July 26, 2022.
On
July 28, 2017, the Board of Directors awarded 34,000 non-qualified stock options from the 2015 Plan to two consultants totaling.
The options have an exercise price of $1.35 per share of common stock and expire on July 28, 2022. All of these options were vested
by December 31, 2017.
On
December 9, 2017, the Company accepted offers from Dr. Arnold S. Lippa, Dr. James S. Manuso, Jeff E. Margolis, James E. Sapirstein,
Kathryn MacFarlane and Robert N. Weingarten (former Chief Financial Officer) pursuant to which such individuals would forgive
accrued compensation and related accrued expenses as of September 30, 2017 in the following amounts: $807,497; $878,360; $560,876;
$55,000; $55,000 and $200,350, respectively, for a total of $2,557,083. On the same date, the Board of Directors
of the Company granted to the same individuals, or designees of such individuals from the 2015 Plan, non-qualified stock options,
exercisable for 10 years with an exercise price of $1.45 per share of common stock, among other terms and features as follows:
559,595; 608,704; 388,687; 38,114; 38,114 and 138,842, respectively, for options exercisable into a total of 1,772,055
shares of common stock.
On
December 9, 2017, the Board of Directors of the Company awarded 100,000 non-qualified stock options from the 2015 Plan to Richard
Purcell, the Company’s Senior Vice President of Research and Development as a bonus. These options vested upon grant, have
an exercise price of $1.45 and are exercisable for 10 years.
Information
with respect to the issuance of common stock options in connection with the settlement of debt obligations and as payment for
consulting services is provided in the Company’s Consolidated Financial Statements at Note 5.
Information
with respect to common stock awards issued to officers and directors as compensation is provided above under “Common Stock.”
Information
with respect to the Black-Scholes variables used in connection with the evaluation of the fair value of stock-based compensation
is provided in the Company’s Consolidated Financial Statements at Note 2.
University
of Alberta License 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. The Company agreed to pay the University of Alberta a licensing fee and a patent issuance fee, which were paid, and
prospective payments consisting of a royalty on net sales, sublicense fee payments, maintenance payments and milestone payments.
The prospective maintenance payments commence on the enrollment of the first patient into the first Phase 2B clinical trial and
increase upon the successful completion of the Phase 2B clinical trial. As the Company does not at this time anticipate scheduling
a Phase 2B clinical trial, no maintenance payments are currently due and payable to the University of Alberta. In addition, no
other prospective payments are currently due and payable to the University of Alberta.
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 material terms of which were similar to the License Agreement between the parties that had been previously terminated
on March 21, 2013. The 2014 License Agreement became effective on September 18, 2014, 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 outstanding patent costs aggregating $15,840, and (iii) the assignment to the University of Illinois of rights
the Company held in certain patent applications, all of which conditions were fulfilled.
The
2014 License Agreement granted 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 of Illinois 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 OSA, the most common form of sleep apnea.
The
2014 License Agreement provides for various commercialization and reporting requirements commencing on June 30, 2015. In addition,
the 2014 License Agreement provides for various royalty payments, including a royalty on net sales of 4%, payment on sub-licensee
revenues of 12.5%, and a minimum annual royalty beginning in 2015 of $100,000, which is due and payable on December 31 of each
year beginning on December 31, 2015. The minimum annual royalty of $100,000 was paid as scheduled in December 2017 and 2016, respectively.
In the year after the first application for market approval is submitted to the FDA and until approval is obtained, the minimum
annual royalty will increase to $150,000. In the year after the first market approval is obtained from the FDA and until the first
sale of a product, the minimum annual royalty will increase to $200,000. In the year after the first commercial sale of a product,
the minimum annual royalty will increase to $250,000. The Company recorded a charge to operations of $100,000 with respect to
its 2017 minimum annual royalty obligation, which is included in research and development expenses in the Company’s consolidated
statement of operations for the year ended December 31, 2017.
The
2014 License Agreement also provides for certain one-time milestone payments. A payment of $75,000 is due within five days after
any one of the following: (a) dosing of the first patient with a product in a Phase 2 human clinical study anywhere in the world
that is not sponsored by the University of Illinois, (b) dosing of the first patient in a Phase 2 human clinical study anywhere
in the world with a low dose of dronabinol, or (c) dosing of the first patient in a Phase 1 human clinical study anywhere in the
world with a proprietary reformulation of dronabinol. A payment of $350,000 is due within five days after dosing of the first
patient with a product in a Phase 3 human clinical trial anywhere in the world. A payment of $500,000 is due within five days
after the first new drug application filing with the FDA or a foreign equivalent for a product. A payment of $1,000,000 is due
within 12 months after the first commercial sale of a product.
Research
Contract with the University of Alberta
On
January 12, 2016, the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of
ampakines at a variety of dosage and formulation levels in the potential treatment of Pompe Disease, apnea of prematurity and
spinal cord injury, as well as to conduct certain electrophysiological studies to explore the ampakine mechanism of action for
central respiratory depression. The Company agreed to pay the University of Alberta total consideration of approximately CAD$146,000
(approximately US$108,000), consisting of approximately CAD$85,000 (approximately US$63,000) of personnel funding in cash in four
installments during 2016, to provide approximately CAD$21,000 (approximately US$16,000) in equipment, to pay patent costs of CAD$20,000
(approximately US$15,000), and to underwrite additional budgeted costs of CAD$20,000 (approximately US$15,000). As of December
31, 2017, the Company had recorded amounts payable in respect to this Research Contract of US$16,207 (CAD$21,222) which amount
was paid in US dollars in January 2018. The conversion to US dollars above utilizes an exchange rate of approximately US$0.76
for every CAD$1.00.
The
University of Alberta received matching funds through a grant from the Canadian Institutes of Health Research in support of this
research. The Company will retain the rights to research results and any patentable intellectual property generated by the research.
Dr. John Greer, Ph.D., faculty member of the Department of Physiology, Perinatal Research Centre, and Women & Children’s
Health Research Institute at the University of Alberta, collaborated on this research. The studies were completed in 2016.
Duke
University Clinical Trial Agreement
On
January 27, 2015, the Company entered into a Clinical Study and Research Agreement (the “Agreement”) with Duke University
to develop and conduct a protocol for a program of clinical study and research at a total cost of $50,579, which was completed
in March 2015. On October 30, 2015, the Agreement was amended to provide for certain additional services related to the Company’s
Phase 2A clinical trial of CX1739. The commencement of this clinical trial was subject to resolution of two deficiencies raised
by the FDA in its clinical hold letter issued in November 2015, which were satisfactorily resolved in early 2016, as a result
of which the FDA removed the clinical hold on the Company’s IND for CX1739 on February 25, 2016, thus allowing for the initiation
of the clinical trial. During March 2016, upon receiving unconditional approval from the Institutional Review Board of the Duke
Clinical Research Unit, this Phase 2A clinical trial at Duke University School of Medicine was initiated. There were no direct
costs in 2017 with respect to this clinical trial.
The Company
incurred $602,642
of direct costs in 2016 with respect to this clinical trial, which was completed in 2016.
Sharp
Clinical Services, Inc. Agreement
On
August 31, 2015, the Company entered into an agreement with Sharp Clinical Services, Inc. to provide packaging, labeling, distribution
and analytical services for the Company with respect to CX1739. The Company incurred $28,467 and $83,081 of such services in 2017
and 2016, respectively.
Contractual
Obligations and Commitments
The
following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of
December 31, 2017, aggregating $1,340,350.
|
|
|
|
|
Payments
Due By Year
|
|
|
|
Total
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
Research
and development contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Clinical
trial agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
License
agreements
|
|
|
500,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Digital
media consulting agreement
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment
and consulting agreements (1)
|
|
|
820,350
|
|
|
|
820,350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,340,350
|
|
|
$
|
940,350
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
(1)
The payment of such amounts has been deferred indefinitely, as described above at “Employment Agreements”.
.
Off-Balance
Sheet Arrangements
At
December 31, 2017, the Company did not have any transactions, obligations or relationships that could be considered off-balance
sheet arrangements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Not
applicable for smaller reporting companies.
Item
8. Financial Statements and Supplementary Data
Our
financial statements and other information required by this item are set forth herein in a separate section beginning with the
Index to Consolidated Financial Statements on page F-1.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not
applicable.
Item
9A. Controls and Procedures
Disclosure
Controls and Procedures
The
Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed
in the reports that the Company files with the Securities and Exchange Commission (the “SEC”) under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that
such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and
Chief Financial Officer, to allow for timely decisions regarding required disclosures.
The
Company carried out an evaluation, under the supervision and with the participation of its management, consisting of its principal
executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company’s principal executive
officer and principal financial officer concluded that, as of the end of the period covered in this Annual Report on Form 10-K,
the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed
in reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is
accumulated and communicated to the Company’s management, consisting of the Company’s principal executive officer
and principal financial officer, to allow timely decisions regarding required disclosure.
The
Company failed to complete and file various periodic reports in 2012, 2013 and 2014 in a timely manner because the Company’s
accounting and financial staff had resigned by October 26, 2012 and its financial and accounting systems had been shut-down at
December 31, 2012. Current management, two of whom joined the Company in March 2013, has been focusing on developing replacement
controls and procedures that are adequate to ensure that information required to be disclosed in reports filed under the Exchange
Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to the
Company’s management to allow timely decisions regarding required disclosure. Current management has instituted a program
to reestablish the Company’s accounting and financial staff and install new accounting and internal control systems, and
has retained accounting personnel, established accounting and internal control systems, addressed the preparation of delinquent
financial statements, and worked diligently to bring current delinquent SEC filings as promptly as reasonably possible under the
circumstances. The Company is current in its SEC periodic reporting obligations, but as of the date of the filing of this Annual
Report on Form 10-K, the Company had not yet completed the process to establish adequate internal controls over financial reporting.
In February 2017, the Company’s Chief Financial Officer resigned and one of the existing officers was appointed Interim
Chief Financial Officer and subsequently, Chief Financial Officer. The Company has not completed its search for a permanent replacement.
The
Company’s management, consisting of its principal executive officer and principal financial officer, does not expect that
its disclosure controls and procedures or its internal controls will prevent all error or fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits of
controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. In addition,
as conditions change over time, so too may the effectiveness of internal controls. However, management believes that the financial
statements included in this Annual Report on Form 10-K fairly present, in all material respects, the Company’s financial
condition, results of operations and cash flows for the periods presented.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to ensure that material
information regarding our operations is made available to management and the board of directors to provide them reasonable assurance
that the published financial statements are fairly presented. There are limitations inherent in any internal control, such as
the possibility of human error and the circumvention or overriding of controls. As a result, even effective internal controls
can provide only reasonable assurance with respect to financial statement preparation. As conditions change over time so too may
the effectiveness of internal controls.
Our
management, consisting of our Chief Executive Officer and our Chief Financial Officer, has evaluated our internal control over
financial reporting as of December 31, 2017 based on the 2013 Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on this assessment, and taking into account
the operating structure of the Company as it has existed from October 2012 through December 2017, as well as the various factors
discussed herein, our management has concluded that material weaknesses in the Company’s internal control over financial
reporting existed as of December 31, 2017, as a result of which our internal control over financial reporting was not effective
at December 31, 2017.
Prior
management, which had essentially ceased business operations and was preparing to shut down the Company and cause it to file for
liquidation under Chapter 7 of the United States Bankruptcy Code, was replaced on March 22, 2013 in conjunction with the change
in control of the Board of Directors on such date. Since that date, new management has instituted a program to reestablish the
Company’s accounting and financial staff functions, as well as to install new accounting and internal control systems.
Within
the constraints of the Company’s limited financial resources, new management has retained accounting personnel, established
accounting and internal control systems, addressed the preparation of delinquent SEC financial filings, and filed all delinquent
SEC filings. As of the date of the filing of this Annual Report on Form 10-K, the Company has not yet completed this process of
reestablishing adequate internal controls over financial reporting.
This
Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s
independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s
report in this Annual Report on Form 10-K.
Changes
in Internal Control over Financial Reporting
The
Company’s management, consisting of its principal executive officer and principal financial officer, has determined that
no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f)
of the Securities Exchange Act of 1934) occurred during or subsequent to the fourth quarter of the year ended December 31, 2017
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting. The Company’s management has made this determination as of December 31, 2017 and 2016.
Item
9B. Other Information
None.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2017 and 2016
1.
Organization and Basis of Presentation
Organization
RespireRx
Pharmaceuticals Inc. (“RespireRx”) was formed in 1987 under the name Cortex Pharmaceuticals, Inc. to engage in the
discovery, development and commercialization of innovative pharmaceuticals for the treatment of neurological and psychiatric disorders.
On December 16, 2015, RespireRx filed a Certificate of Amendment to its Second Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware to amend its Second Restated Certificate of Incorporation to change its name from
Cortex Pharmaceuticals, Inc. to RespireRx Pharmaceuticals Inc.
In
August 2012, RespireRx acquired Pier Pharmaceuticals, Inc. (“Pier”), which is now its wholly-owned subsidiary.
Basis
of Presentation
The
consolidated financial statements are of RespireRx and its wholly-owned subsidiary, Pier (collectively referred to herein as the
“Company,” unless the context indicates otherwise), as of December 31, 2017 and for each of the years ended December
31, 2017 and 2016.
Reverse
Stock Split
On
August 16, 2016, at a special meeting of the stockholders of the Company, the stockholders approved an amendment to the Company’s
Second Restated Certificate of Incorporation (i) to effect, at the discretion of the Company’s Board of Directors, a three
hundred twenty five-to-one (325-to-1) reverse stock split of all of the outstanding shares of the Company’s common stock,
par value $0.001 per share, and (ii) to set the number of the Company’s authorized shares of stock at 70,000,000 shares,
consisting of 65,000,000 shares designated as common stock, par value $0.001 per share, and 5,000,000 shares designated as preferred
stock, par value $0.001 per share. On September 1, 2016, the Company filed a Certificate of Amendment to the Company’s Second
Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the approved amendment.
Pursuant
to the amendment, an aggregate of 191.068 fractional shares resulting from the reverse stock split were not issued, but were paid
out in cash (without interest or deduction) in an amount equal to the number of shares exchanged into such fractional share multiplied
by the average closing trading price of the Company’s common stock on the OTCQB for the five trading days immediately before
the Certificate of Amendment effecting the reverse stock split was filed with the Delaware Secretary of State ($6.7899 per share,
on a post reverse stock split basis) for an aggregate of $1,298.
All
share and per share amounts with respect to common stock presented herein have been retroactively restated to reflect the 325
to 1 reverse stock split as if it had been effected on the first day of the earliest period presented. Certain share amounts have
been rounded to whole shares in the process of recording the effect of the reverse stock split.
2.
Business
RespireRx
is developing dronabinol, a synthetic derivative of a naturally occurring substance in the cannabis plant, otherwise known as
Δ9-THC or Δ9-tetrahydrocannabinol, for the treatment of Obstructive Sleep Apnea (“OSA”), a serious respiratory
disorder that impacts an estimated 30 million people in the United States. OSA has been linked to increased risk for hypertension,
heart failure, depression, and diabetes, and has an annual economic cost of $162 billion according to the American Academy of
Sleep Medicine. There are no approved drug treatments for OSA.
RespireRx holds the exclusive
world-wide license to a family of patents for the use of cannabinoids, including dronabinol, in the treatment of sleep disordered
breathing from the University of Illinois at Chicago (“UIC”). In addition, RespireRx has several extensions and pending
applications that, if issued, will extend patent protection for over a decade. With approximately $5 million in funding from the
National Heart, Lung and Blood Institute of the National Institutes of Health, UIC recently completed a Phase 2B multi-center,
double-blind, placebo-controlled clinical trial of dronabinol in patients with OSA. Entitled
P
harmacotherapy of
A
pnea
with
C
annabimimetic
E
nhancement (“PACE”), this study replicated an earlier Phase 2A RespireRx
sponsored clinical trial and demonstrated statistically significant improvements in respiration, daytime sleepiness, and patient
satisfaction after administration of dronabinol. The results from PACE were published in the journal Sleep Vol. 41. No. 1, 2018.
RespireRx
believes that the most direct route to commercialization is to proceed directly to a Phase 3 pivotal trial using the currently
available dronabinol formulation (2.5, 5 and 10 mg gel caps) and to then commercialize a RespireRx branded dronabinol capsule
(“RBDC”).
There
are also numerous opportunities for reformulation of dronabinol to produce a second generation proprietary, branded product for
the treatment of OSA with an improved profile. Therefore, simultaneous with the development of the RBDC, RespireRx plans to develop
a proprietary dronabinol formulation to optimize the dose and duration of action for treating OSA.
RespireRx
initiated its dronabinol program when it acquired 100% of the issued and outstanding equity securities of Pier effective August
10, 2012 pursuant to an Agreement and Plan of Merger. Pier was formed in June 2007 (under the name SteadySleep Rx Co.) as a clinical
stage pharmaceutical company to develop a pharmacologic treatment for OSA and had been engaged in research and clinical development
activities.
Prior
to the merger, Pier 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, the primary
therapeutic end-point, and was observed to be safe and well tolerated.
Through
the merger, RespireRx gained access to a 2007 Exclusive License Agreement (as amended, the “Old License”) that Pier
had entered into with the University of Illinois on October 10, 2007. The Old License covered certain patents and patent applications
in the United States and other countries claiming the use of certain compounds referred to as cannabinoids, including dronabinol,
for the treatment of sleep-related breathing disorders (including sleep apnea).
Dronabinol
is a Schedule III, controlled generic drug with a relatively low abuse potential that is approved by the U.S. Food and Drug Administration
(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, the Company believes that it would only
require approval by the FDA of a 505(b)(2) new drug application, an efficient regulatory pathway.
The
Old License was terminated effective March 21, 2013, due to the Company’s failure to make a required payment. Subsequently,
current management opened negotiations with the University of Illinois, and as a result, the Company entered into a new license
agreement (the “2014 License Agreement”) with the University of Illinois on June 27, 2014, the material terms of which
were similar to the Old License.
Similar
to the Old License, the 2014 License Agreement grants the Company, among other provisions, exclusive rights: (i) to practice certain
patents and patent applications, as defined in the 2014 License Agreement, that are 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 2014 License Agreement, subject to the provisions of the 2014 License
Agreement. The Company is required under the 2014 License Agreement, among other terms and conditions, to pay the University of
Illinois a license fee, royalties, patent costs and certain milestone payments.
Since
its formation in 1987, RespireRx has been engaged in the research and clinical development of a class of proprietary compounds
known as ampakines, which act to enhance the actions of the excitatory neurotransmitter glutamate at AMPA glutamate receptors.
Several ampakines, in both oral and injectable form, are being developed by the Company for the treatment of a variety of breathing
disorders. In clinical studies, select ampakines have shown preliminary efficacy in central sleep apnea and in the control of
respiratory depression produced by opioids, without altering their analgesic effects. In animal models of orphan disorders, such
as Pompe Disease, spinal cord damage and perinatal respiratory distress, it has been demonstrated that certain ampakines improve
breathing function. The Company’s compounds belong to a new class of ampakines that do not display the undesirable side
effects previously reported in animal models of earlier generations.
The
Company owns patents and patent applications, or the rights thereto, for certain families of chemical compounds, including ampakines,
which claim the chemical structures, their actions as ampakines and their use in the treatment of various disorders. Patents claiming
a family of chemical structures, including CX1739 and CX1942, as well as their use in the treatment of various disorders extend
through at least 2028. Additional patents claiming a family of chemical structures, including CX717, as well as their use in the
treatment of various disorders expired in 2017 in the U.S. and will expire in 2018 internationally.
In
2011, RespireRx conducted a re-evaluation of its strategic focus and determined that clinical development in the area of respiratory
disorders, particularly sleep apnea and drug-induced respiratory depression, provided the most cost-effective opportunities for
potential rapid development and commercialization of RespireRx’s compounds. Accordingly, RespireRx narrowed its clinical
focus at that time and sidelined other avenues of scientific inquiry. This re-evaluation provided the impetus for RespireRx’s
acquisition of Pier in August 2012, as described above.
The
Company has continued to implement this strategic focus, notwithstanding a change in management in March 2013, and has continued
its efforts to obtain the capital necessary to fund the clinical activities. As a result of the Company’s scientific discoveries
and the acquisition of strategic, exclusive license agreements, management believes that the Company is now a leader in developing
drugs for respiratory disorders, particularly sleep apneas and drug-induced respiratory depression which is a form of apnea.
On
May 8, 2007, RespireRx entered into a license agreement, as subsequently amended, with the University of Alberta granting RespireRx
exclusive rights to method of treatment patents held by the University of Alberta claiming the use of ampakines for the treatment
of various respiratory disorders. These patents, along with RespireRx’s own patents claiming chemical structures, comprise
RespireRx’s principal intellectual property supporting RespireRx’s research and clinical development program in the
use of ampakines for the treatment of respiratory disorders. RespireRx has completed pre-clinical studies indicating that several
of its ampakines, including CX717, CX1739 and CX1942, were efficacious in treating drug induced respiratory depression caused
by opioids or certain anesthetics without offsetting the analgesic effects of the opioids 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, RespireRx has conducted a Phase 2A clinical study in which patients with sleep apnea were administered
CX1739, RespireRx’s lead clinical compound. The results suggested that CX1739 might have use as a treatment for central
sleep apnea (“CSA”) and mixed sleep apnea, but not obstructive OSA.
Going
Concern
The
Company’s 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 net losses
of $4,291,483 and $9,229,760 and had negative operating cash flows of $697,009 and $1,328,684 for the fiscal years ended December
31, 2017 and 2016, respectively. The Company also had a stockholders’ deficiency of $4,355,384 at December 31, 2017, and
expects to continue to incur net losses and negative operating cash flows for at least the next few years. As a result, management
has concluded that there is substantial doubt about the Company’s ability to continue as a going concern. In addition, the
Company’s independent registered public accounting firm, in its report on the Company’s consolidated financial statements
for the year ended December 31, 2017, has expressed 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 sustainable revenue. Management is continuing to address various aspects of the Company’s
operations and obligations, including, without limitation, debt obligations, financing requirements, intellectual property, licensing
agreements, legal and patent matters and regulatory compliance, and has continued to raise new debt and equity capital to fund
the Company’s business activities from both related and unrelated parties, as described at Notes 4 and 6.
The
Company is continuing efforts to raise additional capital in order to pay its liabilities, fund its business activities and underwrite
its research and development programs. The Company regularly evaluates various measures to satisfy the Company’s liquidity
needs, including the development of agreements with collaborative partners and, when necessary, the exchange or restructuring
of the Company’s outstanding securities. As a result of the Company’s current financial situation, the Company has
limited access to external sources of debt and equity financing, and has recently utilized short-term borrowings from its Chief
Executive Officer and its Chief Scientific Officer to fund operations, although there can be no assurances that such borrowings
will continue to be available. Accordingly, there can be no assurances that the Company will be able to secure additional financing
in the amounts necessary to fund its operating and debt service requirements. If the Company is unable to access sufficient cash
resources on a timely basis, the Company may be forced to reduce or suspend operations indefinitely, or to discontinue operations
entirely and liquidate.
3.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements are prepared in accordance with United States generally accepted accounting principles
(“GAAP”) and include the financial statements of RespireRx and its wholly-owned subsidiary, Pier. Intercompany balances
and transactions have been eliminated in consolidation.
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. Significant estimates
include, among other things, accounting for potential liabilities, and the assumptions used in valuing stock-based compensation
issued for services. Actual amounts may differ from those estimates.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents.
The Company limits its exposure to credit risk by investing its cash with high quality financial institutions. The Company’s
cash balances may periodically exceed federally insured limits. The Company has not experienced a loss in such accounts to date.
Cash
Equivalents
The
Company considers all highly liquid short-term investments with maturities of less than three months when acquired to be cash
equivalents.
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value of financial instruments 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.
The
carrying amount of financial instruments (consisting of cash, cash equivalents, advances on research grants and accounts payable
and accrued expenses) is considered by the Company to be representative of the respective fair values of these instruments due
to the short-term nature of those instruments. With respect to the note payable to SY Corporation and the convertible notes payable,
management does not believe that the credit markets have materially changed for these types of borrowings since the original borrowing
date.
Deferred
Financing Costs
Costs
incurred in connection with ongoing debt and equity financings, including legal fees, are deferred until the related financing
is either completed or abandoned.
Costs
related to abandoned debt or equity financings are charged to operations in the period of abandonment. Costs related to completed
debt financings are presented as a direct deduction from the carrying amount of the related debt liability (see “Capitalized
Financing Costs” below). Costs related to completed equity financings are charged directly to additional paid-in capital.
Capitalized
Financing Costs
The
Company presents debt issuance costs related to a debt liability in its consolidated balance sheet as a direct deduction from
the carrying amount of that debt liability, consistent with the presentation for debt discounts.
Series
G 1.5% Convertible Preferred Stock
The
shares of Series G 1.5% Convertible Preferred Stock (“Series G Preferred Stock”) (including accrued dividends) issued
in 2014 were mandatorily convertible into common stock at a fixed conversion rate on April 17, 2016 (if not converted earlier)
and provided no right to receive a cash payment. There were no shares of Series G Preferred Stock outstanding at any time in 2017.
There were $1,165 of accrued dividends in respect to the Series G Preferred Stock for the year ended December 31, 2016. All Series
G Preferred Stock, including accrued dividends, that had not been earlier converted, was mandatorily converted to the Company’s
common stock, par value $0.001 on April 17, 2016.
Convertible
Notes Payable
Original
Issuance of Notes and Warrants
The
convertible notes sold to investors in 2014 and 2015, which aggregated a total of $579,500, had a fixed interest
rate of 10% per annum and are convertible into common stock at a fixed price of $11.3750 per share. The convertible notes have
no reset rights or other protections based on subsequent equity transactions, equity-linked transactions or other events. The
warrants to purchase 50,945 shares of common stock issued in connection with the sale of the convertible notes were exercisable
at a fixed price of $11.3750 per share, provided no right to receive a cash payment, and included no reset rights or other protections
based on subsequent equity transactions, equity-linked transactions or other events. The Company determined that there were no
embedded derivatives to be identified, bifurcated and valued in connection with this financing.
The
maturity date of the notes was extended to September 15, 2016 and included the issuance of 27,936 additional warrants to purchase
common stock, exercisable at $11.375 per share of common stock.
Note
Exchange Agreements
During
April and May 2016, the Company entered into Note Exchange Agreements with certain note holders, including one then non-officer/director
affiliate, as described below, representing an aggregate of $303,500 of principal amount of the convertible notes (out of a total
of $579,500 of original principal amount of the convertible notes payable). The Note Exchange Agreements were substantially similar
and provided for the note holders to exchange their notes, original warrants and new warrants (collectively, the
“Exchanged Securities”), plus cash, in exchange for shares of the Company’s common stock. In the aggregate,
$344,483 of principal amount (which included accrued interest of $40,993) of the convertible notes, original warrants to
purchase 26,681 shares of the Company’s common stock and New Warrants to purchase 14,259 shares of the Company’s common
stock, plus an aggregate of $232,846 in cash, were exchanged for 101,508 shares of the Company’s common stock, with a total
market value of $631,023 (average $6.2075 per share), which resulted in a credit to total stockholders’ deficiency of $577,329.
All of the Exchanged Securities were cancelled as a result of the respective exchange transactions.
Among
the executed Note Exchange Agreements, the Company entered into one Note Exchange Agreement with a then non-officer/director affiliate
effective May 4, 2016 (the financial information with respect thereto is included in the summary paragraph presented above), pursuant
to which this then affiliate exchanged $28,498 of principal amount (which included accrued interest of $3,498) of the convertible
notes, original warrants to purchase 2,198 shares of the Company’s common stock and New Warrants to purchase 1,178 shares
of the Company’s common stock, plus $19,200 in cash, in return for 8,386 shares of the Company’s common stock.
In
this transaction, the exchanging note holders agreed to exchange their convertible notes (including accrued interest) into common
stock at a 50% discount to the conversion rate ($11.3750 per share) provided for by the terms of the convertible notes, if they
also exchanged all of their warrants associated with the convertible notes, plus paid cash equal to a 50% discount to the exercise
price ($11.3750 per share). For accounting purposes, the transactions have been treated as if (i) the participants had converted
the convertible notes (which included accrued but unpaid interest of $40,993) at a conversion price reduced from $11.3750 to $5.6875
per share, and that such conversions in the aggregate resulted in the issuance of an aggregate of 60,568 shares of common stock,
and (ii) the participants had exercised their original warrants to purchase an aggregate of 26,681 shares of common stock and
the New Warrants to purchase an aggregate of 14,259 shares of common stock, all at an exercise price reduced from $11.3750 to
$5.6875 per share, and that such exercise of the warrants generated an aggregate cash payment to the Company of $232,846 and resulted
in the issuance of an aggregate of 40,940 shares of common stock. In connection with the exchange of the convertible notes, original
warrants, New Warrants and the payment of cash, a total of 101,508 shares of common stock in the aggregate were issued. The closing
market price of the Company’s common stock during the period that these exchange transactions were entered into ranged from
$5.8500 to $7.7675 per share.
The
Company reviewed the guidance in ASC 470-20-40-13 through 17, Recognition of Expense Upon Conversion, and in ASC 470-20-40-26,
Induced Conversions. Pursuant to this accounting guidance, for those convertible note holders accepting the Company’s exchange
offer, the Company evaluated the fair value of the incremental consideration paid to induce the convertible note holders to exchange
their convertible notes for equity (i.e., 30,284 shares of common stock), based on the closing market price of the Company’s
common stock on the date of each transaction, and recorded a charge to operations of $188,274.
The
Company evaluated the warrants exchanged in conjunction with the Note Exchange Agreements. The Company calculated the fair value
of the warrants exchanged (consisting of the warrants issued in conjunction with the original issuance of the convertible notes)
as if the warrants were modified immediately before the theoretical warrant modification and immediately after such warrant modification.
As the fair value of the warrants immediately after the modifications was less than the fair value of the warrants immediately
before the modifications (both amounts calculated pursuant to the Black-Scholes option-pricing model), the Company did not record
any accounting entry with respect to the warrant exchange transactions.
The
fair value of the warrants subject to the Note Exchange Agreements was estimated using the Black-Scholes option-pricing model
utilizing the following assumptions:
|
|
Before
Warrant
Modifications
|
|
|
After
Warrant
Modifications
|
|
Exercise
price per warrant
|
|
$
|
11.3750
|
|
|
$
|
5.6875
|
|
Stock price
|
|
|
$
5.8500 to $7.5400
|
|
|
|
$
5.8500 to $7.5400
|
|
Risk-free
interest rate
|
|
|
0.23
|
%
|
|
|
0.23
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
201.59
|
%
|
|
|
201.59
|
%
|
Expected
life
|
|
|
4.4
to 4.5 months
|
|
|
|
0
months
|
|
2015
Unit Offering
Units
sold to investors on August 28, 2015, September 28, 2015 and November 2, 2015 were comprised of one share of the Company’s
common stock and one common stock purchase warrant to purchase two additional shares of the Company’s common stock. Units
were sold for $6.83475 per unit and the warrants issued in connection with the units were exercisable at a fixed price $6.83475
per share of the Company’s common stock. The warrants provided no right to receive a cash payment and included no reset
rights or other protections based on subsequent equity transactions, equity-linked transactions or other events. The Company determined
that there were no embedded derivatives to be identified, bifurcated and valued in connection with this unit financing. The aggregate
gross proceeds of this unit financing were $1,194,710.
The
closing market prices of the Company’s common stock on the transaction closing dates of August 28, 2015, September 28, 2015
and November 2, 2015 were $12.50, $8.1169 and $8.1169 respectively compared to the fixed unit price per unit and warrant exercise
price per share of $6.83475.
Unit
Exchange Agreements
During
April and May 2016, the Company entered into Unit Exchange Agreements with certain warrant holders, including two affiliates,
one of whom was Dr. Manuso, and the other of whom was then a non-officer/director affiliate, both as described below. The Unit
Exchange Agreements were substantially similar, and provided for the warrant holders to exchange (i) existing warrants to purchase
an aggregate of 217,188 shares of the Company’s common stock (which were cancelled as a result of the respective exchange
transactions), plus (ii) an aggregate of $529,394 in cash, in return for (i) an aggregate of 108,594 shares of the Company’s
common stock, and (ii) new warrants to purchase an aggregate of 108,594 shares of the Company’s common stock. The new warrants
have the same expiration date as the original warrants (September 30, 2020) and may be exercised for cash or on a cashless basis
at $4.8750 per share.
Among
the executed Unit Exchange Agreements, the Company entered into a Unit Exchange Agreement with Dr. Manuso effective April 6, 2016
(the financial information with respect thereto is included in the summary paragraph presented above), pursuant to which Dr. Manuso
exchanged a warrant to purchase 73,156 shares of the Company’s common stock that was originally issued to him in the Company’s
August 28, 2015 unit offering (which warrant was cancelled as a result of the exchange transaction), plus $178,317 in cash, in
return for 36,578 shares of the Company’s common stock and the issuance of a new warrant to purchase 36,578 shares of the
Company’s common stock. The new warrant has the same expiration date as the original warrant (September 30, 2020) and may
be exercised for cash or on a cashless basis at $4.8750 per share. The closing market price of the Company’s common stock
on April 6, 2016 was $7.7675 per share.
Among
the executed Unit Exchange Agreements, the Company also entered into Unit Exchange Agreements (which are included in the summary
paragraph above) with a then non-officer/director affiliate (and his affiliate) effective May 4, 2016 (the financial information
with respect thereto is included in the summary paragraph presented above), pursuant to which this then affiliate exchanged warrants
to purchase 88,132 shares of the Company’s common stock that were originally issued to the then affiliate in the Company’s
August 28, 2015 unit offering (which were cancelled as a result of the exchange transaction), plus $214,822 in cash, in return
for 44,066 shares of the Company’s common stock and the issuance of new warrants to purchase 44,066 shares of the Company’s
common stock. The new warrants have the same expiration date as the original warrants (September 30, 2020) and may be exercised
for cash or on a cashless basis at $4.8750 per share. The closing market price of the Company’s common stock on May 4, 2016
was $5.8500 per share.
In
this transaction, exchanging warrant holders who received their warrants in any of the three closings of the Company’s 2015
unit offering agreed to exchange their warrants associated with such financing, plus paid cash equal to a reduced exercise price
per share ($4.8750 per share) for 50% of such warrants, with 50% of the warrants replaced with similar warrants with the same
term at a reduced exercise price. For accounting purposes, the transactions have been treated as if (i) participants exercised
one-half of the existing warrants entitling them to purchase an aggregate of 217,188 shares of the Company’s common stock
that were originally issued to them in the Company’s unit offering, with closings on August 28, 2015, September 28, 2015
and November 2, 2015 (i.e., warrants to purchase 108,594 shares of common stock), at an exercise price reduced from $6.8348 to
$4.8750 per share, and (ii) the other one-half of the original warrants were cancelled. The Unit Exchange Agreements also provided
for the Company to issue new warrants to the participants to purchase an aggregate of 108,594 shares of common stock. The new
warrants have the same expiration date as the original warrants (September 30, 2020) and may be exercised for cash or on a cashless
basis at $4.8750 per share. For accounting purposes, the transaction was treated as if the warrant exercise price for all of the
warrants was reduced from $6.8348 to $4.8750 per share, in exchange for which 50% of the warrants were exercised for cash at the
reduced exercise price, and the remaining 50% of the warrants continued to remain outstanding through September 30, 2020 and gained
a cashless exercise provision. The closing market price of the Company’s common stock during the period that these exchange
transactions were entered into ranged from $5.8500 to $7.7675 per share.
The
Company evaluated the warrants exchanged in conjunction with the Unit Exchange Agreements. The Company calculated the fair value
of the warrants exchanged as if the warrants were modified immediately before the theoretical warrant modification and immediately
after such warrant modification. As the fair value of the warrants immediately after the modifications was less than the fair
value of the warrants immediately before the modifications (both amounts calculated pursuant to the Black-Scholes option-pricing
model), the Company did not record any accounting entry with respect to the warrant exchange transactions.
The
fair value of the warrants subject to the Unit Exchange Agreements was estimated using the Black-Scholes option-pricing model
utilizing the following assumptions:
|
|
Before
Warrant
Modifications
|
|
|
After
Warrant
Modifications
|
|
Exercise
price per warrant
|
|
$
|
6.8348
|
|
|
$
|
4.8750
|
|
Stock price
|
|
|
$
5.8500 to $7.7675
|
|
|
|
$
5.8500 to $7.7675
|
|
Risk-free
interest rate
|
|
|
1.12
|
%
|
|
|
0.23
% and 1.12
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
201.59
|
%
|
|
|
201.59
|
%
|
Expected
life
|
|
|
4.4
to 4.5 years
|
|
|
|
0
years to 4.5 years
|
|
1
st
2016 Unit Offering
Units
were sold to investors from January 8, 2016 through June 30, 2016. These units were comprised of one share of the Company’s
common stock and one common stock purchase warrant to purchase two additional shares of the Company’s common stock. Units
were sold for $7.2085 per unit and the warrants issued in connection with the units were exercisable at a fixed price $7.93 per
share of the Company’s common stock. The warrants provided no right to receive a cash payment and included no reset rights
or other protections based on subsequent equity transactions, equity-linked transactions or other events. The warrants contained
a cashless exercise provision and certain blocker provisions preventing exercise during periods of time when the investor would
beneficially own more than 4.99% of the Company’s outstanding shares of common stock if such exercise were to occur. The
Company determined that there were no embedded derivatives to be identified, bifurcated and valued in connection with this unit
financing. The aggregate gross proceeds of this unit financing were $307,985.
The
closing market prices of the Company’s common stock on the transaction closing dates ranging from January 8, 2016 through
June 30, 2016, ranged from a low of $3.4416 on February 9, 2016 to a high of $9.7403 on February 29, 2016.
2
nd
2016 Unit Offering
On
December 29, 2016 and December 30, 2016, the Company sold units to investors for aggregate gross proceeds of $185,000, comprised
of one share of the Company’s common stock and one common stock purchase warrant to purchase one share of the Company’s
common stock. Units were sold for $1.42 per unit and the warrants issued in connection with the units were exercisable through
December 31, 2021 at a fixed price $1.562 per share of the Company’s common stock. The warrants contained a cashless exercise
provision and certain blocker provisions preventing exercise if the investor would beneficially own more than 4.99% of the Company’s
outstanding shares of common stock as a result of such exercise. The warrants were also subject to redemption by the Company at
$0.001 per share upon ten (10) days written notice if the Company’s common stock closes at 200% or more of the unit purchase
price for any five (5) consecutive trading days. The investors were not affiliates of the Company. Investors received an
unlimited number of piggy-back registration rights. The investors also received an unlimited number of exchange rights
to exchange such investor’s entire investment (and not less than the entire investment) into subsequent offerings of the
Company until the earlier of: (i) the completion of any number of subsequent financings aggregating at least $15 million gross
proceeds to the Company, or (ii) December 30, 2017. The dollar amount used to determine the amount invested or exchanged into
the subsequent financing was 1.2 times the amount of the original investment. Under certain circumstances, the ratio might have
been 1.4 instead of 1.2. The Company evaluated whether the warrants or the exchange rights met criteria to be accounted for as
a derivative in accordance with Accounting Standard Codification (ASC) 815 and determined that the derivative criteria were not
met. Therefore, the Company determined no bifurcation and separate valuation was necessary and that the warrants and exchange
right should be accounted for with the host instrument. The Company then looked to how the host instrument should be classified
and determined that it could not, at that time, be classified as permanent equity as there was a potential that the Unit investment
amount could be exchanged for debt (convertible or otherwise) or for redeemable preferred stock. Since the exchange right expired
within one year, the Company concluded that the Unit investment would be appropriately classified as a current liability. The
closing market prices of the Company’s common stock on December 29, 2016 and December 30, 2016 were $2.85 and $2.80 respectively.
1
st
2017 Unit Offering
On
March 10, 2017 and March 28, 2017, the Company sold units to investors for aggregate gross proceeds of $350,000, with each unit
consisting of one share of the Company’s common stock and one common stock purchase warrant to purchase one share of the
Company’s common stock (the “1
st
2017 Unit Offering”). Units were sold for $2.50 per unit and the
warrants issued in connection with the units were exercisable through December 31, 2021 at a fixed price $2.75 per share of the
Company’s common stock. The warrants contained a cashless exercise provision and certain blocker provisions preventing exercise
if the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a result of
such exercise. The warrants were also subject to redemption by the Company at $0.001 per share upon ten (10) days written notice
if the Company’s common stock closes at 200% or more of the unit purchase price for any five (5) consecutive trading days.
The investors were not affiliates of the Company. Investors received an unlimited number of piggy-back registration rights. Investors
also received an unlimited number of exchange rights, which were options and not obligations, to exchange such investor’s
entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting solely of
convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only
into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion of any number of subsequent
financings aggregating at least $15 million gross proceeds to the Company, or (ii) December 30, 2017. The dollar amount used to
determine the amount invested or exchanged into the subsequent financing was 1.2 times the amount of the original investment.
Under certain circumstances, the ratio might have been 1.4 instead of 1.2. The exchange right did not permit the investors to
exchange into a debt offering or into redeemable preferred stock, therefore, unlike the 2
nd
2016 Unit Offering, the
2017 Unit Offering resulted in the issuance of permanent equity. The Company evaluated whether the warrants or the exchange rights
met criteria to be accounted for as a derivative in accordance with Accounting Standard Codification Topic (ASC) 815 and determined
that the derivative criteria were not met. Therefore, the Company determined no bifurcation and separate valuation was necessary
and that the warrants and exchange right should be accounted for with the host instrument. The closing market prices of the Company’s
common stock on March 10, 2017 and March 28, 2017 were $4.05 and $3.80 respectively. In connection with this transaction, Aurora
Capital LLC (“Aurora”) served as a placement agent and earned $20,000 fees and 8,000 placement agent common stock
warrants associated with the closing of 1
st
2017 Unit Offering. The fees were unpaid as of December 31, 2017 and have
been accrued in accounts payable and accrued expenses and charged against Additional paid-in capital as of March 31, 2017, June
30, 2017, September 30, 2017 and December 31, 2017. The placement agent common stock warrants were valued at $27,648 and
were accounted for in Additional paid-in capital as of March 31, 2017 and remain valued at that amount as of December 31, 2017.
For additional information see Note 6.
On
July 26, 2017, the Company’s Board approved an offering of securities conducted via private placement (the “2
nd
2017 Unit Offering” discussed below) that, because of the terms of the 2
nd
2017 Unit Offering as compared
to the terms of the 2
nd
2016 Unit offering and the 1
st
2017 Unit Offering, resulted in an exchange
of all of the units from the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering into equity
securities of the Company in the 2
nd
2017 Unit Offering by all of the investors in the 2
nd
2016 Unit Offering and all of the investors in the 1
st
2017 Unit Offering. Because all of the investors
in the 2
nd
2016 Unit Offering exchanged their units into the 2
nd
2017 Unit Offering the current non-permanent
equity liability as of December 31, 2016 has been reclassified in 2017 as permanent equity capital. Because the 1
st
2017 Unit Offering and the 2
nd
2017 Unit Offering were both originally accounted for as equity, a reclassification
similar to the one effected with respect to the 2
nd
2016 Unit Offering was not required.
2
nd
2017 Unit Offering
On
August 29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017,
December 21, 2017, December 22, 2017 and December 29, 2017 the Company sold units to investors in the 2
nd
2017
u
nit
o
ffering for aggregate gross proceeds of $404,500, with each unit consisting
of one share of the Company’s common stock and one common stock purchase warrant to purchase one share of the Company’s
common stock. Units were sold for $1.00 per unit and the warrants issued in connection with the units are exercisable through
September 29, 2022 at a fixed price $1.10 per share of the Company’s common stock. The warrants contain a cashless
exercise provision and certain blocker provisions preventing exercise if the investor would beneficially own more than 4.99% of
the Company’s outstanding shares of common stock as a result of such exercise. The warrants are also subject to redemption
by the Company at $0.001 per share upon ten (10) days written notice if the Company’s common stock closes at 250% or more
of the unit purchase price for any five (5) consecutive trading days. Investors were non-affiliated purchasers. Investors also
received an unlimited number of piggy-back registration rights. Investors received an unlimited number of exchange rights,
which are options and not obligations, to exchange such investor’s entire investment (and not less than the entire investment)
into one or more subsequent equity financings (consisting solely of convertible preferred stock or common stock or units containing
preferred stock or common stock and warrants exercisable only into preferred stock or common stock) that would be considered as
“permanent equity” under United States Generally Accepted Accounting Principles and the rules and regulations of the
United States Securities and Exchange Commission, and therefore classified as stockholders’ equity, and excluding any form
of debt or convertible debt (each such financing a “Subsequent Equity Financing” as in the 1
st
2017 Unit
Offering). These exchange rights were effective until the earlier of: (i) the completion of any number of subsequent financings
aggregating at least $15 million gross proceeds to the Company, or (ii) December 30, 2017, and have therefore expired.
The dollar amount used to determine the amount invested or exchanged into the subsequent financing would have been 1.2 times the
amount of the original investment. Under certain circumstances, the ratio might have been 1.4 instead of 1.2. The exchange right
did not permit the investors to exchange into a debt offering or into redeemable preferred stock, therefore, unlike the 2
nd
2016 Unit Offering, the 2
nd
2017 Unit Offering resulted in the issuance of permanent equity. All exchange rights
have expired as of December 30, 2017. The Company evaluated whether the warrants or the exchange rights met criteria to be accounted
for as a derivative in accordance with Accounting Standard Codification Topic (ASC) 815, and determined that the derivative criteria
were not met. Therefore, the Company determined no bifurcation and separate valuation was necessary and that the warrants and
exchange right should be accounted for with the host instrument. The closing market prices of the Company’s common stock
on August 29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13,
2017, December 21, 2017, December 22, 2017 and December 29, 2017 were $1.00, $1.40, $1.40, $1.50, $0.80, $1.05, $1.45, $1.51,
$1.45 and $1.14, respectively. There was no placement agent and therefore no fees associated with the 2
nd
2017
Unit Offering. For additional information see Note 6.
The
terms of the 2
nd
2017 Unit Offering, as compared to the terms of the 2
nd
2016 Unit Offering and the
1
st
2017 Unit Offering, resulted in an exchange of all of the units from each of the 2
nd
2016 Unit Offering
and the 1
st
2017 Unit Offering into equity securities of the 2
nd
2017 Unit Offering. Because the 1
st
2017 Unit Offering and the 2
nd
2017 Unit Offering were both originally accounted for as equity, a reclassification
similar to the 2
nd
2016 Unit Offering was not required.
Equipment
Equipment
is recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which range from three to five
years.
Long-Term
Prepaid Insurance
Long-term
prepaid insurance represents the premium paid in March 2014 for directors and officers insurance tail coverage, which is being
amortized on a straight-line basis over the policy period of six years. The amount amortizable in the ensuing twelve-month period
is recorded as a current asset in the Company’s consolidated balance sheet at each reporting date.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets, including long-term prepaid insurance, for impairment whenever events or changes in circumstances
indicate that the total amount of an asset may not be recoverable, but at least annually. 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 has not deemed any long-lived assets as impaired at December 31, 2017.
Stock-Based
Compensation
The
Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Board members and consultants
for services rendered. Such issuances vest and expire according to terms established at the issuance date of each grant.
The
Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for
equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock-based
payments to Scientific Advisory Board members and consultants by determining the value of the stock compensation based upon the
measurement date at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary
performance to earn the equity instruments is complete.
Stock
grants, which are generally subject to time-based vesting, are measured at the grant date fair value and charged to operations
ratably over the vesting period.
Stock
options granted to members of the Company’s Scientific Advisory Board and to outside consultants are revalued each reporting
period until vested to determine the amount to be recorded as an expense in the respective period. As the stock options vest,
they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the
value on the date of vesting.
The
fair value of stock options granted as stock-based compensation is determined utilizing the Black-Scholes option-pricing model,
and is affected by several variables, the most significant of which are the life of the equity award, the exercise price of the
stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common
stock over the term of the equity award. Estimated volatility is based on the historical volatility of the Company’s common
stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The fair market value
of common stock is determined by reference to the quoted market price of the Company’s common stock.
Stock
options and warrants issued to non-employees as compensation for services to be provided to the Company or in settlement of debt
are accounted for based upon the fair value of the services provided or the estimated fair value of the stock option or warrant,
whichever can be more clearly determined. Management uses the Black-Scholes option-pricing model to determine the fair value of
the stock options and warrants issued by the Company. The Company recognizes this expense over the period in which the services
are provided.
For
stock options requiring an assessment of value during the year ended December 31, 2017, the fair value of each stock option award
was estimated using the Black-Scholes option-pricing model using the following assumptions:
Risk-free
interest rate
|
|
1.89%
to 2.20
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
132.87%
to 184.92
|
%
|
Expected
life
|
|
|
4.55
to 5 years
|
|
For
stock options granted with a 10 year life, all of which vested immediately, the simple method of estimating the option life, which
is the of the sum of the vesting period and the term of the option divided by 2 was used and resulted in the use of a 5 year estimated
life when using the Black-Scholes option-pricing model.
For
stock options requiring an assessment of value during the year ended December 31, 2016, the fair value of each stock option award
was estimated using the Black-Scholes option-pricing model using the following assumptions:
Risk-free
interest rate
|
|
0.87%
to 1.93
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
173.87%
to 202.51
|
%
|
Expected
life
|
|
|
3.9
to 5 years
|
|
The
Company recognizes the fair value of stock-based compensation in general and administrative costs and in research and development
costs, as appropriate, in the Company’s consolidated statements of operations. The Company issues new shares of common stock
to satisfy stock option and warrant exercises. There were no stock options exercised during the years ended December 31, 2017
and 2016.
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.
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.
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 anticipates
it will be able to utilize these tax attributes.
As
of December 31, 2017, the Company did not have any unrecognized tax benefits related to various federal and state income tax matters
and does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The
Company is subject to U.S. federal income taxes and income taxes of various state tax jurisdictions. As the Company’s net
operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions
in which the Company currently operates or has operated in the past.
The
Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.
The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority
as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits
of the position are recognized. As of December 31, 2017, the Company had not recorded any liability for uncertain tax positions.
In subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income
tax expense.
Foreign
Currency Transactions
The
note payable to SY Corporation, which is denominated in a foreign currency (the South Korean Won), is translated into the Company’s
functional currency (the United States Dollar) at the exchange rate on the balance sheet date. The foreign currency exchange gain
or loss resulting from translation is recognized in the related consolidated statements of operations.
Research
Grants
The
Company recognizes revenues from research grants as earned based on the percentage-of-completion method of accounting and issues
invoices for contract amounts billed based on the terms of the grant agreement. Amounts recorded under research grants in excess
of amounts earned are classified as unearned grant revenue liability in the Company’s consolidated balance sheet. Grant
receivable reflects contractual amounts due and payable under the grant agreement. Payments of grants receivable
are based on progress reports provided to the grant provider by the Company.
Research
and Development
Research
and development costs include compensation paid to management directing the Company’s research and development activities,
and fees paid to consultants and outside service providers and organizations (including research institutes at universities),
patent fees and costs, and other expenses relating to the acquisition, design, development and clinical testing of the Company’s
treatments and product candidates.
Research
and development costs incurred by the Company under research grants are expensed as incurred over the life of the underlying contracts,
unless the terms of the contract indicate that a different expensing schedule is more appropriate.
The
Company reviews the status of its research and development contracts on a quarterly basis.
On
May 6, 2016, the Company made an advance payment to Duke University with respect to the Phase 2A clinical trial of CX1739. At
December 31, 2017 and 2016, a balance of $48,912 remained from the advance payment.
License
Agreements
Obligations
incurred with respect to mandatory payments provided for in license agreements are recognized ratably over the appropriate period,
as specified in the underlying license agreement, and are recorded as liabilities in the Company’s consolidated balance
sheet, with a corresponding charge to research and development costs in the Company’s consolidated statement of operations.
Obligations incurred with respect to milestone payments provided for in license agreements are recognized when it is probable
that such milestone will be reached and are recorded as liabilities in the Company’s consolidated balance sheet, with a
corresponding charge to research and development costs in the Company’s consolidated statement of operations. Payments of
such liabilities are made in the ordinary course of business.
Patent
Costs
Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on
the Company’s research efforts and any related patent applications, all patent costs, including patent-related legal and
filing fees, are expensed as 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) 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 years ended December 31, 2017 and 2016.
Earnings
per Share
The
Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as
the income (loss) attributable to common stockholders 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.
Net
income (loss) attributable to common stockholders consists of net income or loss, as adjusted for actual and deemed preferred
stock dividends declared, amortized or accumulated.
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
December 31, 2017 and 2016, 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.
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Series
B convertible preferred stock
|
|
|
11
|
|
|
|
11
|
|
Convertible
notes payable
|
|
|
32,941
|
|
|
|
29,768
|
|
Common
stock warrants
|
|
|
1,464,415
|
|
|
|
540,198
|
|
Common
stock options
|
|
|
3,996,167
|
|
|
|
1,307,749
|
|
Total
|
|
|
5,493,534
|
|
|
|
1,877,726
|
|
Reclassifications
Certain
comparative figures in 2016 have been reclassified to conform to the current year’s presentation. These reclassifications
were immaterial, both individually and in the aggregate.
Recent
Accounting Pronouncements
In
August 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2017-12
—Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard is intended
to improve and simplify accounting rules around hedge accounting. The new standard refines and expands hedge accounting for both
financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented,
both on the face of the financial statements and in the footnotes, for investors and analysts. The new standard takes effect for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard.
The
adoption of ASU 2017-12 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11 (ASU 2017-11), Earnings Per Share (Topic 260): Distinguishing
Liabilities from Equity (Topic 480): Derivatives and Hedging (Topic 815). The relevant section for the Company is Tock 815 where
it pertains to accounting for certain financial instruments with down round features. Until the issuance of this ASU, financial
instruments with down round features required fair value measurement and subsequent changes in fair value were recognized in earnings.
As a result of the ASU, financial instruments with down round features are no longer treated as a derivative liability measured
at fair value. Instead, when the down round feature is triggered, the effect is treated as a dividend and as a reduction of income
available to common shareholders in basic earnings per share. For public entities, the ASU is effective for fiscal years beginning
after December 15, 2018. Early adoption is permitted including adoption in an interim period. The adoption of ASU 2017-11 is not
expected to have any impact on the Company’s financial statement presentation or disclosures.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718).” The amendments in
in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following
are met: (i) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the
modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method
is used) of the original award immediately before the original award is modified, (ii) the vesting conditions of the modified
award are the same as the vesting conditions of the original award immediately before the original award is modified and (iii)
the classification off the modified award as an equity instrument or a liability instrument is the same as the classification
of the original award immediately before the original award is modified. The amendments in this update are effective for annual
periods beginning after December 15, 2017 and for interim periods within those annual periods and are not expected to have any
impact on the Company’s financial statement presentation or disclosures.
In
April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing.” The amendments in this update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts
with Customers (Topic 606), which we are required to apply for annual and interim periods beginning after December 15, 2017. Management’s
current analysis is that the new guidelines currently will not substantially impact our revenue recognition. The adoption of the
ASU is not expected to have any impact on the Company’s financial statement presentation or disclosure.
In
March 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09), Compensation – Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requires, among other things, that all income tax effects
of awards be recognized in the statement of operations when the awards vest or are settled. ASU 2016-09 also allows for an employer
to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting
and allows for a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for fiscal years beginning
after December 15, 2016 and therefore is effective for this annual period. The adoption of ASU 2016-09 has not had a significant
impact on the Company’s 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.
Notes Payable
Convertible
Notes Payable
The
convertible notes sold to investors in 2014 and 2015, which aggregated a total of $579,500, had a fixed interest
rate of 10% per annum and are convertible into common stock at a fixed price of $11.3750 per share. The convertible notes have
no reset rights or other protections based on subsequent equity transactions, equity-linked transactions or other events. The
warrants to purchase 50,945 shares of common stock issued in connection with the sale of the convertible notes were exercisable
at a fixed price of $11.3750 per share, provided no right to receive a cash payment, and included no reset rights or other protections
based on subsequent equity transactions, equity-linked transactions or other events. The Company determined that there were no
embedded derivatives to be identified, bifurcated and valued in connection with this financing.
The
maturity date of the notes was extended to September 15, 2016 and included the issuance of 27,936 additional warrants to purchase
common stock, exercisable at $11.375 per share of common stock.
During
the years ended December 31, 2017 and 2016, $0 and $129,857, respectively, was charged to interest expense from the amortization
of debt discount related to the value attributed to the New Warrants and extension of the original Warrants. The carrying value
of the Notes was further reduced by a discount for a beneficial conversion feature of $206,689. The value attributed to the beneficial
conversion feature was amortized as additional interest expense over the extended term of the Notes. During the years ended December
31, 2017 and 2016, $0 and $45,186, respectively, was charged to interest expense from the amortization of debt discount related
to the value attributed to the beneficial conversion feature.
During
April and May 2016, the Company entered into Note Exchange Agreements with certain note holders representing an aggregate of $303,500
of principal amount of the Notes (out of a total of $579,500 of original principal amount of the Notes). Pursuant to the Note
Exchange Agreements, an aggregate of $344,483, which included accrued interest of $40,983, of the Notes were exchanged (together
with original warrants to purchase 26,681 shares of the Company’s common stock, New Warrants to purchase 14,259 shares of
the Company’s common stock, and the payment of an aggregate of $232,846 in cash) into a total of 101,508 shares of the Company’s
common stock. None of the Notes had previously been converted into shares of the Company’s common stock. For accounting
purposes, for those convertible note holders accepting the Company’s exchange offer, the Company evaluated the fair value
of the incremental consideration paid to induce the convertible note holders to exchange their convertible notes for equity (i.e.,
30,284 shares of common stock), based on the closing market price of the Company’s common stock on the date of each transaction,
and recorded a charge to operations of $188,274. Information with respect to the Black-Scholes variables used in connection with
the evaluation of the fair value of the exchange consideration is provided at Note 3.
During
year ended December 31, 2016, in connection with the Note Exchange Agreements, the Company wrote off and charged to interest expense
the unamortized discount related to the value attributed to the New Warrants and the extension of the original Warrants of $66,811,
and the unamortized discount related to the value attributed to the related beneficial conversion feature of $49,688.
On
September 15, 2016, the remaining outstanding Notes previously issued by the Company on November 5, 2014, December 9, 2014, December
31, 2014, and February 2, 2015, matured and the principal and accrued interest under those remaining Notes became due and payable
upon demand. At the September 15, 2016 maturity date, Notes totaling $329,261, which included accrued interest of $53,261, became
due and payable upon demand. During October 2016, holders of four Notes issued formal notices of default, and as a result, those
four Notes were deemed to be in default under the terms of the Notes and began to accrue interest at the default rate of 12% per
annum from the default date in accordance with the terms of the Notes. As of December 31, 2017 such notes remained in default
and totaled $91,028, including accrued interest of $25,028.
Additionally,
on September 15, 2016, the remaining outstanding 13,137 New Warrants and 24,264 original Warrants (which had been previously extended)
expired.
The
Notes consist of the following at December 31, 2017 and 2016:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Principal
amount of convertible notes payable
|
|
$
|
276,000
|
|
|
$
|
276,000
|
|
Add
accrued interest payable
|
|
|
98,646
|
|
|
|
62,616
|
|
|
|
$
|
374,646
|
|
|
$
|
338,616
|
|
As
of December 31, 2017, the remaining outstanding Notes were convertible into 32,941 shares of the Company’s common stock,
including 8,677 shares attributable to accrued interest of $98,646 payable as of such date. As of December 31, 2016, the Notes
were convertible into 29,768 shares of the Company’s common stock, including 5,505 shares attributable to accrued interest
of $62,616 payable as of such date.
Note
Payable to SY Corporation Co., Ltd.
On
June 25, 2012, the Company borrowed 465,000,000 Won (the currency of South Korea, equivalent to approximately $400,000 United
States Dollars) from and executed a secured note payable to SY Corporation Co., Ltd., formerly known as Samyang Optics Co. Ltd.
(“SY Corporation”), an approximately 20% common stockholder of the Company at that time. SY Corporation was a significant
stockholder and a related party at the time of the transaction, but has not been a significant stockholder or related party of
the Company subsequent to December 31, 2014. The note accrues simple interest at the rate of 12% per annum and had a maturity
date of June 25, 2013. The Company has not made any payments on the promissory note. At June 30, 2013 and subsequently, the promissory
note was outstanding and in default, although SY Corporation has not issued a notice of default or a demand for repayment. The
Company believes that SY Corporation is in default of its obligations under its January 2012 license agreement, as amended, with
the Company, but the Company has not yet issued a notice of default. The Company is continuing efforts towards a comprehensive
resolution of the aforementioned matters involving SY Corporation.
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 patents for its ampakine
compounds CX1739 and CX1942, or to the patent for the use of ampakine compounds for the treatment of respiratory depression.
Note
payable to SY Corporation consists of the following at December 31, 2017 and 2016:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Principal
amount of note payable
|
|
$
|
399,774
|
|
|
$
|
399,774
|
|
Accrued
interest payable
|
|
|
267,335
|
|
|
|
219,362
|
|
Foreign
currency transaction adjustment
|
|
|
(83,282
|
)
|
|
|
(25,129
|
)
|
|
|
$
|
583,827
|
|
|
$
|
594,007
|
|
Interest
expense with respect to this promissory note was $47,973 and $48,105 for years ended December 31, 2017 and 2016, respectively.
Advances
and Notes Payable to Officers
On
January 29, 2016, Dr. Arnold S. Lippa, the Company’s Chief Scientific Officer and Chairman of the Board of Directors, advanced
$52,600 to the Company for working capital purposes under a demand promissory note with interest at 10% per annum. On September
23, 2016, Dr. Lippa advanced $25,000 to the Company for working capital purposes under a second demand promissory note with interest
at 10% per annum. The notes are secured by the assets of the Company. During the year ended December 31, 2017, $7,760 was charged
to interest expense with respect to the notes. In connection with the loan, Dr. Lippa was issued fully vested warrants
to purchase 15,464 shares of the Company’s common stock, 10,309 of which have an exercise price of $5.1025 per share and
5,155 of which have an exercise price of $4.85 which were the closing prices of the Company’s common stock on the respective
dates of grant. The warrant expires on January 29, 2019 and September 23, 2019 respectively and may be exercised on a cashless
basis. The aggregate grant date fair value of the warrants, as calculated pursuant to the Black-Scholes option-pricing model,
was determined to be $70,577, and was charged to interest expense as additional consideration for the loan during the year ended
December 31, 2016.
On
February 2, 2016, Dr. James S. Manuso, the Company’s Chief Executive Officer and Vice Chairman of the Board of Directors,
advanced $52,600 to the Company for working capital purposes under a demand promissory note with interest at 10% per annum. On
September 22, 2016, Dr. Manuso, advanced $25,000 to the Company for working capital purposes under a demand promissory note with
interest at 10% per annum. The notes are secured by the assets of the Company. During the year ended December 31, 2017, $7,760
was charged to interest expense with respect to the notes. In connection with the loan, Dr. Manuso was issued fully vested warrants
to purchase 13,092 shares of the Company’s common stock, 8,092 of which have an exercise price of $6.5000 per share and
5,000 of which have an exercise price of $5.00, which were the closing market prices of the Company’s common stock on the
respective dates of grant. The warrants expire on February 2, 2019 and September 22, 2019, respectively, and may
be exercised on a cashless basis. The aggregate grant date fair value of the warrants, as calculated pursuant to the Black-Scholes
option pricing model, was determined to be $70,543, and was charged to interest expense as additional consideration for the loan
during the year ended December 31, 2016.
Other
Short-Term Notes Payable
Other
short-term notes payable at December 31, 2017 and 2016 consisted of premium financing agreements with respect to various insurance
policies. On March 14, 2017 and April 1, 2017 the Company entered in insurance premium financing agreements of $59,857 and $9,307,
respectively, that are in respect to director and officer liability coverage, clinical trial coverage and office and
other coverages. As of December 31, 2017 and 2016, the aggregate amounts of such short-term notes were $8,630 and $4,095 respectively.
5.
Settlement and Payment Agreements
On
December 9, 2017, the Company accepted offers from certain executive officers, a former executive officer, the independent members
of the Board of Directors and two consultants (“Offerees”) pursuant to which such Offerees offered to forgive all,
or in one case, a portion of their accrued compensation and compensation related amounts owed to them and vendor accounts payable
as of September 30, 2017. Also, on December 9, 2017, the Company granted non-qualified stock options (“NQSOs”)
to the Offerees. The NQSOs immediately vested, have a term of 10 years and have an exercise price of $1.45 per share, which
was the closing price on the last trading day before the grant date (Friday, December 8, 2017). The NQSOs were valued using the
Black-Scholes option pricing model utilizing the following assumptions: (i) stock price $1.45, (ii) exercise price $1.45, (iii)
estimated term 5 years (utilizing the simple method to determine estimated when option terms exceed 5 years, which method is to
sum the vesting period (in this case 0) and the term (in this case 10 years) and divide by 2), (iv) estimated volatility of 184.92%,
(v) risk free rate 1.62% and (vi) dividend yield 0%. The resulting value was $1.396 per NQSO.
The
table below summarizes the result of the forgiveness and NQSO grant transactions:
|
|
Dollar
amount
forgiven
|
|
|
Number
of
NQSOs granted
|
|
|
Value
of
NQSOs granted
|
|
|
Gain
|
|
Executive
Officers, former executive officer, independent members of the Board of Directors
|
|
$
|
2,557,083
|
|
|
|
1,772,056
|
|
|
$
|
2,475,561
|
|
|
$
|
81,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants
|
|
$
|
111,635
|
|
|
|
77,362
|
|
|
$
|
108,076
|
|
|
$
|
3,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,668,718
|
|
|
|
1,849,418
|
|
|
$
|
2,583,637
|
|
|
$
|
85,081
|
|
All
of the amounts in the table above have been reflected in the Company’s Consolidated Statement of Operations for the
year ended December 31, 2017 as a reduction of general and administrative or research and development expenses,
as appropriate. The amounts forgiven reduced accrued compensation and related expenses and, in the case of the consultants, accounts
payable and accrued expenses on the Company’s Consolidated Balance Sheet as of December 31, 2017.
On
September 2, 2016, the Company issued a stock option to purchase 7,222 shares of its common stock in partial payment of consulting
fees to one of its professional service providers. The stock option was fully vested on the date of grant and will expire on September
2, 2021. The exercise price of the stock option was established on the grant date at $4.50 per share, which was the closing market
price of the Company’s common stock on the date of grant. The aggregate grant date fair value of the stock option, calculated
pursuant to the Black-Scholes option-pricing model, was determined to be $31,174. The issuance of the stock option resulted in
a gain to the Company of $1,076 during the year ended December 31, 2016.
On
June 27, 2016, the Company issued 16,453 of its common stock valued at $96,250 ($5.85 per share), which was the then closing market
price of the Company’s common stock, in payment of legal fees to one of its patent law firms.
The
Company continues to explore ways to reduce its obligations and indebtedness, and might in the future enter into additional settlement
and payment agreements.
6.
Stockholders’ Deficiency
Preferred
Stock
The
Company has authorized a total of 5,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2017 and
2016, 1,250,000 shares were designated as 9% Cumulative Convertible Preferred Stock (non-voting, “9% Preferred Stock”);
37,500 shares were designated as Series B Convertible Preferred Stock (non-voting, “Series B Preferred Stock”); 205,000
shares were designated as Series A Junior Participating Preferred Stock (non-voting, “Series A Junior Participating Preferred
Stock”); and 1,700 shares were designated as Series G 1.5% Convertible Preferred Stock. Accordingly, as of December 31,
2017, 3,505,800 shares of preferred stock were undesignated and may be issued with such rights and powers as the Board of Directors
may designate.
There
were no shares of 9% Preferred Stock or Series A Junior Participating Preferred Stock or Series G 1.5% Convertible Preferred Stock
outstanding as of December 31, 2017 and 2016.
Series
B Preferred Stock outstanding as of December 31, 2017 and 2016 consisted of 37,500 shares issued in a May 1991 private placement.
Each share of Series B Preferred Stock is convertible into approximately 0.00030 shares of common stock at an effective conversion
price of $2,208,375 per share of common stock, which is subject to adjustment under certain circumstances. As of December 31,
2017 and 2016, the shares of Series B Preferred Stock outstanding are convertible into 11 shares of common stock. The Company
may redeem the Series B Preferred Stock for $25,001, equivalent to $0.6667 per share, an amount equal to its liquidation preference,
at any time upon 30 days prior notice.
Series
G 1.5% Convertible Preferred Stock
On
April 17, 2016, the remaining 259.7 unconverted shares of Series G 1.5% Convertible Preferred Stock outstanding (including accrued
but unpaid dividends) issued in 2014 were automatically and mandatorily converted into 242,173 newly issued shares of common stock
at a conversion price of $1.0725 per share and provided no right to receive a cash payment. There were no shares of Series G Preferred
Stock outstanding at any time in 2017. There were $1,165 of accrued dividends in respect to the Series G Preferred Stock for the
year ended December 31, 2016.
Common
Stock
On
August 16, 2016, at a special meeting of the stockholders of the Company, the stockholders approved an amendment to the Company’s
Second Restated Certificate of Incorporation (i) to effect, at the discretion of the Company’s Board of Directors, a three
hundred twenty five-to-one (325-to-1) reverse stock split of all of the outstanding shares of the Company’s common stock,
par value $0.001 per share, and (ii) to set the number of the Company’s authorized shares of stock at 70,000,000 shares,
consisting of 65,000,000 shares designated as common stock, par value $0.001 per share, and 5,000,000 shares designated as preferred
stock, par value $0.001 per share. On September 1, 2016, the Company filed a Certificate of Amendment to the Company’s Second
Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the approved amendment.
Pursuant
to the amendment, an aggregate of 191.068 fractional shares resulting from the reverse stock split were not issued, but were to
be paid out in cash (without interest or deduction) in an amount equal to the number of shares exchanged into such fractional
share multiplied by the average closing trading price of the Company’s common stock on the OTCQB for the five trading days
immediately before the Certificate of Amendment effecting the reverse stock split was filed with the Delaware Secretary of State
($6.7899 per share, on a post reverse stock split basis) for an aggregate of $1,298.
2015
Unit Offering
On
August 28, 2015, the Company entered into a Second Amended and Restated Common Stock and Warrant Purchase Agreement (the “Purchase
Agreement”) with various accredited investors (each, a “Purchaser”, and together with purchasers in subsequent
closings in the private placement, the “Purchasers”), pursuant to which the Company sold units for aggregate cash
consideration of $721,180, with each unit consisting of (i) one share of the Company’s common stock, representing an aggregate
of 105,517 shares of common stock, and (ii) one warrant to purchase two additional shares of common stock, representing an aggregate
of 211,034 warrants. This financing represented the initial closing of a private placement of up to $3,000,000. On September 28,
2015, the Company completed a second closing of the Purchase Agreement with various additional Purchasers, pursuant to which the
Company sold units for aggregate cash consideration of $218,530, with each unit consisting of (i) one share of the Company’s
common stock, representing an aggregate of 31,973 shares of common stock, and (ii) one warrant to purchase two additional shares
of common stock, representing an aggregate of 63,946 Warrants. On November 2, 2015, the Company completed a third closing of the
Purchase Agreement with various Purchasers, pursuant to which the Company sold units for aggregate cash consideration of $255,000,
with each unit consisting of (i) one share of the Company’s common stock, representing an aggregate of 37,309 shares of
common stock, and (ii) one warrant to purchase two additional shares of common stock, representing an aggregate of 74,618 warrants.
This third closing brought the aggregate amount raised under this private placement as of November 2, 2015 to $1,194,710.
The
unit price in each closing of the private placement was $6.8348 (the “Per Unit Price”). The Warrants are exercisable
through September 30, 2020 and may be exercised at a price of $6.8348 for each share of Common Stock to be acquired upon exercise.
The Purchasers consisted of non-affiliated investors, other than Dr. James S. Manuso, the current President and Chief Executive
Officer of the Company, who invested $250,000 in the initial closing of the private placement, and one other investor who invested
$301,180 in the private placement and became an affiliate of the Company by virtue of his aggregate stock holdings in the Company.
The Warrants do not contain any cashless exercise provisions or reset rights.
No
registration rights were granted to any Purchaser in this private placement with respect to (i) the shares of common stock issued
as part of the units, (ii) the warrants, or (iii) the shares of common stock issuable upon exercise of the warrants.
Placement
agent fees, brokerage commissions, and similar payments were made in the form of cash and warrants to qualified referral sources
in connection with certain sales of the shares of common stock and warrants, while other sales, including the sale to Dr. James
S. Manuso, did not result in any fees or commissions. Accordingly, the amount of such fees, on a percentage basis, varies in each
closing. The fees paid to such referral sources for the initial closing in cash totaled $47,118, or 6.5% of the aggregate amount
paid for the units sold. The fees paid in warrants for the initial closing to such referral sources (the warrants paid to qualified
referral sources are referred to herein as the “Placement Agent Warrants”) consist of warrants for 6,894 shares of
common stock, or that number of shares equal to 6.5% of the number of shares of common stock issued as part of the units, but
not the shares underlying the warrants. In connection with the second closing, fees paid to referral sources in cash totaled $18,603,
or 8.5% of the aggregate amount paid for the units sold, and 2,722 Placement Agent Warrants were issued, or warrants for that
number of shares equal to 8.5% of the number of shares of common stock issued as part of the units, but not the shares underlying
the Warrants. In connection with the third closing, fees paid to referral sources in cash totaled $25,500, or 10% of the aggregate
amount paid for the units sold, and 3,731 Placement Agent Warrants were issued, or warrants for that number of shares equal to
10% of the number of shares of common stock issued as part of the units, but not the shares underlying the Warrants. Placement
Agent Warrants are exercisable until September 30, 2020 at the Per Unit Price. The Placement Agent Warrants have cashless exercise
provisions. One of the placement agents that received Placement Agent Warrants is Aurora. Both Arnold S. Lippa and Jeff E. Margolis,
officers and directors of the Company, have indirect ownership interests in Aurora through interests held in its members, and
Jeff E. Margolis is also an officer of Aurora. As a result, both Arnold S. Lippa and Jeff E. Margolis, or entities in which they
have interests, will receive a portion of the Placement Agent Warrants awarded in this private placement.
In
addition to the above described placement agent fees, brokerage commissions, and similar payments that were made in the form of
cash and warrants to qualified referral sources, the Company also paid $10,164 in cash to other professionals for services related
to the three closings.
The
shares of common stock and warrants were offered and sold without registration under the Securities Act 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. None of the
shares of common stock issued as part of the units, the warrants, the common stock issuable upon exercise of the warrants, the
Placement Agent Warrants or the shares of common stock issuable upon exercise of the Placement Agent Warrants were 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.
Unit
Exchange Agreement
During
April and May 2016, the Company entered into Unit Exchange Agreements with certain warrant holders who had acquired units in connection
with the Second Amended and Restated Common Stock and Warrant Purchase Agreement on August 28, 2015, September 28, 2015 or November
2, 2015. The Unit Exchange Agreements provided for the warrant holders to exchange (i) existing warrants to purchase an aggregate
of 217,187 shares of the Company’s common stock, plus (ii) an aggregate of $529,394 in cash, in return for (i) an aggregate
of 108,594 shares of the Company’s common stock with a total market price of $728,859 (average $6.7275 per share), and (ii)
new warrants to purchase an aggregate of 108,594 shares of the Company’s common stock with an exercise price of $4.8750
per share, exercisable for cash or on a cashless basis through the original expiration date of September 30, 2020.
For
accounting purposes, for those unit warrant holders accepting the Company’s exchange offer, the Company evaluated the fair
value of the incremental consideration paid to induce the unit warrant holders to exchange their original warrants for exchanged
warrants and determined that the Company did not incur any cost with respect to the exchange transactions. Information with respect
to the Black-Scholes variables used in connection with the evaluation of the fair value of the exchange consideration is provided
at Note 3.
1st
2016 Unit Offering
On
January 8, 2016, the Company initiated a new equity private placement, consisting of units of common stock and warrants, up to
an aggregate of $2,500,000, with each unit consisting of (i) one share of common stock, and (ii) one warrant to purchase two additional
shares of common stock. During the nine months ended September 30, 2016, the Company entered into purchase agreements with nine
accredited and four non-accredited, non-affiliated investors, pursuant to which an aggregate of 43,003 shares of common stock
and an aggregate of 86,006 warrants were sold, generating gross proceeds of $309,985.
Included
in the gross proceeds of $309,985 received was $25,350 received on June 30, 2016 from the sale of 3,517 shares of common stock
and an aggregate of 7,034 warrants to an unrelated entity with which the Company simultaneously entered into one-year agreement
for investor relations services.
The
unit price in the private placement closings was $7.2085. The warrants are exercisable at $7.9300, for each share of common stock
to be acquired, and expire on February 28, 2021. The warrants have cashless exercise provisions and contain certain “blocker”
provisions limiting the percentage of shares of the Company’s common stock that the purchaser can beneficially own upon
conversion to not more than 4.99% of the issued and outstanding shares immediately after giving effect to the warrant exercise.
In
the case of an acquisition in which the Company is not the surviving entity, the holder of the warrant would receive from any
surviving entity or successor to the Company, in exchange for the warrant, a new warrant from the surviving entity or successor
to the Company, substantially in the form of the existing warrant and with an exercise price adjusted to reflect the nearest equivalent
exercise price of common stock (or other applicable equity interest) of the surviving entity that would reflect the economic value
of the warrant, but in the surviving entity.
No
registration rights were granted to the purchasers in the private placement with respect to (i) the shares of common stock issued
as part of the units, (ii) the warrants, or (iii) the shares of common stock issuable upon exercise of the warrants.
No
placement agent fees, brokerage commissions, finder’s fees or similar payments were made in the form of cash or warrants
to qualified referral sources in connection with the sale of the shares of common stock and warrants. The Company paid $3,429
in cash to other professionals for services related to the seven closings.
2nd
2016 Unit Offering
On
December 29, 2016, the Company entered into purchase agreements with certain accredited investors, pursuant to which, the Company
sold units in a private placement for aggregate cash consideration of $125,000, with each unit consisting of (i) one share of
common stock, and (ii) one warrant to purchase an additional share of common stock. On December 30, 2016, the Company sold additional
units to additional investors for aggregate cash consideration of $60,000 in a second and final closing, bringing the total aggregate
consideration paid in the private placement to $185,000 through December 31, 2016. On December 31, 2016, the private placement
terminated pursuant to its terms. The price per unit in the initial closing of the private placement was $1.42. The warrants were
exercisable until December 31, 2021 and would have been exercisable at 110% of the per unit price, or $1.562 per share of common
stock. The warrants had a cashless exercise provision and certain “blocker” provisions limiting the percentage of
shares of common stock of the Company that the purchaser would have been able to hold upon exercise. The warrants were also subject
to a call by the Company at $0.001 per share upon ten (10) days written notice if the Company’s common stock closes at 200%
or more of the unit purchase price for any five (5) consecutive trading days. The investors were not affiliates of the Company.
In total, 130,284 shares of common stock were purchased in the private placement, together with warrants to purchase an additional
130,284 shares of Common Stock.
In
addition, as set forth in the purchase agreements, each purchaser had the option, but not the obligation, to exchange the entire
amount invested in the private placement (but not less than the entire amount), in such purchaser’s sole discretion, into
any subsequent offering of the Company until the earlier of (i) the completion of subsequent offerings by the Company aggregating
at least $15 million of gross proceeds to the Company, or (ii) December 31, 2017. If exchanged, the amount to be invested in a
subsequent offering would be 1.2 times the amount of the initial investment in the private placement, or 1.4 times the amount
of the initial investment if the Company had entered into financing transactions pursuant to Sections 3(a)(9) or 3(a)(10) of the
Securities Act of 1933, as amended, or other financing arrangements that had full-ratchet anti-dilution provisions (i) without
a floor, or (ii) with an indeterminate and potentially infinite number of shares issuable pursuant to such provisions. If neither
termination condition had been reached, and the Company had more than one subsequent offering, the purchaser could have elected
to exchange into any subsequent offering, regardless of whether such purchaser has already exchanged into a subsequent offering;
provided, however, that the amount invested in such subsequent offering would only and always be 1.2 (or 1.4, as applicable) times
the amount of the initial investment.
In
the case of an acquisition, as defined in the agreement, in which the Company was not the surviving entity, the holder of each
warrant would receive from any surviving entity or successor to the Company, in exchange for such warrant, a new warrant from
the surviving entity or successor to the Company, substantially in the form of the existing warrant and with an exercise price
adjusted to reflect the nearest equivalent exercise price of common stock (or other applicable equity interest) of the surviving
entity that would reflect the economic value of the warrant, but in the surviving entity.
Unlimited
piggy-back registration rights had been granted with respect to the common stock, and the common stock underlying the warrants,
unless such common stock was eligible to be sold without volume limits under an exemption from registration under any rule or
regulation of the SEC that permitted the holder to sell securities of the Company to the public without registration.
The
Company is obligated to pay placement agent fees, brokerage commissions, finder’s fees or similar payments totaling up to
$13,875 to an unaffiliated qualified referral source as well as warrants up to 7.5% of number of units sold in the private placement.
The Company paid $4,000 in cash to other professionals for services related to the closings.
The
shares of common stock and warrants were offered and sold without registration under the Securities Act 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. None of the
shares of common stock issued as part of the units, the warrants, the common stock issuable upon exercise of the warrants or any
warrants issued to a qualified referral source. have 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.
The
Company evaluated whether the warrants or the exchange rights met criteria to be accounted for as a derivative in accordance with
Accounting Standard Codification (ASC) 815 and determined that the derivative criteria were not met. Therefore, the Company determined
no bifurcation and separate valuation was necessary and the warrants and exchange right should be accounted for with the host
instrument. The Company then looked to how the host instrument should be classified and determined that it cannot be classified
as permanent equity as there is a potential that the Unit investment amount could be exchanged for debt (convertible or otherwise)
or for redeemable preferred stock. Since the exchange right expires within one year, the Company concluded that the Unit investment
would be appropriately classified as a current liability as of December 31, 2016.
1
st
2017 Unit Offering
On
March 10, 2017 and March 28, 2017, the Company sold units to investors for aggregate gross proceeds of $350,000, with each unit
consisting of one share of the Company’s common stock and one common stock purchase warrant to purchase one share of the
Company’s common stock (the “1
st
2017 Unit Offering”). Units were sold for $2.50 per unit and the
warrants issued in connection with the units are exercisable through December 31, 2021 at a fixed price $2.75 per share of the
Company’s common stock. The warrants contained a cashless exercise provision and certain blocker provisions preventing exercise
if the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a result of
such exercise. The warrants were also subject to redemption by the Company at $0.001 per share upon ten (10) days written notice
if the Company’s common stock closed at 200% or more of the unit purchase price for any five (5) consecutive trading days.
Investors were not affiliates of the Company. The investors received an unlimited number of piggy-back registration rights. Investors
also received an unlimited number of exchange rights, which were options and not obligations, to exchange such investor’s
entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting solely of
convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only
into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion of any number of subsequent
financings aggregating at least $15 million gross proceeds to the Company, or (ii) December 30, 2017. The dollar amount used to
determine the amount invested or exchanged into the subsequent financing would be 1.2 times the amount of the original investment.
Under certain circumstances, the ratio might have been 1.4 instead of 1.2. The exchange right did not permit the investors to
exchange into a debt offering or into redeemable preferred stock, therefore, unlike the 2
nd
2016 Unit Offering, the
2017 Unit Offering resulted in the issuance of permanent equity. The Company evaluated whether the warrants or the exchange rights
met criteria to be accounted for as a derivative in accordance with Accounting Standard Codification Topic (ASC) 815 and determined
that the derivative criteria were not met. Therefore, the Company determined no bifurcation and separate valuation was necessary
and that the warrants and exchange right should be accounted for with the host instrument. The closing market prices of the Company’s
common stock on March 10, 2017 and March 28, 2017 were $4.05 and $3.80 respectively. In connection with this transaction, Aurora
Capital LLC (“Aurora”) served as a placement agent and earned $20,000 fees and 8,000 placement agent common stock
warrants associated with the closing of 1
st
2017 Unit Offering. The fees were unpaid as of December 31, 2017 and have
been accrued in accounts payable and accrued expenses and charged against Additional paid-in capital as of March 31, 2017, June
30, 2017, September 30, 2017 and December 31, 2017. The placement agent common stock warrants were valued at $27,648
and were accounted for in Additional paid-in capital as of March 31, 2017 and remain valued at that amount as of December 31,
2017.
On
July 26, 2017, the Company’s Board approved an offering of securities conducted via private placement (the “2
nd
2017 Unit Offering” described below) that, because of the terms of the 2
nd
2017 Unit Offering as compared
to the terms of the 2
nd
2016 Unit offering and the 1
st
2017 Unit Offering, resulted in an exchange
of all of the units from the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering into equity
securities of the Company in the 2
nd
2017 Unit Offering by all of the investors in the 2
nd
2016 Unit
Offering and all of the investors in the 1
st
2017 Unit Offering. Because all of the investors in the
2
nd
2016 Unit Offering exchanged their units into the 2
nd
2017 Unit Offering the current non-permanent equity
liability as of December 31, 2016 has been reclassified in 2017 as permanent equity capital. Because the 1
st
2017 Unit
Offering and the 2
nd
2017 Unit Offering were both originally accounted for as equity, a reclassification similar to
the one effected with respect to the 2
nd
2016 Unit Offering was not required.
2
nd
2017 Unit Offering
On
August 29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017,
December 21, 2017, December 22, 2017 and December 29, 2017 the Company sold units in the 2
nd
2017 Unit Offering
to investors for aggregate gross proceeds of $404,500, with each unit consisting of one share of the Company’s common
stock and one common stock purchase warrant to purchase one share of the Company’s common stock. Units were sold for $1.00
per unit and the warrants issued in connection with the units are exercisable through September 29, 2022 at a fixed price $1.10
per share of the Company’s common stock. The warrants contain a cashless exercise provision and certain blocker provisions
preventing exercise if the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common
stock as a result of such exercise. The warrants are also subject to redemption by the Company at $0.001 per share upon ten (10)
days written notice if the Company’s common stock closes at 250% or more of the unit purchase price for any five (5) consecutive
trading days. The investors were not affiliates of the Company. Investors received an unlimited number of piggy-back registration
rights. Investors also received an unlimited number of exchange rights, which are options and not obligations, to exchange
such investor’s entire investment (and not less than the entire investment) into one or more subsequent equity financings
(consisting solely of convertible preferred stock or common stock or units containing preferred stock or common stock and warrants
exercisable only into preferred stock or common stock) that would be considered as “permanent equity” under United
States Generally Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission,
and therefore classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing
a “Subsequent Equity Financing” as in the 1
st
2017 Unit Offering). These exchange rights are effective
until the earlier of: (i) the completion of any number of subsequent financings aggregating at least $15 million gross proceeds
to the Company, or (ii) December 30, 2017 and have therefore expired. The dollar amount used to determine the amount invested
or exchanged into the subsequent financing would have been 1.2 times the amount of the original investment. Under certain circumstances,
the ratio might have been 1.4 instead of 1.2. The exchange right did not permit the investors to exchange into a debt offering
or into redeemable preferred stock, therefore, unlike the 2
nd
2016 Unit Offering, the 2
nd
2017 Unit Offering
resulted in the issuance of permanent equity. All exchange rights have expired as of December 30, 2017. The Company evaluated
whether the warrants or the exchange rights met criteria to be accounted for as a derivative in accordance with Accounting Standard
Codification Topic (ASC) 815 and determined that the derivative criteria were not met. Therefore, the Company determined no bifurcation
and separate valuation was necessary and that the warrants and exchange right should be accounted for with the host instrument.
The closing market prices of the Company’s common stock on August 29, 2017, September 27, 2017, September 28, 2017, October
5, 2017, October 25, 2017, November 29, 2017, December 13, 2017, December 21, 2017, December 22, 2017 and December 29, 2017 were
$1.00, $1.40, $1.40, $1.50, $0.80, $1.05, $1.45, $1.51, $1.45 and $1.14, respectively. There was no placement agent and
therefore no fees associated with the 2
nd
2017 Unit Offering.
The
terms of the 2
nd
2017 Unit Offering, as compared to the terms of the 2
nd
2016 Unit Offering and the
1
st
2017 Unit Offering, resulted in an exchange of all of the units from each of the 2
nd
2016 Unit Offering
and the 1
st
2017 Unit Offering into equity securities of the 2
nd
2017 Unit Offering. Because the 1
st
2017 Unit Offering and the 2
nd
2017 Unit Offering were both originally accounted for as equity, a reclassification
similar to the 2
nd
2016 Unit Offering was not required.
Information
with respect to the issuance of common stock in connection with the settlement of debt obligations is provided at Note 5.
Common
Stock Warrants
A
summary of warrant activity for the year ended December 31, 2017 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants
outstanding at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
Issued
|
|
|
1,194,500
|
|
|
|
|
|
|
|
|
|
Reduction
through transactions in conjunction with -
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit
Exchange Agreements
|
|
|
(270,283
|
)
|
|
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
Warrants
exercisable at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
4.88
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2017:
Exercise
Price
|
|
|
Warrants
Outstanding
(Shares)
|
|
|
Warrants
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
1.0000
|
|
|
|
916,217
|
|
|
|
916,217
|
|
|
September
20, 2022
|
$
|
1.2870
|
|
|
|
41,002
|
|
|
|
41,002
|
|
|
April
17, 2019
|
$
|
1.5620
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December
31, 2021
|
$
|
2.7500
|
|
|
|
8,000
|
|
|
|
8000
|
|
|
September
20, 2022
|
$
|
4.8500
|
|
|
|
5,155
|
|
|
|
5,155
|
|
|
September
23, 2019
|
$
|
4.8750
|
|
|
|
108,594
|
|
|
|
108,594
|
|
|
September
30, 2020
|
$
|
5.0000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
September
22, 2019
|
$
|
5.1025
|
|
|
|
10,309
|
|
|
|
10,309
|
|
|
January
29, 2019
|
$
|
6.5000
|
|
|
|
8,092
|
|
|
|
8,092
|
|
|
February
4, 2019
|
$
|
6.8348
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September
30, 2020
|
$
|
7.9300
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February
28, 2021
|
|
|
|
|
|
1,464,415
|
|
|
|
1,464,415
|
|
|
|
Based
on a fair market value of $1.14 per share on December 31, 2017, the intrinsic value of exercisable in-the-money common stock warrants
was $128,270 as of December 31, 2017.
A
summary of warrant activity for the year ended December 31, 2016 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants
outstanding at December 31, 2015
|
|
|
482,288
|
|
|
$
|
7.10125
|
|
|
|
|
|
Issued
|
|
|
244,845
|
|
|
|
|
|
|
|
|
|
Note exchanges
|
|
|
(40,940
|
)
|
|
|
|
|
|
|
|
|
Unit exchanges
|
|
|
(108,594
|
)
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(37,401
|
)
|
|
|
-
|
|
|
|
|
|
Warrants
outstanding at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2015
|
|
|
482,288
|
|
|
$
|
7.10125
|
|
|
|
|
|
Warrants
exercisable at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2016:
Exercise
Price
|
|
|
Warrants
Outstanding
(Shares)
|
|
|
Warrants
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
1.2870
|
|
|
|
41,002
|
|
|
|
41,002
|
|
|
April
17, 2019
|
$
|
1.5620
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December
31, 2021
|
$
|
4.8500
|
|
|
|
5,155
|
|
|
|
5,155
|
|
|
September
23, 2019
|
$
|
4.8750
|
|
|
|
108,594
|
|
|
|
108,594
|
|
|
September
30, 2020
|
$
|
5.0000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
September
22, 2019
|
$
|
5.1025
|
|
|
|
10,309
|
|
|
|
10,309
|
|
|
January
29, 2019
|
$
|
6.5000
|
|
|
|
8,092
|
|
|
|
8,092
|
|
|
February
4, 2019
|
$
|
6.8348
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September
30, 2020
|
$
|
7.9300
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February
28, 2021
|
|
|
|
|
|
540,198
|
|
|
|
540,198
|
|
|
|
Based
on a fair market value of $2.80 per share on December 31, 2016, the intrinsic value of exercisable in-the-money common stock warrants
was $223,328 as of December 31, 2016.
Stock
Options
On
March 18, 2014, 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 “2014 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 325,025 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.
On
June 30, 2015, the Board of Directors adopted the 2015 Stock and Stock Option Plan (the “2015 Plan”). The 2015 Plan
initially provided for, among other things, the issuance of either or any combination of restricted shares of common stock and
non-qualified stock options to purchase up to 461,538 shares of the Company’s common stock for periods up to ten years to
management, members of the Board of Directors, consultants and advisors. The Company has not and does not intend to present the
2015 Plan to stockholders for approval. On August 18, 2015, the Board of Directors increased the number of shares that may be
issued under the 2015 Plan to 769,231 shares of the Company’s common stock. On March 31, 2016, the Board of Directors further
increased the number of shares that may be issued under the 2015 Plan to 1,538,461 shares of the Company’s common stock.
On January 17, 2017, the Board of Directors further increased the number of shares that may be issued under the 2015 Plan to 3,038,461
shares of the Company’s common stock. On December 9, 2017, the Board of Directors further increased the number of shares
that may be issued under the 2015 Plan to 6,985,260 shares of the Company’s common stock.
On
August 18, 2015, the Company entered into an employment agreement with Dr. James S. Manuso to be its new President and Chief Executive
Officer. In connection therewith, and in addition to other provisions, the Board of Directors of the Company awarded Dr. Manuso
stock options to purchase a total of 261,789 shares of common stock, of which options for 246,154 shares were granted pursuant
to the Company’s 2015 Plan and options for 15,635 shares were granted pursuant to the Company’s 2014 Plan. The stock
options vested 50% on August 18, 2015 (at issuance), 25% on February 18, 2016, and 25% on August 18, 2016, and will expire on
August 18, 2025. The exercise price of the stock options was established on the grant date at $6.4025 per share, which is equal
to the simple average of the most recent four full trading weeks, weekly Volume Weighted Average Prices (“VWAPs”)
of the Company’s common stock price immediately preceding the date of grant as reported by the OTC Markets, as compared
to the closing market price of the Company’s common stock on August 18, 2015 of $7.0200 per share. The aggregate grant date
fair value of these stock options calculated pursuant to the Black-Scholes option-pricing model was $1,786,707. During the years
ended December 31, 2017 and 2016, the Company recorded charges to operations of $0 and $569,222, respectively, with respect to
these stock options. Additional information with respect to other provisions of the employment agreement is provided at Note 9.
On
August 18, 2015, the Company also entered into employment agreements with Dr. Arnold S. Lippa, its new Chief Scientific Officer,
Robert N. Weingarten, its then Vice President and Chief Financial Officer, and Jeff E. Margolis, its Vice President, Treasurer
and Secretary. Mr. Weingarten resigned from the Company in February 2017. In connection therewith, and in addition to other provisions,
the Board of Directors of the Company awarded to each of those officers stock options to purchase a total of 30,769 shares of
common stock pursuant to the Company’s 2015 Plan. The stock options vested 25% on December 31, 2015, 25% on March 31, 2016,
25% on June 30, 2016, and 25% on September 30, 2016, and will expire on August 18, 2022. The exercise price of the stock options
was established on the grant date at $6.4025 per share, which is equal to the simple average of the most recent four full trading
weeks, weekly VWAPs of the Company’s common stock price immediately preceding the date of grant as reported by the OTC Markets
as compared to the closing market price of the Company’s common stock on August 18, 2015 of $7.0200 per share. The aggregate
grant date fair value of these stock options calculated pursuant to the Black-Scholes option-pricing model was $609,000. During
the years ended December 31, 2017 and 2016, the Company recorded charges to operations of $0 and $407,493, respectively, with
respect to these stock options. Additional information with respect to other provisions of the employment agreement is provided
at Note 9.
Additionally,
on August 18, 2015, the Board of Directors of the Company awarded stock options for 9,231 shares of common stock to each of seven
other individuals who are members of management, the Company’s Scientific Advisory Board, independent members of the Board
of Directors, or outside service providers pursuant to the Company’s 2015 Plan, representing stock options for a total of
64,617 shares of common stock. The stock options vested 25% on December 31, 2015, 25% on March 31, 2016, 25% on June 30, 2016,
and 25% on September 30, 2016, and will expire on August 18, 2020 as to stock options for 27,693 shares of common stock and August
18, 2022 as to stock options for 36,924 shares of common stock. The exercise price of the stock options was established on the
grant date at $6.4025 per share, which is equal to the simple average of the most recent four full trading weeks, weekly VWAPs
of the Company’s common stock price immediately preceding the date of grant as reported by the OTC Markets, as compared
to the closing market price of the Company’s common stock on August 18, 2015 of $7.0200 per share. The aggregate grant date
fair value of these stock options calculated pursuant to the Black-Scholes option-pricing model was $430,800. During the years
ended December 31, 2017 and 2016, the Company recorded charges to operations of $0 and $223,089, respectively, with respect to
these stock options.
On
December 11, 2015, the Company entered into a consulting agreement for investor relations services, which provided for the payment
of a fee for such services through the granting of non-qualified stock options to purchase a total of 8,791 shares of common stock
pursuant to the Company’s 2015 Plan. The stock options vested in equal installments on the last day of each month during
the term of the consulting agreement, ranging from December 11, 2015 through March 31, 2016, and will expire on December 11, 2020.
The exercise price of the stock options was established on the grant date at $6.825 per share, which was the closing market price
of the Company’s common stock on the date of grant. The aggregate grant date fair value of these stock options calculated
pursuant to the Black-Scholes option-pricing model was $58,286. During the years ended December 31, 2017 and 2016, the Company
recorded charges to operations of $0 and $50,286, respectively, with respect to these stock options.
On
March 31, 2016, the Board of Directors of the Company awarded stock options for a total of 523,075 shares of common stock in various
quantities to twelve individuals who are members of management, the Company’s Scientific Advisory Board, independent members
of the Board of Directors, or outside service providers pursuant to the Company’s 2015 Plan. The stock options vested 25%
on each of March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016, and will expire on March 31, 2021. The exercise
price of the stock options was established on the grant date at $7.3775 per share, which was the closing market price of the Company’s
common stock on such date. The aggregate grant date fair value of these stock options, as calculated pursuant to the Black-Scholes
option-pricing model, was $3,774,000. During the years ended December 31, 2017 and 2016, the Company recorded a charge to operations
of $0 and $3,469,500 dollars, respectively, with respect to these stock options.
On
September 12, 2016, the Company entered into an agreement for consulting services, which provided for the payment of a fee through
the granting of a non-qualified stock option to purchase a total of 2,608 shares of common stock pursuant to the Company’s
2015 Plan. The stock option was fully vested on the date of grant and will expire on September 12, 2021. The exercise price of
the stock option was established on the grant date at $5.7500 per share, which was the closing market price of the Company’s
common stock on the date of grant. The aggregate grant date fair value of the stock option, calculated pursuant to the Black-Scholes
option-pricing model, was $14,384, which was charged to operations on the date of grant.
On
July 26, 2017, the Board of Directors of the Company awarded stock options for a total of 25,000 shares of common stock to one
individual who is a member of management pursuant to the Company’s 2015 Plan. The stock options vested 25% upon grant, 25%
on September 30, 2017 and 50% on December 31, 2017. The exercise price of the options was established on the grant date at $2.00,
which was above the closing market price of the Company’s common stock on that date, which was $1.30. The aggregate
grant date fair value of these stock options, as calculated pursuant to the Black Scholes option pricing model, was $27,225. During
the twelve months ended December 31, 2017, the Company recorded a charge to operations of $27,225 with respect to these options.
On
July 28, 2017, the Board of Directors of the Company awarded stock options for a total of 34,000 shares of common stock to two
individuals who are consultants pursuant to the Company’s 2015 Plan. With respect to one individual, the 9,000 options vested
33 1/3% upon grant, 33 1/3 % on August 31, 2017 and 33 1/3% on September 30, 2017. With respect to the other individual, the 25,000
options vested 20% on each of August 31, 2017, September 30, 2017, October 31, 2017, November 30, 2017 and December 31, 2017,
thus all options had vested by December 31, 2017. The exercise price of the options was established on the grant date at $1.35,
which was the closing market price of the Company’s common stock on the date of the grant. The aggregate grant date fair
value of these stock options, as calculated pursuant to the Black Scholes option pricing model, was $39,807. During the twelve
months ended December 31, 2017, the Company recorded a charge to operations of $37,457 with respect to these stock options.
On
December 9, 2017, the Board of Directors of the Company awarded stock options for a total of 1,772,055 shares of common stock
to six executive officers, a former executive officer and two independent members of the Board of Directors pursuant to the Company’s
2015 Plan. All of these options vested upon grant. The exercise price of the options was established on the grant date at $1.45
which was the closing price of the Company’s common stock on the last trading date prior to the grant. The aggregate grant
date fair market value of these stock options as calculated pursuant to the Black Scholes option pricing model was $2,475,561.
The Company recorded a charge to operations of $2,475,561 with respect to these options. These options were granted on the same
date that these individuals forgave $2,557,083 of accrued compensation and related expenses owed to them.
On
December 9, 2017, the Board of Directors of the Company awarded stock options for a total of 77,363 shares of common stock to
two consultants pursuant to the Company’s 2015 Plan. All of these options vested upon grant. The exercise price of the options
was established on the grant date at $1.45 which was the closing price of the Company’s common stock on the last trading
date prior to the grant. The aggregate grant date fair market value of these stock options as calculated pursuant to the Black
Scholes option pricing model was $108,076. The Company recorded a charge to operations of $108,076 with respect to these options.
These options were granted on the same date that these consultants forgave $111.635 of accounts payable owed to them.
On
December 9, 2017, the Board of Directors of the Company awarded stock options for a total of 100,000 shares of common stock to
one member of management as a bonus pursuant to the Company’s 2015 Plan. These options vested upon grant. The exercise price
of the options was established on the grant date at $1.45 which was the closing price of the Company’s common stock on the
last trading date prior to the grant. The aggregate grant date fair market value of these stock options as calculated pursuant
to the Black Scholes option pricing model was $139,700. The Company recorded a charge to operations of $139,700 with respect to
these options.
Information
with respect to the issuance of common stock options in connection with the settlement of debt obligations and as payment for
consulting services is provided at Note 5.
Information
with respect to common stock awards issued to officers and directors as compensation is provided above under “Common Stock.”
Information
with respect to the Black-Scholes variables used in connection with the evaluation of the fair value of stock-based compensation
is provided at Note 3.
A
summary of stock option activity for the year ended December 31, 2017 is presented below.
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options
outstanding at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6515
|
|
|
|
5.31
|
|
Granted
|
|
|
2,688,418
|
|
|
|
1.8721
|
|
|
|
8.38
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
outstanding at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
7.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6515
|
|
|
|
5.31
|
|
Options
exercisable at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
7.38
|
|
There
was no deferred compensation expense for the outstanding and unvested stock options at December 30, 2017.
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2017:
Exercise
Price
|
|
|
Options
Outstanding
(Shares)
|
|
|
Options
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
1.3500
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
July
28, 2022
|
$
|
1.4500
|
|
|
|
1,849,418
|
|
|
|
1,849,418
|
|
|
December
9, 2027
|
$
|
1.4500
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
December
9, 2027
|
$
|
2.0000
|
|
|
|
285,000
|
|
|
|
285,000
|
|
|
June
30, 2022
|
$
|
2.0000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
July
26, 2022
|
$
|
3.9000
|
|
|
|
395,000
|
|
|
|
395,000
|
|
|
January
17, 2022
|
$
|
4.5000
|
|
|
|
7,222
|
|
|
|
7,222
|
|
|
September
2, 2021
|
$
|
5.6875
|
|
|
|
89,686
|
|
|
|
89,686
|
|
|
June
30, 2020
|
$
|
5.7500
|
|
|
|
2,608
|
|
|
|
2,608
|
|
|
September
12, 2021
|
$
|
6.4025
|
|
|
|
27,692
|
|
|
|
27,692
|
|
|
August
18, 2020
|
$
|
6.4025
|
|
|
|
129,231
|
|
|
|
129,231
|
|
|
August
18, 2022
|
$
|
6.4025
|
|
|
|
261,789
|
|
|
|
261,789
|
|
|
August
18, 2025
|
$
|
6.8250
|
|
|
|
8,791
|
|
|
|
8,791
|
|
|
December
11, 2020
|
$
|
7.3775
|
|
|
|
523,077
|
|
|
|
523,077
|
|
|
March
31, 2021
|
$
|
8.1250
|
|
|
|
169,231
|
|
|
|
169,231
|
|
|
June
30, 2022
|
$
|
13.0000
|
|
|
|
7,385
|
|
|
|
7,385
|
|
|
March
13, 2019
|
$
|
13.0000
|
|
|
|
3,846
|
|
|
|
3,846
|
|
|
April
14, 2019
|
$
|
13.9750
|
|
|
|
3,385
|
|
|
|
3,385
|
|
|
March
14, 2024
|
$
|
15.4700
|
|
|
|
7,755
|
|
|
|
7,755
|
|
|
April
8, 2020
|
$
|
15.9250
|
|
|
|
2,462
|
|
|
|
2,462
|
|
|
February
28, 2024
|
$
|
16.0500
|
|
|
|
46,154
|
|
|
|
46,154
|
|
|
July
17, 2019
|
$
|
16.6400
|
|
|
|
1,538
|
|
|
|
1,538
|
|
|
January
29, 2020
|
$
|
19.5000
|
|
|
|
9,487
|
|
|
|
9,487
|
|
|
July
17, 2022
|
$
|
19.5000
|
|
|
|
6,410
|
|
|
|
6,410
|
|
|
August
10, 2022
|
|
|
|
|
|
3,996,167
|
|
|
|
3,996,161
|
|
|
|
Based
on a fair market value of $1.14 per share on December 31, 2017, there were no exercisable in-the-money common
stock options as of December 31, 2017.
A
summary of stock option activity for the year ended December 31, 2016 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options
outstanding at December 31, 2015
|
|
|
774,842
|
|
|
$
|
7.8325
|
|
|
|
|
|
Granted
|
|
|
532,907
|
|
|
|
7.3305
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options
outstanding at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6515
|
|
|
|
5.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2015
|
|
|
519,662
|
|
|
$
|
8.5150
|
|
|
|
|
|
Options
exercisable at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6515
|
|
|
|
5.31
|
|
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2016:
Exercise
Price
|
|
|
Options
Outstanding
(Shares)
|
|
|
Options
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
4.5000
|
|
|
|
7,222
|
|
|
|
7,222
|
|
|
September
2, 2021
|
$
|
5.6875
|
|
|
|
89,686
|
|
|
|
89,686
|
|
|
June
30, 2020
|
$
|
5.7500
|
|
|
|
2,608
|
|
|
|
2,608
|
|
|
September
12, 2021
|
$
|
6.4025
|
|
|
|
27,692
|
|
|
|
6,923
|
|
|
August
18, 2020
|
$
|
6.4025
|
|
|
|
129,231
|
|
|
|
32,308
|
|
|
August
18, 2022
|
$
|
6.4025
|
|
|
|
261,789
|
|
|
|
130,894
|
|
|
August
18, 2025
|
$
|
6.8250
|
|
|
|
8,791
|
|
|
|
2,198
|
|
|
December
11, 2020
|
$
|
7.3775
|
|
|
|
523,077
|
|
|
|
523,077
|
|
|
March
31, 2021
|
$
|
8.1250
|
|
|
|
169,231
|
|
|
|
169,231
|
|
|
June
30, 2022
|
$
|
13.0000
|
|
|
|
7,385
|
|
|
|
7,385
|
|
|
March
13, 2019
|
$
|
13.0000
|
|
|
|
3,846
|
|
|
|
3,846
|
|
|
April
14, 2019
|
$
|
13.9750
|
|
|
|
3,385
|
|
|
|
3,385
|
|
|
March
14, 2024
|
$
|
15.4700
|
|
|
|
7,755
|
|
|
|
7,755
|
|
|
April
8, 2020
|
$
|
15.9250
|
|
|
|
2,462
|
|
|
|
2,462
|
|
|
February
28, 2024
|
$
|
16.2500
|
|
|
|
46,154
|
|
|
|
46,154
|
|
|
July
17, 2019
|
$
|
16.6400
|
|
|
|
1,538
|
|
|
|
1,538
|
|
|
January
29, 2020
|
$
|
19.5000
|
|
|
|
9,487
|
|
|
|
9,487
|
|
|
July
17, 2022
|
$
|
19.5000
|
|
|
|
6,410
|
|
|
|
6,410
|
|
|
August
10, 2022
|
|
|
|
|
|
1,307,749
|
|
|
|
1,307,749
|
|
|
|
Based
on a fair market value of $2.8000 per share on December 30, 2016, the intrinsic value of exercisable in-the-money common stock
options was $0 as of December 30, 2016.
For
the years ended December 31, 2017 and 2016, stock-based compensation costs included in the consolidated statements of operations
consisted of general and administrative expenses of $2,966,420 and $3,391,848, respectively, and research and development expenses
of $1,543,556 and $1,342,126, respectively.
Pier
Contingent Stock Consideration
In
connection with the merger transaction with Pier effective August 10, 2012, RespireRx issued 179,747 newly issued shares of its
common stock with an aggregate fair value of $3,271,402 ($18.2000 per share), based upon the closing price of RespireRx’s
common stock on August 10, 2012. The shares of common stock were distributed to stockholders, convertible note holders, warrant
holders, option holders, and certain employees and vendors of Pier in satisfaction of their interests and claims. The common stock
issued by RespireRx represented approximately 41% of the 443,205 common shares outstanding immediately following the closing of
the transaction.
Pursuant
to the terms of the transaction, RespireRx agreed to issue additional contingent consideration, consisting of up to 56,351 shares
of common stock, to Pier’s former security holders and certain other creditors and service providers (the “Pier Stock
Recipients”) that received RespireRx’s common stock as part of the Pier transaction if certain of RespireRx’s
stock options and warrants outstanding immediately prior to the closing of the merger were subsequently exercised. In the event
that such contingent shares were issued, the ownership percentage of the Pier Stock Recipients, following their receipt of such
additional shares, could not exceed their ownership percentage as of the initial transaction date.
The
stock options and warrants outstanding at June 30, 2012 were all out-of-the-money on August 10, 2012. During late July and early
August 2012, shortly before completion of the merger, the Company issued options to officers and directors at that time to purchase
a total of 22,651 shares of common stock exercisable for ten years at $19.5000 per share. By October 1, 2012, these options, as
well as the options and warrants outstanding at June 30, 2012, were also out-of-the-money and continued to be out-of-the-money
through December 31, 2017.
There
were no stock options or warrants exercised subsequent to August 10, 2012 that triggered additional contingent consideration,
and the only remaining stock options outstanding that could still trigger the additional contingent consideration remained generally
and substantially out-of-the-money through December 31, 2017. As of December 31, 2017, due to the expirations and forfeitures
of RespireRx stock options and warrants occurring since August 10, 2012, 6,497 contingent shares of common stock remained issuable
under the Pier merger agreement.
The
Company concluded that the issuance of any of the contingent shares to the Pier Stock Recipients was remote, as a result of the
large spread between the exercise prices of these stock options and warrants as compared to the common stock trading range, the
subsequent expiration or forfeiture of most of the options and warrants, the Company’s distressed financial condition and
capital requirements, and that these stock options and warrants have generally remained significantly out-of-the-money through
December 31, 2017. Accordingly, the Company considered the fair value of the contingent consideration to be immaterial and therefore
did not ascribe any value to such contingent consideration. If any such shares are ultimately issued to the former Pier stockholders,
the Company will recognize the fair value of such shares as a charge to operations at that time.
Reserved
and Unreserved Shares of Common Stock
At
December 31, 2017, the Company had 65,000,000 shares of common stock authorized and 3,065,261 shares of common stock issued
and outstanding. Furthermore, as of December 31, 2017, the Company had reserved an aggregate of 11 shares for issuance upon conversion
of the Series B Preferred Stock; 1,464,415 shares for issuance upon exercise of warrants; 3,996,167 shares for issuance upon exercise
of outstanding stock options; 63,236 shares to cover equity grants available for future issuance pursuant to the 2014 Plan; 3,059,812
shares to cover equity grants available for future issuance pursuant to the 2015 Plan; 32,941 shares for issuance upon conversion
of the Convertible Notes; and 6,497 shares issuable as contingent shares pursuant to the Pier merger. Accordingly, as of December
31, 2017, the Company had an aggregate of 8,952,423 shares of common stock reserved for issuance and 53,311,660 shares
of common stock unreserved and available for future issuance. The Company expects to satisfy its future common stock commitments
through the issuance of authorized but unissued shares of common stock.
7.
Income Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
as of December 31, 2017 and 2016 are summarized below.
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Capitalized
research and development costs
|
|
$
|
183,000
|
|
|
$
|
150,000
|
|
Research
and development credits
|
|
|
3,017,000
|
|
|
|
3,239,000
|
|
Stock-based
compensation
|
|
|
3,268,000
|
|
|
|
3,430,000
|
|
Stock
options issued in connection with the payment of debt
|
|
|
199,000
|
|
|
|
289,000
|
|
Net
operating loss carryforwards
|
|
|
25,569,000
|
|
|
|
37,745,000
|
|
Accrued
compensation
|
|
|
135,000
|
|
|
|
794,000
|
|
Accrued
interest due to related party
|
|
|
83,000
|
|
|
|
94,000
|
|
Other,
net
|
|
|
10,000
|
|
|
|
14,000
|
|
Total
deferred tax assets
|
|
|
32,824,000
|
|
|
|
45,755,000
|
|
Valuation
allowance
|
|
|
(32,824,000
|
)
|
|
|
(45,755,000
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
In
assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon
the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December
31, 2017 and 2016, management was unable to determine that it was more likely than not that the Company’s deferred tax assets
will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates.
No
federal tax provision has been provided for the years ended December 31, 2017 and 2016 due to the losses incurred during such
periods. Reconciled below is the difference between the income tax rate computed by applying the U.S. federal statutory rate and
the effective tax rate for the years ended December 31, 2017 and 2016.
|
|
Years
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
U.
S. federal statutory tax rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
Forgiveness
of indebtedness
|
|
|
(0.9
|
)%
|
|
|
-
|
%
|
Change
in valuation allowance
|
|
|
(2.4
|
)%
|
|
|
33.0
|
%
|
Amortization
of warrant discounts
|
|
|
-
|
%
|
|
|
1.3
|
%
|
Fair
value of note payable conversion discounts
|
|
|
-
|
%
|
|
|
0.7
|
%
|
Adjustment
to deferred tax asset
|
|
|
38.8
|
%
|
|
|
-
|
%
|
Other
|
|
|
(0.5
|
)%
|
|
|
-
|
%
|
Effective
tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
As
of December 31, 2017, the Company had federal and state tax net operating loss carryforwards of approximately $88,492,000 and
$98,854,000, respectively. The state tax net operating loss carryforward consists of $92,084,000 for California purposes and $6,770,000
for New Jersey purposes. The difference between the federal and state tax loss carryforwards was primarily attributable to the
capitalization of research and development expenses for California franchise tax purposes. The federal and state net operating
loss carryforwards will expire at various dates from 2018 through 2037. The Company also had federal and California research and
development tax credit carryforwards that totaled approximately $1,872,000 and $1,146,000, respectively, at December 31, 2017.
The federal research and development tax credit carryforwards will expire at various dates from 2018 through 2031. The California
research and development tax credit carryforward does not expire and will carryforward indefinitely until utilized.
While
the Company has not performed a formal analysis of the availability of its net operating loss carryforwards under Internal Revenue
Code Sections 382 and 383, management expects that the Company’s ability to use its net operating loss carryforwards will
be limited in future periods.
8.
Related Party Transactions
Dr.
Arnold S. Lippa and Jeff E. Margolis, officers and directors of the Company since March 22, 2013, have indirect ownership interests
and managing memberships in Aurora Capital LLC (“Aurora”) through interests held in its members, and Jeff. E. Margolis
is also an officer of Aurora. Aurora is a boutique investment banking firm specializing in the life sciences sector that is also
a full service brokerage firm.
On
March 31, 2013, the Company accrued $85,000 as reimbursement for legal fees incurred by Aurora in conjunction with the removal
of the Company’s prior Board of Directors on March 22, 2013, which amount has been included in accounts payable and accrued
expenses at December 31, 2017 and 2016. On March 28, 2017, the Company recorded $20,000 of placement agent fees due to Aurora,
which amount has been included in accounts payable and accrued expenses at December 31, 2017. On March 31, 2017, the Company issued
8,000 common stock purchase warrants to Aurora Capital LLC as an additional placement agent fee. Such warrants have an exercise
price of $2.75 per share and are exercisable until December 31, 2021.
On
June 30, 2015, the Board of Directors of the Company awarded, but did not pay, cash bonuses totaling $215,000, including an aggregate
of $195,000 to certain of the Company’s executive officers and an aggregate of $20,000 to the independent members of the
Company’s Board of Directors. The cash bonuses awarded to executive officers were as follows: Dr. Arnold S. Lippa - $75,000;
Jeff E. Margolis - $60,000; and Robert N. Weingarten - $60,000. The cash bonuses awarded to the two independent members of the
Company’s Board of Directors were as follows: James E. Sapirstein - $10,000; and Kathryn MacFarlane - $10,000. The cash
bonuses were awarded as partial compensation for services rendered by such persons from January 1, 2015 through June 30, 2015,
and are included in accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31,
2017 and 2016.
On
June 30, 2015, the Board of Directors also established cash compensation arrangements for certain of the Company’s executive
officers at the following monthly rates: Dr. Arnold S. Lippa - $12,500; Jeff E. Margolis - $10,000; and Robert N. Weingarten -
$10,000. In addition, the Company established quarterly cash board fees for the two independent members of the Company’s
Board of Directors as follows: James E. Sapirstein - $5,000; and Kathryn MacFarlane - $5,000. This compensation was payable in
arrears and commenced on July 1, 2015. These compensation arrangements have been extended through December 31, 2017. On August
18, 2015, the cash compensation arrangements for these executive officers were further revised as described below.
Both
the cash bonuses and the cash monthly compensation were accrued and will not be paid until such time as the Board of Directors
of the Company determines that sufficient capital has been raised by the Company or is otherwise available to fund the Company’s
operations on an ongoing basis.
Effective
August 18, 2015, Company entered into employment agreements with Dr. Arnold S. Lippa, Robert N. Weingarten and Jeff E. Margolis,
which superseded the compensation arrangements previously established for those officers on June 30, 2015, excluding the cash
bonuses referred to above.
On
February 17, 2017 Robert N. Weingarten resigned as a director and as the Company’s Vice President and Chief Financial Officer,
but remains a consultant to the Company.
Jeff
E. Margolis’ employment agreement was amended effective July 1, 2017. The employment agreement amendment called for payment
in three installments in cash of the $60,000 bonus granted on June 30, 2015. A minimum of $15,000 was to be payable in cash as
follows: (a) $15,000 payable in cash upon the next closing (after July 1, 2017) of any financing in excess of $100,000 (b) $15,000
payable by the end of the following month assuming cumulative closings (beginning with the closing that triggered (a)) in excess
of $200,000 and (c) $30,000 payable in cash upon the next closing of any financing in excess of an additional $250,000
.
The conditions of (a), (b) and (c) above were met as of December 31, 2017, however Mr. Margolis has waived the Company’s
obligation to make any payments of the cash bonus until the Board of Directors of the Company determines that sufficient capital
has been raised by the Company or is otherwise available to fund the Company’s operations on an ongoing basis. Obligations
through September 30, 2017 were forgiven by Mr. Margolis as described below.
Additional
information with respect to these employment agreements entered into on August 18, 2015 is provided at Note 9.
On
December 9, 2017, the Company accepted offers from Dr. Arnold S. Lippa, Dr. James S. Manuso, Jeff E. Margolis, James E. Sapirstein,
Kathryn MacFarlane and Robert N. Weingarten (former Chief Financial Officer) pursuant to which such individuals would forgive
accrued compensation and related accrued expenses as of September 30, 2017 in the following amounts: $807,497; $878,360; $560,876;
$55,000; $55,000 and $200,350 respectively for a total of $2,557,083. On the same date, the Company granted to the same individuals,
or designees of such individuals from the 2015 Plan, non-qualified stock options, exercisable for 10 years with an exercise price
of $1.45 per share of common stock, among other terms and features as follows: 559,595; 608,704; 388,687; 38114; 38,114 and 138,842
respectively, for options exercisable into a total of 1,772,055 shares of common stock with a total value of $2,475,561.
During
the years ended December 31, 2017 and 2016, the Company recorded charges to operations of $0 and $20,464, respectively, for consulting
services rendered by an entity controlled by family members of Dr. Arnold S. Lippa.
A
description of other transactions between the Company and Aurora is provided at Notes 4, 6 and 10.
A
description of advances and notes payable to officers is provided at Note 4.
9.
Commitments and Contingencies
Pending
or Threatened Legal Actions and Claims
By
letter dated November 11, 2014, a former director of the Company, who joined the Company’s Board of Directors on August
10, 2012 in conjunction with the Pier transaction and who resigned from the Company’s Board of Directors on September 28,
2012, asserted a claim for unpaid consulting compensation of $24,000. The Company has not received any further communications
from the former director with respect to this matter.
By
letter dated February 5, 2016, the Company received a demand from a law firm representing a professional services vendor of the
Company alleging an amount due and owing for unpaid services rendered. On January 18, 2017, following an arbitration proceeding,
an arbitrator awarded the vendor the full amount sought in arbitration of $146,082. Additionally, the arbitrator granted the vendor
attorneys’ fees and costs of $47,937. All such amounts have been accrued at December 31, 2017.
By
e-mail dated July 21, 2016, the Company received a demand from an investment banking consulting firm that represented the Company
in 2012 in conjunction with the Pier transaction alleging that $225,000 is due and owing for unpaid investment banking services
rendered. The Company has been in discussions with this firm regarding this matter.
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 consolidated financial statements at December 31, 2017 and
2016 with respect to such matters, including, specifically, the matters noted above. The Company intends to vigorously defend
itself if any of the matters described above results in the filing of a lawsuit or formal claim.
Significant
Agreements and Contracts
Consulting
Agreement
Richard
Purcell was appointed as the Company’s Senior Vice President of Research and Development effective October 15, 2014. Mr.
Purcell provides his services to the Company on a month-to-month basis through his consulting firm, DNA Healthlink, Inc., through
which the Company has contracted for his services, for a monthly cash fee of $12,500. Additional information with respect to shares
of common stock issued to Mr. Purcell is provided at Note 6. Cash compensation expense pursuant to this agreement totaled $150,000
for the years ended December 31, 2017 and 2016, which is included in research and development expenses in the Company’s
consolidated statements of operations for such periods.
Employment
Agreements
On
August 18, 2015, the Company entered into an employment agreement with Dr. James S. Manuso, Ph.D., to be its new President and
Chief Executive Officer. Pursuant to the agreement, which is for an initial term through September 30, 2018 (and which will be
deemed to be automatically extended, upon the same terms and conditions, for successive periods of one year, unless either party
provides written notice of its intention not to extend the term of the agreement at least 90 days prior to the applicable renewal
date), Dr. Manuso received an annual base salary of $375,000. Dr. Manuso is also eligible to earn a performance-based annual bonus
award of up to 50% of his base salary, based upon the achievement of annual performance goals established by the Board of Directors
in consultation with the executive prior to the start of such fiscal year, or any amount at the discretion of the Board of Directors.
Additionally, Dr. Manuso was granted stock options to acquire 261,789 shares of common stock of the Company and is eligible to
receive additional awards under the Company’s Plans in the discretion of the Board of Directors. Dr. Manuso is also entitled
to receive, until such time as the Company establishes a group health plan for its employees, $1,200 per month, on a tax-equalized
basis, as additional compensation to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as
additional compensation for a term life insurance policy and disability insurance policy. Dr. Manuso is also entitled to be reimbursed
for business expenses. Additional information with respect to the stock options granted to Dr. Manuso is provided at Note 6. Cash
compensation accrued pursuant to this agreement totaled $414,600 for the year ended December 31, 2017, and $421,350 for the year
ended December 31, 2016. Such amounts were included in accrued compensation and related expenses in the Company’s
consolidated balance sheet at December 31, 2017 and 2016, respectively, and in general and administrative expenses in the Company’s
consolidated statement of operations for the years ended December 31, 2017 and 2016. On December 9, 2017, Dr. Manuso forgave $878,360
of accrued compensation and related expenses which was the amount owed by the Company as of September 30, 2017. Dr. Manuso does
not receive any additional compensation for serving as Vice Chairman or a member of on the Board of Directors.
Such amounts have not been paid to Dr. Manuso.
Dr.
Manuso had also agreed to purchase newly issued securities of the Company in an amount of $250,000, which was accomplished by
Dr. Manuso’s participation in the first closing of the unit offering of common stock and warrants on August 28, 2015, as
described at Note 6.
On
August 18, 2015, concurrently with the hiring of Dr. James S. Manuso as the Company’s new President and Chief Executive
Officer, Dr. Arnold S. Lippa resigned as the Company’s President and Chief Executive Officer. Dr. Lippa continues to serve
as the Company’s Executive Chairman and as a member of the Board of Directors. Also on August 18, 2015, Dr. Lippa was named
Chief Scientific Officer of the Company, and the Company entered into an employment agreement with Dr. Lippa in that capacity.
Pursuant to the agreement, which is for an initial term through September 30, 2018 (and which will be deemed to be automatically
extended, upon the same terms and conditions, for successive periods of one year, unless either party provides written notice
of its intention not to extend the term of the agreement at least 90 days prior to the applicable renewal date), Dr. Lippa received
an annual base salary of $300,000. Dr. Lippa is also eligible to earn a performance-based annual bonus award of up to 50% of his
base salary, based upon the achievement of annual performance goals established by the Board of Directors in consultation with
the executive prior to the start of such fiscal year, or any amount at the discretion of the Board of Directors. Additionally,
Dr. Lippa was granted stock options to acquire 30,769 shares of common stock of the Company and is eligible to receive additional
awards under the Company’s Plans at the discretion of the Board of Directors. Dr. Lippa is also entitled to receive, until
such time as the Company establishes a group health plan for its employees, $1,200 per month, on a tax-equalized basis, as additional
compensation to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as reimbursement for a
term life insurance policy and disability insurance policy. Dr. Lippa is also entitled to be reimbursed for business expenses.
Additional information with respect to the stock options granted to Dr. Lippa is provided at Note 6. Cash compensation accrued
pursuant to this agreement totaled $339,600 and $339,800 for the years ended December 31, 2017 and 2016, respectively, which is
included in accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31, 2017 and
2016, and in research and development expenses in the Company’s consolidated statement of operations. Cash compensation
accrued to Dr. Lippa for bonuses and under a prior superseded arrangement, while still serving as the Company’s President
and Chief Executive Officer, totaled $94,758 and is included in accrued compensation and related expenses in the Company’s
consolidated balance sheet at December 31, 2017 and 2016, and in general and administrative expenses in the Company’s consolidated
statement of operations. Such amounts have not been paid to Dr. Lippa. Dr. Lippa does not receive any additional compensation
for serving as Executive Chairman and on the Board of Directors. On December 9, 2017, Dr. Lippa forgave $807,497 of accrued compensation
and related expenses which was the amount owed by the Company as of September 30, 2017.
On
August 18, 2015, the Company also entered into employment agreements with Jeff E. Margolis, in his continuing role as Vice President,
Secretary and Treasurer, and Robert N. Weingarten, in his continuing role as then Vice President and Chief Financial Officer.
Mr. Weingarten resigned from the Company in February 2017. Pursuant to the agreements, which are for initial terms through September
30, 2016 (and which will be deemed to be automatically extended upon the same terms and conditions, for successive periods of
one year, unless either party provides written notice of its intention not to extend the term of the agreement at least 90 days
prior to the applicable renewal date), Mr. Margolis and Mr. Weingarten each received an annual base salary of $195,000, and each
is also eligible to receive performance-based annual bonus awards ranging from $65,000 to $125,000, based upon the achievement
of annual performance goals established by the Board of Directors in consultation with the executive prior to the start of such
fiscal year, or any amount at the discretion of the Board of Directors. Additionally, Mr. Margolis and Mr. Weingarten were each
granted stock options to acquire 30,769 shares of common stock of the Company and both are eligible to receive additional awards
under the Company’s Plans at the discretion of the Board of Directors. Mr. Margolis and Mr. Weingarten are also each entitled
to receive, until such time as the Company establishes a group health plan for its employees, $1,200 per month, on a tax-equalized
basis, as additional compensation to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as
reimbursement for a term life insurance policy and disability insurance policy. Both Mr. Margolis and Mr. Weingarten are also
each entitled to be reimbursed for business expenses. Additional information with respect to the stock options granted to Mr.
Margolis and Mr. Weingarten is provided at Note 6. Cash compensation accrued pursuant to these agreements totaled $269,100 for
Mr. Margolis and $28,524 from Mr. Weingarten for the year ended December 31, 2017 and $433,200 ($216,600 each) for the year ended
December 31, 2016, which is included in accrued compensation and related expenses in the Company’s consolidated balance
sheet at December 31, 2017 and 2016, and in general and administrative expenses in the Company’s consolidated statement
of operations. On December 9, 2017, Mr. Margolis forgave $560,876 of accrued compensation and related expenses which was the amount
owed by the Company as of September 30, 2017. On December 9, 2017, Mr. Weingarten forgave $200,350 which was 50% of the amount
owed by the Company as of September 30, 2017. Cash compensation accrued to Mr. Margolis and Mr. Weingarten for bonuses and under
prior superseded arrangements totaled $151,612 ($75,806 each) and is also included in accrued compensation and related expenses
in the Company’s consolidated balance sheet at September 30, 2016, and in general and administrative expenses in the Company’s
consolidated statement of operations. Such amounts have not been paid to Mr. Margolis or Mr. Weingarten. Mr. Margolis and Mr.
Weingarten also continue to serve as Directors of the Company, but do not receive any additional compensation for serving on the
Board of Directors.
The
employment agreements between the Company and each of Dr. Manuso, Dr. Lippa, Mr. Margolis and Mr. Weingarten, respectively, provided
that the payment obligations associated with the first year base salary were to accrue, but no payments were to be made, until
at least $2,000,000 of net proceeds from any offering or financing of debt or equity, or a combination thereof, was received by
the Company, at which time scheduled payments were to commence. As this financing milestone has not been achieved, Dr. Manuso,
Dr. Lippa, Mr. Margolis and Mr. Weingarten (who are each also directors of the Company) have each agreed, effective as of August
11, 2016, to continue to defer the payment of such amounts indefinitely, until such time as the Board of Directors of the Company
determines that sufficient capital has been raised by the Company or is otherwise available to fund the Company’s operations
on an ongoing basis.
On
February 17, 2017 Robert N. Weingarten resigned as a director and as the Company’s Vice President and Chief Financial Officer.
He remains a consultant to the Company.
Jeff
E. Margolis’ employment agreement was amended effective July 1, 2017. The employment agreement amendment called for payment
in three installments in cash of the $60,000 bonus granted on June 30, 2015. A minimum of $15,000 was to be payable in cash as
follows: (a) $15,000 payable in cash upon the next closing (after July 1, 2017) of any financing in excess of $100,000 (b) $15,000
payable by the end of the following month assuming cumulative closings (beginning with the closing that triggered (a)) in excess
of $200,000 and (c) $30,000 payable in cash upon the next closing of any financing in excess of an additional $250,000
.
The conditions of (a), (b) and (c) above were met as of December 31, 2017, however Mr. Margolis has waived the Company’s
obligation to make any payments of the cash bonus until the Board of Directors of the Company determines that sufficient capital
has been raised by the Company or is otherwise available to fund the Company’s operations on an ongoing basis. Obligations
through September 30, 2017 were forgiven by Mr. Margolis as described below.
On
December 9, 2017, the Company accepted offers from Dr. Arnold S. Lippa, Dr. James S. Manuso, Jeff E. Margolis, James E. Sapirstein,
Kathryn MacFarlane and Robert N. Weingarten (former Chief Financial Officer) pursuant to which such individuals would forgive
accrued compensation and related accrued expenses as of September 30, 2017 in the following amounts: $807,497; $878,360; $560,876;
$55,000; $55,000 and $200,350 respectively for a total of $2,557,083. On the same date, the Company granted to the same individuals,
or designees of such individuals from the 2015 Plan, non-qualified stock options, exercisable for 10 years with an exercise price
of $1.45 per share of common stock, among other terms and features as follows: 559,595; 608,704; 388,687; 38114; 38,114 and 138,842
respectively, for options exercisable into a total of 1,772,055 shares of common stock with a total value of $2,475,561.
University
of California, Irvine License Agreements
The
Company entered into a series of license agreements in 1993 and 1998 with the University of California, Irvine (“UCI”)
that granted the Company proprietary rights to certain chemical compounds that acted as ampakines and to 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 UCI; (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. The Company was required, among other terms and conditions,
to pay UCI a license fee, royalties, patent costs and certain additional payments.
Under
such license agreements, the Company was required to make minimum annual royalty payments of approximately $70,000. The Company
was also required to spend a minimum of $250,000 per year to advance the ampakine compounds until the Company began to market
an ampakine compound. The commercialization provisions in the agreements with UCI required the Company to file for regulatory
approval of an ampakine compound before October 2012. In March 2011, UCI agreed to extend the required date for filing regulatory
approval of an ampakine compound to October 2015. During December 2012, the Company informed UCI that it would be unable to make
the annual payment due to a lack of funds. The Company believes that this notice, along with its subsequent failure to make its
minimum annual payment obligation, constituted a default and termination of the license agreements.
On
April 15, 2013, the Company received a letter from UCI indicating that the license agreements between UCI and the Company had
been terminated due to the Company’s failure to make certain payments required to maintain the agreements. Since the patents
covered in these license agreements had begun to expire and the therapeutic uses described in these patents were no longer germane
to the Company’s new focus on respiratory disorders, the loss of these license agreements is not expected to have a material
impact on the Company’s current drug development programs. In the opinion of management, the Company has made adequate provision
for any liability relating to this matter in its consolidated financial statements at December 31, 2017 and 2016.
University
of Alberta License 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. The Company agreed to pay the University of Alberta a licensing fee and a patent issuance fee, which were paid, and
prospective payments consisting of a royalty on net sales, sublicense fee payments, maintenance payments and milestone payments.
The prospective maintenance payments commence on the enrollment of the first patient into the first Phase 2B clinical trial and
increase upon the successful completion of the Phase 2B clinical trial. As the Company does not at this time anticipate scheduling
a Phase 2B clinical trial in the near term, no maintenance payments to the University of Alberta are currently due and payable,
nor are any maintenance payments expected to be due in the near future in connection with the license agreement.
Transactions
with Biovail Laboratories International SRL
In
March 2010, the Company entered into an asset purchase agreement with Biovail Laboratories International SRL (“Biovail”).
Pursuant to the asset purchase agreement, Biovail acquired the Company’s interests in CX717, CX1763, CX1942 and the injectable
dosage form of CX1739, as well as certain of its other ampakine compounds and related intellectual property for use in the field
of respiratory depression or vaso-occlusive crises associated with sickle cell disease. The agreement provided the Company with
the right to receive milestone payments in an aggregate amount of up to $15,000,000 plus the reimbursement of certain related
expenses, conditioned upon the occurrence of particular events relating to the clinical development of certain assets that Biovail
acquired. None of these events occurred.
As
part of the transaction, Biovail licensed back to the Company certain exclusive and irrevocable rights to some acquired ampakine
compounds, other than CX717, an injectable dosage form of CX1739, CX1763 and CX1942, for use outside of the field of respiratory
depression or vaso-occlusive crises associated with sickle cell disease. Accordingly, following the transaction with Biovail,
the Company retained its rights to develop and commercialize the non-acquired ampakine compounds as a potential treatment for
neurological diseases and psychiatric disorders. Additionally, the Company retained its rights to develop and commercialize the
ampakine compounds as a potential treatment for sleep apnea disorders, including an oral dosage form of ampakine CX1739.
In
September 2010, Biovail’s parent corporation, Biovail Corporation, combined with Valeant Pharmaceuticals International in
a merger transaction and the combined company was renamed “Valeant Pharmaceuticals International, Inc.” (“Valeant”).
Following the merger, Valeant and Biovail conducted a strategic and financial review of their product pipeline and, as a result,
in November 2010, Biovail announced its intent to exit from the respiratory depression project acquired from the Company in March
2010.
Following
that announcement, the Company entered into discussions with Biovail regarding the future of the respiratory depression project.
In March 2011, the Company entered into a new agreement with Biovail to reacquire the ampakine compounds, patents and rights that
Biovail had acquired from the Company in March 2010. The new agreement provided for potential future payments of up to $15,150,000
by the Company based upon the achievement of certain developments, including new drug application submissions and approval milestones.
Biovail is also eligible to receive additional payments of up to $15,000,000 from the Company based upon the Company’s net
sales of an intravenous dosage form of the compounds for respiratory depression.
At
any time following the completion of Phase 1 clinical studies and prior to the end of Phase 2A clinical studies, Biovail retains
an option to co-develop and co-market intravenous dosage forms of an ampakine compound as a treatment for respiratory depression
and vaso-occlusive crises associated with sickle cell disease. In such an event, the Company would be reimbursed for certain development
expenses to date and Biovail would share in all such future development costs with the Company. If Biovail makes the co-marketing
election, the Company would owe no further milestone payments to Biovail and the Company would be eligible to receive a royalty
on net sales of the compound by Biovail or its affiliates and licensees.
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 material terms of which were similar to a License Agreement between the parties that had been previously terminated
on March 21, 2013. The 2014 License Agreement became effective on September 18, 2014, 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 outstanding patent costs aggregating $15,840, and (iii) the assignment to the University of Illinois of rights
the Company held in certain patent applications, all of which conditions were fulfilled.
The
2014 License Agreement granted 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 of Illinois 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 OSA, the most common form of sleep apnea.
The
2014 License Agreement provides for various commercialization and reporting requirements commencing on June 30, 2015 and also
requires the Company to pay the University of Illinois a license fee, royalties, patent costs and certain milestone payments.
The 2014 License Agreement provides for various royalty payments by the Company, including a royalty on net sales of 4%, payment
on sub-licensee revenues of 12.5%, and a minimum annual royalty of $100,000 beginning in 2015, which is due and payable on December
31 of each year. The 2016 minimum annual royalty of $100,000 was paid as scheduled in December 2016, and the 2017 minimum annual
royalty of $100,000 was paid as scheduled in December 2017. In the year after the first application for market approval is submitted
to the FDA and until approval is obtained, the minimum annual royalty will increase to $150,000. In the year after the first market
approval is obtained from the FDA and until the first sale of a product, the minimum annual royalty payable by the Company will
increase to $200,000. In the year after the first commercial sale of a product, the minimum annual royalty will increase to $250,000.
The
2014 License Agreement also provides for certain one-time milestone payments by the Company. A payment of $75,000 is due within
five days after any one of the following: (a) dosing of the first patient with a product in a Phase 2 human clinical study anywhere
in the world that is not sponsored by the University of Illinois, (b) dosing of the first patient in a Phase 2 human clinical
study anywhere in the world with a low dose of dronabinol, or (c) dosing of the first patient in a Phase 1 human clinical study
anywhere in the world with a proprietary reformulation of dronabinol. A payment of $350,000 is due within five days after dosing
of the first patient with a product in a Phase 3 human clinical trial anywhere in the world. A payment of $500,000 is due within
five days after the first new drug application filing with the FDA or a foreign equivalent for a product. A payment of $1,000,000
is due within 12 months after the first commercial sale of a product.
During
the years ended December 31, 2017 and 2016, the Company recorded a charge to operations of $100,000 and $100,000, respectively,
with respect to its 2017 and 2016 minimum annual royalty obligation, which is included in research and development expenses in
the Company’s consolidated statement of operations for the years ended December 31, 2017 and 2016.
Research
Contract with the University of Alberta
On
January 12, 2016, the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of
ampakines at a variety of dosage and formulation levels in the potential treatment of Pompe Disease, apnea of prematurity and
spinal cord injury, as well as to conduct certain electrophysiological studies to explore the ampakine mechanism of action for
central respiratory depression. The Company agreed to pay the University of Alberta total consideration of approximately CAD$146,000
(approximately US$111,000), consisting of approximately CAD$85,000 (approximately US$65,000) of personnel funding in cash in four
installments during 2016, to provide approximately CAD$21,000 (approximately US$16,000) in equipment, to pay patent costs of CAD$20,000
(approximately US$15,000), and to underwrite additional budgeted costs of CAD$20,000 (approximately US$15,000). As of December
31, 2017, the Company had recorded amounts payable in respect to this Research Contract of US$16,207 (CAD$21,222) which amount
was paid in US dollars in January 2018. The conversion to US dollars above utilizes an exchange rate of approximately US$0.76
for every CAD$1.00.
The
University of Alberta received matching funds through a grant from the Canadian Institutes of Health Research in support of this
research. The Company retained the rights to research results and any patentable intellectual property generated by the research.
Dr. John Greer, faculty member of the Department of Physiology, Perinatal Research Centre and Women & Children’s Health
Research Institute at the University of Alberta collaborated on this research. The studies were completed in 2016.
National
Institute of Drug Abuse Agreement
On
January 19, 2016, the Company announced that that it has reached an agreement with the Medications Development Program of the
National Institute of Drug Abuse (“NIDA”) to conduct research on the Company’s ampakine compounds CX717 and
CX1739. The agreement was entered into as of October 19, 2015, and on January 14, 2016, the Company and NIDA approved the proposed
protocols, allowing research activities to commence.
NIDA
will evaluate the compounds using pharmacologic, pharmacokinetic and toxicologic protocols to determine the potential effectiveness
of the ampakines for the treatment of drug abuse and addiction. Initial studies will focus on cocaine and methamphetamine addiction
and abuse, and will be contracted to outside testing facilities and/or government laboratories, with all costs to be paid by NIDA.
The Company will provide NIDA with supplies of CX717 and CX1739 and will work with the NIDA staff to refine the protocols and
dosing parameters. The Company will retain all intellectual property, as well as proprietary and commercialization rights to these
compounds.
Duke
University Clinical Trial Agreement
On
January 27, 2015, the Company entered into a Clinical Study and Research Agreement (the “Agreement”) with Duke University
to develop and conduct a protocol for a program of clinical study and research at a total cost of $50,579, which was completed
in March 2015 and charged to research and development expenses during the three months ended March 31, 2015. On October 30, 2015,
the Agreement was amended to provide for a Phase 2A clinical trial of CX1739 at a cost of $558,268. During March 2016, a Phase
2A clinical trial at Duke University School of Medicine was initiated, with the dosing portion of the clinical trial completed
in June 2016 and the clinical trial formally completed on July 11, 2016. On July 28, 2016, the Agreement was further amended to
reflect additional post-clinical trial costs of $120,059, increasing the total amount payable under the Agreement to $678,327.
During the the twelve months ended December 31, 2017 and 2016, the Company charged $36,420 and $602,642, respectively, to research
and development expenses with respect to work conducted pursuant to the amended Agreement.
Sharp
Clinical Services, Inc. Agreement
The
Company has various agreements with Sharp Clinical Services, Inc. to provide packaging, labeling, distribution and analytical
services.
Covance
Laboratories Inc. Agreement
On
October 26, 2016, the Company entered into a twelve month agreement with Covance Laboratories Inc. to provide compound testing
and storage services with respect to CX1739, CX1866 and CX1929 at a total budgeted cost of $35,958. This agreement was renewed
in October 2017.
Summary
of Principal Cash Obligations and Commitments
The
following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of
December 31, 2017, aggregating $1,340,350.
|
|
|
|
|
Payments
Due By Year
|
|
|
|
Total
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
Research
and development contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Clinical
trial agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
License
agreements
|
|
|
500,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Digital
media consulting agreement
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment
and consulting agreements (1)
|
|
|
820,350
|
|
|
|
820,350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,340,350
|
|
|
$
|
940,350
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
(1)
The payment of such amounts has been deferred indefinitely, as described above at “Employment Agreements”.
10.
Subsequent Events
On
April 5, 2018, the Board of Directors approved and the Company granted a non-qualified stock option from the 2015 Plan
to a vendor, in satisfaction of $124,025 of amounts owed to that vendor (“Vendor Option”). The Vendor Option
is exercisable into 125,000 shares of common stock at $1.12 per share, which was the closing price of the Company’s
common stock on April 5, 2018 as reported by OTC Markets, vested upon grant and is exercisable for five years. The Vendor Option
had an estimated value on April 5, 2018, based upon the Black-Scholes option valuation method of $1.081 per share of common stock,
or $135,125. The assumptions used for the valuation of the Vendor Options included a stock price and exercise price of $1.12,
an annual volatility of 186.07%, a risk-free rate equal to the yield on the five-year Treasury Note of 2.64% and a zero expected
dividend yield.
On
April 5, 2018, the Board of Directors approved and the Company granted a non-qualified stock option from the 2015 Plan
to Robert N. Weingarten (the “Weingarten Option”), the Company’s most recent former Chief Financial Officer
who is also a former member of the Company’s Board of Directors, which grant was in connection with Mr. Weingarten’s
agreement to forgive $200,350 of accrued compensation and related costs owed to him. The Weingarten Option is exercisable
into 185,388 shares of common stock at $1.12 per share, which was the closing price of the Company’s common stock
on April 5, 2018 as reported by OTC Markets, vested upon grant and is exercisable for five years. The Weingarten Option had an
estimated value on April 5, 2018, based upon the Black-Scholes option valuation method of $1.081 per share of common stock, or
$200,404. The assumptions used for the valuation of the Weingarten Option included a stock price and exercise price of $1.12,
an annual volatility of 186.07%, a risk-free rate equal to the yield on the five-year Treasury Note of 2.64% and a zero expected
dividend yield.
On
April 5, 2018, the Company agreed to issue one or more demand promissory notes, in exchange for borrowings up to
a maximum principal amount of $100,000 in the aggregate to Arnold S. Lippa and James S. Manuso, the Company’s Executive
Chairman and Chief Scientific Officer and the Company’s Vice Chairman and Chief Executive Officer respectively (“New
Officer Notes”). The New Officer Notes bear simple interest at 10% per year. Demand for payment shall be available only
after June 30, 2018. Until then, the principal amount of the New Officer Notes will mandatorily exchange into the first
financing by the Company that results in accounting for the financing as an equity financing (consisting solely of convertible
preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only into preferred
stock or common stock) that would be considered as “permanent equity” under United States Generally Accepted Accounting
Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore classified within
stockholders’ equity, but excluding any form of debt or convertible debt or preferred stock redeemable at the discretion
of the holder. The principal amount of the New Officer Notes exchanged shall be included in determining if the minimum amount,
if any, with respect to such offering is met. Accrued and unpaid interest may be exchanged into such offering, but is not mandatorily
exchangeable and shall not be considered in determining if the minimum amount has been met. If no such offering
has a first closing prior to June 30, 2018, a demand for payment of the New Officer Notes may be made individually by the holders
of such notes.
On
February 28, 2018, the Company entered into an exchange agreement with a holder of two outstanding 10% Convertible Notes, both
of which notes were subject to notices of default and thus were accruing compounded interest at 12% per year commencing
on the dates of the notices of default. The total amount of principal and accrued interest that was due and payable was $43,552.
The notes were exchanged for 58,071 shares of the Company’s common stock. The effective exchange rate was $0.75 per share
of the Company’s common stock. The closing price of the Company’s common stock on February 28, 2018, was $1.90 as
reported by the OTC Markets. On February 28, 2018, the Board of Directors authorized the offering of a similar exchange arrangement
at the same effective exchange rate of $0.75 per share of the Company’s common stock to all remaining holders of 10% Convertible
Notes. As of December 31, 2017, the aggregate amount of principal and accrued interest of the 10% Convertible Notes that have
not been exchanged was $331,924. Such notes will continue to accrue interest until exchanged, if exchanged. If such notes are
not exchanged, they will continue to accrue interest until either paid or disposed of in some other manner. There can be no assurance
that any of the additional holders of the remaining 10% Convertible Notes will exchange their notes.
RespireRx
Pharmaceuticals Inc.
Annual
Report on Form 10-K
Year
Ended December 31, 2017