Risk
Factors
Any
investment in our securities involves a high degree of risk. Investors should carefully consider the risks described below and
all of the information contained in this prospectus before deciding whether to purchase our securities. Our business, financial
condition or results of operations could be materially adversely affected by these risks if any of them actually occur. This prospectus
also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described
below and elsewhere in this prospectus.
Risks
Related to the COVID-19 pandemic
The
novel coronavirus (COVID-19) pandemic may negatively impact our ability to successfully develop and commercialize our product
candidates and technologies and may ultimately affect our business, financial condition and results of operations.
In
March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have
implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, supply chains,
consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn
across many global economies. The COVID-19 pandemic rapidly escalated in the United States and continues to evolve, creating significant
uncertainty and economic disruption, and leading to record levels of unemployment nationally. Numerous state and local jurisdictions
had imposed, and those and others in the future may impose, shelter-in-place orders, quarantines, shut-downs of non-essential
businesses, and similar government orders and restrictions on their residents to control the spread of COVID-19.
The
COVID-19 pandemic and government responses thereto have made it very difficult to recruit clinical trial subjects and patients
and to conduct clinical trials in general. We expect the life sciences industry and clinical trial activity to continue to face
challenges arising from quarantines, site closures, travel limitations, interruptions to the supply chain for investigational
products and other considerations if site personnel or trial subjects become infected with or are significantly at risk of contracting
COVID-19. These challenges may lead to difficulties in meeting protocol-specified procedures. Further, in response to the public
health emergency, the FDA issued guidance in March and July 2020 emphasizing that safety of trial participants is critically important.
Decisions to continue or discontinue individual patients or the trial are expected to be made by trial sponsors in consultation
with clinical investors and Institutional Review Boards, which may lead to the implementation of additional protocols such as
COVID-19 screening procedures, resulting in potential delays and additional costs. The risks, strategic and operational challenges
and costs of conducting such trials as a result of the global pandemic have exacerbated an already challenging clinical trial
process, which may negatively impact our ability to plan or conduct trials if we secure sufficient financing to enable us to pursue
such activity.
In
addition, we expect to be impacted by the downturn in the U.S. economy, which could have an adverse impact on our ability to raise
capital and our business operations.
The
extent to which COVID-19 ultimately impacts our business, financial condition and results of operations will depend on future
developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity
and duration of the COVID-19 pandemic and the effectiveness of actions taken to contain the COVID-19 pandemic or treat its impact,
among others. Additionally, the extent to which COVID-19 ultimately impacts our operations will depend on a number of factors,
many of which will be outside of our control. The COVID-19 pandemic is evolving and new information emerges regularly; accordingly,
the ultimate consequences of the COVID-19 pandemic cannot be predicted with certainty. In addition to the disruptions adversely
impacting our business and financial results, they may also have the effect of heightening many of the other risks described in
these risk factors, including risks relating to our ability to begin to generate revenue, to generate positive cash flow, our
relationships with third parties, and many other factors. We will attempt to minimize these impacts, but there can be no assurance
that we will be successful in doing so.
Risks
Related to Our Business and Our Need for Financing
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 consolidated financial statements as of December 31, 2019 and 2018, our independent
registered public accounting firm 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 condensed consolidated financial
statements at June 30, 2020 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 condensed 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.
Our
independent registered public accounting firm has identified material weaknesses in our financial reporting process.
At
December 31, 2019, our independent registered public accounting firm identified material weaknesses in our internal control over
financial reporting. There can be no assurance that we will be able to successfully implement our plans to remediate the material
weaknesses in our financial reporting process. Our failure to successfully implement our plans to remediate these material weaknesses
could cause us to fail to meet our reporting obligations, to produce timely and reliable financial information, and to effectively
prevent fraud. Additionally, such failure, or other weaknesses that we may experience in our financial reporting process or other
internal controls, could cause investors to lose confidence in our reported financial information, which could have a negative
impact on our financial condition and stock price.
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 quarter ended June 30, 2020, we have generated only
negligible operating revenues. For the six months ended June 30, 2020, our net loss was $1,762,855 and as of June 30, 2020,
we had an accumulated deficit of $168,271,940. We have not generated any revenue from product sales to date, we do not expect
to generate revenue in the near term, 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 biopharmaceutical 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 be unable to continue our business
operations.
We
require additional cash resources for basic operations and will require substantial additional funds to advance our research and
development programs and to continue our operations, particularly if we try to independently conduct later-stage clinical
testing and apply for regulatory approval of any of our product candidates, and if we try to independently undertake the
marketing and promotion of our product candidates if they are approved for commercialization. Additionally, we may require additional
funds in the event that we decide to pursue strategic acquisitions of or licenses to use other products or businesses. Our existing
cash resources will not be sufficient to meet our requirements for the rest of 2020, and any net cash proceeds that we are
able to generate through the exercise of our put right under the Purchase Agreement, by itself, will be insufficient to continue
our operations. We also need additional capital in the near term to fund ongoing 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, biopharmaceutical, biotechnology,
specialty pharmaceutical, or other healthcare companies that include the license or rights to the technologies and product candidates
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. As a result, our outstanding shares of Common Stock may be significantly diluted and/or subject to
senior rights of preferred equity holders.
Our
cash requirements in the future may differ significantly from our current estimates, depending on a number of factors, including:
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our
ability to raise equity or debt capital, or our ability to obtain in-kind services which may be more difficult during the
COVID-19 pandemic;
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the
results of any preclinical studies and clinical trials we may conduct;
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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 or grants;
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the
costs involved in obtaining and enforcing patents or engaging in litigation with 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 that any
of 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 or in-kind services through arrangements with collaborative partners
or others that may require us to relinquish certain or all rights to certain of 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.
Common
Stock reserve requirements may restrict our ability to raise capital and continue to operate our business
Common
Stock reserve requirements may restrict our ability to raise capital and continue to operate our business. We have received temporary
waivers of certain of the Common Stock reserve requirements associated with certain of our convertible notes and certain
related warrants. These waivers are necessary to ensure that we do not default on such notes or the terms of such warrants while
we are seeking to increase the number of authorized shares of our Common Stock. As of September 30, 2020 taking into account the
waivers and the transactions effected on that date, the Company was required to reserve 251,011,042 shares of its authorized and
unissued Common Stock with respect to such notes and warrants that were not subject to such waivers and after reserving for outstanding
options and other outstanding warrants, and had 422,157,997 shares of authorized but unissued shares of Common Stock, including
87,036,986 authorized, unissued and unreserved shares of Common Stock available. If we breach the contractual reserve requirements
we will be in default of such contractual obligations which may have material adverse consequences which may make it more difficult
to raise additional necessary capital. The Company is seeking stockholder approval over a ten-to-one (10:1) reverse stock split
and an increase in our authorized capital stock, both of which would provide the Company additional authorized but unissued and
unreserved capital stock available for future issuances. See “Prospectus Summary—Recent Developments.”
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
our acquisition of Pier, we gained access to a pre-existing relationship between Pier and the University of Illinois at Chicago
(the “UIC”). Effective in September 2014, the Company entered into an exclusive license agreement (the “UIC
License Agreement”) with the UIC, which gave the Company certain exclusive rights with respect to certain patents and patent
applications in the United States and other countries claiming the use of dronabinol and other cannabinoids for the treatment
of sleep-related breathing disorders, including sleep apnea. The UIC License Agreement obligates the Company to comply with various
commercialization and reporting requirements and to make various royalty payments, including potential one-time and annual royalty
payments, as well as payments upon the achievement of certain development milestones.
The
Company and UWMRF executed the UWMRF Patent License Agreement effective August 1, 2020 pursuant to which RespireRx licensed the
intellectual property identified therein, including with respect to GABAkines. In consideration for the licenses granted, the
Company will pay to UWMRF patent filing and prosecution costs, annual license maintenance fees, one-time milestone payments, and
annual royalties.
If
we are unable to comply with the terms of these licenses, such as required payments thereunder, these licenses might be terminated.
We
may not be able to successfully develop and commercialize our product candidates and technologies.
The
development of our product candidates is subject to risks 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 product candidates are in the
preclinical or early to mid-clinical stage of development and although we have previously completed certain Phase 2 trials, and
although we are planning for additional preclinical and clinical trials, including potentially an advanced-clinical stage trial,
we do not have any currently active trials. Accordingly, we will require significant additional funding for research, development
and clinical testing of our product candidates, 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. We cannot be certain that
we will be able to successfully complete any of our research and development activities.
Even
if we do complete our research and development activities, we may not be able to successfully market any of the product
candidates or be able to obtain the necessary regulatory approvals or assure that healthcare providers and payors will accept
our product candidates. We also face the risk that any or all of our product candidates will not work as intended or that they
will be unsafe, or that, even if they do work and are safe, that our product candidates 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 product candidates and
technologies, and we will be dependent on our strategic partners if we do.
We
are seeking pharmaceutical company and other strategic partners to participate with us in the development of major indications
for our cannabinoid and neuromodulator compounds. These relationships may be structured as agreements that would provide us with
additional funds or in-kind services 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.
We
may not be able to compete with other biopharmaceutical or pharmaceutical companies in research, development or the marketing
our products.
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 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.
Our
patents and patent applications do not cover the entire world, thus limiting the potential exclusive commercialization of our
products to those countries in which we have intellectual property protection. We are aware of at least one company that may be
developing a product or product similar to one of our prospective products for our proposed indication in countries where we do
not have intellectual property protection. Such company or companies may choose to compete with us in countries where we do have
intellectual property protection and cause us to expend resources defending our intellectual property. A liberal regulatory environment
or unenforced or poorly enforced regulations may encourage competition from non-drug products such as medical marijuana or dietary
supplements and similar products containing cannabis-derived molecules making claims that would be competitive with our proposed
regulatory-approved claims. Since our target markets are very large, there is a great deal of economic incentive for others to
enter and compete in those markets. We must compete with other companies with respect to their research and development efforts
and for capital and other forms of funding. An inability to compete would have a material adverse impact on our business operations.
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 clinical study or commercial use, the termination
of, or the placing of a hold on a clinical study, or may delay or prevent filing or approval of marketing applications for our
product candidates. 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 product candidates, or to do so on commercially reasonable
terms, we may not be able to complete development or marketing of our product candidates.
We
have announced a restructuring plan to facilitate the financing of our business initiatives. We may not achieve some or all of
the expected benefits of our restructuring plan and the restructuring may adversely affect our business.
As
further discussed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in this prospectus, the Company is considering an internal restructuring plan that contemplates spinning out
our two drug platforms under ResolutionRx and EndeavourRx into separate operating businesses or subsidiaries. The intent of this
restructuring is to facilitate financing of the programs and platforms underlying ResolutionRx and EndeavourRx, and to better
align our human resources with our clinical development strategy.
Implementation
of a restructuring plan is costly and disruptive to our business, and we may encounter unexpected costs while implementing the
restructuring plan. Even if implemented, may not be successful in attracting the necessary sources of financing or recruiting
the necessary human resources to achieve the intended results. As such, we may not be able to obtain the estimated benefits that
are initially anticipated in connection with our restructuring in a timely manner or at all. We may need to undertake additional
restructurings in the future. As a result of any restructuring, we may experience a loss of continuity, loss of accumulated knowledge
and/or inefficiency during transitional periods and may lose momentum in the development of our product candidates. Additionally,
reorganization and restructuring can require a significant amount of management and other employees’ time and focus, which
may divert attention from operating and growing our business. Any failure to properly execute the restructuring plans could result
in total costs that are greater than expected and cause us not to achieve the expected long-term operational benefits, and might
adversely affect our financial condition, operating results and future operations.
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. 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.
We
have not voluntarily implemented various corporate governance measures, in the absence of which stockholders may have more limited
protections against interested director transactions, conflicts of interests and similar matters.
We
have not adopted any corporate governance measures, since our securities are not yet listed on a national securities exchange
and we are not required to do so. We have not adopted corporate governance measures such as separate audit or other independent
committees of our Board as we presently have only one independent director. If we expand our board membership in future periods
to include additional independent directors, we may seek to establish an audit and other committees of our Board. It is possible
that if our Board included additional independent directors and if we were to adopt some or all of these corporate governance
measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested
directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating
and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation
packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest
in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance
measures in formulating their investment decisions.
Risks
Related to this Offering
The
Selling Stockholder will pay less than the then-prevailing market price for our Common Stock.
Our Common Stock to be sold to the Selling
Stockholder pursuant to the Purchase Agreement will be purchased at a price equal to eighty-five percent (85%) of the lowest daily
volume weighted average price during a pricing period of five consecutive trading days prior to the date that the Selling
Stockholder purchases and pays for such shares. The Selling Stockholder has a financial incentive to sell our Common Stock
immediately upon receiving the shares to realize the profit equal to the difference between the discounted price and the market
price, and will have the right and ability to sell the shares during the pricing period. If the Selling Stockholder sells
the shares, the price of our Common Stock could decrease. Regardless of whether our stock price decreases, the Selling Stockholder
may continue to have incentive to sell the shares of our Common Stock that it holds, due to the ongoing discount. These sales
may have a further downward impact on our stock price. If the price of our Common Stock falls to par value of $0.001 per
share, we may be unable to utilize the put options and access the equity line.
We
may not be able to access sufficient funds under the Purchase Agreement when needed.
Our
ability to put shares to the Selling Stockholder and obtain funds under the Purchase Agreement is limited by the terms and conditions
in the Purchase Agreement, including restrictions on when we may exercise our put right, restrictions on the amount we may put
to the Selling Stockholder at any one time, which is determined in part by the trading volume of our Common Stock, and a limitation
on our ability to put shares to the Selling Stockholder to the extent that it would cause the Selling Stockholder to beneficially
own more than 4.99% of our outstanding shares. In addition, we do not expect the commitment under the Purchase Agreement to satisfy
all of our funding needs, even if we are able and choose to take full advantage of the commitment.
The Selling Stockholder may sell a large
number of shares under the Purchase Agreement, causing dilution and downward pricing pressure.
Although the Purchase Agreement contains
a beneficial ownership limitation that provides that the Selling Stockholder is not obligated to purchase shares thereunder to
the extent such purchase would result in the Selling Stockholder or its affiliates beneficially owning more than 4.99%
of our Common Stock at any one time, such limitation does not prevent the Selling Stockholder from selling shares of our
Common Stock received in connection with a put exercise, and then receiving additional shares of our Common Stock in connection
with a subsequent put exercise. In this way, the Selling Stockholder could sell more than 4.99% of the outstanding Common Stock
in a relatively short time frame while never holding more than 4.99% at one time. Large issuances to the Selling Stockholder
under the Purchase Agreement could cause significant dilution, and the resulting high volume of sales by the Selling Stockholder
could put further downward pressure on the trading price of our Common Stock. We will, however, have complete control over when,
or if, to exercise our put right.
Risks
Related to the Trading and Ownership of our Common Stock and our Capital Structure
Our
stock price is volatile and our Common Stock could decline in value.
Our
Common Stock is currently quoted for public trading on the OTCQB Venture Market. The trading price of our Common Stock has been
subject to wide fluctuations and may fluctuate in response to a number of factors, many of which will be beyond our control.
The
market price of securities of life sciences companies in general has been very unpredictable. Broad market and industry factors
may adversely affect the market price of our Common Stock, regardless of our operating performance. In the past, following periods
of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted.
Such litigation, if instituted, could result in substantial costs for us and a diversion of management’s attention and resources.
The
range of sales prices of our Common Stock for the period between January 1, 2020 and September 30, 2020 and the fiscal
year ended December 31, 2019, as quoted on the OTCQB, was $0.0033 to $0.1499 and $0.0771 to $0.8500, respectively. The
following factors, in addition to factors that affect the market generally, could significantly affect our business, and may cause
volatility or a decline in the market price of our Common Stock:
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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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legal
developments regarding cannabinoids and cannabis products 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;
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changes
in healthcare reimbursement policies and healthcare regulations;
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future
issuances and sales of our Common Stock, including pursuant to conversions of our outstanding convertible instruments and
this offering;
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our Common Stock being delisted
from the OTCQB; and
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failure to raise additional needed funds.
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At
times, 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 non-existent.
Recently, our Common Stock has been more “broadly” traded, meaning that it has been trading in higher volumes; however,
there can be no assurance that this attribute will continue. 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 our 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 shares of our
Common Stock are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those
sales with a lesser or no adverse impact on its share price.
Future
sales could depress the market price for our 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 substantially dilute the holdings of existing stockholders, adversely affect the prevailing market price of our Common
Stock and make it more difficult for us to raise funds through future offerings of Common Stock.
As
of September 30, 2020, we had 577,842,003 shares of our Common Stock outstanding, and we are registering the resale
of up to 115,000,000 shares of Common Stock under the registration statement of which this prospectus forms a part. As
of the date of this prospectus, none of the 115,000,000 shares are included in the number of outstanding shares of Common
Stock as of September 30, 2020.
If
all warrants and options outstanding as of September 30, 2020 were exercised prior to their respective expiration dates,
up to 288,093,580 additional shares of our Common Stock could become freely tradable. As of September 30, 2020,
there were remaining outstanding convertible notes totaling $538,224 inclusive of accrued interest. Of that amount, $497,009
was convertible into 47,239,857 shares of Common Stock and the remainder into an indeterminate number of shares of
Common Stock as such notes may convert, at the option of each note holder, acting separately and independently of the other note
holders, into the next exempt private securities offering of equity securities. As is referenced elsewhere in this filing, parties
to which we have issued such convertible instruments include Power Up Lending Group Ltd., Crown Bridge Partners, LLC, FirstFire
Global Opportunities Fund LLC, EMA Financial, LLC, and the Selling Stockholder.
A
large percentage of the Company’s shares are held by a few stockholders, some of whom are affiliated with members of the
Company’s management and our board of directors. As these principal stockholders substantially control the Company’s
corporate actions, our other stockholders may face difficulty in exerting any influence over matters not supported by these principal
stockholders.
The
Company’s principal stockholders include (i) the Arnold Lippa Family Trust of 2007 (the “Lippa Trust”),
(ii) the Jeff Eliot Margolis 2016 Trust, (iii) the Jeff Eliot Margolis Trust for the Benefit of Matthew Shane Margolis, (iv)
Jeff Eliot Margolis Trust for the Benefit of Emily Alexa Margolis, (v) Dawn Gross Margolis 2016 Trust, (vi) Dawn Gross
Margolis Trust for the Benefit of Matthew Shane Margolis, and (vii) Dawn Gross Margolis Trust for the Benefit of Emily
Alexa Margolis (collectively, (ii), (iii), (iv), (v), (vi) and (vii) the “Margolis Trusts” and with the
Lippa Trust, the “Trusts”). The trustee of the Margolis trusts is the spouse of Jeff E. Margolis. Mr.
Margolis, the Company’s Senior Vice President, Chief Financial Officer, Treasurer and Secretary, is affiliated with the
Margolis Trusts and may be deemed to have an indirect beneficial ownership interest in the stock owned by the Trusts. Arnold
S. Lippa is neither the trustee nor the beneficiary of the Lippa Trust. In addition, Timothy L. Jones, the Company’s
President and Chief Executive Officer and a director, owns 4,409,063 shares of Common Stock. As of September 30,
2020, these principal stockholders collectively owned 225,175,088 shares of Common Stock and warrants to purchase an
additional 216,100,903 shares of Common Stock. These stockholders, acting individually or as a group, may be able to
exert control or significant influence over matters such as electing directors, amending the Certificate of Incorporation or
Bylaws, or approving mergers or other business combinations or transactions. In addition, because of the percentage of
ownership and voting concentration in these principal stockholders, elections of the directors on the Board may be within the
control of these stockholders. While all of the Company’s stockholders are entitled to vote on matters submitted to the
Company’s stockholders for approval, the concentration of shares and voting influence or control presently lies with
these principal stockholders. As such, it would be difficult for stockholders to propose and have approved proposals not
supported by these principal stockholders. There can be no assurance that matters voted upon by the Company’s officers
and directors in their capacity as stockholders will be viewed favorably by all stockholders of the Company. The stock
ownership of the Company’s principal stockholders may discourage a potential acquirer from seeking to acquire shares of
the Company’s common stock which, in turn, could reduce the Company’s stock price or prevent the Company’s
stockholders from realizing a premium over the Company’s stock price.
Our
Certificate of Incorporation, Series H Preferred Stock and other governing documents may prevent or delay an attempt by our stockholders
to replace or remove management.
Certain
provisions of our Certificate of Incorporation 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 Certificate of Incorporation allows the Board to issue
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 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.
Historically,
warrants to purchase Common Stock have been issued as compensation for professional services, typically related to fund raising
or in connection with the issuance of promissory notes.
In
addition, certain executive officers, members of the Board and certain vendors have offered to forgive accrued compensation and
other amounts due to them, and the Board accepted such offers in exchange for either shares of Common Stock, options to purchase
Common Stock, or preferred stock convertible into Common Stock. Specifically, in fiscal year 2020, three officers and directors
of the Company exchanged the right to receive payment of accrued compensation in return for shares of Common Stock and for shares
of Series H 2% Voting, Non-Participating, Convertible Preferred Stock (“Series H Preferred Stock”), which entitles
these officers to that number of votes equal to two times the number of Common Stock into which such holder’s Series H Preferred
Stock would be convertible. All such outstanding shares of Series H Preferred Stock have been fully converted into shares of
Common Stock and warrants to purchase shares of Common Stock.
If
executive officers offer and if the Board accepts such offers in the future, a significant number of shares of Common Stock or
one or more options to purchase, or shares of preferred stock convertible into, a significant number of shares of Common Stock
could be issued or granted. The ability of our Board to issue additional shares of Common Stock, options to purchase shares of
Common Stock, warrants to purchase shares of Common Stock, or preferred stock convertible into Common Stock may have the effect
of delaying or preventing an attempt by our stockholders to replace or remove existing directors and management.
Our
Common Stock is deemed a “penny stock,” which a broker-dealer may find more difficult to trade and an investor may
find more difficult to acquire or dispose of in the secondary market.
Our
Common Stock is subject to the so-called “penny stock” rules. The 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 remains 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. Recently, our Common Stock has been
trading below a penny. Many broker-dealers do not accept for deposit shares of common stock that trade below a penny, and those
that do accept such shares for deposit place limitations on the deposit or charge higher fees associated with the deposit, the
transactions in the shares of common stock or with respect to the account in general. Taking these additional factors together,
and investor may find it even more difficult to acquire or dispose of our Common Stock.
We
may issue additional shares of our Common Stock, and
investment in our company is likely to be subject to substantial dilution.
Investors’
interests in the Company will be diluted and investors may suffer dilution in their net book value per share when we issue additional
shares, including pursuant to this offering. Dilution is the difference between what investors pay for their stock and the net
tangible book value per share immediately after the additional shares are purchased. We are authorized to issue up to 1,000,000,000
shares of Common Stock and our Board has authorized an increase to 2,000,000,000, subject to stockholder approval. Our
financing activities in the past focused on convertible note financing that requires us to issue shares of Common Stock to satisfy
principal, interest and any applicable penalties related to these convertible notes. When required under the terms and conditions
of the convertible notes, we issue additional shares of Common Stock that have a dilutive effect on our stockholders. We anticipate
that all or at least a substantial portion of our future funding, if any, will be in the form of equity financing from the sale
of our Common Stock and so any investment in the Company will likely be diluted, with a resulting decline in the value of our
Common Stock.
Additional
financing may not be available on terms acceptable to us, and our ability to raise capital through equity financing may be limited
by the number of authorized shares of our Common Stock. In order to raise significant additional amounts from equity financing,
we will need to seek stockholder approval to amend our Certificate of Incorporation to increase the number of authorized shares
of our Common Stock, and any such amendment would require the approval of the holders of a majority of the outstanding shares
of our Common Stock. If we are unable to obtain needed financing on acceptable terms, we may not be able to implement our business
plan, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our
Common Stock may be subject to removal from the OTC Markets OTCQB quotation service if our stock closes at a price below $0.01
for a period of 90 days.
Our
Common Stock currently trades, and for a period in excess of 30 calendar days has traded, below $0.01 per share on the OTCQB Venture
Market. To continue to meet the OTCQB Venture Market Standards for Continued Eligibility for OTCQB as per the OTCQB Standards,
Section 2.3(2), our Common Stock must have a closing bid of $0.01 per share for more for 10 consecutive trading days. We have
received an extension of time until December 10, 2020 to cure the deficiency. If we do not cure the deficiency, our Common
Stock would no longer be eligible to trade on the OTCQB Venture Market. A downgrade to a lower OTC Pink market would likely have
a material adverse impact on the trading of our Common Stock because fewer brokerage firms would be making markets in our Common
Stock or eligible to transact business in our Common Stock. Stocks that trade on OTC Pink are often considered to be stocks of
companies in financial distress, not current or less transparent in their financial reporting. Management believes that strategies
are available to bring the Company’s stock price back into compliance, including potentially effectuating a reverse share
split, although there is no assurance that any of those strategies will have the desired result. The Company is seeking stockholder
approval for a ten-to-one (10:1) reverse stock split. See “Prospectus Summary—Recent Developments.”
Furthermore,
we may not issue shares for consideration of less than par value of $0.001, and should the share price of our Common
Stock fall below par value, our ability to exercise put options to the Selling Stockholder would be materially impacted,
which could render the equity line unavailable to us and impact our operations.
Delaware
law, our Certificate of Incorporation and our Bylaws provides for the indemnification of our officers and directors at our expense,
and correspondingly limits their liability, which may result in a major cost to us and hurt the interests of our shareholders
because corporate resources may be expended for the benefit of officers and/or directors.
Our
Certificate of Incorporation and By-Laws of the Company, as amended (the “Bylaws”) include provisions that eliminate
the personal liability of our directors for monetary damages for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director’s duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. These provisions eliminate
the personal liability of our directors and our shareholders for monetary damages arising out of any violation of a director of
his fiduciary duty of due care, but do not affect a director’s liabilities under the federal securities laws or the recovery
of damages by third parties.
We
do not intend to pay cash dividends on any investment in the shares of stock of our Company and any gain on an investment in our
Company will need to come through an increase in our stock’s price, which may never happen.
We
have never paid any cash dividends and currently do not intend to pay any cash dividends for the foreseeable future. To the extent
that we require additional funding currently not provided for, our funding sources may prohibit the payment of a dividend. Because
we do not currently intend to declare dividends, any gain on an investment in our Company will need to come through an increase
in our Common Stock’s price. This may never happen, and investors may lose all of their investment in our Company.
FINRA
sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”)
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds
for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial
status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there
is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements
make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may limit your ability
to buy and sell our stock and have an adverse effect on the market for our shares.
Costs
and expenses of being a reporting company under the Exchange Act are substantial and prevent us from achieving profitability.
We
are subject to the reporting requirements of the Exchange Act and aspects of the Sarbanes-Oxley Act. We expect that the requirements
of these rules and regulations will continue to comprise a substantial portion of our legal, accounting and financial compliance
costs, and to make some activities more difficult, time-consuming and costly, placing significant strain on our personnel, systems
and resources.
If we fail to remain current on our
reporting requirements, we could be removed from the OTCQB, which would limit the ability of broker-dealers to sell our Common
Stock and the ability of stockholders to sell their Common Stock in the secondary market.
Companies
trading on the OTCQB must be reporting issuers under Section 12 of the Exchange Act, and must be current in their filings
under the Exchange Act to maintain price quotation privileges on the OTCQB. If we fail to remain current on our reporting requirements,
we could be removed from the OTCQB and be forced to be traded on the OTC Pink Sheets, which requires a more challenging stock
purchase process. As a result, the liquidity for our Common Stock could be adversely affected by limiting the ability of
broker-dealers to sell our common stock and the ability of stockholders to sell their Common Stock in the secondary market. The
OTCQB is recognized by the SEC as an established public market. The OTC Pink Sheets is the lowest and most speculative tier of
the three marketplaces for the trading of over-the-counter stocks.
OTC
Pink Sheets shares generally trade thinly and infrequently making it hard to buy or sell when the investor wants to complete a
transaction. Accordingly, the market for our Common Stock would be significantly diminished if we were forced to trade on the
OTC Pink Sheets market.
There
could be unidentified risks involved with an investment in our securities.
The
foregoing risk factors are not a complete list or explanation of the risks involved with an investment in the securities. Additional
risks will likely be experienced that are not presently foreseen by the Company. Prospective investors must not construe this
the information provided herein as constituting investment, legal, tax or other professional advice. Before making any decision
to invest in our securities, you should read this entire prospectus and consult with your own investment, legal, tax and other
professional advisors. An investment in our securities is suitable only for investors who can assume the financial risks of an
investment in the Company for an indefinite period of time and who can afford to lose their entire investment. The Company makes
no representations or warranties of any kind with respect to the likelihood of the success or the business of the Company, the
value of our securities, any financial returns that may be generated or any tax benefits or consequences that may result from
an investment in the Company.
THE
BUSINESS OF THE COMPANY
Description
of Business
Overview
The
Company 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. In August 2012, the Company acquired
Pier Pharmaceuticals, Inc. (“Pier”), which is now a wholly owned subsidiary. Pier was a clinical stage biopharmaceutical
company developing a pharmacologic treatment for obstructive sleep apnea (“OSA”) and had been engaged in research
and clinical development activities. On December 16, 2015, the Company changed its name to RespireRx Pharmaceuticals
Inc.
The
mission of the Company is to develop innovative and revolutionary treatments to combat diseases caused by disruption of neuronal
signaling. We are developing treatment options that address conditions affecting millions of people, but for which there are few
or poor treatment options, including OSA, attention deficit hyperactivity disorder (“ADHD”), epilepsy, chronic pain
and recovery from spinal cord injury (“SCI”). The Company is developing a pipeline of new drug products based on our
broad patent portfolios for two drug platforms: (i) pharmaceutical cannabinoids, which include dronabinol, a synthetic form of
∆9-tetrahydrocannabinol (“THC”) that acts upon the nervous system’s endogenous cannabinoid receptors and
(ii) neuromodulators, which include ampakines and GABAkines, proprietary compounds that, as positive allosteric modulators (“PAMs”),
positively modulate AMPA-type glutamate receptors and GABAA receptors, respectively. At this time, due to insufficient
funding, we do not have any active clinical trials and our development operations are limited to planning activities.
The
Company is also engaged in a number of business development efforts (licensing/sub-licensing, joint venture and other commercial
structures) with a view to securing strategic partnerships that represent strategic and operational infrastructure additions,
as well as cash and in-kind funding opportunities. These efforts have focused on, but have not been limited to, transacting with
brand and generic pharmaceutical and biopharmaceutical companies as well as companies with potentially useful formulation or manufacturing
capabilities, significant subject matter expertise and financial resources. No assurance can be given that any transaction will
come to fruition and that if it does, that the terms will be favorable to the Company.
Product
Development Plans
In
order to facilitate our business activities and product development, we are organizing our drug platforms into two separate business
units. The business unit focused on pharmaceutical cannabinoids is named ResolutionRx and the business unit focused on neuromodulators
is named EndeavourRx. It is anticipated that the Company will use, at least initially, its management personnel to provide management,
operational and oversight services to these two business units. Below is a description of the Company’s product development
plans within these business units, and further below is background information on these business units.
ResolutionRx
– Dronabinol program
For
the dronabinol program within our ResolutionRx cannabinoid platform, the Company plans to manufacture, on a pilot scale, one or
more new proprietary formulations of dronabinol with the enhanced properties described in our patent applications, for which we
plan to spend approximately $150,000 to bench test in vitro several versions of dronabinol formulations in order to determine
those with the best physico-chemical properties. To finance these efforts, the Company intends to use the estimated net proceeds
to it from exercise of its put right under the Purchase Agreement related to the 115,000,000 shares registered hereby. See the
section titled “Use of Proceeds” of this prospectus for more information.
Assuming
financing is obtained in addition to the net proceeds from the Company’s exercise of its put right under the Purchase Agreement,
the Company intends to spend approximately $450,000 to $600,000 of these funds on the continued development of a proprietary formulation
of dronabinol. This development would include (i) improvements to the Company’s intellectual property position, (ii) improvements
to our dronabinol formulation’s PK profile, (iii) improvements to regulatory compliance, and (iv) expenditures for the initial
stocking of clinical supply, packaging and distribution in anticipation of a Phase 2 PK/PD clinical trial and a pivotal Phase
3 clinical study. The performance of the Phase 2 PK/PD clinical trial and Phase 3 clinical study, however, would need yet additional
funds either from separate financings or a collaboration with a strategic partner.
EndeavourRx
– AMPAkines program
For
the AMPAkines program within our EndeavourRx neuromodulators platform, the Company plans to initiate clinical testing of our AMPAkines
in the treatment of SCI. To this end, approximately $145,000 would be utilized to assess the purity of our existing drug supplies
and finalize a clinical trial protocol for a Phase 2A clinical trial to determine the safety and pharmacokinetic (“PK”)
properties of one of our lead AMPAkines in patients who have had SCI. These tasks are critical for applying to the FDA for permission
to amend our existing IND or initiate a new IND enabling the commencement of clinical trials. To finance these efforts, the Company
intends to use the estimated net proceeds to it from exercise of its put right under the Purchase Agreement related to the 115,000,000
shares registered hereby. See the section titled “Use of Proceeds” of this prospectus for more information.
Assuming
financing is obtained in addition to the net proceeds from the Company’s exercise of its put right under the Purchase Agreement,
the Company would continue to focus on SCI, as we believe it would be the most efficient expenditure of our resources and yield
an actionable result in the shortest period of time. Expenditures would include: (i) an estimated spend of $200,000 for chemistry,
manufacturing and controls (“CMC”) efforts, depending on the assessment of our drug supplies, (ii) an estimated spend
of $400,000 on an initial Phase 2A single ascending dose safety and PK and pharmacodynamic (“PD”) study in human SCI
patients, (iii) an estimated spend of $600,000 on a Phase 2A multiple ascending dose safety and PK and PD study in SCI patients,
and (iv) an estimated spend of $650,000 on a Phase 2B efficacy study in SCI patients. Our anticipated spend for ADHD would be
approximately $100,000 with the larger spends occurring later dependent upon availability of financing.
EndeavourRx
– GABAkines program
Assuming
financing is obtained in addition to the net proceeds from the Company’s exercise of its put right under the Purchase Agreement,
the Company plans to finance efforts with respect to the GABAkines program within our EndeavourRx neuromodulators platform. These
efforts would be in preparation of an IND to be submitted to the FDA to commence human studies of KRM-II-81, our lead GABAkine
drug candidate, for treatment-resistant epilepsy, and expenditures would include (i) an estimated spend of $530,000 for CMC efforts,
(ii) an estimated spend of $450,000 for pre-clinical pharmacology, safety and absorption, distribution, metabolism, excretion
(“ADME”) studies, (iii) an estimated spend of $225,000 for animal safety studies and (iv) an estimated spend of $65,000
for regulatory consultants.
Neurotransmission
The
brain is composed of specialized nerve cells called neurons that communicate information with each other via a process known as
neurotransmission.
Neurotransmission
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As
illustrated in this figure, during neurotransmission, neurons release chemicals called
neurotransmitters which attach to receptors, very specific protein structures residing
on adjacent neurons. This enables neurons to communicate with one another by either
increasing or decreasing the excitability of the neuron receiving the communication.
For example, glutamate is the primary excitatory neurotransmitter in the brain, while
gamma-amino-butyric acid (“GABA”) is the primary inhibitory neurotransmitter.
Neurons also contain receptors for the brain’s own natural cannabinoid (endocannabinoid)
substances.
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ResolutionRx
– Pharmaceutical Cannabinoids
Background
Cannabinoids
are pharmacologically active substances found within the marijuana plant. Due to the liberalization of state laws regulating the
use and sales of marijuana over the last 5 years, a major industry has grown around the commercialization of marijuana for both
medical and recreational use. However, while personal marijuana use has been legalized in certain states, it still is not legal
under federal statutes and regulations. The medical use of any pharmacological agent must be approved by the FDA and, to date,
the FDA has not recognized or approved the marijuana plant as medicine nor is it federally legal to sell products that contain
cannabinoids as drugs or dietary supplements without its approval.
Worldwide
clinical research efforts have established the cannabinoid class of compounds as bona fide pharmaceutical products, or
“pharmaceutical cannabinoids,” that are being developed and commercialized according to FDA regulatory and industry
guidelines. Scientific research and commercial development to date has focused primarily on two major cannabinoids, THC
and cannabidiol (“CBD”). This research and development began in 1985 when dronabinol, a synthetic form of THC, was
approved as Marinol® by the FDA for the treatment of AIDS-related anorexia and later for the treatment of chemotherapy-induced
nausea and vomiting. Dronabinol, in its Marinol® formulation as well as numerous generic formulations, is available in 2.5
mg, 5 mg, and 10 mg capsules, with a maximum labelled dosage of 20 mg/day for the AIDS indication, or 15 mg/m2 per
dose for chemotherapy-induced nausea and vomiting.
This
initial breakthrough subsequently led to the recent FDA approval of Epidiolex®, a proprietary oral solution of
highly purified, plant-derived CBD sold by GW Pharmaceuticals plc (“GW Pharma”) for the treatment of certain rare,
treatment-resistant forms of epilepsy. Nabiximol®, an oromucosal spray containing THC and CBD, was approved under
the tradename Sativex® by applicable regulatory authorities in 25 countries outside the United States and is sold
by GW Pharma in those countries for the treatment of multiple sclerosis.
The
commercialization of these pharmaceutical cannabinoids has opened the door to an expanding market sector. In order to capitalize
upon this opportunity, the Company is implementing an internal restructuring plan by forming ResolutionRx as a stand-alone business
focused on the pharmaceutical cannabinoid market. ResolutionRx’s initial primary focus has been and will be the re-purposing
of dronabinol using new proprietary formulations and therapeutic indications. Because dronabinol already is an approved drug,
we intend to use publicly available information, particularly safety data, in support of a 505(b)(2) New Drug Application (“NDA”),
a much more rapid route to FDA approval than a standard 505(b)(1) NDA.
OSA
and Existing Treatments
The
Company is developing dronabinol for the treatment of OSA, a sleep-related breathing disorder that afflicts an estimated 29 million
people in the United States according to the American Academy of Sleep Medicine (“AASM”), and an additional 26 million
in Germany and 8 million in the United Kingdom, as presented at the European Respiratory Society’s annual Congress in Paris,
France in September 2018. OSA involves a decrease or complete halt in airflow despite an ongoing effort to breathe during sleep.
When the muscles relax during sleep, soft tissue in the back of the throat collapses and obstructs the upper airway. OSA remains
significantly under-recognized, as only 20% of cases in the United States according to the AASM and 20% of cases globally have
been properly diagnosed. About 24 percent of adult men and 9 percent of adult women are believed to have the breathing symptoms
of OSA with or without daytime sleepiness. OSA significantly impacts the lives of sufferers who do not get enough sleep; their
quality of sleep is deteriorated such that daily function is compromised and limited. OSA is associated with decreased quality
of life, significant functional impairment, and increased risk of road traffic accidents, especially in professions like road
and rail transportation and shipping.
Research
has established links between OSA and several important co-morbidities, including hypertension, type II diabetes, obesity, stroke,
congestive heart failure, coronary artery disease, cardiac arrhythmias, and even early mortality. The consequences of undiagnosed
and untreated OSA are medically serious and economically costly. According to the AASM, the estimated economic burden of OSA in
the United States is approximately $162 billion annually. All current treatment options have serious drawbacks. We believe that
a new drug therapy that is effective in reducing the medical and economic burden of OSA would have major benefits for the treatment
of this costly disease indication.
Continuous
Positive Airway Pressure (“CPAP”) is the most common treatment for OSA. CPAP devices work by blowing pressurized air
into the nose (or mouth and nose), which keeps the pharyngeal airway open. Patients must use the device whenever they sleep. Reduction
of the apnea/hypopnea index (“AHI”) is the standard objective measure of therapeutic response in OSA. Apnea is the
cessation of breathing for 10 seconds or more and hypopnea is a reduction in breathing. AHI is the sum of apnea and hypopnea events
per hour. In the sleep laboratory, CPAP is highly effective at reducing AHI. However, the device is cumbersome and difficult for
many patients to tolerate. Most studies describe that 25-50% of patients refuse to initiate or completely discontinue CPAP use
within the first several months and that most patients who continue to use the device do so only intermittently.
Oral
devices may be an option for patients who cannot tolerate CPAP. Several dental devices are available. The cost of these devices
tends to be high and side effects associated with them include night-time pain, dry lips, tooth discomfort, and excessive salivation.
Patients
with clinically significant OSA who cannot be treated adequately with CPAP or oral devices may elect to undergo surgery, the most
common form of which involves the removal of excess tissue in the throat to make the airway wider. Patients who undergo surgery
for the treatment of OSA risk complications. Surgery is often unsuccessful, and at present, no method exists to reliably predict
therapeutic outcome from surgery.
Recently,
another surgical option has become available based on upper airway stimulation. It is a combination of an implantable nerve stimulator
and an external remote controlled by the patient. The implanted device stimulates the hypoglossal nerve, which controls the tongue,
with every attempted breath, regardless of whether such stimulation is needed for that breath. The device is turned on at night
and off in the morning by the patient with the remote.
The
Company’s Rights and Research Efforts Regarding the Treatment of OSA with Cannabinoids
The
poor tolerance and long-term adherence to CPAP, as well as the limitations of mechanical devices and surgery, make discovery of
pharmaco-therapeutic alternatives, like cannabinoids, clinically relevant and important. In order to expand the Company’s
respiratory disorders program and develop cannabinoids for the treatment of OSA, the Company acquired 100% of the issued and outstanding
equity securities of Pier, now its wholly owned subsidiary, effective August 10, 2012. Through the Company’s acquisition
of Pier, the Company gained access to a pre-existing relationship Pier had with the UIC. Effective June 27, 2014, the Company
entered into the UIC License Agreement with UIC, which became effective when certain conditions were met in September 2014. The
agreement gave the Company certain exclusive rights with respect to certain patents and patent applications in the United States
and other countries claiming the use of dronabinol and other cannabinoids for the treatment of sleep-related breathing disorders,
including sleep apnea.
These
rights empowered the Company’s translational research on dronabinol, the results of which demonstrate that dronabinol has
the potential to become the first FDA-approved drug to specifically treat this condition in this large and underserved market
of OSA patients. The Company conducted a 21-day, randomized, double-blind, placebo-controlled, dose escalation Phase 2A clinical
study in 22 patients with OSA, in which dronabinol produced a statistically significant reduction in AHI, the primary therapeutic
end point, and was observed to be safe and well tolerated, with the frequency of side effects no different from placebo. This
clinical trial provided data supporting the submission of patent applications claiming unique dosage strengths and controlled
release formulations optimized for use in the treatment of OSA. If approved, these pending patents would extend market exclusivity
from 2025 until at least 2031.
With
approximately $5 million in funding from the National Heart, Lung and Blood Institute of the National Institutes of Health (“NIH”),
Dr. David Carley of the UIC, along with his colleagues at the UIC and Northwestern University, completed a Phase 2B multi-center,
double-blind, placebo-controlled clinical trial of dronabinol in patients with OSA. This study, named “Pharmacotherapy of
Apnea with Cannabimimetic Enhancement” (“PACE”) replicated the results of the earlier Phase 2A study. The authors
reported that, in a dose-dependent fashion, treatment with 2.5 mg and 10 mg of dronabinol once per day at night, significantly
reduced, compared to placebo, AHI during sleep in the 56 evaluable patients with moderate to severe OSA who completed the study.
Additionally, treatment with 10 mg of dronabinol significantly improved daytime sleepiness as measured by the Epworth Sleepiness
Scale and achieved the greatest overall patient satisfaction. As in the previous Phase 2A study, dronabinol was observed to be
safe and well tolerated, with the frequency of side effects no different from placebo. The Company did not manage this clinical
trial, which was funded entirely by the National Heart, Lung and Blood Institute of NIH.
EndeavourRx
- Neuromodulators
Background
As
described above, during the neurotransmission process, neurons release neurotransmitters that attach to specific receptors residing
on adjacent neurons, enabling them to communicate with one another and produce excitatory or inhibitory effects. For example,
glutamate is the primary excitatory neurotransmitter in the brain and GABA is the primary inhibitory neurotransmitter. While the
neurotransmitter attachment site on each of these receptors does not change, the receptor protein subunit structures can vary
so that the receptors can produce a variety of effects. With the AMPA glutamate receptor, the binding of glutamate or an artificial
agonist to its attachment site causes a change in the structure of the AMPA receptor resulting in an increased excitability. Likewise,
in the case of the GABAA receptor, the binding of GABA or an artificial agonist to its attachment site causes a change
in the structure of the GABAA receptor ion channel and increases the flow of chloride ions (negatively charged anion)
into the cell, resulting in a decreased excitability.
Neurotransmitter
receptor proteins also may contain auxiliary “allosteric” binding sites, which are located adjacent to the agonist
binding sites at which neurotransmitters act. Unlike neurotransmitters, neuromodulators are drugs that act at these allosteric
binding sites rather than directly at the agonist binding site. They can act either as PAMs, which enhance, or as negative allosteric
modulators (“NAMs”), which reduce, the actions of neurotransmitters at their primary receptor sites. Neuromodulators
have no intrinsic activity of their own. We have coined the terms “ampakines” and “GABAkines” to refer
to drugs that act as PAMs at the AMPA and GABAA receptors, respectively. By enhancing the effects of neurotransmitters
without altering the normal pattern of neuronal activity, neuromodulators offer the possibility of developing “kinder and
gentler” neuropharmacological drugs effective in certain neurological and neuropsychiatric disorders, with greater pharmacological
specificity and reduced side effects.
In
order to capitalize upon a possible market opportunity with respect to neuromodulators, the Company is implementing an internal
restructuring plan by forming EndeavourRx as a stand-alone business focused on the neuromodulator market. EndeavourRx will comprise
our ampakine program and our GABAkine program.
AMPAkines
The
Company is developing a class of proprietary compounds known
as ampakines, which are PAMs of the AMPA glutamate receptor. Ampakines are small molecule compounds that enhance the excitatory
actions of glutamate at the AMPA receptor complex, which mediates most excitatory transmission in the CNS. Through an extensive
translational research effort from the cellular level through Phase 2 clinical trials, we have developed a family of ampakines,
including CX717, CX1739 and CX1942 that may have clinical application in the treatment of CNS-driven neurobehavioral and cognitive
disorders, SCI, neurological diseases, and certain orphan indications. CX717 and CX1739, our lead clinical compounds, have successfully
completed multiple Phase 1 safety trials with no drug-associated serious adverse events. Both compounds have also completed Phase
2 efficacy trials demonstrating target engagement, by antagonizing the process of opioid-induced respiratory depression (“OIRD”).
CX717 has successfully completed a Phase 2 trial demonstrating the ability to significantly reduce the symptoms of adult ADHD.
In an early Phase 2 study, CX1739 improved breathing in patients with central sleep apnea. Preclinical studies have highlighted
the potential ability of these ampakines to improve motor function in animals with SCI. Subject to raising sufficient financing
(of which no assurance can be provided), we believe that we will be able to initiate a human Phase 2 study with CX1739 or CX717
in patients with SCI and a human Phase 2B study in patients with ADHD using either CX1739 or CX717.
AMPAkines
as Treatment for ADHD
ADHD
is one of the most common neurobehavioral disorders. Currently available treatments for ADHD include amphetamine-type stimulants
and non-stimulant agents targeting monoaminergic neurotransmitter systems in the brain. However, these neurotransmitter systems
are not restricted to the brain and are widely found throughout the body. Thus, while these agents can be effective in ameliorating
ADHD symptoms, they also can produce adverse cardiovascular effects, such as increased heart rate and blood pressure. Existing
treatments also affect eating habits and can reduce weight gain and growth in children and have been associated with suicidal
ideation in adolescents and adults. In addition, approved stimulant treatments are DEA classified as controlled substances and
present logistical issues for distribution and protection from diversion. Approved non-stimulant treatments, such as atomoxetine
(Strattera® and its generic equivalents), can take four to eight weeks to become effective and undesirable side effects also
have been observed.
Various
investigators have generated data supporting the concept that alterations in AMPA receptor function might underlie the production
of some of the symptoms of ADHD. In rodent and primate models of cognition, ampakines have been demonstrated to reduce inattention
and impulsivity, two of the cardinal symptoms of ADHD. Furthermore, ampakines do not stimulate spontaneous locomotor activity
in either mice or rats, unlike the stimulants presently used for the treatment of ADHD, nor do they increase the stimulation produced
by amphetamine or cocaine. These preclinical considerations prompted us to conduct a randomized, double- blind, placebo controlled,
two period crossover study to assess the efficacy and safety of CX717 in adults with ADHD.
In
a repeated measures analysis, a statistically significant treatment effect on ADHD Rating Scale (ADHD-RS), the primary outcome
measure, was observed after a three-week administration of CX717, 800 mg BID. Differences between this dose of CX717 and placebo
were observed as early as week one of treatment and continued throughout the remainder of the study. The low dose of CX717,
200 mg BID, did not differ from placebo. In general, results from both the ADHD-RS hyperactivity and inattentiveness subscales,
which were secondary efficacy variables, paralleled the results of the total score. CX717 was considered safe and well tolerated.
Based
on these clinical results, ampakines such as CX717 or CX1739 might represent a breakthrough opportunity to develop a non-stimulating
therapeutic for ADHD with the rapidity of onset normally seen with stimulants. Subject to raising sufficient financing (of which
no assurance can be provided), we are planning to continue this program with a Phase 2 clinical trial in patients with adult ADHD
using one of our two lead ampakine compounds.
AMPAkines
as Treatment for SCI
Ampakines
also may have potential utility in the treatment and management of SCI to enhance motor functions and improve the quality of life
for SCI patients. An estimated 17,000 new cases of SCI occur each year in the United States, most a result of automobile accidents.
Currently, there are roughly 282,000 people living with spinal cord injuries, which often produce impaired motor function.
SCI
can profoundly impair neural plasticity leading to significant morbidity and mortality in human accident victims. Plasticity is
a fundamental property of the nervous system that enables continuous alteration of neural pathways and synapses in response to
experience or injury. A large body of literature exists regarding the ability of ampakines to stimulate neural plasticity, possibly
due to an enhanced synthesis and secretion of various growth factors.
Recently,
studies of acute intermittent hypoxia (“AIH”), exposure to short periods of low oxygen, in patients with SCI demonstrate
that neural plasticity can be induced to improve motor function. This is based on the ability of spinal circuitry to learn how
to adjust spinal and brainstem synaptic strength following repeated hypoxic bouts. Because AIH induces spinal plasticity, the
potential exists to harness repetitive AIH as a means of inducing functional recovery of motor function following SCI.
The
Company has been working with Dr. David Fuller, at the University of Florida with funding from NIH, to evaluate the use of ampakines
for the treatment of compromised motor function in SCI. Using mice that have received spinal hemi-sections, CX717 was observed
to increase motor nerve activity bilaterally. The effect on the hemisected side was greater than that measured on the intact side,
with the recovery approximating that seen on the intact side prior to administration of ampakine. The doses of ampakines active
in SCI were comparable to those demonstrating antagonism of OIRD, indicating target engagement of the AMPA receptors.
These
animal models of motor nerve function following SCI support proof of concept for a new treatment paradigm using ampakines to improve
motor functions in patients with SCI. With additional funding granted by NIH to Dr. Fuller, the Company is continuing its collaborative
preclinical research with him while it is planning a clinical trial program focused on developing ampakines for the restoration
of certain motor functions in patients with SCI. The Company is working with researchers at highly regarded clinical sites to
finalize a Phase 2 clinical trial protocol. We believe that a clinical study could be initiated within several months of raising
sufficient financing (of which no assurance can be provided).
GABAkines
The
GABAkine program was recently established pursuant to the UWMRF Patent License Agreement that the Company entered into with UWMRF.
At present, the program is focused on developing certain GABAkines with certain GABAA receptor subtype selectivity.
We believe that there is a considerable degree of receptor subtype heterogeneity, making subtype selectivity of our compounds
a desirable attribute.
Benzodiazepines
(“BDZs”), such as Valium® (diazepam), Librium® (chlordiazepoxide) and Xanax®
(alprazolam) were the first major class of drugs reported to act as GABAA PAMs, by binding at a site distinct
from the binding site for GABA. These drugs produced a wide range of pharmacological properties, including anxiety reduction,
sedation, hypnosis, anti-convulsant, muscle relaxation, respiratory depression, cognitive impairment, as well as tolerance, abuse
and withdrawal. For this reason, it was not surprising that BDZs were observed to act as GABAA PAMs indiscriminately
across all GABAA receptor subtypes. Following the identification of BDZ binding sites on GABAA receptors,
Dr. Lippa described CL218,872, the first non-BDZ to demonstrate that these receptors were heterogeneous by binding selectively
to a subtype of GABAA receptor. This demonstration of receptor heterogeneity led to the hypothesis that the various
pharmacological actions of the BDZs might be separable depending on the receptor subtype involved. In animal testing, CL218,872
provided the proof of principle that such a separation could be achieved by displaying anti-anxiety and anti-convulsant properties
in the absence of sedation, amnesia and muscular incoordination. These findings gave impetus to the search for novel therapeutic
drugs for neurological and psychiatric illnesses that display improvements in efficacy and reductions in side effects.
Over
the last several years, a group of scientists led by Dr. James Cook of the University of Wisconsin and Dr. Jeffrey Witkin affiliated
with the Indiana University School of Medicine, who are advising us, have synthesized and tested a broad series of novel
drugs that display GABAA receptor subtype selectivity and pharmacological specificity.
Certain
of these chemical compounds are the subject of the UWMRF Patent License Agreement. Of these compounds, we have identified KRM-II-81
as a clinical lead. KRM-II-81 is the most advanced and druggable of a series of compounds that display certain receptor subtype
selective and pharmacological specificity. In studies using cell cultures, brain tissues and whole animals, KRM-II-81 acts as
a GABAA PAM at selective GABAA receptor subtypes that we feel are intimately involved in neuronal processes
underlying epilepsy, pain, anxiety and certain other indications. KRM-II-81 has demonstrated highly desirable properties in animal
models of these and other potential therapeutic indications, in the absence of or with greatly reduced liability to produce sedation,
motor incoordination, cognitive impairments, respiratory depression, tolerance, abuse and withdrawal seizures, all side effects
associated with BDZs. We currently are focused on the potential treatment of epilepsy and pain.
Epilepsy
and Existing Treatments
Epilepsy
is a chronic and highly prevalent neurological disorder that affects millions of people world-wide and has serious consequences
for the life of the affected individual. A first-line approach to the control of epilepsy is through the administration of anticonvulsant
drugs. Repeated, uncontrolled seizures and the side effects arising from seizure medications have a negative effect on the developing
brain and can lead to brain cell loss and severe impairment of neurocognitive function. The continued occurrence of seizure activity
also increases the probability of subsequent epileptic events through sensitization mechanisms called seizure kindling. Seizures
that are unresponsive to anti-epileptic treatments are life-disrupting and life-threatening with broad health, life, and economic
consequences.
Like
many diseases, epilepsy is still remarkably underserved by currently available medicines. Pharmaco-resistance to anticonvulsant
therapy continues to be one of the key obstacles to the treatment of epilepsy. Although many anticonvulsant drugs are approved
to decrease seizure probability, seizures frequently are not fully controlled and patients are generally maintained daily on multiple
antiepileptic drugs with the hope of enhancing the probability of seizure control. Despite this polypharmacy approach, as many
as 60% to 70% of patients continue to have seizures. As a result of the lack of seizure control, pharmaco-resistant epilepsy patients,
including young children, sometimes require and elect to have invasive therapeutic procedures such as surgical resection.
Despite
the availability of a host of marketed drugs of different mechanistic classes, the lack of seizure control in patients is the
primary factor driving the need for improved antiepileptic drugs emphasized by researchers and patient advocacy communities. Increasing
inhibitory tone in the CNS through enhancement of GABAergic inhibition is a proven mechanism for seizure control. However, GABAergic
medications also exhibit liabilities that limit their antiepileptic potential. Tolerance develops to GABAergic drugs such as BDZs,
limiting their use in a chronic setting. These drugs can produce cognitive impairment, somnolence, sedation, tolerance and withdrawal
seizures that create dosing limitations such that they are generally used only for acute convulsive episodes.
GABAkines
as Treatments for Epilepsy
KRM-II-81
has demonstrated efficacy in multiple rodent models and measures of antiepileptic drug efficacy in vivo. This includes
nine acute seizure provocation models in mice and rats, four seizure sensitization models in rats and mice, two models of chronic
epilepsy, and three models specifically testing pharmaco-resistant antiepileptic drug efficacy. Because it appears to have a greatly
reduced side effect liability, it might be possible to use higher, more effective doses that standard of care medications. Predictions
of superior efficacy of KRM-II-81 over standard of care anti-epileptics comes from the efficacy of this compound across a broad
range of animal models of epilepsy. Importantly, KRM-II-81 has been shown to be effective in models assessing pharmaco-resistant
epilepsy. Under these conditions, KRM-II-81 is efficacious in cases where standard of care medicines do not work.
In
the absence of seizure control by anti-epileptics, surgical resection of affected brain tissue is one potential alternative to
help with the control of seizures. In the process of this surgery, epileptic brain tissue can become available for research into
epileptic mechanisms and the identification of novel antiepileptic drugs. The anticonvulsant action of KRM-II-81 was confirmed
by microelectrode recordings from slices obtained from freshly excised cortex from epileptic patients where KRM-II-81 suppressed
epileptiform electrical activity. While preliminary, these translational data lend considerable support to the further development
of KRM-II-81 for the treatment of epilepsy.
GABAkines
as Treatments for Pain
It
is impossible not to be aware of the crisis that the opioid epidemic has created in the treatment of chronic pain. While there
is no question as to their efficacy, the clinical use of opioids is severely limited due to the rapid development of tolerance
and the production of OIRD, the major cause of opioid-induced lethality. Research programs are underway nationwide to discover
and develop new non-opioid drugs that are effective analgesics without the tolerance and abuse liability ascribed to opioids.
Chronic pain is especially difficult to treat due to its complex nature with a variety of different etiologies. For example, chronic
pain may be produced by injury, surgery, neuropathy, the inflammation produced by arthritis or by certain drugs such as cancer
chemotherapeutics. For these reasons, better management and control of chronic pain continues to be a serious need in medical
practice.
Data
from both preclinical and clinical studies are consistent with the idea that GABAergic neurotransmission is an important regulatory
mechanism for the control of pain. gabapentin (Neurontin®) and pregabalin (Lyrica®) two commonly
used drugs for the treatment of chronic pain are believed to produce their analgesic effects by enhancing GABAergic neurotransmission.
However, although they have received FDA approval, the clinical results have not been overwhelming. In a published review of 37
clinical trials with a total of 5,914 patients experiencing neuropathic pain there was no difference in the percentage of patients
experiencing pain reduction of greater than 50% when comparing gabapentin to placebo. The most common side effects produced by
gabapentin were sedation, dizziness and problems walking. It is uncertain whether greater efficacy was not observed because of
poor intrinsic pharmacological efficacy or insufficient dosages due to dose limiting side effects.
An
alternate approach to enhancing GABAergic neurotransmission is the use of GABAA PAMs. This approach has been under-utilized
because of the general lack of efficacy of the BDZ PAMs. However, a strong case for the potential value of subtype selective GABAA
PAMs for the treatment of pain can be made. First, GABAA receptor regulated pathways are integral to pain processing
with α2/3 containing GABAA receptor subtypes present on nerve pathways modulating pain sensation and perception.
Second, we believe that the analgesic properties of BDZs may be masked by concurrent activation of other receptor subtypes that
mediate the side effects. Diazepam has been reported to produce maximal analgesia if the side effects are attenuated by GABAA
subtype genetic manipulation. Third, predecessor GABAkines, made by Dr. Cook, that selectively amplify GABAA
receptor subtype signaling are effective in pain models in rodents at doses lower than those producing motor side effects.
In
a number of laboratory procedures and animal studies, KRM-II-81 has been shown to selectively bind to GABAA receptor
subtypes and enhance GABAergic neurotransmission. Sub-chronic dosing for 22 days with KRM-II-81 and the structural analogue, MP-III-80,
demonstrated enduring analgesic efficacy without tolerance development. In contrast, tolerance developed to the analgesic effects
of gabapentin. At a dose that produces maximal analgesic effect in an inflammatory chronic pain model, KRM-II-81 does not substitute
for the BDZ midazolam in a drug discrimination assay, suggesting a reduced abuse liability. Furthermore, KRM-II-81 did not produce
the respiratory depression observed with alprazolam, a major problem with BDZs leading to emergency room visits and overdose.
We
believe that the ability to attenuate both acute and chronic pain combined with a greatly reduced side effect profile, a lack
of tolerance and a reduced abuse potential makes KRM-II-81 a promising clinical lead and a potential advance in pain therapeutics.
Results from preliminary chemistry, metabolism and pharmacokinetic studies support its further development.
Financing
our Business Units
Our
major challenge has been to raise substantial equity or equity-linked financing to support research and development plans for
our cannabinoid and neuromodulator platforms under ResolutionRx and EndeavourRx, respectively, while minimizing the dilutive effect
to pre-existing stockholders. At present, we believe that we are hindered primarily by our public corporate structure, our OTCQB
listing, and low market capitalization as a result of our low stock price.
For
this reason, the Company is considering an internal restructuring plan that contemplates spinning out our two drug platforms under
ResolutionRx and EndeavourRx into separate operating businesses or subsidiaries. We believe that by creating one or more subsidiaries,
it may be possible, through separate finance channels, to optimize the asset values of both the cannabinoid platform and the neuromodulator
platform. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Development
Plan for ResolutionRx” for a discussion of our proposed ResolutionRx cannabinoid platform subsidiary.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred
net losses of $1,762,855 for the six-months ended June 30, 2020 and $2,115,033 for the fiscal year ended December 31, 2019 respectively,
as well as negative operating cash flows of $106,448 for the six-months ended June 30, 2020 and $487,745 for the fiscal year ended
December 31, 2019. The Company also had a stockholders’ deficiency of $7,846,748 at June 30, 2020 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 audit report on the Company’s condensed consolidated financial statements for
the year ended December 31, 2019, 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 extremely limited cash resources and
current assets and no current revenue. Management is continuing to address various aspects of the Company’s operations
and obligations, including, without limitation, debt obligations, financing requirements, establishment of new and maintenance
and improvement of existing and in-process intellectual property, licensing agreements, legal and patent matters and regulatory
compliance, and has taken steps to continue to raise new debt and equity capital to fund the Company’s business activities
from both related and unrelated parties to fund the Company’s business activities.
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 the pursuit of the Company’s planned research and development activities.
The Company regularly evaluates various measures to satisfy the Company’s liquidity needs, including development and other
agreements with collaborative partners and, when necessary, seeking to exchange or restructure the Company’s outstanding
securities. The Company is evaluating certain changes to its operations and structure to facilitate raising capital from sources
that may be interested in financing only discrete aspects of the Company’s development programs. Such changes could include
a significant reorganization, which may include the formation of one or more subsidiaries into which one or more of our programs
may be contributed. 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.
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,
a New Drug Application (“NDA”) 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.
The
recent COVID-19 pandemic has made it very difficult to recruit subjects and patients and to conduct clinical trials in general.
Given the public health emergency during the winter and spring of 2020, the FDA issued guidance to be implemented without the
normal prior public comment period as the FDA had concluded that public participation would not be feasible or appropriate. Guidance
is not legally enforceable, but the FDA recommends the following of its guidance. Challenges are expected to arise from quarantines,
site closures, travel limitations, interruptions to the supply chain for investigational products, or other considerations if
site personnel or trial subjects become infected with COVID-19. These challenges may lead to difficulties in meeting protocol-specified
procedures. The FDA emphasized that safety of trial participants is critically important. Decisions to continue or discontinue
individual patients or the trial are expected to be made by trial sponsors in consultation with clinical investors and Institutional
Review Boards. COVID-19 screening procedures may need to be implemented. As challenging as the clinical trial process is during
normal times, the risks, strategic and operational challenges and the costs of conducting such trials has increased substantially
during the pandemic. See the section titled “Risk Factors” for more information on this and other risks to the Company.
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 (see below with respect to dronabinol) 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 generally, absent any disruptions that may be caused by the COVID-19 pandemic,
substantial availability of both bulk chemical manufacturing and dosage form manufacturing capability throughout the world that
we believe we can readily access.
On
September 4, 2018, the Company entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Noramco subsequently assigned this agreement (as assigned, the “Purisys Agreement”)
to its subsidiary, Purisys, LLC (“Purisys”). Under the terms of the Purisys Agreement, Purisys agreed to (i) provide
all of the active pharmaceutical ingredient (“API”) estimated to be needed for the clinical development process for
both the first- and second-generation products (each a “Product” and collectively, the “Products”), three
validation batches for New Drug Application (“NDA”) filing(s) and adequate supply for the initial inventory stocking
for the wholesale and retail channels, subject to certain limitations, (ii) maintain or file valid drug master files (“DMFs”)
with the FDA or any other regulatory authority and provide the Company with access or a right of reference letter entitling the
Company to make continuing reference to the DMFs during the term of the agreement in connection with any regulatory filings made
with the FDA by the Company, (iii) participate on a development committee, and (iv) make available its regulatory consultants,
collaborate with any regulatory consulting firms engaged by the Company and participate in all FDA or Drug Enforcement Agency
(“DEA”) meetings as appropriate and as related to the API.
In
consideration for these supplies and services, the Company has agreed to purchase exclusively from Purisys during the commercialization
phase all API for its Products as defined in the Purisys Agreement at a pre-determined price subject to certain producer price
adjustments and agreed to Purisys’s participation in the economic success of the commercialized Products up to the earlier
of the achievement of a maximum dollar amount or the expiration of a period of time.
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 product candidates 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 September 30, 2020, the Company employed five people (all officers), three of whom were full time. The Company
periodically engages certain contractors with domain expertise who provide services such as biostatistics, regulatory
consulting and other services, to the Company.
Technology
Rights
University
of Illinois License Agreement
On
June 27, 2014, the Company entered into the UIC License Agreement with the UIC. The UIC License Agreement granted the Company
(i) exclusive rights to several issued and pending patents in several jurisdictions and (ii) the non-exclusive right to certain
technical information that is generated by UIC in connection with certain clinical trials as specified in the UIC License Agreement,
all of which relate to the use of cannabinoids for the treatment of sleep-related breathing disorders. As discussed above, the
Company is developing dronabinol (a synthetic form of Δ9-THC) for the treatment of OSA, the most common form of sleep apnea.
The
UIC License Agreement provides for various commercialization and reporting requirements that commenced on June 30, 2015. In addition,
the UIC 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 obligation of $100,000 due on December 31, 2019, was extended
to June 30, 2020 and further extended to July 7, 2020 when the obligation was paid. One-time milestone payments may become due
based upon the achievement of certain development milestones. $350,000 will be due within five days after the dosing of the first
patient is a Phase III human clinical trial anywhere in the world. $500,000 will be due within five days after the first NDA filing
with FDA or a foreign equivalent. $1,000,000 will be due within twelve months of the first commercial sale. One-time royalty payments
may also become due and payable. Annual royalty payments may also become due. In the year after the first application for market
approval is submitted to the FDA or a foreign equivalent 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 or a foreign equivalent 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.
UWMRF
Patent License Agreement
On
August 1, 2020, the Company exercised its option pursuant to its option agreement dated March 2, 2020, between the Company and
UWMRF. Upon exercise, the Company and UWMRF executed the UWMRF Patent License Agreement, effective August 1, 2020, pursuant to
which the Company licensed the intellectual property identified therein, including patent rights, technology rights and improvements,
on a worldwide basis.
In
consideration for the licenses granted, the Company will pay to UWMRF the following: (i) patent filing and prosecution costs incurred
by UWMRF prior to the effective date, which totaled $60,370 as of January 14, 2020, paid in three yearly installments with 25%
payable twelve months after the effective date, 25% payable twenty-four months after the effective date, and the remaining 50%
payable thirty-six months after the effective date; (ii) annual license maintenance fees, beginning on the second anniversary
of the effective date, which annual maintenance fees vary from year-to-year from the second anniversary date through the fifth
anniversary date, with the amount due on the fifth anniversary being due each anniversary date thereafter until such payments
terminate upon the Company’s payment of royalties pursuant to clause (iv) below; (iii) one-time milestone payments, paid
upon the occurrence of certain dosing events of patients during clinical trials and certain approvals by the FDA, with the first
to be paid upon the dosing of the first patient in a Phase II clinical trial, the second to be paid upon the dosing of the first
patient in a Phase III clinical trial, and the final milestone payment to be paid upon approval by the FDA of a NDA; and (iv)
annual royalties on net sales of patented products and other products as described and defined in the UWMRF Patent License Agreement,
subject to reduction due to royalty stacking provisions, and subject also to annual minimum royalties after the first commercial
sale of a licensed product, which annual minimums increase in two year increments until they reach a fixed amount in year six
and thereafter. The Company has also granted UWMRF stock appreciation rights providing UWMRF with the right to receive an amount
equal to 4.9% of the consideration received upon the sale or assignment of one or more of the neuromodulator programs above $1
per program. The Company must provide UWMRF with an annual development plan by September 30, 2021 and each September 30th thereafter.
The UWMRF Patent License Agreement will expand the Company’s neuromodulator platform, which has historically included the
Company’s AMPAkine program and now includes a GABAkine program as well. That platform, as expanded, is now called EndeavourRx.
Transactions
with Bausch Health Companies
Beginning
in March 2010, the Company entered into a series of asset purchase and license agreements with Biovail Laboratories International
SRL, which after its merger with Valeant Pharmaceuticals International, Inc. was later renamed Bausch Health Companies Inc. (“Bausch”).
In
March 2011, the Company entered into a new agreement with Bausch to re-acquire the AMPAkine compounds, patents and rights that
Bausch 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 NDA submissions and approval milestones pertaining
to an intravenous dosage form of the AMPAkine compounds for respiratory depression, a therapeutic area not currently pursued by
the Company. Bausch 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 these compounds for respiratory depression.
University
of Alberta License Agreement and Research Agreement
By
letter dated May 18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of the
University of Alberta, which purported to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 between
the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for termination
and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting to be attended
by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute. In February 2019,
the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license agreement and the
form of a new license agreement. However, after reaching that tentative Agreement, the Company re-evaluated that portion of its
AMPAkine program and has decided not to enter into a new agreement at this time. The lack of entry into a new agreement at this
time does not affect the Company’s other AMPAkine programs and permits the Company to reallocate resources to those programs,
including, but not limited to ADHD, SCI, FXS and CNS-driven disorders.
Research
and Development Expenses
The
Company invested $308,466 in research and development in the six months ended June 30, 2020. Of that amount, $244,800 was incurred
with related parties. See our condensed consolidated financial statements for the six months ended June 30, 2020, included in
this prospectus.
The
Company invested $599,329 and $688,285 in research and development in 2019 and 2018, respectively. Of those amounts, $490,908
and $495,638 were incurred with related parties in 2019 and 2018, respectively. See our consolidated financial statements for
the years ended December 31, 2019 and 2018, included in this prospectus.
Description
of Property
As
of September 30, 2020, 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.
Legal
Proceedings
By
letter dated February 5, 2016, the Company received a demand from a law firm representing Salamandra, LLC (“Salamandra”)
alleging $146,082 due and owing for unpaid services rendered. On January 18, 2017, following an arbitration proceeding in the
Superior Court of New Jersey, an arbitrator awarded Salamandra the full amount sought. Additionally, the arbitrator granted Salamandra’s
attorneys’ fees and costs of $47,937. All such amounts have been accrued at June 30, 2020 and December 31, 2019, including
accrued interest at 4.5% annually from February 26, 2018, the date of the judgment, through June 30, 2020, totaling $20,736.
On
December 16, 2019, the Company and Salamandra entered into an amendment to the settlement agreement and release, executed August
21, 2019 (the “Original Settlement Agreement” and as amended, the “Amended Settlement Agreement”) regarding
$202,395 owed by the Company to Salamandra (as reduced by any further payments by the Company to Salamandra, the “Full Amount”)
in connection with the arbitration award previously granted in favor of Salamandra. Under the terms of the Original Settlement
Agreement, the Company was to pay Salamandra $125,000 on or before November 30, 2019 in full satisfaction of the Full Amount owed,
subject to conditions regarding the Company’s ability to raise certain dollar amounts of working capital. Under the Amended
Settlement Agreement, (i) the Company was to pay and the Company paid to Salamandra $25,000 on or before December 21, 2019, (ii)
upon such payment, Salamandra ceased all collection efforts against the Company until March 31, 2020 (the “Threshold Date”),
and (iii) the Company was to pay to Salamandra $100,000 on or before the Threshold Date if the Company had at that time raised
$600,000 in working capital. Such payments by the Company would have constituted satisfaction of the Full Amount owed and would
have served as consideration for the dismissal of the action underlying the arbitration award and the mutual releases set forth
in the Amended Settlement Agreement. If the Company had raised less than $600,000 in working capital before the Threshold Date,
the Company was to pay to Salamandra an amount equal to 21% of the working capital amount raised, in which case such payment would
have reduced the Full Amount owed on a dollar-for-dollar basis, and Salamandra would then have been able to seek collection on
the remainder of the debt. The Company made the initial payment of $25,000 in December 2019, but did not make the subsequent required
payment on March 31, 2020, nor has any payment been made during the three-months ended June 30, 2020. The Company has initiated
further discussions with the intent of reaching a revised settlement agreement which cannot be assured.
By
email 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 payable for investment banking services rendered.
Such amount has been included in accrued expenses at June 30, 2020 and December 31, 2019.
On
February 21, 2020, Sharp Clinical Services, Inc. (“Sharp”), a vendor of the Company, filed a complaint against
the Company in the Superior Court of New Jersey Law Division, Bergen County related to a December 16, 2019 demand for payment
of past due invoices inclusive of late fees totaling $103,890 of which $3,631 relates to late fees, seeking $100,259 plus 1.5%
interest per month on outstanding unpaid invoices. Amid settlement discussions, the vendor stated on March 13, 2020 its intent
to proceed to a default judgment against the Company, and the Company stated on March 14, 2020 its intent to continue settlement
discussions. On May 29, 2020, a default was entered against the Company, and on September 4, 2020, a final judgment by default
was entered against the Company in the amount of $104,217.37.
The
Company is periodically the subject of various pending and threatened legal actions and claims. In the opinion of management of
the Company, adequate provision has been made in the Company’s condensed consolidated financial statements as of June 30,
2020 and December 31, 2019 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.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Overview
The
mission of the Company is to develop innovative and revolutionary treatments to combat diseases caused by disruption of neuronal
signaling. We are developing treatment options that address conditions affecting millions of people, but for which there are few
or poor treatment options, including OSA, ADHD, epilepsy, chronic pain and recovery from SCI. The Company is developing a pipeline
of new drug product candidates based on our broad patent portfolios for two drug platforms: (i) pharmaceutical cannabinoids,
which include dronabinol, a synthetic form of THC that acts upon the nervous system’s endogenous cannabinoid receptors and
(ii) neuromodulators, which include ampakines and GABAkines, proprietary compounds that, as PAMs, positively modulate AMPA-type
glutamate receptors and GABAA receptors, respectively. Due to insufficient funding, we do not currently have any
active clinical trials and only limited operations.
Product
Development Plans
In
order to facilitate our business activities and product development, we are organizing our drug platforms into two
separate business units. The business unit focused on pharmaceutical cannabinoids is named ResolutionRx and the business unit
focused on neuromodulators is named EndeavourRx. It is anticipated that the Company will use, at least initially, its management
personnel to provide management, operational and oversight services to these two business units. Below is a description of
the Company’s product development plans within these business units. Please see the section titled “The Business of
the Company” in this prospectus for background information on these business units.
ResolutionRx
– Dronabinol program
For
the dronabinol program within our ResolutionRx cannabinoid platform, the Company plans to manufacture, on a pilot scale, one or
more new proprietary formulations of dronabinol with the enhanced properties described in our patent applications, for which we
plan to spend approximately $150,000 to bench test in vitro several versions of dronabinol formulations in order to determine
those with the best physico-chemical properties. To finance these efforts, the Company intends to use the estimated net proceeds
to it from exercise of its put right under the Purchase Agreement related to the 115,000,000 shares registered hereby. See the
section titled “Use of Proceeds” of this prospectus for more information.
Assuming
financing is obtained in addition to the net proceeds from the Company’s exercise of its put right under the Purchase Agreement,
the Company intends to spend approximately $450,000 to $600,000 of these funds on the continued development of a proprietary formulation
of dronabinol. This development would include (i) improvements to the Company’s intellectual property position, (ii) improvements
to our dronabinol formulation’s PK profile, (iii) improvements to regulatory compliance, and (iv) expenditures for the initial
stocking of clinical supply, packaging and distribution in anticipation of a Phase 2 PK/PD clinical trial and a pivotal Phase
3 clinical study. The performance of the Phase 2 PK/PD clinical trial and Phase 3 clinical study, however, would need yet additional
funds either from separate financings or a collaboration with a strategic partner.
EndeavourRx
– AMPAkines program
For
the AMPAkines program within our EndeavourRx neuromodulators platform, the Company plans to initiate clinical testing of our AMPAkines
in the treatment of SCI. To this end, approximately $145,000 would be utilized to assess the purity of our existing drug supplies
and finalize a clinical trial protocol for a Phase 2A clinical trial to determine the safety and pharmacokinetic (“PK”)
properties of one of our lead AMPAkines in patients who have had SCI. These tasks are critical for applying to the FDA for permission
to amend our existing IND or initiate a new IND enabling the commencement of clinical trials. To finance these efforts, the Company
intends to use the estimated net proceeds to it from exercise of its put right under the Purchase Agreement related to the 115,000,000
shares registered hereby. See the section titled “Use of Proceeds” of this prospectus for more information.
Assuming
financing is obtained in addition to the net proceeds from the Company’s exercise of its put right under the Purchase Agreement,
the Company would continue to focus on SCI, as we believe it would be the most efficient expenditure of our resources and yield
an actionable result in the shortest period of time. Expenditures would include: (i) an estimated spend of $200,000 for chemistry,
manufacturing and controls (“CMC”) efforts, depending on the assessment of our drug supplies, (ii) an estimated spend
of $400,000 on an initial Phase 2A single ascending dose safety and PK and pharmacodynamic (“PD”) study in human SCI
patients, (iii) an estimated spend of $600,000 on a Phase 2A multiple ascending dose safety and PK and PD study in SCI patients,
and (iv) an estimated spend of $650,000 on a Phase 2B efficacy study in SCI patients. Our anticipated spend for ADHD would be
approximately $100,000 with the larger spends occurring later dependent upon availability of financing.
EndeavourRx
– GABAkines program
Assuming
financing is obtained in addition to the net proceeds from the Company’s exercise of its put right under the Purchase Agreement,
the Company plans to finance efforts with respect to the GABAkines program within our EndeavourRx neuromodulators platform. These
efforts would be in preparation of an IND to be submitted to the FDA to commence human studies of KRM-II-81, our lead GABAkine
drug candidate, for treatment-resistant epilepsy, and expenditures would include (i) an estimated spend of $530,000 for CMC efforts,
(ii) an estimated spend of $450,000 for pre-clinical pharmacology, safety and absorption, distribution, metabolism, excretion
(“ADME”) studies, (iii) an estimated spend of $225,000 for animal safety studies and (iv) an estimated spend of $65,000
for regulatory consultants.
In
connection with the organization and development of the ResolutionRx and EndeavourRx business units, we are planning certain corporate
and development actions as summarized below. All of the below are subject to raising additional financing and/or entering into
strategic relationships, of which no assurance can be given.
Proposed
Creation of Subsidiaries
Pending
approval by the Board, management intends to organize our ResolutionRx and EndeavourRx business units into two subsidiaries: (i)
a ResolutionRx subsidiary, into which we intend to contribute our pharmaceutical cannabinoid platform and its related tangible
and intangible assets and certain of its liabilities and (ii) an EndeavourRx subsidiary, into which we plan to contribute our
neuromodulator platform, including both the AMPAkine and GABAkine programs and their related tangible and intangible assets and
certain of their liabilities.
Management
believes that there are several advantages to separating these platforms formally into newly formed subsidiaries, including but
not limited to optimizing their asset values through separate finance channels and making them more attractive for capital raising
as well as for strategic deal making.
Employee/Consultant
Infrastructure Build-out
In
order to broaden our operational expertise, we are planning to hire a number of highly qualified individuals, either as employees
or consultants and, in tandem, increase our administrative support function.
Our
relationship with Drs. Cook and Witkin has been highly cooperative to date. Our intent is to contractually formalize these
relationships as consultants to the Company.
Key
contracts
The
Purisys Agreement and the UIC License Agreement will need to be transferred or otherwise made available to the ResolutionRx subsidiary.
See “Information with Respect to our Company—Description of Business—Manufacturing” and “Information
with Respect to our Company—Description of Business—Technology Rights—University of Illinois License Agreement”
for more information on these agreements. While this subsidiary’s initial, primary focus will be on repurposing dronabinol
for the treatment of OSA, we believe that our broad enabling patents and a new proprietary formulation may provide a framework
for expanding into the larger burgeoning pharmaceutical cannabinoid industry. We believe that by creating this subsidiary, it
may be possible, through separate finance channels and potential strategic transactions, to optimize the asset value not only
of the ResolutionRx cannabinoid platform, but our EndeavourRx neuromodulator platform as well.
Prospective
Investors
We
have had discussions with a number of potential cannabinoid investors and strategic partners who have expressed interest, mostly
in the development of a new, proprietary formulation with extended patent life. Forming a new subsidiary for our cannabinoid platform
or our neuromodulator platform may allow us to attract financing from investors with a desire to invest in one platform but not
the other.
Intellectual
Property
The
Company has exclusive rights to issued and pending patents claiming cannabinoid compositions and methods for treating cannabinoid-sensitive
disorders, including sleep apnea, pain, glaucoma, muscular spasticity, anorexia and other conditions. In October 2019, we filed
a continuation-in-part for our pending patent that describes and claims novel doses, controlled release compositions and methods
of use for cannabinoids, as well as a new U.S. provisional patent application further disclosing novel dosage and controlled release
compositions and methods of use for cannabinoids, alone or in combination, including with cannabinoid and non-cannabinoid molecules.
Specific claims describe low dosage strengths and controlled release formulations for attaining a therapeutic window of cannabinoid
blood levels that produce the desired therapeutic effects for a controlled period of time, while minimizing undesirable side effects.
As previously disclosed, the original patents were filed by the Company and are now included in the UIC License Agreement. See
“Information with Respect to our Company—Description of Business—Technology Rights—University of Illinois
License Agreement” for more information on the UIC License Agreement. While no assurance can be provided that the claims
in this continuation-in-part or the U.S. provisional patent application will be allowed in whole or in part, or that the patents
will ultimately issue, we believe that these new filings, if allowed, will provide market protections through at least 2031.
We
believe our intellectual property initiatives may afford expanding strategic options and market exclusivity in the burgeoning
pharmaceutical cannabinoid business sector. New cannabinoid formulation technology is headed in the direction of enhanced absorption.
These technologies, including nano- and micro-emulsions and thin films, have been shown to bypass the normal route of absorption
and liver metabolism of cannabinoids, thus dramatically increasing blood levels and allowing for the use of low doses. Similarly,
technologies may be used to achieve a controlled release of dronabinol, and we believe that our pending patent priority relating
back to 2010 predates the efforts of others seeking to develop low-dose or extended release formulations of cannabinoids. Thus,
to the extent that new technologies result in lower doses and/or controlled release formulations, we believe they would infringe
on our pending patents once issued, not only for use in the treatment of OSA but potentially a wide variety of other indications
as well.
Data
from our Phase 2 clinical trials has allowed us to design new proprietary formulations of dronabinol, disclosed in our patent
filings and optimized for the treatment of not only OSA, but also other indications. Within the past 12 to 24 months, new formulation
technology has emerged potentially allowing for the creation of a proprietary dronabinol formulation with optimized dose and duration
of action for treating OSA. We have discussions in progress with a number of companies that have existing cannabinoid formulation
technologies, expertise, and licensure capabilities, which may lead to the development of a proprietary formulation of dronabinol
for the Company based on our pending patents for low-dose and extended release dronabinol and may lead to the development of a
marketable proprietary formulation of dronabinol. We believe that the development of a novel, proprietary formulation of dronabinol
would only extend time to market entry by approximately 12 months compared to the currently available generic soft gel capsules,
but would dramatically extend market exclusivity; however, no assurance can be provided that any of the formulation technologies
that we are currently analyzing will result in viable products or that formulation agreements will be consummated on terms acceptable
to us. The failure to consummate a formulation agreement would materially and adversely affect the Company.
The
Opportunity to Improve Dronabinol Formulations
Dronabinol
is currently marketed as a soft gelatin capsule that suffers from several major deficiencies.
First,
dronabinol exhibits poor and erratic absorption. Δ9-THC is not water soluble. The market dominant commercial gelcap dronabinol
is currently formulated as a sesame oil-based liquid within a soft gelatin capsule. The absorption of dronabinol after oral administration
is poor and highly variable with some patients achieving very high levels and others achieving very low levels. This erratic absorption
may be responsible for the variable therapeutic responses observed in dronabinol clinical trials. Syndros®, on
the other hand, is formulated as a solution in dehydrated alcohol, polyethylene glycol and other materials and exhibits its own
challenges and deficiencies, including but not limited to it being Schedule II as compared to the capsule that is Schedule III.
Second,
dronabinol is rapidly and extensively (approximately 80%) metabolized upon first pass through the liver, resulting in low blood
levels. Additionally, dronabinol has a relatively short half-life (approximately 3 – 4 hours) and, in its present formulation,
is not optimally suited for therapeutic indications requiring blood levels to be sustained for 6 hours or longer.
Third,
in order to achieve sustained, therapeutic blood levels, we have found it necessary to use higher doses of dronabinol in our OSA
clinical trials. For example, over an 8-hour period, the 2.5 mg and 10 mg doses produced therapeutically equivalent effects during
the first 4 hours, but only the 10 mg dose produced therapeutic effects during the second 4 hours. Unfortunately, the 10 mg dose
produces a higher occurrence of side effects than the 2.5 mg dose (as described in the Marinol® package insert).
We anticipate focusing on new formulations that would achieve the blood levels produced by the lower doses for a sustained time
period, resulting in the desired therapeutic effect(s) while minimizing undesirable side effects.
Large
Commercial Opportunity
As
a serious public health issue, the important need for diagnosing and ultimately treating OSA has recently been highlighted by
the FDA clearance of several sleep apnea home test kits that are now third party reimbursed. Further highlighting this need, CVS
Health Corporation (NYSE: CVS) announced the implementation of a program to diagnose and treat OSA initially within their own
in-store, walk-in MinuteClinics. If implemented throughout their HealthHUB store network, the number of people diagnosed with
sleep apnea and eligible for treatment should increase dramatically. Fitbit (NYSE: FIT), the health oriented smart watch company
is seeking clearance from the FDA to diagnose sleep apnea. We believe that the combination of more efficient and patient friendly
diagnostic procedures and, ultimately, pharmaceutical treatments such as those we are developing will encourage more patients
to seek diagnosis and treatment. As noted above, there are approximately 29 million OSA patients in the United States and an additional
26 million in Germany and 8 million in the United Kingdom. There are currently no drugs approved for the treatment of OSA.
As
noted below in “—Proposed Regulatory Process,” there are several ways to achieve market exclusivity with
respect to this large and underserved patient population.
Proposed
Regulatory Process
In
conjunction with its management and consultants, the Company intends to file a new NDA under Section 505(b)(2) of the Federal
Food, Drug and Cosmetic Act (as amended, the “FDCA” and such NDA a “505(b)(2) NDA”), claiming the efficacy
and safety of our proposed proprietary dronabinol formulation in the treatment of OSA. We believe the use of dronabinol for the
treatment of OSA is a novel indication for an already approved drug, making it eligible for a 505(b)(2) NDA, as opposed to the
submission and approval of a full 505(b)(1) NDA.
The
505(b)(2) NDA was created by the Hatch-Waxman Act, as amended (the “Hatch-Waxman Act”), which amended the FDCA to
help avoid unnecessary duplication of studies already performed on a previously approved drug. As amended, the FDCA gives the
FDA express permission to rely on data not developed by the NDA applicant. Accordingly, a 505(b)(2) NDA contains full safety and
effectiveness reports but allows at least some of the information required for NDA approval, such as safety and efficacy information
on the active ingredient, to come from studies not conducted by or for the applicant. This can result in a less expensive and
faster route to approval, compared with a traditional development path, such as 505(b)(1), while still allowing for the creation
of new, differentiated products. The 505(b)(2) NDA regulatory path offers the applicant market protections, such as market exclusivity,
under the Hatch-Waxman Act and the rules promulgated thereunder. Other, international regulatory routes are available to pursue
proprietary formulations of dronabinol and would provide further market protections. For example, in Europe, a regulatory approval
route similar to the 505(b)(2) pathway is the hybrid procedure based on Article 10 of Directive 2001/83/EC.
We
have worked with regulatory consultants who will assist with FDA filings and regulatory strategy. If we can secure sufficient
financing, of which no assurance can be provided, we anticipate requesting a pre-IND meeting with the FDA. This meeting also could
create the type of dialogue with the FDA that is normally communicated at an end-of Phase 2 meeting. The FDA responses to this
meeting will be incorporated into an IND.
If
we can secure sufficient financing, of which no assurance can be provided, we plan to propose conducting the appropriate clinical
studies with our proprietary controlled release formulation in OSA patients to determine safety, pharmacokinetics and efficacy,
as well as a standard Phase 1 clinical study to determine potential abuse liability. When a Phase 3 study is required for a 505(b)(2),
usually only one study with fewer patients is necessary versus the two, large scale, confirmatory studies generally required for
the standard 505(b)(1) NDA. While no assurance can be provided, with an extensive safety database tracking chronic, long-term
use of Marinol® and generics, we believe that the FDA should not have major safety concerns with dronabinol in the treatment
of OSA.
The
Company has worked with the investigators who conducted the Phase 2B clinical trial, as well as with our Clinical Advisory
Panel to design a draft Phase 3 protocol that, based on the experience and results from the Phase 2A and Phase 2B trials, we believe
will provide sufficient data for FDA approval of a RespireRx dronabinol controlled release formulation for OSA. The current version
of the protocol is designed as a 90-day randomized, blinded, placebo-controlled study of dronabinol in the treatment of OSA. Depending
on feedback from the FDA, the Company estimates that the Phase 3 trial would require between 120 and 300 patients at 15 to 20
sites, and take 18 to 24 months to complete, at a cost of between $10 million and $14 million.
We
believe our rights under the Purisys Agreement would help facilitate regulatory approval. Under the Purisys Agreement, Purisys
has agreed to (i) provide all of the API estimated to be needed for the clinical development process for first- and second-generation
products, three validation batches for NDA filings and adequate supply for the initial inventory stocking for the wholesale and
retail channels, subject to certain limitations, (ii) maintain or file valid DMFs with the FDA or any other regulatory authority
and provide the Company with access or a right of reference letter entitling the Company to make continuing reference to the DMFs
during the term of the agreement in connection with any regulatory filings made with the FDA by the Company, (iii) participate
on a development committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting firms
engaged by the Company and participate in all FDA or DEA meetings as appropriate and as related to the API.
In
consideration for these supplies and services, the Company has agreed to (i) purchase exclusively from Purisys, during the commercialization
phase, all API for these products at a pre-determined price subject to certain producer price adjustments and (ii) allow Purisys’s
participation in the economic success of the commercialized products up to the earlier of the achievement of a maximum dollar
amount or the expiration of a period of time. See “Information with Respect to our Company—Description of Business—Manufacturing”
for information on the Purisys Agreement.
Results
of Operations
The Company’s
consolidated statements of operations as discussed herein are presented below.
|
|
|
Six-months
ended
|
|
|
Year
ended
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
829,019
|
|
|
$
|
594,904
|
|
|
$
|
1,137,175
|
|
|
$
|
1,488,238
|
|
|
Research
and development
|
|
|
308,466
|
|
|
|
297,350
|
|
|
|
599,329
|
|
|
|
688,286
|
|
|
Total
operating expenses
|
|
|
1,137,485
|
|
|
|
892,254
|
|
|
|
1,736,504
|
|
|
|
2,176,524
|
|
|
Loss
from operations
|
|
|
(1,137,485
|
)
|
|
|
(892,254
|
)
|
|
|
(1,736,504
|
)
|
|
|
(2,176,524
|
)
|
|
Loss
on extinguishment of debt and other liabilities in exchange for equity
|
|
|
(323,996
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(166,382
|
)
|
|
Interest
expense
|
|
|
(331,316
|
)
|
|
|
(151,645
|
)
|
|
|
(404,661
|
)
|
|
|
(136,243
|
)
|
|
Foreign
currency transaction gain (loss)
|
|
|
29,942
|
|
|
|
26,354
|
|
|
|
26,132
|
|
|
|
(112,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(1,762,855
|
)
|
|
$
|
(1,017,545
|
)
|
|
$
|
(2,115,033
|
)
|
|
$
|
(2,591,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
49,320,761
|
|
|
|
3,872,076
|
|
|
|
3,908,479
|
|
|
|
3,351,105
|
|
Six-months
Ended June 30, 2020 and 2019
Revenues.
The Company had no revenues during the six-months ended June 30, 2020 and 2019.
General
and Administrative. For the six-months ended June 30, 2020, general and administrative expenses were $829,019, an increase
of $234,115, as compared to $594,904 for the six-months ended June 30, 2019. The increase in general and administrative expenses
for the six-months ended June 30, 2020, as compared to the six-months ended June 30, 2019, is primarily due to an increase in
general and administrative salaries of $49,525 with the addition of compensation and benefits for our new Chief Executive Officer
and President effective May 6, 2020, an increase general legal fees of $154,326, primarily related to legal fees associated with
the April 2020 and June 2020 convertible note financings, the increase in the number of our authorized shares that required the
filing of a Form DEF 14C with the Securities and Exchange Commission and a filing with the State of Delaware, and other general
matters as well as an increase in patent legal fees of $13,659 and an increase in directors and officers liability insurance and
other insurance costs of $10,162, offset by the net effect of increases and decreases in other general and administrative expenses.
There was no stock-based compensation in general and administrative expenses for the six-months ended June 30, 2020 or 2019.
Research
and Development. For the six-months ended June 30, 2020, research and development expenses were $308,466, an increase of $11,116,
as compared to $297,350 for the six-months ended June 30, 2019. The increase in research and development expenses for the six-months
ended June 30, 2020, as compared to the six-months ended June 30, 2019, is primarily a result of an adjustment to one research
contract, an increase in research and development related insurance and the payment of option fee associated with the option agreement
related to the UWMRF Patent License Agreement. There was no stock-based compensation in research and development expenses for
the six-months ended June 30, 2020 or 2019.
Interest
Expense. During the six-months ended June 30, 2020, interest expense was $331,316 as compared to $151,645 for the six-months
ended June 30, 2019. The increase of $179,671 is primarily the result of interest and amortization of note discounts to interest
expense with respect to the convertible notes arising in August, October and November 2019 that were included in the current year
three-month period but did not exist in the prior year comparable three-month period.
Foreign
Currency Transaction (Loss) Gain. Foreign currency transaction gain was $29,942 for the six-months ended June 30, 2020, as
compared to a foreign currency transaction gain of $26,354 for the six-months ended June 30, 2019. The foreign currency transaction
(loss) gain relates to the $399,774 loan from SY Corporation made in June 2012, which is denominated in the South Korean Won.
Loss
on Extinguishment of Convertible Debt. The loss on extinguishment of convertible debt during the six-months ended June 30,
2020 was $323,996 as compared to $0 in the six-months ended June 30, 2019. On March 21, 2020, the Company entered into exchange
agreements with several note holders and exchanged an aggregate of $255,786 of principal and accrued interest for 17,052,424 shares
of the Company’s stock with an exchange price of $0.015 per share which was less than the closing price of $0.034 per share.
There was no loss on extinguishment of convertible debt during the six-months ended June 30, 2019.
Net
Loss Attributable to Common Stockholders. For the six-months ended June 30, 2020, the Company incurred a net loss of $816,137
as compared to a net loss of $477,213 for the six-months ended June 30, 2019. Included in the net loss is a loss on extinguishment
of convertible debt of $323,996.
The
Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred
net losses of $1,762,855 for the six-months ended June 30, 2020 and $2,115,033 for the fiscal year ended December 31, 2019 respectively,
as well as negative operating cash flows of $106,448 for the six-months ended June 30, 2020 and $487,745 for the fiscal year ended
December 31, 2019. The Company also had a stockholders’ deficiency of $7,846,748 at June 30, 2020 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 audit report on the Company’s consolidated financial statements for the year ended
December 31, 2019, 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 extremely limited cash resources and
current assets and has no current source of revenue. Management is continuing to address various aspects of
the Company’s operations and obligations, including, without limitation, debt obligations, financing requirements, establishment
of new and maintenance and improvement of existing and in-process intellectual property, licensing agreements, legal and patent
matters and regulatory compliance, and has taken steps to continue to raise new debt and equity capital to fund the Company’s
business activities from both related and unrelated parties to fund the Company’s business activities.
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 the pursuit of the Company’s planned research and development activities.
The Company regularly evaluates various measures to satisfy the Company’s liquidity needs, including development and other
agreements with collaborative partners and, when necessary, seeking to exchange or restructure the Company’s outstanding
securities. The Company is evaluating certain changes to its operations and structure to facilitate raising capital from sources
that may be interested in financing only discrete aspects of the Company’s development programs. Such changes could include
a significant reorganization, which may include the formation of one or more subsidiaries into which one or more of our programs
may be contributed. 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.
Years
Ended December 31, 2019 and 2018
Revenues.
During the year ended December 31, 2019 and 2018, the Company had no revenues.
General
and Administrative. For the year ended December 31, 2019, general and administrative expenses were $1,137,175, a decrease
of $351,063, as compared to $1,488,238 for the year ended December 31, 2018.
Stock-based
compensation costs and fees included in general and administrative expenses were $0 for the December 31, 2019, as compared to
$14,248 for the year ended December 31, 2018, reflecting a decrease of $14,248. The decrease is the result of the fact that no
stock-based compensation was granted to general and administrative employees of the Company during the year ended December 31,
2019. Salaries and employee benefits included in general and administrative expenses were $439,807 for the year ended December
31, 2019 as compared to $685,884 for the year ended December 31, 2018, a decrease of $246,077. The decrease is primarily due to
the full year elimination of the salary and employee benefits of the former Chief Executive Officer and President in the year
ended December 31, 2019 as compared to the elimination of only one quarter of a year of such expenses in the year ended December
31, 2018. Legal fees for general corporate purposes were $213,289 for the year ended December 31, 2019 as compared to $278,373
for the year ended December 31, 2018, a decrease of $65,084. Legal fees for patents and other patent expenses included in general
and administrative expenses were $147,722 for the year ended December 31, 2019, a decrease of $51,641 as compared to $199,363
for the year ended December 31, 2018. The decreases in both general legal fees and legal fees associated with patents and other
patent costs is a result of a reduction in utilization of professional resources as part of the Company’s cost control efforts,
partially offset by patent legal fees associated with patent filings made in October 2019.
The
remaining $25,987 of increases in general and administrative expenses is due to a number of increases partially offset by decreases
in a number of other expense categories.
Research
and Development. For the year ended December 31, 2019, research and development expenses were $599,329, a decrease of $88,957,
as compared to $688,286 for the year ended December 31, 2018, primarily due to a decrease in the utilization of consultants and
a decrease in research contract expenses.
Loss
on Extinguishment of Debt and other Liabilities in Exchange for Equity. There was no loss on extinguishment of debt or other
liabilities for the year ended December 31, 2019 as compared to a loss of $166,382 for the year ended December 31, 2018.
Interest
Expense. During the year ended December 31, 2019, interest expense was $404,661 (including $60,135 to related parties of which
$49,863 is to a single vendor that is also a related party representing interest on invoices subject to delayed payment), an increase
of $268,418, as compared to $136,243 (including $42,821 to related parties) for the year ended December 31, 2018. The increase
in interest expense resulted primarily from interest on five new convertible notes issued from January through March 2019 totaling
$110,000 of principal amount in 2019, and five additional new convertible notes issued in April, May, August, October and November
2019 totaling $393,500 of principal and additional interest with respect to the Salamandra legal settlement as well as from a
single vendor associated with the delay of cash remittances to that vendor.
Foreign
Currency Transaction Loss or Gain. The foreign currency transaction gain was $26,132 for the year ended December 31, 2019,
as compared to a foreign currency transaction loss of $112,641 for the year ended December 31, 2018. The foreign currency transaction
loss or gain relates to the $399,774 loan from SY Corporation Co., Ltd., formerly known as Samyang Optics Co. Ltd. (“SY
Corporation”), made in June 2012, which is denominated in the South Korean Won.
Net
Loss. For the year ended December 31, 2019, the Company incurred a net loss of $2,115,033, as compared to a net loss of $2,591,790
for the year ended December 31, 2018.
Liquidity
and Capital Resources
June
30, 2020
Working
Capital and Cash. The Company’s condensed consolidated
financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. The Company has incurred net losses of $1,762,854 and net losses
from operations of $1,137,484 for the six-months ended June 30, 2020 and $2,115,033 for the fiscal year ended December 31, 2019,
and negative operating cash flows of $106,448 for the six-months ended June 30, 2020 and $487,745 for the fiscal year ended December
31, 2019, had a stockholders’ deficiency of $7,846,748 at June 30, 2020, 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 condensed consolidated financial statements for the year ended December
31, 2019, expressed substantial doubt about the Company’s ability to continue as a going concern.
At
June 30, 2020, the Company had a working capital deficit of $7,846,748, as compared to a working capital deficit of $7,444,819
at December 31, 2019 reflecting an increase in the working capital deficit of $401,929 for the six-months ended June 30, 2020.
The increase in the working capital deficit is due to an increase in current liabilities of $442,284 and a decrease in cash of
$15,198 offset by an increase in prepaid expenses of $55,553.
At
June 30, 2020, the Company had cash aggregating $1,492, as compared to $16,690 at December 31, 2019, reflecting a decrease in
cash of $15,198 for the six-months ended June 30, 2020.
The
Company is currently, and has for some time, been in significant financial distress. It has extremely limited cash resources and
current assets and has no current source of revenue. 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. See Note 8. Commitments and Contingencies and Note 9. Subsequent
Events in notes to condensed consolidated financial statements of the Company as of June 30, 2020 for information on these commitments
and obligations.
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
development and other agreements with collaborative partners and seeking to exchange or restructure some of the Company’s
outstanding securities. The Company is evaluating certain changes to its operations and structure to facilitate raising capital
from sources that may be interested in financing only discrete aspects of the Company’s development programs. Such changes
could include a significant reorganization. Though the Company actively pursues opportunities to finance its operations through
external sources of debt and equity financing, it has limited access to such financing and there can be no assurance that such
financing will be available on terms acceptable to the Company, or at all. See “—Principal Sources of Liquidity”
for more information on certain existing and potential financing opportunities.
Operating
Activities. For the six-months ended June 30, 2020, operating activities utilized cash of $106,448, as compared to utilizing
cash of $266,278 for the six-months ended June 30, 2019, to support the Company’s ongoing general and administrative expenses
as well as its research and development activities.
Principal
Sources of Liquidity
For
the six-months ended June 30, 2020, financing activities consisted of a $1,250 advance from an executive officer, net proceeds
of $50,000 after payment of $3,000 of capitalized note costs from the Power Up April 2020 Note financing and net proceeds of $40,000
after payment of $3,000 of capitalized note costs from the Power Up June 2020 Note financing. For the six-months ended June 30,
2019, financing activities consisted of borrowings on convertible notes with warrants of $213,500 less debt issuance costs of
$5,500 for net proceeds of $208,000 and the proceeds from a note payable to an officer of $25,000. Financing activities since
June 30, 2020 that provided sources of liquidity consisted of net proceeds of $125,000 from the FirstFire SPA, net proceeds of
$68,250 from the EMA SPA. See Note 9. Subsequent Events in notes to condensed consolidated financial statements of the Company
as of June 30, 2020 for more information on these financing activities.
The
Company intends to continue its efforts to finance its research and development efforts and general and administrative expenses
and in doing so, anticipates taking additional steps as necessary to access the full availability
of is its equity line under the Purchase Agreement with the Selling Stockholder, which is likely to include the filing of one
or more subsequent resale registration statements. No assurance can be provided, however, that the Company will be able to access
the full potential gross proceeds under the Purchase Agreement. The Company will also seek financing from the sale of common equity
securities, equity-linked securities, convertible debt, preferred stock, convertible preferred stock, debt or other forms of financing,
but no assurance can be provided that such financing will be obtained on terms acceptable to the Company or at all.
Additionally,
the Company has issued, and may issue in the future, its preferred stock to its executive officers in exchange for the extinguishment
of those executive officers’ rights to the payment of certain accrued compensation. See “—Compensation Forgiveness
by Arnold S. Lippa and Jeff Margolis and Related Issuance of Series H Preferred Stock” in Note 9. Subsequent Events
to notes to condensed consolidated financial statements of the Company as of June 30, 2020 and “Executive Compensation—Certain
Relationships and Related Party Transactions—Transactions with Related Persons” for information on these exchanges.
December
31, 2019
Working
Capital and Cash. 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 $2,115,033 for the fiscal year ended December 31, 2019 and $2,591,790 for the fiscal year ended December
31, 2018, and negative operating cash flows of $487,745 and $427,368 for the fiscal years ended December 31, 2019 and 2018 respectively.
The Company had a stockholders’ deficiency of $7,444,819 at December 31, 2019 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,
2019, has expressed substantial doubt about the Company’s ability to continue as a going concern (see “Going Concern”
below).
At
December 31, 2019, the Company had a working capital deficit of $7,444,819, as compared to a working capital deficit of $5,736,369
at December 31, 2018, reflecting an increase in the working capital deficit of $1,708,450 for the fiscal year ended December 31,
2019. This increase is comprised of an increase in total current liabilities of $1,632,702, and a decrease in current assets of
$78,862. The increase in total current liabilities consists of a net increase in accounts payable and accrued expenses of $468,910,
an increase in accrued compensation and related expenses of $779,407, an increase in convertible notes payable of $311,925, an
increase in the note payable to SY Corporation of $21,795, an increase in notes payable to officers and former officers of $54,938
partially offset by a decrease in other short-term notes payable of $4,273. At December 31, 2019, the Company had cash aggregating
$16,690 as compared to $33,284 at December 31, 2018, reflecting a decrease in cash of $16,594 during the fiscal year ended December
31, 2019.
Operating
Activities. For the fiscal year ended December 31, 2019, operating activities utilized cash of $487,745 as compared to utilizing
cash of $427,368 for the fiscal year ended December 31, 2018, to support the Company’s ongoing operations and research and
development activities.
Financing
Activities. For the fiscal year ended December 31, 2019, financing activities consisted of ten convertible note financings.
In January, February and March 2019, the Company issued new 10% convertible notes, due on either February 28, 2019 or April 30,
2019 with face amounts of $110,000 in the aggregate. Common stock purchase warrants were issued in connection with such notes.
The Company valued the warrants and recorded an original issue discount associated with the new 10% convertible notes which was
then amortized in its entirety during 2019. On March 22, 2020 the principal and accrued interest related to four of the five notes
was exchanged for shares of common stock. In April, May, August, October and November 2019, the Company issued five new convertible
notes due on dates ranging from 9 months to 12 months from the issue date. The aggregate amounts payable at maturity of these
notes was $393,500. Certain of these notes were partially settled through conversions of portions of the maturity amounts into
shares of common stock.
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 $2,115,033 for the fiscal year ended December 31, 2019 and $2,591,790 for the fiscal year ended December
31, 2018, and negative operating cash flows of $487,745 and $427,368 for the fiscal years ended December 31, 2019 and 2018, respectively.
The Company had a stockholders’ deficiency of $7,444,819 at December 31, 2019 and expects to continue to incur net losses
and negative operating cash flows for at least the next few years.
Off-Balance
Sheet Arrangements
At
September 30, 2020, the Company did not have any transactions, obligations or relationships that could be considered off-balance
sheet arrangements.
INDEX
TO FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and Board of Directors
RespireRx
Pharmaceuticals Inc. and Subsidiary
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of RespireRx Pharmaceuticals Inc. and Subsidiary (the “Company”)
as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity (deficiency),
and cash flows for each of the years then ended, and the related notes (collectively, the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of
the years then ended, in conformity with generally accepted accounting principles generally accepted in the United States of America.
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the Company has experienced recurring losses, negative cash flows
from operations, has limited capital resources, and a net stockholders’ deficiency. These matters raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We
have served as the Company’s auditor since 2004.
Irvine,
California
April
14, 2020
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
|
December
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,690
|
|
|
$
|
33,284
|
|
|
Advance
payment on research contract
|
|
|
-
|
|
|
|
48,912
|
|
|
Prepaid
expenses, including current portion of long-term prepaid insurance of $10,586 at December 31, 2019 and $14,945 at December
31, 2018
|
|
|
28,638
|
|
|
|
38,880
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
45,328
|
|
|
|
121,076
|
|
|
Long-term
prepaid insurance, net of current portion of $10,586 and $14,945 at December 31, 2019 and December 31, 2018 respectively
|
|
|
-
|
|
|
|
3,114
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
45,328
|
|
|
$
|
124,190
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses, including $476,671 and $400,229 payable to related parties at December 31, 2019 and 2018, respectively
|
|
$
|
3,772,030
|
|
|
$
|
3,303,120
|
|
|
Accrued
compensation and related expenses
|
|
|
2,083,841
|
|
|
|
1,304,434
|
|
|
Convertible
notes payable, currently due and payable on demand, including accrued interest of $113,304 and $62,635 at December 31, 2019
and 2018, respectively, (of which $43,666, including accrued interest of $18,666, was deemed to be in default at December
31, 2019) (Note 4)
|
|
|
551,591
|
|
|
|
239,666
|
|
|
Note
payable to SY Corporation, including accrued interest of $363,280 and $315,307 at December 31, 2019 and 2018, respectively
(payment obligation currently in default – Note 4)
|
|
|
766,236
|
|
|
|
744,441
|
|
|
Notes
and advances payable to officers, including accrued interest of $35,388 and $25,116 at December 31, 2019 and 2018, respectively
(Note 4)
|
|
|
142,238
|
|
|
|
102,716
|
|
|
Notes
payable to former officer, including accrued interest of $41,977 and $26,561 as of December 31, 2019 and December 31, 2018,
respectively (Note 4)
|
|
|
169,577
|
|
|
|
154,161
|
|
|
Other
short-term notes payable
|
|
|
4,634
|
|
|
|
8,907
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,490,147
|
|
|
|
5,857,445
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficiency: (Note 6)
|
|
|
|
|
|
|
|
|
|
Series
B convertible preferred stock, $0.001 par value; $0.6667 per share liquidation preference; aggregate liquidation preference
$25,001; shares authorized: 37,500; shares issued and outstanding: 37,500; common shares issuable upon conversion at 0.00030
common shares per Series B share: 11
|
|
|
21,703
|
|
|
|
21,703
|
|
|
Common
stock, $0.001 par value; shares authorized: 65,000,000; shares issued and outstanding: 4,175,072 and 3,872,076 at December
31, 2019 and 2018, respectively
|
|
|
4,175
|
|
|
|
3,872
|
|
|
Additional
paid-in capital
|
|
|
159,038,388
|
|
|
|
158,635,222
|
|
|
Accumulated
deficit
|
|
|
(166,509,085
|
)
|
|
|
(164,394,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ deficiency
|
|
|
(7,444,819
|
)
|
|
|
(5,733,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficiency
|
|
$
|
45,328
|
|
|
$
|
124,190
|
|
See
accompanying notes to consolidated financial statements and
report
of independent registered public accounting firm.
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Years
Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative, including $485,332 and $740,975 to related parties for the years ended December 31, 2019 and 2018, respectively
|
|
$
|
1,137,175
|
|
|
$
|
1,488,238
|
|
|
Research
and development, including $490,908 and $495,638 to related parties for the years ended December 31, 2019 and 2018, respectively
|
|
|
599,329
|
|
|
|
688,286
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating costs and expenses
|
|
|
1,736,504
|
|
|
|
2,176,524
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,736,504
|
)
|
|
|
(2,176,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on extinguishment of debt and other liabilities in exchange for equity
|
|
|
-
|
|
|
|
(166,382
|
)
|
|
Interest
expense, including $60,135 and $42,821 to related parties for the years ended December 31, 2019 and 2018, respectively
|
|
|
(404,661
|
)
|
|
|
(136,243
|
)
|
|
Foreign
currency transaction (loss) gain
|
|
|
26,132
|
|
|
|
(112,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,115,033
|
)
|
|
$
|
(2,591,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted
|
|
$
|
(0.54
|
)
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
3,908,479
|
|
|
|
3,351,105
|
|
See
accompanying notes to consolidated financial statements and
report
of independent registered public accounting firm.
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY
Years
Ended December 31, 2019 and 2018
|
|
|
Series
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Stockholders’
Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
3,065,261
|
|
|
$
|
3,065
|
|
|
$
|
157,422,110
|
|
|
$
|
(161,802,262
|
)
|
|
$
|
(4,355,384
|
)
|
|
Fair
value of common stock options issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,248
|
|
|
|
|
|
|
|
29,248
|
|
|
Fair
value of common stock options issued in exchange for accrued compensation and accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335,529
|
|
|
|
|
|
|
|
335,529
|
|
|
Common
stock issued related to extinguishment of convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
284,358
|
|
|
|
284
|
|
|
|
318,236
|
|
|
|
|
|
|
|
318,520
|
|
|
Sale
of common stock units in private placement, net of escrow fees of $5,000
|
|
|
-
|
|
|
|
-
|
|
|
|
191,194
|
|
|
|
191
|
|
|
|
195,559
|
|
|
|
|
|
|
|
195,750
|
|
|
Issuance
of common stock units in exchange for note payable to officer
|
|
|
-
|
|
|
|
-
|
|
|
|
47,620
|
|
|
|
48
|
|
|
|
49,952
|
|
|
|
|
|
|
|
50,000
|
|
|
Fair
value of warrants issued in connection issuance of units in exchange for note payable to officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,975
|
|
|
|
|
|
|
|
49,975
|
|
|
Issuance
of common stock to patent counsel
|
|
|
|
|
|
|
|
|
|
|
283,643
|
|
|
|
284
|
|
|
|
198,266
|
|
|
|
|
|
|
|
198,550
|
|
|
Fair
value of original issue discount associated with warrants issued with convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,347
|
|
|
|
|
|
|
|
36,347
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,591,790
|
)
|
|
$
|
(2,591,790
|
)
|
|
Balance
at December 31, 2018
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
3,872,076
|
|
|
$
|
3,872
|
|
|
$
|
158,635,222
|
|
|
$
|
(164,394,052
|
)
|
|
$
|
(5,733,255
|
)
|
|
Warrants
issued with respect to convertible notes issued from January through March 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,812
|
|
|
|
|
|
|
|
45,812
|
|
|
Common
stock issued related to convertible notes
|
|
|
|
|
|
|
|
|
|
|
17,500
|
|
|
|
17
|
|
|
|
3,316
|
|
|
|
|
|
|
|
3,333
|
|
|
Discounts
associated with convertible note issuances from April through November 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329,019
|
|
|
|
|
|
|
|
329,019
|
|
|
Common
stock issued as partial settlement of convertible notes issued from April through May 2019
|
|
|
|
|
|
|
|
|
|
|
285,496
|
|
|
|
286
|
|
|
|
25,019
|
|
|
|
|
|
|
|
25,305
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,115,033
|
)
|
|
$
|
(2,115,033
|
)
|
|
Balance
at December 31, 2019
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
4,175,072
|
|
|
$
|
4,175
|
|
|
$
|
159,038,388
|
|
|
$
|
(166,509,085
|
)
|
|
$
|
(7,444,819
|
)
|
See
accompanying notes to consolidated financial statements and
report
of independent registered public accounting firm.
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Years
Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,115,033
|
)
|
|
$
|
(2,591,790
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Amortization
of debt discounts related to convertible notes payable
|
|
|
215,575
|
|
|
|
8,378
|
|
|
Costs
associated with convertible note conversion paid with common stock
|
|
|
750
|
|
|
|
|
|
|
Loss
on extinguishment of debt
|
|
|
-
|
|
|
|
105,254
|
|
|
Loss
on extinguishment of other liabilities
|
|
|
-
|
|
|
|
11,154
|
|
|
Loss
on exchange of officer note
|
|
|
-
|
|
|
|
49,974
|
|
|
Stock-based
compensation and fees included in -
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
-
|
|
|
|
14,248
|
|
|
Research
and development expenses
|
|
|
-
|
|
|
|
15,000
|
|
|
Foreign
currency transaction loss (gain)
|
|
|
(26,132
|
)
|
|
|
112,641
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in -
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and advanced clinical research payments
|
|
|
13,355
|
|
|
|
18,962
|
|
|
Increase
(decrease) in -
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
524,324
|
|
|
|
703,682
|
|
|
Accrued
compensation and related expenses
|
|
|
779,407
|
|
|
|
1,025,484
|
|
|
Accrued
interest payable
|
|
|
120,009
|
|
|
|
99,645
|
|
|
Net
cash used in operating activities
|
|
|
(487,745
|
)
|
|
|
(427,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock units and issuance of restricted stock, net of fees
|
|
|
-
|
|
|
|
195,750
|
|
|
Proceeds
from officer notes
|
|
|
22,751
|
|
|
|
100,000
|
|
|
Proceeds
from issuance of notes payable
|
|
|
478,150
|
|
|
|
80,000
|
|
|
Capitalized
note costs
|
|
|
(29,750
|
)
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
471,151
|
|
|
|
375,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Net
decrease
|
|
|
(16,594
|
)
|
|
|
(51,618
|
)
|
|
Balance
at beginning of period
|
|
|
33,284
|
|
|
|
84,902
|
|
|
Balance
at end of period
|
|
$
|
16,690
|
|
|
$
|
33,284
|
|
(Continued)
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Continued)
|
|
|
Years
Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for -
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,130
|
|
|
$
|
3,345
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
|
|
10%
convertible notes payable, including accrued interest of $62,267 exchanged for common stock
|
|
$
|
-
|
|
|
$
|
213,266
|
|
|
Principal
on convertible notes payable paid with common stock
|
|
$
|
24,554
|
|
|
$
|
-
|
|
|
Conversion
fees paid with common stock upon principal payment on convertible notes payable
|
|
$
|
750
|
|
|
$
|
-
|
|
|
Accounts
payable and accrued expenses extinguished with common stock options
|
|
$
|
-
|
|
|
$
|
138,273
|
|
|
Accrued
compensation extinguished with option to purchase common stock options
|
|
$
|
-
|
|
|
|
200,350
|
|
|
Officer
note payable, exchanged for common stock and warrants
|
|
$
|
-
|
|
|
|
50,000
|
|
|
Short-term
note payable issued in connection with financing of directors and officers insurance policy
|
|
$
|
61,746
|
|
|
$
|
63,750
|
|
|
Short-term
note payable issued in connection with financing of clinical trial and other office insurance policies
|
|
$
|
9,322
|
|
|
$
|
9,322
|
|
|
Fair
value of common stock issued to service provider
|
|
$
|
-
|
|
|
$
|
198,550
|
|
See
accompanying notes to consolidated financial statements and
report
of independent registered public accounting firm.
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2019 and 2018
1.
Organization and Basis of Presentation
Organization
RespireRx
Pharmaceuticals Inc. (“RespireRx,” the “Company,” “we” or “our” includes our wholly-owned
subsidiary, Pier Pharmacuticals, Inc., unless the context indicates otherwise) 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. While previously developing potential applications
for respiratory disorders, RespireRx has retained and expanded its neuromodulator intellectual property and data with respect
to neurological and psychiatric disorders and is considering developing certain potential products in this platform, if it is
able to obtain additional financing and/or strategic relationships.
In
August 2012, RespireRx acquired Pier Pharmaceuticals, Inc. (“Pier”), which is now its wholly-owned subsidiary.
In
March 2020, RespireRx and UWM Research Foundation, an affiliate of the University of Wisconsin-Milwaukee, entered into an option
agreement (“UWMRF Option Agreement”) pursuant to which RespireRx has a six-month option to license the identified
intellectual property pursuant to license terms substantially in the Form of a Patent License Agreement (“UWMRF License
Agreement”) that is attached to the UWMRF Option Agreement as Appendix I. The UWMRF License Agreement, if it becomes effective,
will expand the Company’s neuromodulator program which has historically included the Company’s AMPAkine program to
include a GABA-A program as well. See Note 10. Subsequent Events.
Basis
of Presentation
The
consolidated financial statements are of RespireRx and its wholly-owned subsidiary, Pier.
2.
Business
The
mission of the Company is to develop innovative and revolutionary treatments to combat disorders caused by disruption of neuronal
signaling. We are developing treatment options that address conditions that affect millions of people, but for which there are
few or poor treatment options, including obstructive sleep apnea (“OSA”), attention deficit hyperactivity disorder
(“ADHD”) and recovery from spinal cord injury (“SCI”), as well as certain neurological orphan diseases
such as Fragile X Syndrome. RespireRx is developing a pipeline of new drug products based on our broad patent portfolios for two
drug platforms: (i) cannabinoids, including dronabinol (a synthetic form of Δ9-THC) that act upon the nervous system’s
endogenous cannabinoid receptors and (ii) neuromodulators, which we now call EndeavourRx, including (a) AMPAkines, proprietary
compounds that positively modulate AMPA-type glutamate receptors to promote neuronal function and (b) positive allosteric modulators
(“PAMs”) of the gamma-amino-butyric acid subunit A (“GABA-A”) receptors that are the subject of an option
agreement dated March 2, 2020 between the Company and the UWM Research Foundation, Inc. (“UWMRF”), an affiliate of
the University of Wisconsin-Milwaukee. See Note 10. Subsequent Events.
Cannabinoids
With
respect to the cannabinoid platform, two Phase 2 clinical trials have been completed demonstrating the ability of dronabinol to
statistically significantly reduce the symptoms of OSA, which management believes is potentially a multi-billion-dollar market.
Subject to raising sufficient financing (of which no assurance can be provided), we believe that we have put most of the necessary
pieces into place to rapidly initiate a Phase 3 clinical trial program. By way of definition, when a new drug is allowed by the
United States Food and Drug Administration (“FDA”) to be tested in humans, Phase 1 clinical trials are conducted in
healthy people to determine safety and pharmacokinetics. If successful, Phase 2 clinical trials are conducted in patients to determine
safety and preliminary efficacy. Phase 3 trials, large scale studies to determine efficacy and safety, are the final step prior
to seeking FDA approval to market a drug.
With
the cannabinoid platform, we plan to create a wholly-owned private subsidiary of RespireRx (“Newco”, official name
not yet determined) with its own management team and board of directors.
Neuromodulators
– EndeavourRx - AMPAkines and GABA-A
Neuromodulators
are chemicals released by neurons that enable neurons to communicate with one another. This process is called neurotransmission.
Neurons release neurotransmitters that attach to a very specific protein structure, termed a receptor, residing on an adjacent
neuron. This neurotransmission process can either increase or decrease the excitability of the neuron receiving the message.
Neuromodulators
do not act directly at the neurotransmitter binding site, but instead act at accessory sites that enhance (Positive Allosteric
Modulators – “PAMs”) or reduce (Negative Allosteric Modulators – “NAMs”) the actions of neurotransmitters
at their primary receptor sites. Neuromodulators have no intrinsic activity of their own. We believe that neuromodulators offer
the possibility of developing “kinder and gentler” neuropharmacological drugs with greater pharmacological specificity
and reduced side effects compared to present drugs, especially in disorders for which there is a significant unmet or poorly met
clinical need such as Attention Deficit Hyperactivity Disorder (“ADHD”), Autism Spectrum Disorder (“ASD”),
Fragile X Syndrome (“FSX”) and CNS-driven disorders. We are focused presently on developing drugs that act as positive
allosteric modulators (“PAM”) at the AMPA and GABA-A receptors.
Building
upon our AMPAkine platform as a foundation, we also are planning the establishment of a second business unit, which we now call
collectively with the AMPAkines, EndeavourRx, that will focus on developing novel neuromodulators for disorders due to
alterations in neurotransmission. Through an extensive series of translational studies over a number of years, but numerous researchers
and from the cellular level up to human Phase 2 clinical trials, selected AMPAkines have demonstrated target site engagement and
positive results in patients with Attention Deficit Hyperactivity Disorder (see below).
Through
an extensive AMPAkine translational research effort from the cellular level through Phase 2 clinical trials, the Company has developed
a family of novel, low impact AMPAkines, including CX717, CX1739 and CX1942 that may have clinical application in the treatment
of CNS-driven neurobehavioral and cognitive disorders, spinal cord injury, neurological diseases, and certain orphan indications.
From our AMPAkine platform, our lead clinical compounds, CX717 and CX1739, have successfully completed multiple Phase 1 safety
trials. Both compounds have also completed Phase 2 efficacy trials demonstrating target engagement, by antagonizing the ability
of opioids to induce respiratory depression. CX717 has successfully completed a Phase 2 trial demonstrating the ability to statistically
significantly reduce the symptoms of adult ADHD. In an early Phase 2 study, CX1739 improved breathing in patients with central
sleep apnea. Preclinical studies have highlighted the potential ability of these AMPAkines to improve motor function in animals
with spinal injury. Subject to raising sufficient financing (of which no assurance can be provided), we believe that we will be
able to rapidly initiate a human Phase 2 study with CX1739 and/or CX717 in patients with spinal cord injury and a human Phase
2B study in patients with ADHD with either CX717 or CX1739.
In
order to expand the asset base of EndeavourRx, we have entered into an option agreement with UWMRF whereby RespireRx has
a six-month option commencing on March 2, 2020, to license, certain intellectual property regarding chemical compounds that act
as positive allosteric modulators (“PAMs”) at certain specific receptors for gamma-amino-butyric acid type A (“GABA-A”),
a major inhibitory transmitter in the brain (see Subsequent Events). Certain of these compounds have shown impressive activity
in a broad range of animal models of refractory/resistant epilepsy and other convulsant disorders, as well as in brain tissue
samples obtained from epileptic patients in pre-clinical research conducted at the University of Wisconsin-Milwaukee by Drs. James
Cook and Jeffrey Witkin among others and at collaborating institutions. Epilepsy is a chronic and highly prevalent neurological
disorder that affects millions of people world-wide. While many anticonvulsant drugs have been approved to decrease seizure probability,
seizures are not well controlled and, in as many as 60-70% of patients, existing drugs are not efficacious at some point in the
disease progression. We believe that the medical and patient community are in clear agreement that there is desperate need for
improved antiepileptic drugs. In addition, these compounds have shown positive activity in animal models of migraine, inflammatory
and neuropathic pain, as well as other areas of interest. Because of their GABA receptor subunit specificity, the compounds have
a greatly reduced liability to produce sedation, motor incoordination, memory impairments and tolerance, side effects commonly
associated with non-specific GABA PAMs, such as benzodiazepines.
Our
major challenge has been to raise substantial equity or equity-linked financing to support research and development programs for
our two drug platforms, while minimizing the dilutive effect to pre-existing stockholders. At present, we believe that we are
hindered primarily by our public corporate structure, our OTCQB listing, limited float and low market capitalization as a result
of our low stock price. For this reason, RespireRx is considering an internal restructuring plan that contemplates spinning out
our two drug platforms into separate operating businesses.
We
believe that by creating EndeavourRx and ResolutionRx, it may be possible, through separate finance channels, to optimize
the asset values of both the cannabinoid platform and the neuromodulation platform.
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 $2,115,033 and $2,591,790 for the fiscal years ended December 31, 2019 and 2018, respectively, and negative operating cash
flows of $487,745 and $427,368 for the fiscal years ended December 31, 2019 and 2018, respectively. The Company also had a stockholders’
deficiency of $7,444,819 at December 31, 2019 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, 2019, 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 extremely 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 taken steps to continue to raise new debt and equity capital
to fund the Company’s business activities from both related and unrelated parties.
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 the pursuit of the Company’s planned research and development activities.
The Company regularly evaluates various measures to satisfy the Company’s liquidity needs, including development and other
agreements with collaborative partners and, when necessary, seeking to exchange or restructure the Company’s outstanding
securities. The Company is evaluating certain changes to its operations and structure to facilitate raising capital from sources
that may be interested in financing only discrete aspects of the Company’s development programs. Such changes could include
a significant reorganization, which may include the formation of one or more subsidiaries into which one or more programs may
be contributed. 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.
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.
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 amounts of financial instruments (consisting of cash, advances on research grants and accounts payable and accrued expenses)
are 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. The Company
considers the carrying amounts of the notes payable to officers, inclusive of accrued interest, to be representative of the respective
fair values of such instruments due to the short-term nature of those instruments and their terms.
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
equity financings are netted against the proceeds.
Capitalized
Financing Costs
The
Company presents debt issuance costs related to 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.
Convertible
Notes Payable
Convertible
notes are evaluated to determine if they should be recorded at amortized cost. To the extent that there are associated warrants,
commitment shares or a beneficial conversion feature, the convertible notes and warrants are evaluated to determine if there are
embedded derivatives to be identified, bifurcated and valued at fair value in connection with and at the time of such financing.
Extinguishment
of Debt
The
Company accounts for the extinguishment of debt in accordance with GAAP by comparing the carrying value of the debt to the fair
value of consideration paid or assets given up and recognizing a loss or gain in the consolidated statement of operations in the
amount of the difference in the period in which such transaction occurs.
Prepaid
Insurance
Prepaid
insurance represents the premium paid in March 2019 for directors’ and officers’ insurance as well as the amount paid
in April 2019 for office-related insurances and clinical trial coverage. Directors’ and officers’ insurance tail coverage,
purchased in March 2013 and which is a seven-year policy, is being amortized on a straight-line basis over the policy period and
all amounts due within one year are reclassified as current prepaid insurance. The amount amortizable in the ensuing twelve-month
period is recorded as prepaid insurance in the Company’s consolidated balance sheet at each reporting date and amortized
to the Company’s consolidated statement of operations for each reporting period. Amounts due after the ensuing year are
recorded as long-term prepaid insurance.
Stock-Based
Awards
The
Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Board members, consultants
and other vendors 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 value of the 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
consolidated financial statements over the vesting period of the awards.
Stock
grants, which are sometimes 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 outside consultants and other vendors are valued on the grant date. As the stock
options vest, the Company recognizes this expense over the period in which the services are provided.
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 value of the common stock on the grant date, and the estimated volatility of the common stock
over the estimated life 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 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.
During
the fiscal year ended December 31, 2019, there were no stock options granted to officers, directors, Scientific Advisory Board
members, consultants or other vendors. During fiscal year ended December 31, 2018, there were stock grants totaling 283,643 shares
of common stock to designees of one vendor with a value on the date of the grant of $198,550 which amount paid $198,550 of account
payable to that vendor. There was no gain or loss on such stock grant.
For
stock options requiring an assessment of value during the fiscal years ended December 31, 2019 and 2018, the fair value of each
stock option award was estimated using the Black-Scholes option-pricing model using the following assumptions:
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
-
|
%
|
|
|
2.64-2.89
|
%
|
|
Expected
dividend yield
|
|
|
-
|
%
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
-
|
%
|
|
|
186.07-222.64
|
%
|
|
Expected
life at date of issuance
|
|
|
-
|
|
|
|
5
years
|
|
The
expected life is estimated to be equal to the term of the common stock options issued in 2018.
The
Company recognizes the fair value of stock-based awards 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 fiscal years ended December 31, 2019
and 2018.
There
were no warrants issued as compensation or for services during the fiscal years ended December 31, 2019 and 2018 requiring such
assessment. Warrants, if issued for services, are typically issued to placement agents or brokers for fund raising services and
are not issued from any of the Company’s stock and option plans, from which options issued to non-employees for services
are typically issued.
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, 2019, 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, 2019, 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
and Development
Research
and development costs include compensation paid to management directing the Company’s research and development activities,
including but not limited to compensation paid to our Interim Chief Executive Officer and Interim President who is also our Chief
Scientific Officer and fees paid to consultants and outside service providers and organizations (including research institutes
at universities), and other expenses relating to the acquisition, design, development and clinical testing of the Company’s
treatments and product candidates.
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 and are charged to general and administrative expenses.
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, 2019 and 2018, 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,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Series
B convertible preferred stock
|
|
|
11
|
|
|
|
11
|
|
|
Convertible
notes payable
|
|
|
7,017,896
|
|
|
|
16,319
|
|
|
Common
stock warrants
|
|
|
2,191,043
|
|
|
|
1,783,229
|
|
|
Common
stock options
|
|
|
4,344,994
|
|
|
|
4,344,994
|
|
|
Total
|
|
|
13,553,944
|
|
|
|
6,144,553
|
|
Reclassifications
Certain
comparative figures in 2018 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
March 2020, The FASB issued Accounting Standards Update No. 2020-03, Codification Improvements to Financial Instruments. There
are seven issues addressed in this update. Issues 1 – 5 were clarifications and codifications of previous updates. Issue
3 relates only to depository and lending institutions and therefore would not be applicable to the Company. Issue 6 was a clarification
on determining the contractual term of a net investment in a lease for purposes of measuring expected credit losses, an issue
not applicable to the Company. Issue 7 relates to the regaining control of financial assets sold and the recordation of an allowance
for credit losses. The amendment related to issues 1, 2, 4 and 5 become immediately upon adoption of the update. Issue
3 becomes effective for fiscal years beginning after December 15, 2019. Issues 6 and 7 become effective on varying dates that
relate to the dates of adoption other updates. Management’s initial analysis is that it does not believe the new guidance
will substantially impact the Company’s financial statements.
In
November 2019, the FASB issued Accounting Standards Update No. 2019-08, “Compensation-Stock Compensation (Topic 718) and
Revenue from Contracts with Customers (Topic 606)-Codification Improvements-Share-Based Consideration Payable to a Customer.
The update provides measurement guidance that when share-based consideration is granted to a customer, it is treated as a reduction
is the transaction price and that the amount recorded as the reduction should be based on the grant-date fair value of the share-based
payment award. For entities that have not yet adopted the amendments in Accounting Standards Update 2018-07, the amendments of
this update are effective for public entities in fiscal years beginning after December 14, 2019, and interim periods within those
fiscal years. Management’s initial analysis is that it does not believe the new guidance will substantially impact the Company’s
financial statements.
In
August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework—Changes
to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify the disclosure requirements
on fair value measurements in Topic 820, Fair Value Measurement. These amendments affect the disclosures of the fair value of
financial instruments. See Note 3. Summary of Significant Account Policies – Fair Value of Financial Instruments. The
amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, including
interim periods within that fiscal year. Management has not concluded its evaluation of the guidance. Its initial analysis is
that it does not believe the new guidance will substantially impact the Company’s financial statements.
In
June 2018, the FASB issued Accounting Standards Update No. 2018-07 (“ASU 2018-07”), Compensation-Stock Compensation
(Topic 718)—Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 are amendments to Topic 718 that
become effective for public entities like the Company for fiscal years beginning after December 15, 2018, including interim periods
within that fiscal year. This update applies to nonemployee share-based awards within the scope of Topic 718. Consistent with
the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards are measured at grant-date
fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has
been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. Equity-
classified nonemployee share- based payment awards are measured at the grant date. The definition of the term grant date has been
amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions
of a share- based payment award. An entity considers the probability of satisfying performance conditions when nonemployee share-based
payment awards contain such conditions. This is consistent with the treatment for employee-based awards. Generally, the classification
of equity- classified nonemployee share-based payment awards will continue to be subject to the requirements of Topic 718 unless
modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to
benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods or services. This eliminates
the requirement to reassess classification of such awards upon vesting. This standard will change the valuation of applicable
awards granted in subsequent periods.
4.
Notes Payable
Convertible
Notes Payable
On
November 4, 2019, the Company issued a convertible note (the “November 2019 Convertible Note”) bearing interest at
10% per year. The maturity amount is $170,000 and it matures on November 4, 2020. The Company incurred debt issuance costs of
$14,000, which included $8,500 of lender legal fees and $5,500 in placement agency fees paid to Aurora Capital LLC, a registered
broker-dealer and an affiliate of the Company. The transaction included a $13,600 original issue discount. The transaction did
not include any warrants or commitment shares. The net proceeds to the Company directly from the lender was $147,900, from which
the Company then directly paid the $5,500 placement agency fee for final net proceeds of $142,400. Subject to certain limitations
and adjustments as described in the November 2019 Convertible Note, the holder may convert the November 2019 Convertible Note
at a fixed conversion price of $0.50 per share of common stock, provided that from the date that is six months after the issuance
date, the conversion price shall be 60% multiplied by the lowest closing price of the common stock during the twenty (20) consecutive
trading days prior to conversion. The Company evaluated all of the terms of the November 2019 Convertible Note and determined
that, in accordance with ASC 815, there were no derivatives to be bifurcated or separately valued. However, there were three features
of the November 2019 Convertible Note and the related securities purchase agreement that required valuation. They were: (i) the
debt issuance costs of $14,000, (ii) the intrinsic value of the beneficial conversion feature, and (iii) the original issue discount
of $13,600. The amount to be recorded initially as the amount of the November 2019 Convertible Note was calculated by determining
the relative values as percentages of the net proceeds of the November 2019 Convertible Note ($142,400), the beneficial conversion
feature ($142,400) The debt issuance costs, original issue discount and the amount recorded as the intrinsic value of the beneficial
conversion feature each are being amortized to interest expense on a straight-line basis over the life the November 2019 Convertible
Note.
The
table below provides a summary of the November 2019 Convertible Note as of December 31, 2019.
|
Principal
amount of note payable
|
|
$
|
170,000
|
|
|
Debt
discounts, net of amortization of $26,940
|
|
|
(143,060
|
)
|
|
Accrued
coupon interest
|
|
|
2,701
|
|
|
|
|
$
|
29,641
|
|
On
October 22, 2019, the Company issued a convertible note (the “October 2019 Convertible Note”) bearing interest at
10% per year. The maturity amount is $60,000 and it matures on July 22, 2020. The Company incurred debt issuance costs of $3,750
for lender legal fees and due diligence fees. The transaction included a $1,750 original issue discount, a warrant to purchase
175,000 shares of common stock and 10,000 Commitment Shares (as such term is defined in the definitive transaction documents),
which were issued in connection with the October 2019 Convertible Note. The net proceeds to the Company were $54,500. Subject
to certain limitations and adjustments as described in the October 2019 Convertible Note, the holder may convert the October 2019
Convertible Note at a fixed conversion price of $0.50 per share of common stock, provided that from the date that is six months
after the issuance date, the conversion price shall be 60% multiplied by the lowest trading price of the common stock during the
twenty (20) consecutive trading days prior to conversion considering only trades of 100 shares of common stock or more. The Company
evaluated all of the terms of the October 2019 Convertible Note and determined that, in accordance with ASC 815, there were no
derivatives to be bifurcated or separately valued. However, there were five features of the October 2019 Convertible Note and
the related securities purchase agreement that required valuation. They were: (i) the debt issuance costs of $3,750, (ii) the
intrinsic value of the beneficial conversion feature, (iii) the value of the warrant, (iv) the original issue discount of $1,750,
and (v) the value of the Commitment Shares. The Company valued the warrant using the Black-Scholes valuation method utilizing
the following assumptions: (i) exercise price of $0.50, (ii) stock price of $0.31, (iii) life of five years, (iv) five-year risk
free rate of 1.60% and (v) volatility of 476.01% that results in the value of one warrant of $0.310 and a total warrant value
of $54,250. The amount to be recorded initially as the amount of the October 2019 Convertible Note was then calculated by determining
the relative values as percentages of the net proceeds of the October 2019 Convertible Note ($54,500), and the warrant (46.23%
or $27,738) and the Commitment Shares (2.64% or $1,585). The intrinsic value of the beneficial conversion feature was then calculated
based on the value attributed to the October 2019 Convertible Note. The debt issuance costs, original issue discount and the amount
recorded as the intrinsic value of the beneficial conversion feature each are being amortized to interest expense on a straight-line
basis over the life the October 2019 Convertible Note.
The
table below provides a summary of the October 2019 Convertible Note as of December 31, 2019.
|
Principal
amount of note payable
|
|
$
|
60,000
|
|
|
Debt
discounts, net of amortization of $16,490
|
|
|
(47,512
|
)
|
|
Accrued
coupon interest
|
|
|
1,167
|
|
|
|
|
$
|
13,655
|
|
On
August 19, 2019, the Company issued a convertible note (the “August 2019 Convertible Note”) bearing interest at 10%
per year. The maturity amount is $55,000 and it matures on May 19, 2020. The Company incurred debt issuance costs of $2,500 for
lender legal fees. The transaction included a $5,000 original issue discount, a warrant to purchase 150,000 shares of common stock
and 7,500 Commitment Shares (as such term is defined in the definitive transaction documents), which were issued in connection
with the August 2019 Convertible Note. The net proceeds to the Company were $47,500. Subject to certain limitations and adjustments
as described in the August 2019 Convertible Note, the holder may convert the August 2019 Convertible Note at a fixed conversion
price of $0.50 per share of common stock, provided that from the date that is six months after the issuance date, the conversion
price shall be the lower of (a) $0.50 or (b) 60% multiplied by the lowest closing price of the common stock during the twenty
(20) consecutive trading days prior to conversion. The Company evaluated all of the terms of the August 2019 Convertible Note
and determined that, in accordance with ASC 815, there were no derivatives to be bifurcated or separately valued. However, there
were five features of the August 2019 Convertible Note and the related securities purchase agreement that required valuation.
They were: (i) the debt issuance costs of $2,500, (ii) the intrinsic value of the beneficial conversion feature, (iii) the value
of the warrant, (iv) the original issue discount of $5,000, and (v) the value of the Commitment Shares. The Company amortizes
each of these five on a straight-line basis over the life of the August 2019 Convertible Note. The Company valued the warrant
using the Black-Scholes valuation method utilizing the following assumptions: (i) exercise price of $0.50, (ii) stock price of
$0.65, (iii) life of five years, (iv) five-year risk free rate of 1.47% and (v) volatility of 175.5% that results in the value
of one warrant of $0.623 and a total warrant value of $93,450. The amount to be recorded initially as the amount of the August
2019 Convertible Note was then calculated by determining the relative values as percentages of the net proceeds of the August
2019 Convertible Note ($47,500) and the warrant (64.08% or $30,440) and the Commitment Shares (3.34% or $1,588). The intrinsic
value of the beneficial conversion feature was then calculated based on the value attributed to the August 2019 Convertible Note.
The debt issuance costs, original issue discount and the amount recorded as the intrinsic value of the beneficial conversion feature
each are being amortized to interest expense on a straight-line basis over the life the August 2019 Convertible Note.
The
table below provides a summary of the August 2019 Convertible Note as of December 31, 2019.
|
Principal
amount of note payable
|
|
$
|
55,000
|
|
|
Debt
discounts, net of amortization of $27,781
|
|
|
(27,218
|
)
|
|
Accrued
coupon interest
|
|
|
2,034
|
|
|
|
|
$
|
29,816
|
|
On
May 17, 2019, the Company issued a master convertible note (the “May 2019 Convertible Note”) issuable in tranches,
bearing interest at 10% per year, bearing a maximum maturity amount of $150,000. The first tranche has a maturity amount of $50,000
and matures on May 17, 2020. There was a stated original issue discount of $5,000 and the Company incurred debt issuance costs
of $2,000 for lender legal fees. The net proceeds to the Company were $43,000. Subject to certain limitations and adjustments
as described in the May 2019 Convertible Note, the holder may convert from the date of issuance to the maturity date, part or
all of the May 2019 Convertible Note, inclusive of accrued interest, into the Company’s common stock at a variable conversion
price that is the lesser of (i) lowest trading price as such term is defined in the May 2019 Convertible Note (the lowest closing
bid price) in the twenty five day trading period prior to the date of the May 2019 Convertible Note (which price is now fixed
at $0.25, the closing bid price on May 16, 2019), or (ii) the variable conversion price (as defined in the May 2019 Convertible
Note) which is 61% of the market price (as defined in the May 2019 Convertible Note). The market price is the lowest trading price
(closing bid) in the twenty-five day trading day period up to the day prior to the conversion. If at any time while the May 2019
Convertible Note is outstanding, the conversion price is equal to or lower than $0.35, then an additional eleven percent (11%)
discount is to be factored into the conversion price until the May 2019 Convertible Note is no longer outstanding (resulting in
a discount rate of 50% assuming no other adjustments are triggered). The lowest trading price on the date of inception of the
May 2019 Convertible Note ($0.25) and the lowest market price were both below $0.35, the effective conversion rate on the inception
date was $0.125. Therefore, on the inception date, the first tranche would have converted into 400,000 shares of the Company’s
common stock. The Company evaluated all of the terms of the May 2019 Convertible Note and determined that, in accordance with
Accounting Standard Codification (ASC) 815, there were no derivatives to be bifurcated or separately valued. However, there were
four features of the May 2019 Convertible Note, the related securities purchase agreement and the warrant that was issued in connection
therewith that required valuation. They were: (i) the original issue discount of $5,000, (ii) the debt issuance costs of $2,000,
(iii) the beneficial conversion feature and (iv) the value of the warrant. The Company evaluated (iii) the intrinsic value of
the beneficial conversion feature for a calculated value of $286,000 (($0.84 closing price minus $0.125 conversion price) x 400,000
shares). The Company calculated the warrant value using the Black-Scholes valuation method, utilizing the following assumptions:
(a) exercise price of $1.18 per share, (b) stock price $0.84, (c) three year life (d) three year risk free rate of 2.15% and (e)
volatility of 210.19% and determined that the value of one warrant was $0.774 and the total warrant value was $32,796 for the
warrant exercisable into 42,373 shares of the Company’s common stock, par value $0.001. The amount to be recorded initially
as the amount of the May 2019 Convertible Note was then calculated by determining the relative values as percentages of the net
proceeds of the May 2019 Convertible Note ($50,000)
and the warrant ($32,796). The intrinsic value
of the beneficial conversion feature was then calculated based on the value attributed to the May 2019 Convertible Note. The original
issue discount, debt issuance costs, the intrinsic value of the beneficial conversion feature and proceeds allocated to the value
of the warrant are being amortized to interest expense on a straight-line basis over the life the May 2019 Convertible Note. On
December 9, 2019 the holder of the May 2019 Convertible Note converted $4,554 of principal amount into 130,000 shares of the Company’s
common stock ($0.0408 per share).
The
table below provides a summary of the May 2019 Convertible Note as of December 31, 2019.
|
Principal
amount of note payable after payment of $4,554 of principal
|
|
$
|
45,446
|
|
|
Debt
discounts, net of amortization of $33,040
|
|
|
(17,181
|
)
|
|
Accrued
coupon interest
|
|
|
3,108
|
|
|
|
|
$
|
31,373
|
|
On
April 24, 2019, the Company issued a convertible note (“the April 2019 Convertible Note”) bearing interest at 10%
per year. The maturity amount is $58,500 and matures on the one-year anniversary which is April 24, 2020. The Company incurred
debt issuance costs of $3,500 for lender legal and due diligence fees. There was no stated original issue discount and no warrants
were issued in connection with the April 2019 Convertible Note. The net proceeds to the Company were $55,000. Subject to certain
limitations and adjustments as described in the April 2019 Convertible Note, the holder may, from the date that is one hundred
eighty (180) days after the issuance to the maturity date, convert part or all of the April 2019 Convertible Note, inclusive of
accrued interest, into the Company’s common stock at a variable conversion price that is 61% of the market price as defined
in the April 2019 Convertible Note. The market price is the lowest trading price, which in turn is the lowest closing bid price
in the twenty (20) trading days prior to conversion. The lowest closing bid price in the twenty (20) day period prior to inception
was $0.65 which would calculate to a $0.3964 conversion price and further calculate to 147,541 conversion shares to be issued.
The Company evaluated all of the terms of the April 2019 Convertible Note and determined that, in accordance with ASC 815, there
were no derivatives to be bifurcated or separately valued. However, there were two features of the April 2019 Convertible Note
and the related securities purchase agreement that required valuation. They were: (i) the debt issuance costs of $3,500, and (ii)
the intrinsic value of the beneficial conversion feature. The Company evaluated (ii) as the closing price on the inception date
minus the conversion price multiplied by the number of conversion shares and determined that the beneficial conversion feature
had an intrinsic value of $44,950 (($0.701 closing price minus $0.3964 conversion price) x 147,541 shares). The debt issuance
costs and the amount recorded as the intrinsic value of the beneficial conversion feature are each being amortized to interest
expense on a straight-line basis over the life the April 2019 Convertible Note. On November 12, 2019 the holder of the April 2019
Convertible Note converted $10,000 of principal amount into 81,967 shares of the Company’s common stock ($0.1220 per share).
On October 28, 2019 the same holder converted $10,000 of principal amount of the April 2019 Convertible Note into 73,529 shares
of the Company’s common stock ($0.1360 per share). (See Note 10. Subsequent Events).
The
table below provides a summary of the April 2019 Convertible Note as of December 31, 2019.
|
Principal
amount of note payable after payment of $20,000 of principal
|
|
$
|
38,500
|
|
|
Debt
discounts, net of amortization of $37,762
|
|
|
(10,688
|
)
|
|
Accrued
coupon interest
|
|
|
4,257
|
|
|
|
|
$
|
32,069
|
|
On
January 2, 2019, February 27, 2019, March 6, 2019 and March 14, 2019, the Company issued convertible notes (each a “2019
Q1 Convertible Note and collectively, the “2019 Q1 Convertible Notes”) bearing interest at 10% per year. The 2019
Q1 Convertible Notes issued on January 2, 2019 matured on February 28, 2019 with a face amount of $10,000. The 2019 Q1 Convertible
Notes issued on February 27, 2019, March 6, 2019 and March 14, 2019 matured on April 30, 2019 with an aggregate face amount of
$100,000. Investors who purchased 2019 Q1 Convertible Notes also received an aggregate of 110,000 common stock purchase warrants.
The warrants were valued using the Black Scholes option pricing model calculated on the date of each grant and had an aggregate
value of $78,780. Total value received by the investors was $188,780, the sum of the face value of the convertible note and the
value of the warrant. Therefore, the Company recorded a debt discount associated with the warrant issuance of $45,812 and an initial
value of the convertible notes of $64,188 using the relative fair value method. An additional $9,464 of interest expense was recorded
based upon the 10% annual rate for the year ended December 31, 2019. As of December 31, 2019, none of the 2019 Q1 Convertible
Notes were paid and each remained outstanding and continued to accrue interest. Although the 2019 Q1 Convertible Notes are in
default, the Company has not received any notices of default from any of the note holders. The 2019 Q1 Convertible Notes have
no reset rights or other protections based on subsequent equity transactions, equity-linked transactions or other events other
than the right, but not the obligation, for each investor to convert or exchange his or her 2019 Q1 Convertible Note, but not
the warrant, into the next exempt private securities offering. The April 2019 Convertible Note, the May 2019 Convertible Note,
the August 2019 Convertible Note, the October 2019 Convertible Note and the November 2019 Convertible Note, which the Company
does not consider to have arisen from offerings, may be interpreted in such a way that the 2019 Q1 Convertible Note Holders have
the right to convert or exchange. However, no holders of 2019 Q1 Convertible Notes requested a conversion or exchange in connection
with the issuance of such notes. The Company does not believe that an offering occurred as of December 31, 2019 or as of the date
of the issuance of these financial statements. Therefore, the number of shares of common stock (or preferred stock) into which
the 2019 Q1 Convertible Notes may convert is not determinable and the Company has not accounted for any additional consideration.
The warrants to purchase 110,000 shares of common stock issued in connection with the sale of the 2019 Q1 Convertible Notes are
exercisable at a fixed price of $1.50 per share of common stock, provide 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 the 2019 Q1 Convertible Notes.
During
December 2018, convertible notes (“2018 Convertible Notes”) bearing interest at 10% per year and maturing on February
28, 2019 and warrants were sold to investors with an aggregate face amount of $80,000. Investors also received 80,000 common stock
purchase warrants. The warrants were valued using the Black Scholes option pricing model calculated on the date of each grant
and had an aggregate value of $68,025. Total value received by the investors was $148,025, the sum of the face value of the 2018
Convertible Notes and the value of the warrant. Therefore, the Company recorded a debt discount associated with the issuance of
the warrants of $36,347 and an initial value of the 2018 Convertible Notes of $43,653 using the relative fair value method. An
additional $8,111 and $401 of interest expense was recorded based upon the 10% annual rate for the years ended December 31, 2019
and 2018 respectively. The 2018 Convertible Notes matured on February 28, 2019, were not paid, remain outstanding and continue
to accrue interest. Although the 2018 Convertible Notes are in default, the Company has not received any notices of default from
any of the note holders. The 2018 Convertible Notes have no reset rights or other protections based on subsequent equity transactions,
equity-linked transactions or other events other than the right, but not the obligation for each investor to convert or exchange
his or her 2018 Convertible Note, but not the warrant, into the next exempt private securities offering. The May 2019 Convertible
Note and April 2019 Convertible Note, which the Company does not consider to have arisen from an offering, may be interpreted
in such a way that the 2019 Q1 Convertible Note Holders have the right to convert or exchange. However, no holders of such notes
have requested a conversion or exchange. The Company does not believe that an offering occurred as of December 31, 2019 or as
of the date of the issuance of these financial statements. Therefore, the number of shares of common stock (or preferred stock)
into which the 2018 Convertible Notes may convert is not determinable and the Company has not accounted for any additional consideration.
The warrants to purchase 80,000 shares of common stock issued in connection with the sale of the 2018 Convertible Notes are exercisable
at a fixed price of $1.50 per share of common stock, provide 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
2018 Convertible Notes and 2019 Q1 Convertible Notes consist of the following at December 31, 2019 and December 31, 2018:
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
Principal
amount of notes payable
|
|
$
|
190,000
|
|
|
$
|
80,000
|
|
|
Discount
associated with issuance of warrants net of amortization of $82,159 as of December 31, 2019 and $8,379 as of December 31,
2018
|
|
|
-
|
|
|
|
(27,968
|
)
|
|
Accrued
interest payable
|
|
|
17,976
|
|
|
|
401
|
|
|
|
|
$
|
207,976
|
|
|
$
|
52,433
|
|
Convertible
notes were also sold to investors in 2014 and 2015 (“Original Convertible Notes), which aggregated a total of $579,500,
had a fixed interest rate of 10% per annum and those that remain outstanding are convertible into common stock at a fixed price
of $11.3750 per share. The Original 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 have either been exchanged as part of April and May 2016 note and warrant exchange agreements or
expired on September 15, 2016.
The
maturity date of the Original Convertible 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, which expired on September 15, 2016.
The
remaining outstanding Original Convertible Notes (including those for which default notices have been received) consist of the
following at December 31, 2019 and December 31, 2018:
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
Principal
amount of notes payable
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
|
Accrued
interest payable
|
|
|
82,060
|
|
|
|
62,233
|
|
|
|
|
$
|
207,060
|
|
|
$
|
187,233
|
|
As
of December 31, 2019, principal and accrued interest on the Original Convertible Note that is subject to a default notice accrues
annual interest at 12% instead of 10%, totaled $43,666, of which $18,666 was accrued interest. As of December 31, 2018, principal
and accrued interest on Original Convertible Notes subject to default notices totaled $38,292 of which $13,292 was accrued interest.
As
of December 31, 2019 all of the outstanding Original Convertible Notes, inclusive of accrued interest, were convertible into an
aggregate of 18,204 shares of the Company’s common stock, including 7,217 shares attributable to accrued interest of $82,060
payable as of such date. As of December 31, 2018, the outstanding Original Convertible Notes were convertible into 16,460 shares
of the Company’s common stock, including 5,471 shares attributable to accrued interest of $62,233 payable as of such date.
Such Original Convertible Notes will continue to accrue interest until exchanged, paid or otherwise discharged. There can be no
assurance that any of the additional holders of the remaining Original Convertible Notes will exchange their notes.
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 intends to continue 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, 2019 and 2018:
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
Principal
amount of note payable
|
|
$
|
399,774
|
|
|
$
|
399,774
|
|
|
Accrued
interest payable
|
|
|
363,280
|
|
|
|
315,307
|
|
|
Foreign
currency transaction adjustment
|
|
|
3,182
|
|
|
|
29,360
|
|
|
|
|
$
|
766,236
|
|
|
$
|
744,441
|
|
Interest
expense with respect to this promissory note was $47,971 and $47,973 for years ended December 31, 2019 and 2018, respectively.
Advances
from and Notes Payable to Officers
On
January 29, 2016, Dr. Arnold S. Lippa, the Company’s Interim President, Interim Chief Executive Officer, 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. Additionally,
on April 9, 2018, Dr. Lippa advanced another $50,000 to the Company as discussed in more detail below. In connection with the
loans, 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 warrants expired on January 29, 2019 and September 23,
2019, respectively.
On
February 2, 2016, Dr. James S. Manuso, the Company’s then 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. Additionally, on April 9, 2018, Dr. Manuso advanced
another $50,000 to the Company as discussed in more detail below. In connection with the loans, 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 $6.50 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 expired on February 2, 2019 and September 22, 2019, respectively.
On
April 9, 2018, Dr. Arnold S. Lippa, the Company’s Interim President, Interim Chief Executive Officer, Chief Scientific Officer
and Chairman of the Board of Directors and Dr. James S. Manuso, the Company’s then Chief Executive Officer and Vice Chairman
of the Board of Directors, advanced $50,000 each, for a total of $100,000, to the Company for working capital purposes. Each note
is payable on demand after June 30, 2018. Each note was subject to a mandatory exchange provision that provided that the principal
amount of the note would be mandatorily exchanged into a board approved offering of the Company’s securities, if such offering
held its first closing on or before June 30, 2018 and the amount of proceeds from such first closing was at least $150,000, not
including the principal amounts of the notes that would be exchanged, or $250,000 including the principal amounts of such notes.
Upon such exchange, the notes would be deemed repaid and terminated. Any accrued but unpaid interest outstanding at the time of
such exchange will be (i) repaid to the note holder or (ii) invested in the offering, at the note holder’s election. A first
closing did not occur on or before June 30, 2018. Dr. Arnold S. Lippa agreed to exchange his note into the board approved offering
that had its initial closing on September 12, 2018. Accrued interest on Dr. Lippa’s note was not exchanged. As of December
31, 2019, Dr. James S. Manuso had not exchanged his note.
During
the year ended December 31, 2019, Dr. Lippa advanced on an interest free basis the Company $38,000 of which $13,000 was repaid
to Dr. Lippa. The outstanding balance of the advance is payable on demand.
During
the year ended December 31, 2019, the Company repaid $1,000 to Jeff Margolis related to $6,500 of interest free advances Mr. Margolis
made to the Company during the year ended December 2018. The outstanding balance of the advance is payable on demand.
For
the fiscal years ended December 31, 2019 and 2018, $10,272 and $11,268 was charged to interest expense with respect to Dr. Lippa’s
notes, respectively.
For
the fiscal years ended December 31, 2019 and 2018, $15,416 and $12,769 was charged to interest expense with respect to Dr. James
S. Manuso’s notes, respectively.
As
of September 30, 2018, Dr. James S. Manuso resigned his executive officer positions and as a member of the Board of Directors
of the Company. All of the interest expense noted above for 2019 was incurred while Dr. Manuso was no longer an officer. With
respect to the year ended December 31, 2019, of the $12,769 of interest expense noted above, $3,564 was incurred while Dr. Manuso
was no longer an officer.
Other
Short-Term Notes Payable
Other
short-term notes payable at December 31, 2019 and December 31, 2018 consisted of premium financing agreements with respect to
various insurance policies. At December 31, 2019, a premium financing agreement was payable in the initial amount of $61,746,
with interest at 9% per annum, in ten monthly installments of $7,120, and another premium financing arrangement was payable in
the initial amount of $9,322 payable in equal quarterly installments. At December 31, 2019 and 2018, the aggregate amount of the
short-term notes payable was $4,635 and $8,907 respectively.
5.
Settlement and Payment Agreements
On
December 16, 2019, RespireRx and Salamandra, LLC (“Salamandra”) entered into an amendment (the “Amendment”)
to the settlement agreement and release, executed August 21, 2019 (the “Original Settlement Agreement” and as amended,
the “Amended Settlement Agreement”) regarding $202,395 owed by the Company to Salamandra (as reduced by any further
payments by the Company to Salamandra, the “Full Amount”) in connection with an arbitration award previously granted
in favor of Salamandra in the Superior Court of New Jersey. Under the terms of the Original Settlement Agreement, the Company
was to pay Salamandra $125,000 on or before November 30, 2019 in full satisfaction of the Full Amount owed, subject to conditions
regarding the Company’s ability to raise certain dollar amounts of working capital. Under the Amended Settlement Agreement,
(i) the Company must pay and the Company paid to Salamandra $25,000 on or before December 21, 2019, (ii) upon such payment, Salamandra
ceased all collection efforts against the Company until March 31, 2020 (the “Threshold Date”), and (iii) the Company
must pay to Salamandra $100,000 on or before the Threshold Date if the Company has at that time raised $600,000 in working capital.
Such payments by the Company would constitute satisfaction of the Full Amount owed and would serve as consideration for the dismissal
of the action underlying the arbitration award and the mutual releases set forth in the Amended Settlement Agreement. If the Company
raises less than $600,000 in working capital before the Threshold Date, the Company may pay to Salamandra an amount equal to 21%
of the working capital amount raised, in which case such payment will reduce the Full Amount owed on a dollar-for-dollar basis,
and Salamandra may then seek collection on the remainder of the debt. The Company did not make the requirement payment on March
31, 2020 and has initiated further discussions with the intent of reaching a revised settlement agreement which cannot be assured.
In
February 2020, the Company and a vendor agreed to discuss amendments to an agreement in principal reached on September 23, 2019,
whereby the Company and a vendor agreed in principle to a proposed settlement agreement, which has not resulted in a formal agreement.
The discussions included, among other things, an extension of time to raise the amount discussed below. The September 23, 2019
agreement in principal calls for no reduction in the overall amount to be paid by the Company, which amount is not in dispute,
but addresses only a payment schedule. The agreement in principal calls for a payment of a minimum of $100,000 on or before November
30, 2019 assuming the Company has raised at least $600,000 by that date and thereafter calls for a payment of $50,000 per month
until paid in full. If the Company does not make a scheduled payment, the agreement in principal would be deemed null and void.
On
April 5, 2018, the Company issued 185,388 common stock purchase options to Robert N. Weingarten, the Company’s former Chief
Financial Officer and 125,000 common stock purchase options to Pharmaland Executive Consulting Services LLC (“Pharmaland”)
exercisable until April 5, 2023 at $1.12 per share of common stock, which was the closing price of the common stock as quoted
on the OTC QB on that date. All of these common stock purchase options vested immediately. Each of the common stock purchase options
were valued on the issuance date based upon a Black-Scholes valuation method at $1.081. Mr. Weingarten simultaneously with the
issuance of the common stock purchase options, agreed to forgive $200,350 of accrued compensation owed to him. The value of the
options granted to Mr. Weingarten was $200,404. The resulting loss on extinguishment of the accrued liability was $54. The common
stock purchase options issued to Pharmaland was in partial payment of accounts payable owed. The common stock purchase options
issued to Pharmaland had a value of $135,125 and the accounts payable extinguished was $124,025. The loss on extinguishment of
this accounts payable was $11,100.
On
November 21, 2018, the Company issued 283,643 shares of common stock with a value of $198,550 to designees of one of its intellectual
property law firms as partial settlement of accounts payable due to the law firm. There was no gain or loss on the settlement
of this accounts payable.
On
November 21, 2018, the Company granted a non-qualified stock option (“NQSO”) to purchase 21,677 shares of common stock
to a vendor to settle $15,000 of accounts payable due to that vendor. The NQSO vested immediately with respect to 14,452 shares
of common stock and on November 30, 2018 with respect to an additional 7,225 shares of common stock. As of December 31, 2018,
the NQSO has vested with respect to all shares. The NQSO has a term of 5 years and have an exercise price of $0.70 per share,
which was the closing price on the trading day of the grant date. The NQSO was valued using the Black-Scholes option pricing model
resulting value was $0.692 per NQSO. There was no gain or loss on the extinguishment of the accounts payable.
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, 2019 and
2018, 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,
2019, 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, 2019 and 2018.
Series
B Preferred Stock outstanding as of December 31, 2019 and 2018 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,
2019 and 2018, 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.
Common
Stock
There
are 4,175,072 shares of the Company’s Common Stock outstanding as of December 31, 2019. After reserving for conversions
of convertible debt as well as common stock purchase options and warrants exercises, there were 42,831,291 shares of the Company’s
Common Stock available for future issuances as of December 31, 2019. After accounting for excess reserves required by the April
2019 Convertible Note, the May 2019 Convertible Note, the August 2019 Convertible Note, the October 2019 Convertible Note and
the November 2019 Convertible Note, there were 3,438,021 available for future issuances as of December 31, 2019. Each conversion
of such 2019 Convertible Notes reduces the excess reserve requirements.
2018
Unit Offering
On
September 12, 2018, the Company consummated an initial closing on an offering (“2018 Unit Offering”) of Units comprised
of one share of the Company’s common stock and one common stock purchase warrant. The 2018 Unit Offering was for up to $1.5
million and had a final termination date of October 15, 2018. The initial closing was for $250,750 of which $200,750 was the gross
cash proceeds. The additional $50,000 was represented by the conversion into the 2018 Unit Offering of the principal amount of
the Arnold S. Lippa, Demand Promissory Note described below. With the exchange of Dr. Lippa’s Demand Promissory Note into
the 2018 Unit Offering, 47,620 warrants exercisable at 150% of the unit price ($1.575) per share of common stock and expiring
on April 30, 2023 were issued with a value of $49,975 which amount was considered a loss on the extinguishment of that officer
note and which amount was credited to additional paid-in capital. Units were sold for $1.05 per unit and the warrants issued in
connection with the units are exercisable through April 30, 2023 at a fixed price of 150% of the unit purchase price. 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 $3.00 or more for any five (5) consecutive trading days. In total, 238,814 shares of the Company’s common stock
and 238,814 common stock purchase warrants were purchased. Other than Arnold S. Lippa, the investors in the offering were not
affiliates of the Company. Investors also received an unlimited number of piggy-back registration rights in respect to the shares
of common stock and the shares of common stock underlying the common stock purchase warrants, unless such common stock is eligible
to be sold with volume limits under an exemption from registration under any rule or regulation of the SEC that permits the holder
to sell securities of the Company to the public without registration and without volume limits (assuming the holder is not an
affiliate).
The
shares of common stock and common stock purchase warrants 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 common stock purchase warrants, the Common Stock issuable upon exercise of the common stock purchase warrants or any
warrants issued to a qualified referral source (of which there were none in the initial closing) 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.
In
addition, as set forth in the Purchase Agreements, each Purchaser had an unlimited number of exchange rights, which were options
and not obligations, to exchange such Purchaser’s entire investment as defined (but 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 within stockholders’ equity, and excluding any
form of debt or convertible debt or preferred stock redeemable at the discretion of the holder (each such financing a “Subsequent
Equity Financing”). The exchange rights expired on December 31, 2018.
Common
Stock Warrants
In
October 2019, the Company issued a warrant to purchase 175,000 shares of common stock in conjunction with the issuance of the
October 2019 Convertible Note exercisable at $0.50 per share and expiring on October 22, 2024.
In
August 2019, the Company issued a warrant to purchase 150,000 shares of common stock in conjunction with the issuance of the August
2019 Convertible Note exercisable at $0.50 per share and expiring on August 19, 2024.
In
May 2019, the Company issued a warrant to purchase 42,372 shares of common stock in conjunction with the issuance of the May 2019
Convertible Note exercisable at $1.18 per share and expiring on May 17, 2022.
In
January 2019, February 2019 and March 2019, the Company issued warrants to purchase 110,000 shares of common stock in conjunction
with the issuance of the 2019 Q1 Convertible Notes exercisable at $1.50 per share and expiring on December 30, 2023.
During
the year ended December 31, 2019, warrants to purchase 69,558 shares of common stock expired.
In
December 2018, the Company issued warrants to purchase 80,000 of common stock in conjunction with the issuance of the December
2018 10% Convertible Notes exercisable at $1.50 per share and expiring on December 30, 2023.
Although
not considered stock-based compensation, the Company issued a warrant to purchase 47,620 shares of common stock at an exercise
price of $1.50 per share and expiring on December 30, 2023 as part of an officer note exchange into the 2018 Unit Offering. The
warrants were valued at $49,925 as of September 12, 2018, the date of issuance and were accounted for in Additional paid-in capital
as of December 31, 2018.
A
summary of warrant activity for the year ended December 31, 2019 is presented below.
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Warrants
outstanding at December 31, 2018
|
|
|
1,783,229
|
|
|
$
|
2.20393
|
|
|
|
3.06
|
|
|
Issued
|
|
|
477,372
|
|
|
|
0.79079
|
|
|
|
4.36
|
|
|
Expired
|
|
|
(69,558
|
)
|
|
|
2.98989
|
|
|
|
-
|
|
|
Warrants
outstanding at December 31, 2019
|
|
|
2,191,043
|
|
|
$
|
1.87109
|
|
|
|
3.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2018
|
|
|
1,783,229
|
|
|
$
|
2.20393
|
|
|
|
3.06
|
|
|
Warrants
exercisable at December 31, 2019
|
|
|
2,191,043
|
|
|
$
|
1.87109
|
|
|
|
3.44
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2019:
|
Exercise
Price
|
|
|
Warrants
Outstanding
(Shares)
|
|
|
Warrants
Exercisable
(Shares)
|
|
|
Expiration
Date
|
|
$
|
0.5000
|
|
|
|
175,000
|
|
|
|
175,000
|
|
|
October
22, 2024
|
|
$
|
0.5000
|
|
|
|
150,000
|
|
|
|
150,000
|
|
|
August
19, 2024
|
|
$
|
1.0000
|
|
|
|
916,217
|
|
|
|
916,217
|
|
|
September
20, 2022
|
|
$
|
1.1800
|
|
|
|
42,372
|
|
|
|
42,372
|
|
|
May
17, 2022
|
|
$
|
1.5000
|
|
|
|
190,000
|
|
|
|
190,000
|
|
|
December
30, 2023
|
|
$
|
1.5620
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December
31, 2021
|
|
$
|
1.5750
|
|
|
|
238,814
|
|
|
|
238,814
|
|
|
April
30, 2023
|
|
$
|
2.7500
|
|
|
|
8,000
|
|
|
|
8000
|
|
|
September
20, 2022
|
|
$
|
4.8750
|
|
|
|
108,594
|
|
|
|
108,594
|
|
|
September
30, 2020
|
|
$
|
6.8348
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September
30, 2020
|
|
$
|
7.9300
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February
28, 2021
|
|
|
|
|
|
|
2,191,043
|
|
|
|
2,191,043
|
|
|
|
Based
on a fair value of $0.10 per share on December 31, 2019, there were no exercisable in-the money common stock warrants as of December
31, 2019.
A
summary of warrant activity for the year ended December 31, 2018 is presented below.
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Warrants
outstanding at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
3.73
|
|
|
Issued
|
|
|
318,814
|
|
|
|
1.55618
|
|
|
|
4.50
|
|
|
Warrants
outstanding at December 31, 2018
|
|
|
1,783,229
|
|
|
$
|
2.20393
|
|
|
|
3.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2,68146
|
|
|
|
3.73
|
|
|
Warrants
exercisable at December 31, 2018
|
|
|
1,783,229
|
|
|
$
|
2.20393
|
|
|
|
3.06
|
|
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 December 28, 2018, the Board of Directors further increased the number of shares that
may be issued under the 2015 Plan to 8,985,260 shares of the Company’s common stock.
During
fiscal year ended December 31, 2018, there were three grants of options to purchase an aggregate of 348,827 shares of the Company’s
common stock to a vendor. The value of these options on the grant date was approximately equal to the amount payable to the vendor
that was to be paid with the options. The cumulative loss on extinguishment of three liabilities totaling $353,623 was $11,154.
The remaining amount payable to the vendor is due in cash.
Information
with respect to the Black-Scholes variables used in connection with the evaluation of the fair value of stock-based compensation
costs and fees is provided at Note 3.
A
summary of stock option activity for the year ended December 31, 2019 is presented below.
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Options
outstanding at December 31, 2018
|
|
|
4,344,994
|
|
|
$
|
3.5414
|
|
|
|
5.90
|
|
|
Expired
|
|
|
(57,385
|
)
|
|
|
15.6139
|
|
|
|
-
|
|
|
Options
outstanding at December 31, 2019
|
|
|
4,287,609
|
|
|
$
|
3.3798
|
|
|
|
4.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2018
|
|
|
4,344,994
|
|
|
$
|
3.5414
|
|
|
|
5.90
|
|
|
Options
exercisable at December 31, 2019
|
|
|
4,287,609
|
|
|
$
|
3.3789
|
|
|
|
4.98
|
|
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2019:
|
Exercise
Price
|
|
|
Options
Outstanding (Shares)
|
|
|
Options
Exercisable (Shares)
|
|
|
Expiration
Date
|
|
$
|
0.7000
|
|
|
|
21,677
|
|
|
|
21,677
|
|
|
November
21, 2023
|
|
$
|
1.1200
|
|
|
|
310,388
|
|
|
|
310,388
|
|
|
April
5, 2023
|
|
$
|
1.2500
|
|
|
|
16,762
|
|
|
|
16,762
|
|
|
December
7, 2022
|
|
$
|
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
|
|
$
|
13.9750
|
|
|
|
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
|
|
$
|
16.6400
|
|
|
|
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
|
|
|
|
|
|
|
4,287,609
|
|
|
|
4,287,609
|
|
|
|
There
was no deferred compensation expense for the outstanding and unvested stock options at December 31, 2019.
Based
on a fair value of $0.10 per share on December 31, 2019, there were no exercisable in-the-money common stock options as of December
31, 2019.
A
summary of stock option activity for the year ended December 31, 2018 is presented below.
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Options
outstanding at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
6.30
|
|
|
Granted
|
|
|
348,827
|
|
|
|
1.1002
|
|
|
|
4.29
|
|
|
Options
outstanding at December 31, 2018
|
|
|
4,344,994
|
|
|
$
|
3.5414
|
|
|
|
5.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
6.30
|
|
|
Options
exercisable at December 31, 2018
|
|
|
4,344,994
|
|
|
$
|
3.5414
|
|
|
|
5.90
|
|
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2018:
|
Exercise
Price
|
|
|
Options
Outstanding (Shares)
|
|
|
Options
Exercisable (Shares)
|
|
|
Expiration
Date
|
|
$
|
0.7000
|
|
|
|
21,677
|
|
|
|
21,677
|
|
|
November
21, 2023
|
|
$
|
1.1200
|
|
|
|
310,388
|
|
|
|
310,388
|
|
|
April
5, 2023
|
|
$
|
1.2500
|
|
|
|
16,762
|
|
|
|
16,762
|
|
|
December
7, 2022
|
|
$
|
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
|
|
|
|
|
|
|
4,344,994
|
|
|
|
4,344,994
|
|
|
|
There
was no deferred compensation expense for the outstanding and unvested stock options at December 31, 2018.
Based
on a fair value of $0.65 per share on December 31, 2018, there were no exercisable in-the-money common stock options as of December
31, 2018.
For
the years ended December 31, 2019 and 2018, stock-based compensation costs and fees included in the consolidated statements of
operations consisted of general and administrative expenses of $0 and $14,248 respectively, and research and development expenses
of $0 and $15,000, 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.
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 remained significantly out-of-the-money through December
31, 2019. 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
On
January 17, 2017, the Board of Directors of the Company approved the adoption of an amendment of the Amended and Restated RespireRx
Pharmaceuticals, Inc. 2015 Stock and Stock Option Plan (as amended, the “2015 Plan”). That amendment increases the
shares issuable under the plan by 1,500,000, from 1,538,461 to 3,038,461. On December 9, and December 28, 2018, the Board of Directors
further amended the 2015 Plan to increase the number of shares that may be issued under the 2015 Plan to 6,985,260 and 8,985,260
shares of the Company’s common stock.
Other
than the change in the number of shares available under the 2015 Plan, no other changes were made to the 2015 Plan by these amendments
noted above.
At
December 31, 2019, the Company had 65,000,000 shares of common stock authorized and 4,175,072 shares of common stock issued and
outstanding. The Company has reserved 11 shares of common stock for the conversion of the Series B Preferred Stock. The Company
has reserved an aggregate of 7,035,706 for the calculated amount of shares of common stock into which convertible notes may convert
and an additional 39,375,462 shares of common stock for contractual reserves. In addition, The Company has reserved 6,478,652
shares of the Company’s common stock for exercises of common stock purchase options granted and warrants issued. There are
4,490,578 shares reserved for future issuances under the Company’s 2014 Plan and 2015 Plan. Accordingly, after taking into
consideration the shares of common stock reserved for all conversions, exercises and contingent share issuances, there were 42,813,484
shares of the Company’s common stock available for future issuances as of December 31, 2019. After accounting for additional
contractual reserves, which amount declines with each actual conversion, there are 3,438,022 shares of the Company’s common
stock available for future issuances as of December 31, 2019. The Company has taken steps to increase the number of authorized
shares. See Note 10. Subsequent Events. 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, 2019 and 2018 are summarized below.
|
|
|
December
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Capitalized
research and development costs
|
|
$
|
-
|
|
|
$
|
183,000
|
|
|
Research
and development credits
|
|
|
3,017,000
|
|
|
|
3,017,000
|
|
|
Stock-based
compensation
|
|
|
3,787,000
|
|
|
|
3,787,000
|
|
|
Stock
options issued in connection with the payment of debt
|
|
|
202,000
|
|
|
|
202,000
|
|
|
Net
operating loss carryforwards
|
|
|
19,982,000
|
|
|
|
20,424,000
|
|
|
Accrued
compensation
|
|
|
586,000
|
|
|
|
367,000
|
|
|
Accrued
interest due to related party
|
|
|
217,000
|
|
|
|
103,000
|
|
|
Other,
net
|
|
|
8,000
|
|
|
|
8,000
|
|
|
Total
deferred tax assets
|
|
|
27,799,000
|
|
|
|
28,091,000
|
|
|
Valuation
allowance
|
|
|
(27,799,000
|
)
|
|
|
(28,091,000
|
)
|
|
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, 2019 and 2018, 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, 2019 and 2018 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, 2019 and 2018.
|
|
|
Years
Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
U.
S. federal statutory tax rate
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
|
Forgiveness
of indebtedness
|
|
|
-
|
%
|
|
|
-
|
%
|
|
Change
in valuation allowance
|
|
|
(1.0
|
)%
|
|
|
(14.4
|
)%
|
|
Adjustment
to deferred tax asset
|
|
|
22.0
|
%
|
|
|
35.4
|
%
|
|
Other
|
|
|
-
|
%
|
|
|
-
|
%
|
|
Effective
tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
As
of December 31, 2019, the Company had federal and state tax net operating loss carryforwards of approximately $102,216,000 and
$46,645,000, respectively. The state tax net operating loss carryforward consists of $19,673,000 for California purposes and $26,972,000
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 net operating loss carryforwards
will expire at various dates from 2020 through 2039. State net operating losses expire at various dates from 2020 through 2029
for California and through 2039 for New Jersey. The Company also had federal and California research and development tax credit
carryforwards that totaled approximately $1,871,000 and $1,146,000, respectively, at December 31, 2019. The federal research and
development tax credit carryforwards will expire at various dates from 2020 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.
The
Company did not file its federal or state tax returns for the year ended December 31, 2017 or 2018 and has not yet filed such
returns for the year ended December 31, 2019. The Company does not expect there to be any material non-filing penalties. The Company
intends to file such returns as soon as practical.
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.
A
description of advances and notes payable to officers is provided at Note 4. Notes Payable – Advances from and Notes
Payable to Officer.
Dr.
James S. Manuso resigned as the Company’s President and Chief Executive Officer as well as Vice Chairman and member of the
Board of Directors effective as of September 30, 2018. Having been the principal executive officer of the Company during the fiscal
year ended December 31, 2018, Dr. Manuso is considered a named executive officer for the year ended December 31, 2018, but not
for the year ended December 31, 2019. Dr. Manuso remains an affiliate due to his equity ownership and option grants.
9.
Commitments and Contingencies
Pending
or Threatened Legal Action and Claims
On
March 10, 2020, Sharp Clinical Services, Inc. filed a complaint and summons dated February 21, 2020 in Superior Court of New Jersey
Law Division, Bergen County against the Company related to a December 16, 2019 demand for payment of past due invoices inclusive
of late fees totaling $103,890 of which $3,631 relates to late fees. The complaint and summons seeks $100,259 plus 1.5% interest
per month on outstanding unpaid invoices. On Friday On Friday March 13, 2020, the RespireRx and its counsel communicated with
counsel to this vendor and discussed why a settlement of such matter would be in the best interests of both parties, but has not
yet received a response from this vendor or it’s counsel. As of December 31, 2019, the Company had recorded accounts payable
of $99,959 to such vendor an amount considered by the Company to be reasonable given the ongoing settlement discussions.
By
letter dated May 18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of the
University of Alberta, which purports to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 between
the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for termination
and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting to be attended
by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute. In February 2019,
the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license agreement and the
form of a new license agreement. However, the Company has re-evaluated that portion of its AMPAkine program and has decided not
to enter into a new agreement at this time. The lack of entry into a new agreement at this time does not affect the Company’s
other AMPAkine programs and permits the Company to reallocate resources to those programs, including, but not limited to ADHD,
SCI, FXS and others.
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 payable for investment banking services rendered.
Such amount has been included in accrued expenses at December 31, 2019 and 2018.
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 as of December 31, 2019
and 2018 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. See Note 5. Settlement and Payment
Agreements for additional items and details.
Significant
Agreements and Contracts
Consulting
Agreement
Richard
Purcell, the Company’s Senior Vice President of Research and Development since October 15, 2014, 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 that have been
issued to Mr. Purcell is provided at Note 6. Cash compensation expense pursuant to this agreement totaled $150,000 for the fiscal
years ended December 31, 2019 and 2018, which is included in research and development expenses in the Company’s consolidated
statements of operations for such periods.
Employment
Agreements
Employment
Agreements
On
October 12, 2018, after the resignation of Dr. James Manuso effective September 30, 2018, Dr. Lippa was named Interim President
and Interim Chief Executive Officer (see Note 9 to the Company’s consolidated financial statements for the fiscal years
ended December 31, 2019 and 2018). Dr. Lippa has continued to serve as the Company’s Executive Chairman and as a member
of the Board of Directors. 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 was for an initial term through
September 30, 2018 (and which automatically extended on September 30, 2018 and 2019 and will automatically extend annually, 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 earned 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 has
been granted stock options on several occasions and is eligible to receive additional awards under the Company’s
Plans at the discretion of the Board of Directors. Dr. Lippa did not receive any option to purchase shares of common stock during
fiscal year ended December 31, 2019. 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 to the Company’s consolidated financial statements for the fiscal
years ended December 31, 2019 and 2018. Cash compensation inclusive of employee benefits accrued pursuant to this agreement totaled
$339,600 for each of the fiscal years ended December 31, 2019 and 2018, respectively, which amounts are included in accrued compensation
and related expenses in the Company’s consolidated balance sheet at December 31, 2019 and 2018, and in research and development
expenses in the Company’s consolidated statement of operations for the fiscal years ended December 31, 2019 and 2018. Dr.
Lippa does not receive any additional compensation for serving as Executive Chairman and on the Board of Directors.
On
August 18, 2015, the Company also entered into an employment agreement with Jeff E. Margolis, in his role at that time as Vice
President, Secretary and Treasurer. Pursuant to the agreement, which was for an initial term through September 30, 2016 and later
amended (and which automatically extended on September 30, 2016, 2017, 2018 and 2019 and will automatically extend annually, 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 currently receives
an annual base salary of $300,000, and is eligible to receive performance-based annual bonus awards 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. Additionally, Mr. Margolis has granted stock options on several occasions and is eligible to receive additional awards
under the Company’s Plans at the discretion of the Board of Directors. Mr. Margolis 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. Mr. Margolis is also entitled to be reimbursed for business expenses.
Additional information with respect to the stock options granted to Mr. Margolis is provided at Note 6 to the Company’s
consolidated financial statements for fiscal years ended December 31, 2019 and 2018. Recurring cash compensation accrued pursuant
to this amended agreement totaled $321,600 for the fiscal year ended December 31, 2019 and 2018 which amounts are included in
accrued compensation and related expenses in the Company’s consolidated balance sheet December 31, 2019 and 2018, and in
general and administrative expenses in the Company’s consolidated statement of operations.
The
employment agreements between the Company and Dr. Lippa, and Mr. Margolis (prior to the 2017 amendment), 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. Dr. Lippa, and Mr. Margolis (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.
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. 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 obligation of $100,000 due on December 31, 2019, was extended
to June 30, 2020. One-time milestone payments may become due based upon the achievement of certain development milestones. $350,000
will be due within five days after the dosing of the first patient is a Phase III human clinical trial anywhere in the world.
$500,000 will be due within five days after the first NDA filing with FDA or a foreign equivalent. $1,000,000 will be due within
twelve months of the first commercial sale. One-time royalty payments may also become due and payable. Annual royalty payments
may also become due. In the year after the first application for market approval is submitted to the FDA or a foreign equivalent
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 or a foreign equivalent 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.
During
the fiscal years ended December 31, 2019 and 2018, the Company recorded charges to operations of $100,000, respectively, with
respect to its 2019 and 2018 minimum annual royalty obligation, which is included in research and development expenses in the
Company’s consolidated statement of operations for the fiscal years ended December 31, 2019 and 2018. The Company did not
pay the amount due on December 31, 2019 for which the Company was granted an extension until June 30, 2020.
University
of Alberta License Agreement
On
May 18, 2018, the Company received a letter from counsel claiming to represent TEC Edmonton and The Governors of the University
of Alberta, which purported to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 (as subsequently
amended) between the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds
for termination and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting
to be attended by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute.
In February 2019, the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license
agreement and the form of a new license agreement. However, after reaching that tentative agreement, the Company has re-evaluated
that portion of its AMPAkine program and has decided not to enter into a new agreement at this time. The lack of entry into a
new agreement at this time does not affect the Company’s other AMPAkine programs and permits the Company to reallocate resources
to those programs, including, but not limited to ADHD, FXS, SCI and CNS-driven Disorders.
Noramco
Inc. - Dronabinol Development and Supply Agreement
On
September 4, 2018, RespireRx entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Under the terms of the Agreement, Noramco agreed to (i) provide all of the active pharmaceutical
ingredient (“API”) estimated to be needed for the clinical development process for both the first- and second-generation
products (each a “Product” and collectively, the “Products”), three validation batches for New Drug Application
(“NDA”) filing(s) and adequate supply for the initial inventory stocking for the wholesale and retail channels, subject
to certain limitations, (ii) maintain or file valid drug master files (“DMFs”) with the FDA or any other regulatory
authority and provide the Company with access or a right of reference letter entitling the Company to make continuing reference
to the DMFs during the term of the agreement in connection with any regulatory filings made with the FDA by the Company, (iii)
participate on a development committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting
firms engaged by the Company and participate in all FDA or Drug Enforcement Agency (“DEA”) meetings as appropriate
and as related to the API.
In
consideration for these supplies and services, the Company has agreed to purchase exclusively from Noramco during the commercialization
phase all API for its Products as defined in the Development and Supply Agreement at a pre-determined price subject to certain
producer price adjustments and agreed to Noramco’s participation in the economic success of the commercialized Product or
Products up to the earlier of the achievement of a maximum dollar amount or the expiration of a period of time.
Transactions
with Biovail Laboratories International SRL
Beginning
in March 2010, the Company entered into a series of asset purchase and license agreements with Biovail Laboratories International
SRL later merged with Valeant Pharmaceuticals International, Inc. which was later renamed Bausch Health Companies Inc. (“Biovail”).
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
pertaining to an intravenous dosage form of the AMPAkine compounds for respiratory depression, a therapeutic area not currently
pursued by the Company. 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.
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, 2019, aggregating $995,900. Employment agreement amounts included in the 2020 column represent amounts contractually
due at from January 1, 2020 through September 30, 2020 when such contracts expire unless extended pursuant to the terms of the
contracts.
|
|
|
|
|
|
Payments
Due By Year
|
|
|
|
|
Total
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
License
agreements
|
|
$
|
500,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
Employment
agreements (1)
|
|
|
495,900
|
|
|
|
495,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
995,900
|
|
|
$
|
595,900
|
|
|
$
|
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
March 10, 2020, RespireRx was served a complaint and summons dated February 21, 2020 related to a December 16, 2019 demand for
payment of past due invoices inclusive of late fees totaling $103,890 of which $3,631 relates to late fees which seeks $100,259
plus 1.5% interest per month on outstanding unpaid invoices. On Friday March 13, 2020, RespireRx and its counsel communicated
with vendor’s counsel and discussed why a settlement of such matter would be in the best interests of both parties. As of
December 31, 2019, the Company had recorded accounts payable of $99,959 to such vendor an amount considered by the Company to
be reasonable given the ongoing settlement discussions.
The
due date of the $100,000 annual amount payable to the University of Illinois that was originally due on December 31, 2019 pursuant
to the 2014 License Agreement, was extended to June 30, 2020.
On
March 2, 2020, RespireRx and UWM Research Foundation, an affiliate of the University of Wisconsin-Milwaukee, entered into an option
agreement (“UWMRF Option Agreement”) pursuant to which RespireRx has a six-month option to license the identified
intellectual property pursuant to license terms substantially in the Form of a Patent License Agreement (“UWMRF License
Agreement”) that is attached to the UWMRF Option Agreement as Appendix I. The UWMRF License Agreement, if it becomes effective,
will expand the Company’s neuromodulator program which has historically included the Company’s AMPAkine program to
include a GABA-A program as well.
On
March 20, 2020, the holder of the August 2019 Convertible Note converted $1,000 of principal and $866 of reimbursable costs into
200,000 shares of the Company’s common stock. On March 16, 2020 the same holder converted $1,000 principal amount and $866
of reimbursable conversion costs into 200,000 shares of the Company’s common stock. On February 24, 2020 the same holder
converted $6,150 principal amount and $1,200 of reimbursable costs into 175,000 shares of the Company’s common stock. There
remains $46,850 of principal amount plus accrued interest due on the August 2019 Convertible Note (See Note 4. Notes Payable –
Convertible Notes Payable).
On
March 20, 2020, the holder of the May 2019 Convertible Note converted $493 of principal and $750 of reimbursable costs into 259,000
shares of the Company’s common stock. There remains $44,953 of principal amount plus accrued interest due on the May 2019
Convertible Note. (See Note 4. Notes Payable – Convertible Notes Payable).
On
March 26, 2020 the holder of the April 2019 Convertible Note converted $5,600 principal amount and $3,510 of interest into 1,247,945
shares of the Company’s common stock which resulted in the full repayment of all amounts owed pursuant to the April 2019
Convertible Note. On March 24, 2020 and March 20, 2019, the holder of the April 2019 Convertible Note converted $1,800 principal
amount on each date into 246,575 shares of the Company’s common stock on each date. Similarly, on March 19, 2020 the holder
of the April 2019 Convertible Note converted $1,800 principal amount into 246,575 shares of the Company’s common stock.
On January 6, 2020, February 18, 2020 and March 4, 2020 the holder of the April 2019 Convertible Note converted $9,800, $9,400
and $8,300 respectively, of principal amount into 200,820, 217,090 and 226,776 shares of the Company’s common stock respectively.
There remains no principal amount or accrued interest due on the April 2019 Convertible Note. (See Note 4. Notes Payable –
Convertible Notes Payable).
On
March 21, 2020, the Company entered into five separately negotiated Exchange Agreements (each an “Exchange Agreement”
and collectively, the “Exchange Agreements”) with certain existing holders (the “Noteholders”) of Convertible
Promissory Notes of the Company (the “Notes”). On March 22, 2020 (the “Closing Date”), each Noteholder
exchanged his, her or its Note or Notes for shares of common stock of the Company as contemplated by the respective Exchange Agreement.
The Noteholders were issued the Notes by the Company on one or more of the following dates: December 31, 2014, December 6, 2018,
December 7, 2018, February 27, 2019, March 6, 2019 and March 14, 2019. Under the Exchange Agreements, an aggregate of $255,786.37
principal amount and accrued interest with respect to the Notes were exchanged and cancelled in return for an aggregate of 17,052,424
shares of Common Stock.
On
March 21, 2020, two directors and officers of the Company, agreed to forgive a portion of the accrued but unpaid compensation
to which each was entitled pursuant to his employment agreement with the Company, equal to $153,000 each. On March 22, 2020, the
Company issued to each of them 4,500,000 shares of Common Stock in exchange for this forgiveness, which equates to a per share
value of $0.034 per share, the closing share price of Common Stock on Friday, March 20, 2020, the last business day prior to the
transaction.
Under
the terms of the April 2019 Convertible Note, the May 2019 Convertible Note, the August 2019 Convertible Note, the October 2019
Convertible Note and the November 2019 Convertible Note (each a “Subsequent Note” and collectively, the “Subsequent
Notes”), the Company is subject to covenants to maintain a number of reserved shares of common stock with respect to these
Subsequent Notes. The reserve requirement is generally a multiple of the number of shares of common stock that would be issued
if there were a conversion pursuant to the terms of the applicable Subsequent Note. A breach by the Company of these covenants
is an event of default under the terms of the April, August and October Subsequent Notes that generally increases the applicable
note’s principal amount and interest rate, and accelerates its maturity date, making the debt immediately due and payable.
For the May Subsequent Note, the provisions are similar, but a notice of default is required before such increases and acceleration.
For the November Subsequent Note, an event of default will only occur if the holder requests replenishment of the reserves, and
that request is not met within three days or a subsequent five-day cure period. The holder of the November Subsequent Note has
not yet made such request. (See Note 4. Notes Payable – Convertible Notes Payable).
On
March 21 and 22, 2020, the board of directors of Company approved, and on March 22, 2020 the holders of a majority of the outstanding
shares of the Company’s common stock executed written consents approving a Certificate of Amendment to the Company’s
Certificate of Incorporation. When filed with the Secretary of State of Delaware, the Certificate of Amendment will increase the
number of authorized shares of Common Stock of the Company from 65,000,000 to 1,000,000,000. The Company as required, filed a
Form DEF 14C Information Statement with the Securities and Exchange Commission. The filing was made on April 10, 2020. The Company
is required to provide (generally by mail), the DEF 14C to its shareholders who did not consent to the action. Twenty days after
the commencement of the distribution of the Form DEF 14C, the Company is eligible to file the Certificate of Amendment with the
Secretary of State of Delaware. The Company has taken this action primarily to increase the number of authorized shares available
and to bring it back into compliance with the covenants in the Subsequent Notes regarding the required number of reserved shares
of common stock. As described above, the outstanding principal of certain of the Subsequent Notes has been reduced as the holders
of these notes have converted a portion of the outstanding principal in exchange for Common Shares, pursuant to the term of the
applicable Subsequent Note. With respect to those Subsequent Notes for which conversions have occurred, interest continues to
accrue based upon the reduced principal amount of the relevant Subsequent Note. The Company has received waivers of the reserve
requirements from several of the Subsequent Note holders until April 30, 2020. The Company is in discussions with the relevant
remaining holders of the Subsequent Notes with respect to this recent action, seeking waivers regarding the technical breach of
the reserve provisions until such time as the increase in authorized shares is effective, which the Company currently expects
will be on or about April 30, 2020, at which time the Company expects that the number of reserved shares will again be in compliance
with the applicable covenants.
Dr.
Lippa and Mr. Margolis have made advances to the Company on April 13, 2020 totaling $18,500 in the aggregate, which funds were
utilized to make a payment of $18,000 to the Company’s auditors.
FINANCIAL
STATEMENTS AND INFORMATION
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,492
|
|
|
$
|
16,690
|
|
|
Prepaid
expenses
|
|
|
84,191
|
|
|
|
28,638
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
85,683
|
|
|
|
45,328
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
85,683
|
|
|
$
|
45,328
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses, including $574,226 and $476,671 payable to related parties at June 30, 2020 and December 31,
2019, respectively
|
|
$
|
4,307,228
|
|
|
$
|
3,772,030
|
|
|
Accrued
compensation and related expenses
|
|
|
2,270,084
|
|
|
|
2,083,841
|
|
|
Convertible
notes payable, currently due and payable on demand, including accrued interest of $69,297 and $113,304 at June 30, 2020 and
December 31, 2019, respectively of which $46,230 and $43,666, was deemed to be in default at June 30, 2020 and December 31,
2019 (Note 4)
|
|
|
201,754
|
|
|
|
551,591
|
|
|
Note
payable to SY Corporation, including accrued interest of $387,201 and $363,280 at June 30, 2020 and December 31, 2019, respectively
(payment obligation currently in default – Note 4)
|
|
|
760,215
|
|
|
|
766,236
|
|
|
Notes
payable to officer, including accrued interest of $41,021 and $35,388 as of June 30, 2020 and December 31, 2019, respectively
(Note 4)
|
|
|
147,871
|
|
|
|
142,238
|
|
|
Notes
payable to former officer, including accrued interest of $50,417 and $41,977 as of June 30, 2020 and December 31, 2019, respectively
(Note 4)
|
|
|
178,017
|
|
|
|
169,577
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
short-term notes payable
|
|
|
67,262
|
|
|
|
4,634
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,932,431
|
|
|
|
7,490,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficiency: (Note 6)
|
|
|
|
|
|
|
|
|
|
Series
B convertible preferred stock, $0.001 par value; $0.6667 per share liquidation preference; aggregate liquidation preference
$25,001; shares authorized: 37,500; shares issued and outstanding: 11; common shares issuable upon conversion at 0.00030 common
shares per Series B share
|
|
|
21,703
|
|
|
|
21,703
|
|
|
Common
stock, $0.001 par value; shares authorized: 1,000,000,000; shares issued and outstanding: 222,307,381 at June 30, 2020 and
4,175,072 at December 31, 2019, respectively (Note 2 and Note 9)
|
|
|
222,307
|
|
|
|
4,175
|
|
|
Additional
paid-in capital
|
|
|
160,181,182
|
|
|
|
159,038,388
|
|
|
Accumulated
deficit
|
|
|
(168,271,940
|
)
|
|
|
(166,509,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ deficiency
|
|
|
(7,846,748
|
)
|
|
|
(7,444,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficiency
|
|
$
|
85,683
|
|
|
$
|
45,328
|
|
See
accompanying notes to condensed consolidated financial statements (unaudited).
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative, including $147,255 and $122,025 to related parties for the three months ended June 30, 2020 and 2019,
respectively, and $249,614 and $243,225 to related parties for the six months ended June 30, 2020 and 2019, respectively
|
|
$
|
463,739
|
|
|
|
$
|
270,391
|
|
|
$
|
829,019
|
|
|
$
|
594,904
|
|
|
Research
and development, including $121,900 and $122,400 to related parties for the three months ended June 30, 2020 and 2019, respectively,
and $244,800 to related parties for the six months ended June 30, 2020 and 2019, respectively
|
|
|
153,176
|
|
|
|
|
148,000
|
|
|
|
308,466
|
|
|
|
297,350
|
|
|
Total
operating expenses
|
|
|
616,915
|
|
|
|
|
418,391
|
|
|
|
1,137,485
|
|
|
|
892,254
|
|
|
Loss
from operations
|
|
|
(616,915
|
)
|
|
|
|
(418,391
|
)
|
|
|
(1,137,485
|
)
|
|
|
(892,254
|
)
|
|
Loss
on extinguishment of debt and other liabilities in exchange for equity
|
|
|
(-
|
)
|
|
|
|
-
|
|
|
|
(323,996
|
)
|
|
|
-
|
|
|
Interest
expense, including $2,817 and $2,561 to related parties for the three months ended June 30, 2020 and 2019, respectively, and
$5,633 and $5,094 to related parties for the six months ended June 30, 2020 and 2019, respectively
|
|
|
(190,606
|
)
|
|
|
|
(70,533
|
)
|
|
|
(331,316
|
)
|
|
|
(151,645
|
)
|
|
Foreign
currency transaction gain (loss)
|
|
|
(8,616
|
)
|
|
|
|
11,711
|
|
|
|
29,942
|
|
|
|
26,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to Common Stockholders
|
|
$
|
(816,137
|
)
|
|
|
$
|
(477,213
|
)
|
|
$
|
(1,762,855
|
)
|
|
$
|
(1,017,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
86,606,705
|
|
|
|
|
3,872,076
|
|
|
|
49,320,761
|
|
|
|
3,872,076
|
|
See
accompanying notes to condensed consolidated financial statements (unaudited).
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
(Unaudited)
Six-months
Ended June, 2020
|
|
|
Series
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2019
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
4,175,072
|
|
|
$
|
4,175
|
|
|
$
|
159,038,388
|
|
|
$
|
(166,509,085
|
)
|
|
$
|
(7,444,819
|
)
|
|
Issuances
of Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
29,518,781
|
|
|
|
29,519
|
|
|
|
910,599
|
|
|
|
-
|
|
|
|
940,118
|
|
|
Net
loss for the three months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(946,718
|
)
|
|
|
(946,718
|
)
|
|
Balance
at March 31, 2020
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
33,693,853
|
|
|
$
|
33,694
|
|
|
$
|
159,948,987
|
|
|
$
|
(167,455,803
|
|
|
$
|
(7,451,419
|
)
|
|
Issuances
of Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
188,613,528
|
|
|
|
188,613
|
|
|
|
142,195
|
|
|
|
-
|
|
|
|
330,808
|
|
|
Note
discounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,000
|
|
|
|
|
|
|
|
90,000
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(816,137
|
)
|
|
|
(816,137
|
)
|
|
Balance,
June 30, 2020
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
222,307,381
|
|
|
$
|
222,307
|
|
|
$
|
160,181,182
|
|
|
$
|
(168,271,940
|
)
|
|
$
|
(7,846,748
|
)
|
Three-months
Ended June, 2020
|
|
|
Series
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2020
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
33,693,853,
|
|
|
$
|
33,694
|
|
|
$
|
159,948,987
|
|
|
$
|
(167,455,803
|
)
|
|
$
|
(7,451,419
|
)
|
|
Issuances
of Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
188,613,528
|
|
|
|
188,613
|
|
|
|
232,195
|
|
|
|
-
|
|
|
|
420,808
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(816,137
|
)
|
|
|
(816,137
|
)
|
|
Balance,
June 30, 2020
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
222,307,381
|
|
|
$
|
222,307
|
|
|
$
|
160,181,182
|
|
|
$
|
(168,271,940
|
)
|
|
$
|
(7,846,748
|
)
|
Six-months
Ended June 30, 2019
|
|
|
Series
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficiency
|
|
|
Balance,
December 31, 2018
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
3,872,076
|
|
|
$
|
3,872
|
|
|
$
|
158,635,222
|
|
|
$
|
(164,394,052
|
)
|
|
$
|
(5,733,255
|
)
|
|
Fair
value of Common Stock warrants issued in connection with convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,812
|
|
|
|
-
|
|
|
|
45,812
|
|
|
Net
loss for the three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(540,332
|
)
|
|
$
|
(540,332
|
)
|
|
Balance
at March 31, 2019
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
3,872,076
|
|
|
$
|
3,872
|
|
|
$
|
158,681,034
|
|
|
$
|
(164,934,384
|
)
|
|
$
|
(6,227,775
|
)
|
|
Fair
value of Common Stock warrants and beneficial conversion feature associated with convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,950
|
|
|
|
|
|
|
$
|
87,950
|
|
|
Net
loss for the three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(477,213
|
)
|
|
|
(477,213
|
)
|
|
Balance,
June 30, 2019
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
3,872,076
|
|
|
$
|
3,872
|
|
|
$
|
158,768,984
|
|
|
$
|
(165,411,597
|
)
|
|
$
|
(6,617,038
|
)
|
Three-months
Ended June 30, 2019
|
|
|
Series
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2019
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
3,872,076,
|
|
|
$
|
3,872
|
|
|
$
|
158,681,034
|
|
|
$
|
(164,934,384
|
)
|
|
$
|
(6,227,775
|
)
|
|
Fair
value of Common Stock warrants and beneficial conversion feature associated with convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
87,950
|
|
|
|
-
|
|
|
|
87,950
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(477,213
|
)
|
|
|
(477,213
|
)
|
|
Balance,
June 30, 2019
|
|
|
37,500
|
|
|
$
|
21,703
|
|
|
|
3,872,076
|
|
|
$
|
3,872
|
|
|
$
|
158,768,984
|
|
|
$
|
(165,411,597
|
)
|
|
$
|
(6,617,038
|
)
|
See
accompanying notes to condensed consolidated financial statements (unaudited).
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,762,855
|
)
|
|
$
|
(1,017,545
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Amortization
of debt discounts
|
|
|
237,615
|
|
|
|
89,000
|
|
|
Loss
on extinguishment of debt
|
|
|
323,996
|
|
|
|
-
|
|
|
Foreign
currency transaction (gain) loss
|
|
|
(29,942
|
)
|
|
|
(26,354
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
(55,552
|
)
|
|
|
(59,250
|
)
|
|
Accounts
payable and accrued expenses
|
|
|
535,198
|
|
|
|
261,889
|
|
|
Accrued
compensation and related expenses
|
|
|
492,243
|
|
|
|
390,600
|
|
|
Accrued
interest payable
|
|
|
152,849
|
|
|
|
95,382
|
|
|
Net
cash used in operating activities
|
|
|
(106,448
|
)
|
|
|
(266,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from convertible notes borrowings
|
|
|
90,000
|
|
|
|
213,500
|
|
|
Debt
issuance costs
|
|
|
-
|
|
|
|
(5,500
|
)
|
|
Proceeds
from issuance of note payable to officer
|
|
|
1,250
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
91,250
|
|
|
|
233,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Net
decrease
|
|
|
(15,198
|
)
|
|
|
(33,278
|
)
|
|
Balance
at beginning of period
|
|
|
16,690
|
|
|
|
33,284
|
|
|
Balance
at end of period
|
|
$
|
1,492
|
|
|
$
|
6
|
|
(Continued)
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for -
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,498
|
|
|
$
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
|
|
Beneficial
Conversion Feature and Warrants issued with convertible debt
|
|
$
|
90,000
|
|
|
|
50,258
|
|
|
Debt
and accrued interest converted to Common Stock
|
|
$
|
950,421
|
|
|
$
|
-
|
|
|
Issuance
of Common Stock for accrued compensation and benefits
|
|
$
|
306,000
|
|
|
$
|
-
|
|
|
Cashless
warrant exercises
|
|
$
|
15,638
|
|
|
$
|
-
|
|
|
Original
issue discounts associated with convertible debt
|
|
$
|
-
|
|
|
$
|
10,500
|
|
See
accompanying notes to condensed consolidated financial statements (unaudited).
RESPIRERX
PHARMACEUTICALS INC.
AND
SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 (as amended,
the “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 a wholly owned subsidiary. Pier was a clinical
stage biopharmaceutical company developing a pharmacologic treatment for obstructive sleep apnea (“OSA”) and had been
engaged in research and clinical development activities which activities are now in RespireRx.
While
developing potential applications for respiratory disorders, notably dronabinol (a cannabinoid that is a synthetic form of ∆9-tetrahydrocannabinol
(“Δ9-THC”)), for the treatment of OSA, the Company has retained and expanded its AMPAkine intellectual property
and data with respect to neurological and psychiatric disorders and is considering developing certain potential products in this
platform, subject to raising additional financing and/or entering into strategic relationships, of which no assurance can be provided.
On August 1, 2020, RespireRx and the University of Wisconsin-Milwaukee Research Foundation, Inc. (“UWMRF”), an affiliate
of the University of Wisconsin-Milwaukee, entered into a Patent License Agreement (the “UWMRF Patent License Agreement”),
pursuant to which UWMRF licensed to RespireRx certain patent and technology rights held by UWMRF for RespireRx’s use in
developing commercial products (See Note 9. Subsequent Events). The licensed intellectual property is associated with a program
involving GABAkines, positive allosteric modulators (“PAMs”) of the Type A gamma-amino-butyric acid (“GABAA”)
receptors. Together, the AMPAkine and GABAkine programs are the foundation of the Company’s neuromodulator platform called
EndeavourRx.
Basis
of Presentation
The
condensed consolidated financial statements are of RespireRx and its wholly owned subsidiary, Pier (collectively referred to herein
as the “Company,” “we” or “our,” unless the context indicates otherwise). The condensed consolidated
financial statements of the Company at June 30, 2020 and for the three-months and six-months ended June 30, 2020 and 2019, are
unaudited. In the opinion of management, all adjustments (including normal recurring adjustments) have been made that are necessary
to present fairly the condensed consolidated financial position of the Company as of June 30, 2020, the results of its condensed
consolidated operations for the three-months and six-months ended June 30, 2020 and 2019, changes in its condensed consolidated
statements of stockholders’ deficiency for the six-months ended June 30, 2020 and 2019 and its condensed consolidated cash
flows for the six-months ended June 30, 2020 and 2019. Condensed consolidated operating results for the interim periods presented
are not necessarily indicative of the results to be expected for a full fiscal year. The consolidated balance sheet at December
31, 2019 has been derived from the Company’s audited consolidated financial statements at such date.
The
condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”). Accordingly, certain information and note disclosures normally included
in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”)
have been omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and other information included in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC.
2.
Business
The
mission of the Company is to develop innovative and revolutionary treatments to combat disorders caused by disruption of neuronal
signalling. We are developing treatment options that address conditions that affect millions of people, but for which there are
few or poor treatment options, including obstructive sleep apnea (“OSA”), attention deficit hyperactivity disorder
(“ADHD”) and recovery from spinal cord injury (“SCI”), as well as certain neurological orphan diseases
such as Fragile X Syndrome (“FXS”). With the addition of the GABAkine program we have added development programs for
treatment resistant epilepsy and other convulsant disorders, and potentially migraine, inflammatory and neuropathic pain, as well
as other areas of interest based on results of animal studies to date. We are developing a pipeline of new drug products based
on our broad patent portfolios for two drug platforms: (i) our cannabinoids platform (which we refer to as ResolutionRx), including
dronabinol (a synthetic form of ∆9-tetrahydrocannabinol (“Δ9-THC”)), which acts upon the nervous system’s
endogenous cannabinoid receptors and (ii) our neuromodulators platform (which we refer to as EndeavourRx), which platform includes
two programs: (a) our AMPAkines program, proprietary compounds that positively modulate AMPA-type glutamate receptors to promote
neuronal function and (b) our GABAkines program, PAMs of GABAA receptors that are the subject of the UWMRF Patent License
Agreement.
With
the ResolutionRx cannabinoid platform, we plan to create a wholly owned private subsidiary of RespireRx with its own board of
directors.
With
the EndeavourRx neuromodulator platform, we are considering creating another wholly owned private subsidiary of RespireRx with
its own board of directors.
Cannabinoids
With
respect to the cannabinoid platform, two Phase 2 clinical trials have been completed demonstrating the ability of dronabinol to
significantly reduce the symptoms of OSA, which management believes is potentially a multi-billion-dollar market. Subject to raising
sufficient financing (of which no assurance can be provided), we believe that we have put most of the necessary pieces into place
to rapidly initiate a Phase 3 clinical trial program. By way of definition, when a new drug is allowed by FDA to be tested in
humans, Phase 1 clinical trials are conducted in healthy people to determine safety and pharmacokinetics. If successful, Phase
2 clinical trials are conducted in patients to determine safety and preliminary efficacy. Phase 3 trials, large scale studies
to determine efficacy and safety, are the final step prior to seeking FDA approval to market a drug.
Neuromodulators
– EndeavourRx - AMPAkines and GABAkines
Neurotransmitters
are chemicals released by neurons that enable neurons to communicate with one another. This process is called neurotransmission.
Neurons release neurotransmitters that attach to a very specific protein structure, termed a receptor, residing on an adjacent
neuron. This neurotransmission process can either increase or decrease the excitability of the neuron receiving the message.
Neuromodulators
do not act directly at the neurotransmitter binding site, but instead act at accessory sites that enhance (Positive Allosteric
Modulators – “PAMs”) or reduce (Negative Allosteric Modulators – “NAMs”) the actions of neurotransmitters
at their primary receptor sites. Neuromodulators have no intrinsic activity of their own. We believe that neuromodulators offer
the possibility of developing “kinder and gentler” neuropharmacological drugs with greater pharmacological specificity
and reduced side effects compared to present drugs, especially in disorders for which there is a significant unmet or poorly met
clinical need such as ADHD, SCI, Autism Spectrum Disorder (“ASD”), FXS, treatment resistant epilepsy, neuropathic
pain and additional CNS-driven disorders. We are focused presently on developing drugs known as AMPAkines (PAMs at AMPA receptors)
and GABAkines (PAMs at GABAA receptors).
Through
an extensive AMPAkine translational research effort from the cellular level through Phase 2 clinical trials, the Company has developed
a family of novel, low impact AMPAkines, including CX717, CX1739 and CX1942 that may have clinical application in the treatment
of CNS-driven neurobehavioral and cognitive disorders, SCI, neurological diseases, and certain orphan indications. From our AMPAkine
program, our lead clinical compounds, CX717 and CX1739, have successfully completed multiple Phase 1 safety trials. Both compounds
have also completed Phase 2 efficacy trials demonstrating target engagement, by antagonizing the ability of opioids to induce
respiratory depression. CX717 has successfully completed a Phase 2 trial demonstrating the ability to significantly reduce the
symptoms of adult ADHD. In an early Phase 2 study, CX1739 improved breathing in patients with central sleep apnea (“CSA”).
Preclinical studies have highlighted the potential ability of these AMPAkines to improve motor function in animals with SCI. Subject
to raising sufficient financing (of which no assurance can be provided), we believe that we will be able to rapidly initiate a
human Phase 2 study with CX1739 or CX717 in patients with spinal cord injury and a human Phase 2B study in patients with ADHD
with either CX1739 or CX717.
In
order to expand our neuromodulator asset base, we entered into an option agreement with UWMRF which option we exercised effective
August 1, 2020 resulting in the establishment of the UWMRF Patent License Agreement. Under the UWMRF Patent License Agreement,
UWMRF granted to the Company an exclusive license to commercialize GABAkine products based on UWMRF’s rights in certain
patents and patent applications, and a non-exclusive license to commercialize products based on UWMRF’s rights in certain
technology that is not the subject of the patents or patent applications. See Note 8. Commitments and Contingencies – Significant
Agreements and Contracts – UWMRF Patent License Agreement.
Certain
of these GABAkines have shown impressive activity in a broad range of animal models of treatment resistant epilepsy and other
convulsant disorders, as well as in brain tissue samples obtained from epileptic patients in research conducted at the University
of Wisconsin-Milwaukee by Dr. James Cook and by Dr. Jeffrey Witkin of the Indiana University School of Medicine, among others
at collaborating institutions. Epilepsy is a chronic and highly prevalent neurological disorder that affects millions of people
world-wide. While many anticonvulsant drugs have been approved to decrease seizure probability, seizures are not well controlled
and, in as many as 60-70% of patients, existing drugs are not efficacious at some point in the disease progression. We believe
that the medical and patient community are in clear agreement that there is desperate need for improved antiepileptic drugs. In
addition, these GABAkines have shown positive activity in animal models of migraine, inflammatory and neuropathic pain, as well
as other areas of interest. Because of these compounds’ GABA receptor subunit specificity, we believe the compounds have
a greatly reduced liability to produce sedation, motor incoordination, memory impairments and tolerance, side effects commonly
associated with non-specific GABA PAMs, such as benzodiazepines.
Building
upon the AMPAkine and GABAkine programs as a foundation, we established a second business unit called EndeavourRx which focuses
on developing novel neuromodulators for disorders resulting from alterations in neurotransmission.
Financing
our Platforms
Our
major challenge has been to raise substantial equity or equity-linked financing to support research and development plans for
our cannabinoid and neuromodulator platforms, while minimizing the dilutive effect to pre-existing stockholders. At present, we
believe that we are hindered primarily by our public corporate structure, our OTCQB listing, and low market capitalization as
a result of our low stock price. For this reason, the Company is considering an internal restructuring plan that contemplates
spinning out our two drug platforms into separate operating businesses or subsidiaries.
We
believe that by creating one or more subsidiaries to further the aims of ResolutionRx and EndeavourRx, it may be possible, through
separate finance channels, to optimize the asset values of both the cannabinoid platform and the neuromodulator platform.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred
net losses of $1,762,855 for the six-months ended June 30, 2020 and $2,115,033 for the fiscal year ended December 31, 2019 respectively,
as well as negative operating cash flows of $106,448 for the six-months ended June 30, 2020 and $487,745 for the fiscal year ended
December 31, 2019. The Company also had a stockholders’ deficiency of $7,846,748 at June 30, 2020 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 audit report on the Company’s consolidated financial statements for the year ended
December 31, 2019, 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 extremely 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, establishment of new and
maintenance and improvement of existing and in-process intellectual property, licensing agreements, legal and patent matters and
regulatory compliance, and has taken steps to continue to raise new debt and equity capital to fund the Company’s business
activities from both related and unrelated parties to fund the Company’s business activities.
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 the pursuit of the Company’s planned research and development activities.
The Company regularly evaluates various measures to satisfy the Company’s liquidity needs, including development and other
agreements with collaborative partners and, when necessary, seeking to exchange or restructure the Company’s outstanding
securities. The Company is evaluating certain changes to its operations and structure to facilitate raising capital from sources
that may be interested in financing only discrete aspects of the Company’s development programs. Such changes could include
a significant reorganization, which may include the formation of one or more subsidiaries into which one or more of our programs
may be contributed. 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.
3.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed 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.
Concentration
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.
Value
of Financial Instruments
The
authoritative guidance with respect to value of financial instruments established a value hierarchy that prioritizes the inputs
to valuation techniques used to measure value into three levels and requires that assets and liabilities carried at 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 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 value hierarchy within which each value measurement falls in its entirety, based on the lowest
level input that is significant to the 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 amounts of financial instruments (consisting of cash, cash equivalents, and accounts payable and accrued expenses) are
considered by the Company to be representative of the respective values of these instruments due to the short-term nature of those
instruments. With respect to the note payable to SY Corporation (as defined below) 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.
The Company considers the carrying amounts of the notes payable to officers, inclusive of accrued interest, to be representative
of the respective values of such instruments due to the short-term nature of those instruments and their terms.
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
equity financings are netted against the proceeds.
Capitalized
Financing Costs
The
Company presents debt issuance costs related to debt obligations in its consolidated balance sheet as a direct deduction from
the carrying amount of that debt obligation, consistent with the presentation for debt discounts.
Convertible
Notes Payable
Convertible
notes are evaluated to determine if they should be recorded at amortized cost. To the extent that there are associated warrants
or a beneficial conversion feature, the convertible notes and warrants are evaluated to determine if there are embedded derivatives
to be identified, bifurcated and valued in connection with and at the time of such financing.
Notes
Exchanges
In
cases where debt or other liabilities are exchanged for equity, the Company compares the carrying value of debt, inclusive of
accrued interest, if applicable, being exchanged, to the value of the equity issued and records any loss or gain as a result of
such exchange. See Note 4. Notes Payable.
Extinguishment
of Debt and Settlement of Liabilities
The
Company accounts for the extinguishment of debt and settlement of liabilities by comparing the carrying value of the debt or liability
to the value of consideration paid or assets given up and recognizing a loss or gain in the condensed consolidated statement of
operations in the amount of the difference in the period in which such transaction occurs.
Prepaid
Insurance
Prepaid
insurance represents the premium paid in March 2020 for directors and officers insurance, as well as the amortized amount of an
April 2020 premium payment for office-related insurances and clinical trial coverage. Directors’ and Officers’ insurance
tail coverage, purchased in March 2013 expired in March 2020 and all prepaid amounts have been fully amortized. The amounts of
prepaid insurance amortizable in the ensuing twelve-month period are recorded as prepaid insurance in the Company’s consolidated
balance sheet at each reporting date and amortized to the Company’s consolidated statement of operations for each reporting
period.
Stock-Based
Awards
The
Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Board members, consultants
and vendors 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, directors, outside consultants and vendors by measuring the cost of services
received in exchange for equity awards based on the grant date value of the awards, with the cost recognized as compensation expense
on the straight-line basis in the Company’s consolidated financial statements over the vesting period of the awards.
Stock
grants, which are sometimes 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 outside consultants and other vendors are valued on the grant date. As the stock
options vest, the Company recognizes this expense over the period in which the services are provided.
The
value of stock options granted as stock-based payments 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.
The
Company recognizes the value of stock-based payments in general and administrative costs and in research and development costs,
as appropriate, in the Company’s condensed consolidated statements of operations. The Company issues new shares of common
stock to satisfy stock option and warrant exercises.
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 June 30, 2020, 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 June 30, 2020, 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 (as defined below), 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 condensed consolidated statements of operations.
Research
and Development
Research
and development costs include compensation paid to management directing the Company’s research and development activities,
including but not limited to compensation paid to our former Interim Chief Executive Officer and Interim President who is also
our Chief Scientific Officer and fees paid to consultants and outside service providers and organizations (including research
institutes at universities), and other expenses relating to the acquisition, design, development and clinical testing of the Company’s
treatments and product candidates.
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 condensed consolidated
balance sheet, with a corresponding charge to research and development costs in the Company’s condensed 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 condensed consolidated
balance sheet, with a corresponding charge to research and development costs in the Company’s condensed 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 and recorded as general and administrative expenses.
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
loss attributable to common stockholders consists of net 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
June 30, 2020 and 2019, 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.
|
|
|
June
30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Series
B convertible preferred stock
|
|
|
11
|
|
|
|
11
|
|
|
Convertible
notes payable
|
|
|
55,578,272
|
|
|
|
564,797
|
|
|
Common
stock warrants
|
|
|
124,514,653
|
|
|
|
1,876,198
|
|
|
Common
stock options
|
|
|
4,188,630
|
|
|
|
4,333,763
|
|
|
Total
|
|
|
184,281,566
|
|
|
|
6,774,769
|
|
Reclassifications
Certain
comparative figures in 2019 have been reclassified to conform to the current quarter’s presentation. These reclassifications
were immaterial, both individually and in the aggregate.
Recent
Accounting Pronouncements
In
August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The subtitle is Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity. This Accounting Standard Update (“ASU”)
addresses complex financial instruments that have characteristics of both debt and equity. The application of this ASU would reduce
the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models
would result in fewer embedded conversion features being separately recognized from the host contract as compared with current
GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features
that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify
for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which
the premiums are recorded as paid-in capital. The Company has historically issued complex financial instruments and has considered
whether embedded conversion features have existed within those contracts or whether derivatives would appropriately be bifurcated.
To date, no such bifurcation has been necessary. However, it is possible that this ASU may have a substantial impact on the Company’s
financial statements. Management is evaluating the potential impact. This ASU becomes effective for fiscal years beginning after
December 15, 2023.
In
March 2020, The FASB issued Accounting Standards Update No. 2020-03, Codification Improvements to Financial Instruments. There
are seven issues addressed in this update. Issues 1 through 5 were clarifications and codifications of previous updates. Issue
3 relates only to depository and lending institutions and therefore would not be applicable to the Company. Issue 6 was a clarification
on determining the contractual term of a net investment in a lease for purposes of measuring expected credit losses, an issue
not applicable to the Company. Issue 7 relates to the regaining control of financial assets sold and the recordation of an allowance
for credit losses. The amendment related to issues 1, 2, 4 and 5 become effective immediately upon adoption of the update. Issue
3 becomes effective for fiscal years beginning after December 15, 2019. Issues 6 and 7 become effective on varying dates that
relate to the dates of adoption other updates. Management’s initial analysis is that it does not believe the new guidance
will substantially impact the Company’s financial statements.
In
December 2019, the FASB issued an amendment to the guidance on income taxes which is intended to simplify the accounting for income
taxes. The amendment eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for
calculating income taxes in an interim period, and the recognition of the deferred tax liabilities for outside basis differences.
The amendment also clarifies existing guidance related to the recognition of franchise tax, the evaluation of a step up in the
tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other
clarifications. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2020. Management is currently evaluating the impact the guidance will have on our consolidated financial statements.
In
June 2016, the FASB issued an amendment to the guidance on the measurement of credit losses on financial instruments. The amendment
updates the guidance for measuring and recording credit losses on financial assets measured and amortized cost by replacing the
“incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented
at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale debt
securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment
model. The guidance is effective for smaller reporting companies for fiscal years beginning after December 15, 2022 including
interim periods within those fiscal years. Early adoption is permitted for annual periods after December 15, 2018. Management
is currently evaluating the impact the guidance will have on our consolidated financial statements.
4.
Notes Payable
Convertible
Notes Payable
Q2
2020 Convertible Notes
RespireRx
and Power Up Lending Group Ltd. (the “Lender”) entered into Securities Purchase Agreements, dated as of April 15,
2020 and June 7, 2020 (each, a “Power Up Agreement”), by which the Lender loaned $53,000 and $43,000, respectively,
to RespireRx in return for two convertible promissory notes (the “April 2020 Note” and the “June 2020 Note”
respectively), a limited guaranty associated with the April 2020 Note, and the delivery into escrow of a confession of judgment
in favor of the Lender for the amount of the April 2020 Note plus fees and costs to be filed by the Lender upon the occurrence
of an Event of Default (as defined in the April 2020 Note) and other transaction-related documents associated with both the April
2020 Note and the June 2020 Note. The proceeds of the loans, which equal $90,000 after payment of $5,000 in legal fees and $1,000
in due diligence fees, are being used for general corporate purposes.
The
April 2020 Note and the June 2020 Note will be payable on April 15, 2021 and June 7, 2021, respectively (each, a “Maturity
Date”), and bear interest at a rate equal to 12% per annum, with any amount of principal or interest which is not paid when
due bearing interest at the rate of 22% per annum.
The
Lender has the right, at any time during the period beginning on the date that is 180 days following the date of each of the notes
and ending on the later of (i) the applicable Maturity Date and (ii) the date of payment of the Default Amount (as defined in
the notes), to convert any outstanding and unpaid amount of the notes into shares of RespireRx’s common stock or securities
convertible into RespireRx’s common stock (“2020 Note Conversion Shares”), provided that such conversion would
not result in the Lender beneficially owning more than 4.99% of RespireRx’s common stock. Subject to certain limitations
and adjustments as described in the notes, the Lender may convert at a per share conversion price equal to 61% of the lowest trading
price of the common stock as reported by the exchange on which RespireRx’s shares are traded, for the twenty trading days
prior to, but excluding, the day upon which a notice of conversion is received by RespireRx. Upon the conversion of all amounts
due under each of the April 2020 Note and the June 2020 Note, each would be deemed repaid and terminated.
RespireRx
may prepay the outstanding principal amount under the April 2020 Note and the June 2020 Note by paying a certain percentage of
the sum of the outstanding principal, interest, default interest and other amounts owed. Such percentage varies from 120% to 145%
depending on the period in which the prepayment occurs, as set forth in the April 2020 Note and June 2020 Note, respectively.
During the period in which each note is outstanding, subject to certain limited exceptions, RespireRx must notify the Lender in
advance of closing of any financing transactions with third party investors. At the Lender’s discretion, RespireRx must
amend and restate each note, including its conversion terms, and the 2020 Note Conversion Shares to be identical to the instruments
evidencing such financing transaction.
In
consideration of and to induce the Lender to consummate the April 2020 Note referenced herein, the Chief Financial Officer of
RespireRx (the “CFO”), on April 15, 2020, issued a limited guaranty in favor of the Lender whereby the CFO guaranteed
to the Lender the prompt and full performance and observance by RespireRx of its obligation to promptly cooperate in processing
all notices of conversions issued pursuant to the April 2020 Note.
Both
the April 2020 Note and the June 2020 Note and the shares of common stock issuable upon conversion thereof were offered and sold
to the Lender in reliance upon specific exemptions from the registration requirements of United States federal and state securities
laws, which include Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”), and Rule 506 promulgated
by the SEC under the 1933 Act. Pursuant to these exemptions, the Lender represented to RespireRx under each Power Up Agreement,
among other representations, that it was an “accredited investor” as that term is defined in Rule 501(a) of Regulation
D under the 1933 Act.
The
outstanding amounts of the April 2020 Note and June 2020 Note consist of the following at June 30, 2020 and December 31, 2019:
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
Principal
amount of notes payable
|
|
$
|
96,000
|
|
|
$
|
-
|
|
|
Unamortized
portion of note discounts
|
|
|
(82,254
|
)
|
|
|
|
|
|
Accrued
interest payable
|
|
|
1,649
|
|
|
|
-
|
|
|
|
|
$
|
15,395
|
|
|
$
|
-
|
|
2019
Convertible Notes
On
November 4, 2019, October 22, 2019, August 19, 2019, May 17, 2019 and April 24, 2019, the Company issued a series of convertible
notes (“2019 Convertible Notes”), all similar in nature, all subject to debt issuance costs (“DIC”) and
original issue discount (“OID”) and beneficial conversion (“BCF”) features and some subject to the issuance
of warrants (“NW”) and/or commitment shares (“CS”) and placement agent fees. Two of the notes had maturity
dates nine months after issuance and three were for one year. One note was a master note agreement in the amount of $150,000,
but with an initial drawdown of $50,000. The Company evaluated all of the terms of the 2019 Convertible Notes and determined that,
in accordance with ASC 815, there were no derivatives to be bifurcated or separately valued. Each of the April, 24, 2019, August
19, 2019 and October 22, 2019 Convertible Notes was satisfied in full by the lenders electing to convert the outstanding balances
to common stock during the six-months ended June 30, 2020 and the May 17, 2019 Convertible Note, the maturity date of which was
extended to November 17, 2020, was satisfied in full by the lenders electing to convert the outstanding balances to common stock
during the three-months ended June 30, 2020, except for $2,747 of accrued interest that remains outstanding. The 2019 Convertible
Notes that have balances outstanding as of June 30, 2020 are summarized in the table below.
|
Inception
date
|
|
Maturity
date
|
|
Original
principal amount
|
|
|
Interest
rate
|
|
|
Original
aggregate DIC, OID, BCF, NW and CS
|
|
|
Cumulative
amortization of DIC, OID, BCF, NW and CS
|
|
|
Principal
remaining at June 30, 2020
|
|
|
Accrued
Interest at June 30, 2020
|
|
|
Balance
sheet carrying amount at June 30, 2020 inclusive of accrued interest
|
|
|
November
4, 2019
|
|
November
4, 2020
|
|
$
|
170,000
|
|
|
|
10
|
%
|
|
$
|
170,000
|
|
|
$
|
148,211
|
|
|
$
|
30,500
|
|
|
$
|
1,964
|
|
|
$
|
10,675
|
|
|
May
17, 2019
|
|
May
17, 2020, extended to November 17, 2020
|
|
$
|
50,000
|
|
|
|
10
|
%
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
$
|
2,747
|
|
|
$
|
2,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
220,000
|
|
|
|
|
|
|
$
|
220,000
|
|
|
$
|
198,211
|
|
|
$
|
30,500
|
|
|
$
|
4,711
|
|
|
$
|
13,422
|
|
2018
Q4 and 2019 Q1 Notes and Original Convertible Notes
On
December 6, 2018, December 7, 2018 and December 31, 2018 the Company issued convertible notes (each a “2018 Q4 Note”)
and on January 2, 2019, February 27, 2019, March 6, 2019 and March 14, 2019, the Company issued additional convertible notes (each
a “2019 Q1 Note”, respectively and collectively with the “2018 Q4, the “2018 Q4 and 2019 Q1 Notes”)
bearing interest at 10% per year. All of the 2018 Q4 and 2019 Q1 Notes matured on either February 28, 2019 or April 30, 2019.
The original aggregate principal amount was $190,000. None of the 2018 Q4 and 2019 Q1 Notes were repaid at maturity. The 2018
Q4 and 2019 Q1 Note investors also received an aggregate of 190,000 common stock purchase warrants. The warrants were valued using
the Black Scholes option pricing model calculated on the date of each grant and had an aggregate value of $146,805. Total value
received by the investors was $336,805, the sum of the face value of the convertible note and the value of the warrant. Therefore,
the Company recorded a debt discount associated with the warrant issuance of $82,159 and an initial value of the convertible notes
of $107,841 using the relative fair value method. All debt discounts were fully amortized by the original maturity dates. On March
21, 2020, all except one of the 2018 Q4 and 2019 Q1 Note holders exchanged the outstanding principal amount and accrued interest
for shares of common stock. The exchange price was $0.015 per share of common stock. The closing price on March 20, 2020, the
last trading day before the closing of the exchange agreements which took place on a Saturday, was $0.034 per share of common
stock. An aggregate of $155,000 of principal and $17,911 of accrued interest was exchanged for 11,527,407 shares of common stock.
The Company recorded a loss on the extinguishment of the exchanged 2018 Q4 Notes and 2019 Q1 Notes of $219,021. As of June 30,
2020, there remains one outstanding 2018 Q4 Note and one outstanding 2019 Q1 Note, both held by the same single investor, with
an aggregate principal amount of $35,000 and aggregate accrued interest of $5,321 as of June 30, 2020. The 2019 Convertible Notes
discussed above, which the Company does not consider to have arisen from one or more offerings, may be interpreted in such a way
that the remaining 2018 Q4 Note and 2019 Q1 Note holders had the right to convert or exchange into such notes. However, no holder
of the Q4 2018 and 2019 Notes has requested such a conversion or exchange. The Company does not believe that an offering occurred
as of June 30, 2020 or as of the date of the issuance of these financial statements. Therefore, the number of shares of common
stock (or preferred stock) into which the remaining 2018 Q4 Note and the remaining 2019 Q1 Note may convert is not determinable
and the Company has not accounted for any additional consideration. The warrants to purchase 190,000 shares of common stock issued
in connection with the sale of the 2018 Q4 and 2019 Q1 Notes are exercisable at a fixed price of $1.50 per share of common stock,
provide 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 issued to the Q4 2018 and Q1 2019 Note holders expire on December 30,
2023. The Company determined that there were no embedded derivatives to be identified, bifurcated and valued in connection with
this financing.
The
2018 Q4 Notes and 2019 Q1 Notes consist of the following at June 30, 2020 and December 31, 2019:
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
Principal
amount of notes payable
|
|
$
|
35,000
|
|
|
$
|
190,000
|
|
|
Accrued
interest payable
|
|
|
5,321
|
|
|
|
17,976
|
|
|
|
|
$
|
40,321
|
|
|
$
|
207,976
|
|
Other
convertible notes were also sold to investors in 2014 and 2015 (the “Original Convertible Notes), which aggregated a total
of $579,500, and had a fixed interest rate of 10% per annum. The Original Convertible Notes have no reset rights or other protections
based on subsequent equity transactions, equity-linked transactions or other events. The warrants to purchase shares of common
stock issued in connection with the sale of the Original Convertible Notes have either been exchanged for common stock or expired.
On
March 21, 2020, the holder of one of the Original Convertible Notes exchanged $50,000 of principal and $32,875 of accrued interest
for 5,525,017 shares of the Company’s common stock. The exchange price was $0.015 per share of common stock. The closing
price on March 20, 2020, the last trading day before the closing of the exchange agreements, was $0.034 per share of common stock.
The Company recorded a loss on the extinguishment of the exchanged Original Convertible Note of $104,975.
The
remaining outstanding Original Convertible Notes (including that for which a default notice has been received) consist of the
following at June 30, 2020 and December 31, 2019:
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
Principal
amount of notes payable
|
|
$
|
75,000
|
|
|
$
|
125,000
|
|
|
Accrued
interest payable
|
|
|
57,616
|
|
|
|
82,060
|
|
|
|
|
$
|
132,616
|
|
|
$
|
207,060
|
|
As
of June 30, 2020, principal and accrued interest on the Original Convertible Note that is subject to a default notice accrues
annual interest at 12% instead of 10%, totalled $46,230, of which $21,230 was accrued interest. As of December 31, 2019, principal
and accrued interest on Original Convertible Notes subject to default notices totalled $43,666 of which $18,666 was accrued interest.
As
of June 30,2020 all of the outstanding Original Convertible Notes, inclusive of accrued interest, were convertible into an aggregate
of 11,658 shares of the Company’s common stock. Such Original Convertible Notes will continue to accrue interest until exchanged,
paid or otherwise discharged. There can be no assurance that any of the additional holders of the remaining Original Convertible
Notes will exchange their Original Convertible Notes.
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 as of that date) 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. Management 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 has in the past made several
efforts towards a comprehensive resolution of the aforementioned matters involving SY Corporation. During the six-months ended
June 30, 2020, there were no further communications between the Company and 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 June 30, 2020 and December 31, 2019:
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
Principal
amount of note payable
|
|
$
|
399,774
|
|
|
$
|
399,774
|
|
|
Accrued
interest payable
|
|
|
387,201
|
|
|
|
363,280
|
|
|
Foreign
currency transaction adjustment
|
|
|
(26,760
|
)
|
|
|
3,182
|
|
|
|
|
$
|
760,215
|
|
|
$
|
766,236
|
|
Interest
expense with respect to this promissory note was $11,960 and $11,829 for the three-months and was $23,921 and $23,789 for the
six months ended June 30, 2020 and 2019, respectively.
Notes
Payable to Officers and Former Officers
For
the three-months ended June 30, 2020 and 2019, $2,817 and $2,561 and for the six-months ended June 30, 2020, $5,633 and $5,094
was charged to interest expense with respect to Dr. Arnold S. Lippa’s notes, respectively.
For
the three-months ended June 30, 2020 and 2019, $4,228 and $3,843 and for the six-months ended June 30, 2020, $8,439 and $7,645
was charged to interest expense with respect to Dr. James S. Manuso’s notes, respectively.
As
of September 30, 2018, Dr. James S. Manuso resigned as executive officer in all capacities and as a member of the Board. All of
the interest expense noted above for the six-months ended June 30, 2020 and 2019, was incurred while Dr. Manuso was no longer
an officer.
Other
Short-Term Notes Payable
Other
short-term notes payable at June 30, 2020 and December 31, 2019 consisted of premium financing agreements with respect to various
insurance policies. At June 30, 2020, a premium financing agreement was payable in the initial amount of $70,762, with interest
at11% per annum, in nine monthly installments of $8,256. In addition, there is a balance of $11,532 of short-term financing of
office and clinical trials insurance premiums that includes a prior period premium financing of $2,317. At June 30, 2020 and December
31, 2019, the aggregate amount of the short-term notes payable was $67,262 and $4,635 respectively.
5.
Settlement and Payment Agreements
On
December 16, 2019, RespireRx and Salamandra, LLC (“Salamandra”) entered into an amendment to the settlement agreement
and release, executed August 21, 2019 (the “Original Settlement Agreement” and as amended, the “Amended Settlement
Agreement”) regarding $202,395 owed by the Company to Salamandra (as reduced by any further payments by the Company to Salamandra,
the “Full Amount”) in connection with an arbitration award previously granted in favor of Salamandra in the Superior
Court of New Jersey. Under the terms of the Original Settlement Agreement, the Company was to pay Salamandra $125,000 on or before
November 30, 2019 in full satisfaction of the Full Amount owed, subject to conditions regarding the Company’s ability to
raise certain dollar amounts of working capital. Under the Amended Settlement Agreement, (i) the Company was to pay and the Company
paid to Salamandra $25,000 on or before December 21, 2019, (ii) upon such payment, Salamandra ceased all collection efforts against
the Company until March 31, 2020 (the “Threshold Date”), and (iii) the Company was to pay to Salamandra $100,000 on
or before the Threshold Date if the Company had at that time raised $600,000 in working capital. Such payments by the Company
would have constituted satisfaction of the Full Amount owed and would have served as consideration for the dismissal of the action
underlying the arbitration award and the mutual releases set forth in the Amended Settlement Agreement. If the Company had raised
less than $600,000 in working capital before the Threshold Date, the Company was to pay to Salamandra an amount equal to 21% of
the working capital amount raised, in which case such payment would have reduced the Full Amount owed on a dollar-for-dollar basis,
and Salamandra would then have been able to seek collection on the remainder of the debt. The Company made the initial payment
of $25,000 in December 2019, but did not make the subsequent required payment on March 31, 2020, nor has any payment been made
during the three-months ended June 30, 2020. The Company has initiated further discussions with the intent of reaching a revised
settlement agreement which cannot be assured.
In
June 2020, the Company made a settlement proposal to a vendor, the terms of which, if accepted by the vendor would supersede a
prior agreement in principle originally reached on September 23, 2019 regarding the payment schedule of undisputed amounts owed
by the Company to the vendor. The current proposal includes, among other things, an extension of time until December 31, 2020
to raise the amounts owed. Neither the original agreement in principle nor the discussion of amendments has resulted in a formal
agreement. The original agreement in principle called for a payment of a minimum of $100,000 on or before November 30, 2019 assuming
the Company had raised at least $600,000 by that date and thereafter called for a payment of $50,000 per month until paid in full.
No payments had been made through June 30, 2020 with respect to the original agreement in principle. The currently proposed settlement
has not yet been accepted and is being reviewed by the vendor and calls for a payment of $100,000 if RespireRx is able to raise
$700,000 by December 31, 2020 with subsequent settlement payments of $50,000 per month with a residual final payment of less than
$50,000 representing the remaining balance. Under the proposal, if RespireRx raises less than $700,000 by December 31, 2020, the
Company may cancel a portion of the amount owed to the vendor by paying at least 21% of the working capital raised which amount
would reduce the amount owed dollar-for-dollar and the vendor would be able to seek collection of the balance.
The
due date of the $100,000 annual amount payable to the University of Illinois that was originally due on December 31, 2019 pursuant
to the 2014 License Agreement (as defined below), was extended to June 30, 2020 and further extended to July 7, 2020 when it was
paid in full (See Note 9. Subsequent Events).
6.
Stockholders’ Deficiency
Reserved
and Unreserved Shares of Common Stock
At
June 30, 2020, RespireRx had 1,000,000,000 shares of common stock authorized and 222,307,381 shares of common stock issued and
outstanding. RespireRx has reserved 11 shares of common stock for conversion of the Series B Preferred Stock, 55,578,263 shares
of common stock for conversion of various convertible notes, 124,514,653 for warrant exercises and 4,188,630 for the exercise
of outstanding options. RespireRx has reserved 63,236 shares of common stock with respect unissued shares available for issuance
from the 2014 Plan and 54,427,342 shares of common stock with respect to unissued shares available for issuance from the 2015
Plan. RespireRx has reserved 6,497 Pier Contingent shares. There are 538,913,987 shares of common stock available for issuance.
The above amounts do not include contractual reserve requirements of certain convertible notes and exercisable warrants in excess
of actual conversion or exercise amounts. RespireRx believes that the common stock available for issuance is adequate to meet
the contractual reserve requirements at all times.
Preferred
Stock
RespireRx
has authorized a total of 5,000,000 shares of preferred stock, par value $0.001 per share. As of June 30, 2020 and December 31,
2019, 1,250,000 shares were designated as 9% Cumulative Convertible 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; and 1,700 shares were designated as Series G 1.5% Convertible Preferred Stock. Accordingly, as
of June 30, 2020 and December 31, 2019, 3,505,800 shares of preferred stock were undesignated and were able to be issued with
such rights and powers as the Board of Directors may designate. On July 13, 2020, RespireRx designated 1,200 shares of Series
H, Voting, Non-participating, Convertible Preferred Stock (“Series H Preferred Stock”) reducing the number of shares
of preferred stock that were undesignated to 3,504,600 as of July 13, 2020 (See Note 9. Subsequent Events).
Series
B Preferred Stock outstanding as of June 30, 2020 and 2019 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 June 30, 2020
and December 31, 2019, the shares of Series B Preferred Stock outstanding are convertible into 11 shares of common stock. RespireRx
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.
Common
Stock
There
were 222,307,381 shares of RespireRx’s Common Stock outstanding as of June 30, 2020. As of March 31, 2020, RespireRx did
not have enough authorized shares to reserve for all conversions of convertible debt as well as common stock purchase options
and warrants exercises. Assuming everything had been reserved, there would have been no shares of RespireRx’s common stock
available for future issuances. On March 21, 2020, the Board of Directors approved an amendment to the Certificate of Incorporation
to increase the authorized shares of common stock from 65,000,000 shares to 1,000,000,000 (one billion) shares subject to approval
by the holders of a majority of voting stock of RespireRx, appropriate notification of all shareholders and subject to the authorized
officers making the appropriate filings with the Secretary of State of the State of Delaware. On March 22, 2020, holders of a
majority of voting stock of RespireRx consented to this increase in writing without a meeting. The amendment to the Certificate
of Incorporation and increase in the number of authorized shares of common stock became effective on April 30, 2020 when RespireRx
filed the amendment with the Secretary of State of Delaware.
Common
Stock Warrants
Information
with respect to the issuance and exercise of common stock purchase warrants in connection with the Convertible Note Payable and
Warrant Purchase Agreement, and Notes Payable to Officers, is provided at Note 4 Notes Payable.
A
summary of warrant activity for the six-months ended June 30, 2020 is presented below.
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (in Years)
|
|
|
Warrants
outstanding at December 31, 2019
|
|
|
2,191,043
|
|
|
$
|
1.87109
|
|
|
|
3.44000
|
|
|
Warrants
issued due to anti-dilution provisions increasing number of originally issued warrants included in December 31, 2019 balance
|
|
|
138,824,795
|
|
|
|
0.00153
|
|
|
|
3.70650
|
|
|
Exercised
|
|
|
(16,501,185
|
)
|
|
|
0.00157
|
|
|
|
-
|
|
|
Warrants
outstanding and exercisable at June 30, 2020
|
|
|
124,514,653
|
|
|
$
|
0.03272
|
|
|
|
3.78506
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at June 30, 2020:
|
Exercise
Price
|
|
|
Warrants
Outstanding (Shares)
|
|
|
Warrants
Exercisable
(Shares)
|
|
|
Expiration
Date
|
|
$
|
0.001485
|
|
|
|
58,922,559
|
|
|
|
58,922,559
|
|
|
October
22, 2024
|
|
$
|
0.001530
|
|
|
|
41,643,423
|
|
|
|
41,643,423
|
|
|
August
19, 2024
|
|
$
|
0.001600
|
|
|
|
22,125,000
|
|
|
|
22,125,000
|
|
|
May
17, 2022
|
|
$
|
1.000000
|
|
|
|
916,217
|
|
|
|
916,217
|
|
|
September
20, 2022
|
|
$
|
1.500000
|
|
|
|
190,000
|
|
|
|
190,000
|
|
|
December
30, 2023
|
|
$
|
1.562000
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December
31, 2021
|
|
$
|
1.575000
|
|
|
|
238,814
|
|
|
|
238,814
|
|
|
April
30, 2023
|
|
$
|
2.750000
|
|
|
|
8,000
|
|
|
|
8000
|
|
|
September
20, 2022
|
|
$
|
4.875000
|
|
|
|
108,594
|
|
|
|
108,594
|
|
|
September
30, 2020
|
|
$
|
6.834800
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September
30, 2020
|
|
$
|
7.930000
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February
28, 2021
|
|
|
|
|
|
|
124,514,653
|
|
|
|
124,514,653
|
|
|
|
Based
on a value of $0.0064 per share on June 30, 2020, there were 122,690,982 exercisable in-the-money common stock warrants as of
June 30, 2020.
A
summary of warrant activity for the six months ended June 30, 2019 is presented below.
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Number
of
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Life
(in Years)
|
|
|
Warrants
outstanding at December 31, 2018
|
|
|
|
1,783,229
|
|
|
$
|
2.20393
|
|
|
|
3.06
|
|
|
Issued
|
|
|
|
152,372
|
|
|
|
1.41101
|
|
|
|
|
|
|
Expired
|
|
|
|
(59,403
|
)
|
|
|
2.65928
|
|
|
|
|
|
|
Warrants
outstanding at June 30, 2019
|
|
|
|
1,876,198
|
|
|
$
|
2.12512
|
|
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at June 30, 2019
|
|
|
|
1,876,198
|
|
|
$
|
2.12512
|
|
|
|
2.79
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at June 30, 2019:
|
Exercise
Price
|
|
|
Warrants
Outstanding (Shares)
|
|
|
Warrants
Exercisable (Shares)
|
|
|
Expiration
Date
|
|
$
|
1.0000
|
|
|
|
916,217
|
|
|
|
916,217
|
|
|
September
20, 2022
|
|
$
|
1.1800
|
|
|
|
42,372
|
|
|
|
42,372
|
|
|
May
17, 2022
|
|
$
|
1.5000
|
|
|
|
190,000
|
|
|
|
190,000
|
|
|
December
30, 2023
|
|
$
|
1.5620
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December
31, 2021
|
|
$
|
1.5750
|
|
|
|
238,814
|
|
|
|
238,814
|
|
|
April
30, 2023
|
|
$
|
2.7500
|
|
|
|
8,000
|
|
|
|
8,000
|
|
|
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
|
|
$
|
6.8348
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September
30, 2020
|
|
$
|
7.9300
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February
28, 2021
|
|
|
|
|
|
|
1,876,198
|
|
|
|
1,876,198
|
|
|
|
Based
on a fair market value of $0.70 per share on June 30, 2019, there was no intrinsic value of exercisable in-the-money common stock
warrants as of June 30, 2019.
Stock
Options
On
March 18, 2014, RespireRx adopted its 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan (the “2014 Plan”).
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 (as amended, the “2015 Plan”).
As of March 31, 2020, there were 8,985,260 shares that may be issued under the 2015 Plan. On May 5, 2020 the Board of Directors
increased the number of shares that may be issued under the 2015 Plan to 58,985,260. On July 31, 2020 the Board of Directors increased
the number of shares that may be issued under the 2015 Plan to 158,985, 260. (See Note 9. Subsequent Events). The Company has
not and does not intend to present the 2015 Plan to stockholders for approval.
Other
than the change in the number of shares available under the 2015 Plan, no other changes were made to the 2015 Plan by these amendments
noted above.
There
were no stock or stock option grants during the three-months and six months ended June 30, 2020 or in the three-months and six-months
ended June 30, 2019.
See
Note 9. Subsequent Events for a description of stock options granted on July 31, 2020.
Information
with respect to the Black-Scholes variables used in connection with the evaluation of the fair value of stock-based compensation
costs and fees is provided at Note 3 Summary of Significant Accounting Policies.
A
summary of stock option activity for the six-months ended June 30, 2020 is presented below.
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining Contractual Life (in Years)
|
|
|
Options
outstanding at December 31, 2019
|
|
|
|
4,287,609
|
|
|
$
|
3.3798
|
|
|
|
4.98
|
|
|
Expired
|
|
|
|
(98,979
|
)
|
|
|
6.6242
|
|
|
|
-
|
|
|
Options
outstanding at June 30, 2020
|
|
|
|
4,188,630
|
|
|
$
|
3.3031
|
|
|
|
4.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at June 30, 2020
|
|
|
|
4,188,630
|
|
|
$
|
3.3031
|
|
|
|
4.59
|
|
The
exercise prices of common stock options outstanding and exercisable were as follows at June 30, 2020:
|
Exercise
Price
|
|
|
Options
Outstanding (Shares)
|
|
|
Options
Exercisable
(Shares)
|
|
|
Expiration
Date
|
|
$
|
0.7000
|
|
|
|
21,677
|
|
|
|
21,677
|
|
|
November
21, 2023
|
|
$
|
1.1200
|
|
|
|
310,388
|
|
|
|
310,388
|
|
|
April
5, 2023
|
|
$
|
1.2500
|
|
|
|
16,762
|
|
|
|
16,762
|
|
|
December
7, 2022
|
|
$
|
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
|
|
$
|
5.7500
|
|
|
|
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
|
|
$
|
13.9750
|
|
|
|
3,385
|
|
|
|
3,385
|
|
|
March
14, 2024
|
|
$
|
15.9250
|
|
|
|
2,462
|
|
|
|
2,462
|
|
|
February
28, 2024
|
|
$
|
19.5000
|
|
|
|
9,487
|
|
|
|
9,487
|
|
|
July
17, 2022
|
|
$
|
19.5000
|
|
|
|
6,410
|
|
|
|
6,410
|
|
|
August
10, 2022
|
|
|
|
|
|
|
4,188,630
|
|
|
|
4,188,630
|
|
|
|
There
was no deferred compensation expense for the outstanding and unvested stock options at June 30, 2020.
Based
on a fair value of $0.0064 per share on June 30, 2020, there were no exercisable in-the-money common stock options as of June
30, 2020.
7.
Related Party Transactions
Dr.
Arnold S. Lippa and Jeff E. Margolis, officers and directors of RespireRx since March 22, 2013, have indirect ownership and managing
membership interests 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.
A
description of advances and notes payable to officers is provided at Note 4. Notes Payable.
8.
Commitments and Contingencies
Pending
or Threatened Legal Action and Claims
On
February 21, 2020, Sharp Clinical Services, Inc., a vendor of RespireRx, filed a complaint against RespireRx in the Superior Court
of New Jersey Law Division, Bergen County related to a December 16, 2019 demand for payment of past due invoices inclusive of
late fees totaling $103,890 of which $3,631 relates to late fees, seeking $100,259 plus 1.5% interest per month on outstanding
unpaid invoices. Amid settlement discussions, the vendor stated on March 13, 2020 its intent to proceed to a default judgment
against the Company, and the Company stated on March 14, 2020 its intent to continue settlement discussions. On May 29, 2020,
a default was entered against RespireRx. As of June 30, 2020, the Company had recorded accounts payable of $99,959 to such vendor,
an amount considered by the Company to be reasonable given the settlement discussions that were ongoing at that time. On August
18, 2020, RespireRx communicated with Sharp Clinical Services, Inc. in an attempt to continue settlement discussions.
Related
to the Salamandra matter described in Note 5. Settlements and Payments Agreements, and preceding the settlement discussions, by
letter dated February 5, 2016, the Company received a demand from a law firm representing Salamandra 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 June 30, 2020 and December 31, 2019, including accrued interest at 4.5% annually
from February 26, 2018, the date of the judgment, through June 30, 2020, totalling $20,736.
By
letter dated May 18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of the
University of Alberta, which purported to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 between
the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for termination
and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting to be attended
by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute. In February 2019,
the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license agreement and the
form of a new license agreement. However, the Company has re-evaluated that portion of its AMPAkine program and has decided not
to enter into a new agreement at this time. The lack of entry into a new agreement at this time does not affect the Company’s
other AMPAkine programs and permits the Company to reallocate resources to those programs, including, but not limited to ADHD,
SCI, FXS and others.
By
email 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 payable for investment banking services rendered.
Such amount has been included in accrued expenses at June 30, 2020 and December 31, 2019.
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 as of June 30, 2020 and
December 31, 2019 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. See Note 5. Settlement
and Payment Agreements for additional items and details.
Significant
Agreements and Contracts
Consulting
Agreement
Richard
Purcell, the Company’s Senior Vice President of Research and Development since October 15, 2014, 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 that have been
issued to Mr. Purcell is provided at Note 6. Stockholders’ Deficiency. Cash compensation expense pursuant to this agreement
totalled $37,500 and $75,000 for the three-months and six-months ended June 30, 2020 and 2019, which is included in research and
development expenses in the Company’s consolidated statements of operations for such periods.
Employment
Agreements
Effective
on May 6, 2020, Timothy Jones was appointed as RespireRx’s President and Chief Executive Officer and entered into an employment
agreement as of that date. In addition, Mr. Jones has continued to serve as a member of the Company’s Board of Directors,
a position he has held since January 28, 2020. On November 19, 2019, Mr. Jones became an advisor to the Company’s Board
of Directors, a position he held until January 27, 2020. Under the employment agreement, a provisional period of “at will”
employment was to expire on July 31, 2020. Neither party terminated the employment agreement prior to July 31, 2020, and on that
date all rights and obligations under the agreement were deemed effective, including with respect to the certain economic obligations
of the Company upon termination of Mr. Jones’ employment. The Board of Directors and Mr. Jones agreed to continue the employment
agreement after the initial provisional period. The employment agreement has a termination date of September 30, 2023 and will
automatically extend annually, 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.
On July 31, 2020, the employment agreement was amended. The terms of the amended agreement call for a base salary through September
30, 2020 of $300,000 per year which may remain accrued but unpaid at the discretion of the Board of Directors until such time
as at least $2,500,000 has been raised. If $10,000,000 or more has been raised by September 30, 2021, Mr. Jones’ base salary
would be increased to $375,000 per year. Otherwise, it would remain at $300,000 annually unless increased pursuant to the employment
agreement or by the Board of Directors. Mr. Jones’ base salary is subject to cost of living increases. Since the expiration
of the provisional period, Mr. Jones is eligible for a guaranteed bonus of $200,000 on October 31,2020, $200,000 on March 31,
2021 and $150,000 each six months thereafter on each March 31st and September 30th thereafter, unless the agreement
is earlier terminated. At the end of the provisional period, pursuant to the employment agreement, Mr. Jones was granted an option
grant for the purchase of 1,000,000 shares of the Company’s common stock upon the expiration of the provisional period.
In addition, until such time as the Company establishes comparable benefits, Mr. Jones is entitled to $1,200 per month on a tax
equalized basis for health insurance and $1,000 per month on a tax equalized basis for term life insurance plus a disability policy.
Mr. Jones is entitled to be reimbursed for business expenses. Mr. Jones would be entitled to a $12,000 tax equalized annual automobile
allowance after the Company has raised $10,000,000. In addition, on July 31, 2020, the Board of Directors granted Mr. Jones a
discretionary bonus that was a grant of an option to purchase 16,000,000 shares of common stock expiring on July 31, 2025 at an
exercise price equal to the closing price of the Company’s common stock on July 31, 2020 of $0.0072, 25% of which vested
immediately and 25% of which will vest on each of September 30, 2020, December 31, 2020 and March 31, 2021. Upon commencement
of Mr. Jones’ employment agreement on May 6, 2020, Mr. Jones was no longer eligible to receive fees for his participation
as a member of the Board of Directors. From January 1, 2020 to January 27, 2020, while Mr. Jones was an advisor to the Company’s
Board of Directors, the Company accrued $3,484 for Mr. Jones’ advisory fees. From January 28, 2020 to May 5, 2020, the Company
accrued $16,734 of fees for Mr. Jones’ participation as a member of the Board of Directors and $0 thereafter. From May 6,
2020 to June 30, 2020, the Company accrued $49,525 for Mr. Jones’ compensation and related benefits. These amounts are included
in accounts payable and accrued expenses and in accrued compensation in the Company’s Condensed Consolidated Balance Sheet
as of June 30, 2020.
Effective
May 6, 2020, with the appointment of Timothy Jones as RespireRx’s President and Chief Executive Officer, Dr. Lippa resigned
the interim officer positions of Interim Chief Executive Officer and Interim President, positions that Dr. Lippa has assumed on
October 12, 2018 after the resignation of Dr. James Manuso on September 30, 2018. Dr. Lippa continues to serve as RespireRx’s
Executive Chairman and as a member of the Board of Directors as well as the Company’s Chief Scientific Officer. Dr. Lippa
has been granted stock options on several occasions and is eligible to receive additional awards under RespireRx’s 2014
Plan and 2015 Plan at the discretion of the Board of Directors. Dr. Lippa did not receive any option to purchase shares of common
stock during the three-month and six-month periods ending June 30, 2020. Additional information with respect to the stock options
granted to Dr. Lippa is provided at Note 6 Stockholders’ Deficiency. Dr. Lippa is also entitled to receive, until such time
as RespireRx 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. Cash compensation inclusive
of employee benefits accrued pursuant to this agreement totalled $84,900 and $169,800 for each of the three-months and six-months
ended June 30, 2020 and 2019, respectively. Dr. Lippa’s cash compensation is included in accrued compensation and related
expenses in the Company’s condensed consolidated balance sheet at June 30, 2020 and in research and development expenses
in the Company’s condensed consolidated statement of operations for the three-months and six-months ended June 30, 2020
and 2019. Dr. Lippa does not receive any additional compensation for serving as Executive Chairman and on the Board of Directors.
On July 13, 2020, Dr. Lippa forgave $600,000 of accrued compensation and benefits and in exchange received 600 shares of Series
H Preferred Stock (See Note 9. Subsequent Events).
Jeff
E. Margolis currently serves as the Company’s Senior Vice President, Chief Financial Officer, Treasurer and Secretary. On
August 18, 2015, the Company entered into an employment agreement with Mr. Margolis in his role at that time as Vice President,
Secretary and Treasurer. Pursuant to the agreement, which was for an initial term through September 30, 2016 and later amended
(and which automatically extended on September 30, 2016, 2017, 2018 and 2019 and will automatically extend annually, 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 receives an annual base
salary of $300,000, and is eligible to receive performance-based annual bonus awards 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. Additionally,
Mr. Margolis has been granted stock options on several occasions and is eligible to receive additional awards under the Company’s
Plans at the discretion of the Board of Directors. Mr. Margolis 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, which $1,000 per month obligation has been waived by Mr. Margolis until Mr. Margolis notifies the
Company of the rescission of the waiver. Mr. Margolis is also entitled to be reimbursed for business expenses. Additional information
with respect to the stock options granted to Mr. Margolis is provided at Note 6 Stockholders’ Deficiency. Recurring cash
compensation accrued pursuant to this amended agreement totalled $80,400 and $169,800 for the three-months and six-months ended
June 30, 2020 and 2019, respectively, Mr. Margolis’ cash compensation is included in accrued compensation and related expenses
in the Company’s condensed consolidated balance sheet as of June 30, 2020 and December 31, 2019, and in general and administrative
expenses in the Company’s condensed consolidated statement of operations. Mr. Margolis does not receive any additional compensation
for serving on the Company’s Board of Directors. On July 13, 2020, Mr. Margolis forgave $500,000 of accrued compensation
and benefits and in exchange received 500 shares of Series H Preferred Stock (See Note 9. Subsequent Events).
The
employment agreements between the Company and each of Dr. Lippa and Mr. Margolis (prior to the 2017 amendment), 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. Dr. Lippa and Mr. Margolis (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.
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 2014 License Agreement granted the Company (i) exclusive rights to several issued and pending patents in several
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 that commenced 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 obligation of $100,000 due on December 31, 2019, was extended
to June 30, 2020 and further extended to July 7, 2020 when the obligation was paid (See Note 9. Subsequent Events). One-time milestone
payments may become due based upon the achievement of certain development milestones. $350,000 will be due within five days after
the dosing of the first patient is a Phase III human clinical trial anywhere in the world. $500,000 will be due within five days
after the first NDA filing with FDA or a foreign equivalent. $1,000,000 will be due within twelve months of the first commercial
sale. One-time royalty payments may also become due and payable. Annual royalty payments may also become due. In the year after
the first application for market approval is submitted to the FDA or a foreign equivalent 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 or a foreign
equivalent 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.
During
each of the three-months and six-months ended June 30, 2020 and 2019, the Company recorded charges to operations of $25,000, respectively,
with respect to its 2020 and 2019 minimum annual royalty obligation, which is included in research and development expenses in
the Company’s condensed consolidated statement of operations for the three-months and six-months ended June 30, 2020 and
2019, respectively.
UWM
Research Foundation Patent License Agreement
On
August 1, 2020, RespireRx exercised its option pursuant to its option agreement dated March 2, 2020, between RespireRx and UWM
Research Foundation, an affiliate of the University of Wisconsin-Milwaukee (“UWMRF”). Upon exercise RespireRx and
UWMRF executed the UWMRF Patent License Agreement effective August 1, 2020 pursuant to which RespireRx licensed the identified
intellectual property.
Under
the UWMRF Patent License Agreement, the Company has an exclusive license to commercialize GABAkine products based on UWMRF’s
rights in certain patents and patent applications, and a non-exclusive license to commercialize products based on UWMRF’s
rights in certain technology that is not the subject of the patents or patent applications. UWMRF maintains the right to use,
and, upon the approval of the Company, to license, these patent and technology rights for any non-commercial purpose, including
research and education. The UWMRF Patent License Agreement expires upon the later of the expiration of the Company’s payment
obligations to UWMRF or the expiration of the last remaining licensed patent granted thereunder, subject to early termination
upon the occurrence of certain events. The License Agreement also contains a standard indemnification provision in favor of UWMRF
and confidentiality provisions obligating both parties. For additional details, see Note 9. Subsequent Events - Exercise of
Option pursuant to Option Agreement with UWMRF and Commencement of UWMRF Patent License Agreement.
Noramco
Inc./Purisys, LLC - Dronabinol Development and Supply Agreement
On
September 4, 2018, RespireRx entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Noramco subsequently assigned this agreement (as assigned, the “Purisys Agreement”)
to its subsidiary, Purisys, LLC (“Purisys”). Under the terms of the Purisys Agreement, Purisys agreed to (i) provide
all of the active pharmaceutical ingredient (“API”) estimated to be needed for the clinical development process for
both the first- and second-generation products (each a “Product” and collectively, the “Products”), three
validation batches for New Drug Application (“NDA”) filing(s) and adequate supply for the initial inventory stocking
for the wholesale and retail channels, subject to certain limitations, (ii) maintain or file valid drug master files (“DMFs”)
with the FDA or any other regulatory authority and provide the Company with access or a right of reference letter entitling the
Company to make continuing reference to the DMFs during the term of the agreement in connection with any regulatory filings made
with the FDA by the Company, (iii) participate on a development committee, and (iv) make available its regulatory consultants,
collaborate with any regulatory consulting firms engaged by the Company and participate in all FDA or Drug Enforcement Agency
(“DEA”) meetings as appropriate and as related to the API.
In
consideration for these supplies and services, the Company has agreed to purchase exclusively from Purisys during the commercialization
phase all API for its Products as defined in the Development and Supply Agreement at a pre-determined price subject to certain
producer price adjustments and agreed to Purisys’s participation in the economic success of the commercialized Product or
Products up to the earlier of the achievement of a maximum dollar amount or the expiration of a period of time.
Transactions
with Bausch Health Companies Inc.
Beginning
in March 2010, the Company entered into a series of asset purchase and license agreements with Biovail Laboratories International
SRL, which after its merger with Valeant Pharmaceuticals International, Inc. was later renamed Bausch Health Companies Inc. (“Bausch”).
In
March 2011, the Company entered into a new agreement with Bausch to re-acquire the AMPAkine compounds, patents and rights that
Bausch 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 NDA submissions and approval milestones pertaining
to an intravenous dosage form of the AMPAkine compounds for respiratory depression, a therapeutic area not currently pursued by
the Company. Bausch 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 these compounds for respiratory depression.
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
June 30, 2020, aggregating $2,289,770. License agreement amounts included in the 2020 column represents amounts contractually
due from July 1, 2020 through December 31, 2020 (six months) and in each of the subsequent years, represents the full year. Employment
agreement amounts included in the 2020 column represent amounts contractually due from July 1, 2020 through September 30, 2020
(three months) and in one case through September 30, 2023 when such contracts expire unless extended pursuant to the terms of
the contracts.
|
|
|
|
|
|
Payments
Due By Year
|
|
|
|
|
Total
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
License
agreements
|
|
$
|
510,370
|
|
|
$
|
50,000
|
|
|
$
|
115,092
|
|
|
$
|
115,093
|
|
|
$
|
130,185
|
|
|
$
|
100,000
|
|
|
Employment
agreements (1)
|
|
|
1,779,400
|
|
|
|
450,200
|
|
|
|
689,600
|
|
|
|
639,600
|
|
|
|
554,700
|
|
|
|
-
|
|
|
Total
|
|
$
|
2,289,770
|
|
|
$
|
500,200
|
|
|
$
|
739,600
|
|
|
$
|
654,700
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
(1)
The payment of amounts related to Dr. Lippa and Mr. Margolis have been deferred indefinitely, as described above at “Employment
Agreements.” The payment amounts to Mr. Jones have been deferred pending the Company achieving certain financing thresholds
as described above at “Employment Agreements.” The 2020 amounts include three-months of employment agreement obligations
for Dr. Lippa, Mr. Jones and Mr. Margolis as their employment contracts renewed on September 30, 2019 and the 2020 obligations
include the three months of obligations through September 30, 2020. In the case of Mr. Jones, the obligations extend through the
first renewal date of his employment contract which is September 30, 2023. Also, in the case of Mr. Jones, guaranteed bonus obligations
are included in the periods in which such amounts are due.
9.
Subsequent Events
Convertible
Notes
FirstFire
Global Opportunties Fund LLC
On
July 2, 2020, RespireRx and FirstFire Global Opportunities Fund LLC (“FF”) entered into a Securities Purchase Agreement
(the “FF SPA”) by which FF provided a sum of $125,000 to the Company, in return for a convertible promissory note
with a face amount of $137,500 (which difference in value as compared to the consideration is due to an original issue discount
of $12,500), a common stock purchase warrant for 6,875,000 shares of the Company’s common stock (the “FF Warrant”),
and the Confession of Judgment (as defined below), among other agreements and obligations.
The
note obligates the Company to pay interest at a rate of 10% per annum on any unpaid principal since July 2, 2020, and to make
five monthly amortization payments in the amount of $30,250 each, with the first such payment due on December 2, 2020, and the
final such payment, along with any unpaid principal and any accrued and unpaid interest and other fees, due on April 2, 2021.
Any amount of principal or interest that is not paid when due bears interest at the rate of the lesser of 24% and the maximum
amount permitted by law, from the due date to the date such amount is paid.
FF
has the right, at any time, to convert any outstanding and unpaid amount of the note into shares of the Company’s common
stock or securities convertible into the Company’s common stock, provided that such conversion would not result in FF beneficially
owning more than 4.99% of the Company’s then outstanding shares of common stock. Subject to certain limitations and adjustments
as described in the note, FF may convert at a per share conversion price equal to $0.02, provided that upon any event of default
(as defined in the note), the conversion price will equal the lower of (i) the fixed conversion price, (ii) discount to market
based upon subsequent financings with other investors, or (iii) 60% multiplied by the lowest traded price of the common stock
of the Company during the twenty-one consecutive trading day (as defined in the note) period immediately preceding the date of
such conversion. Upon such conversion, all rights with respect to the portion of the note being so converted terminate, except
for the right to receive the Company’s common stock or other securities, cash or other assets as provided in the note due
upon such conversion.
The
Company may, with prior written notice to FF, prepay the outstanding principal amount under the note during the initial 180 day
period after the Effective Date by making a payment to FF of an amount in cash equal to a certain percentage of the outstanding
principal, interest, default interest and other amounts owed. Such percentage varies from 105% to 115% depending on the period
in which the prepayment occurs, as set forth in the note.
The
FF SPA provides FF with certain participation rights in any subsequent offering of debt or equity. Under the FF SPA, the Company
may not enter into an offering of its securities with terms that would benefit an investor more than FF is benefited under the
FF SPA and the agreements ancillary thereto, unless the Company offers FF those same terms. The FF SPA also grants FF certain
registration rights.
The
FF Warrant is a common stock purchase warrant to purchase 6,875,000 shares of the Company’s common stock, for value received
in connection with the issuance of the note, from the date of issuance of the FF Warrant until September 30, 2023, at an exercise
price of $0.007 (subject to adjustment as provided therein) per share of common stock.
Additionally,
the Company provided a confession of judgment (the “Confession of Judgment”) in favor of FF for the amount of the
note plus fees and costs, to be filed pursuant to the terms and conditions of the FF SPA and the note.
The
note and the shares of the Company’s common stock issuable upon its conversion were offered and sold to FF in reliance upon
specific exemptions from the registration requirements of United States federal and state securities laws, which include Section
4(a)(2) of the 1933 Act, and Rule 506(b) promulgated by the SEC under the 1933 Act. Pursuant to these exemptions, FF represented
to the Company under the FF SPA, among other representations, that it was an “accredited investor” as that term is
defined in Rule 501(a) of Regulation D under the 1933 Act.
EMA
Financial, LLC
On
July 30, 2020, the Company and EMA Financial, LLC (“EMA”) entered into a securities purchase Agreement (the “EMA
SPA”) by which EMA provided a sum of $68,250 to the Company, in return for a convertible note with a face amount of $75,000,
and a common stock purchase warrant (the “EMA Warrant”) for 3,750,000 shares of the Company’s common stock.
The
note obligates the Company to pay by October 30, 2021 a principal amount of $75,000 together with interest at a rate equal to
10% per annum, which principal exceeds the consideration by the amount of an original issue discount of $6,750. Any amount of
principal or interest that is not paid by the maturity date would bear interest at the rate of 24% from the maturity date to the
date such amount is paid.
EMA
has the right, in its discretion, at any time, to convert any outstanding and unpaid amount of the note into shares of common
stock, provided that such conversion would not result in EMA beneficially owning more than 4.99% of the Company’s then outstanding
common stock. In the absence of an event of default (as defined in the note), EMA may convert at a per share conversion price
equal to $0.02, subject to a retroactive downward adjustment if the lowest traded price on each of the three consecutive trading
days following such conversion is lower than $0.02. Upon an event of default, the conversion price is to be adjusted downward
based on a discount to market with respect to subsequent financings or a percentage of the lowest traded price during the twenty-one
day period prior to the conversion, if lower than $0.02. Upon such conversion, all rights with respect to the portion of the note
being so converted terminate, except for the right to receive common stock or other securities, cash or other assets as provided
in the note due upon such conversion.
The
Company may, with prior written notice to EMA, prepay the outstanding principal amount under the Note during the initial 180 day
period after July 30, 2020 by making a payment to EMA of an amount in cash equal to a certain percentage of the outstanding principal,
interest, default interest and other amounts owed. Such percentage varies from 110% to 115% depending on the period in which the
prepayment occurs, as set forth in the note.
If,
prior to the repayment or conversion of the note, the Company consummates a registered, qualified or unregistered primary offering
of its securities for capital raising purposes with aggregate net proceeds in excess of $2,500,000, EMA will have the right, in
its discretion, to demand repayment in full of any outstanding principal, interest (including default interest) under the note
as of the closing date of such offering.
The
EMA SPA includes, among other things: (1) an automatic adjustment to the terms of the EMA SPA and related documents to the terms
of a future financing if those terms are more beneficial to an investor than the terms of the EMA SPA and related documents are
to EMA, subject to limited exceptions; and (2) certain registration rights. In addition, any subsidiary to which the Company transfers
a material amount of assets must guarantee certain obligations of the Company under the note.
The
EMA Warrant is a common stock purchase warrant to purchase 3,750,000 shares of common stock, for value received in connection
with the issuance of the note, from the date of issuance of the EMA Warrant until September 30, 2023, at an exercise price of
$0.007 (subject to adjustment as provided therein) per share of common stock.
The
note and the shares of common stock issuable upon conversion thereof are offered and sold to EMA in reliance upon specific exemptions
from the registration requirements of United States federal and state securities laws, which include Section 4(a)(2) of the 1933
Act, and Rule 506 of Regulation D promulgated thereunder. Pursuant to these exemptions, EMA represented to the Company under the
EMA SPA, among other representations, that it was an “accredited investor” as that term is defined in Rule 501(a)
of Regulation D under the 1933 Act.
2014
License Agreement Extension of Time to Meet December 31, 2019 Payment Obligation
RespireRx
received an extension of time to meet the $100,000 per year payment obligation that was originally due on December 31, 2019, until
July 7, 2020 when the payment obligation was met by RespireRx. The next annual payment obligation due with respect to the 2014
License Agreement is due on December 31, 2020. See Note 8. Significant Agreements and Contracts – University of Illinois
2014 Exclusive License Agreement.
Compensation
Forgiveness by Arnold S. Lippa and Jeff Margolis and Related Issuance of Series H Preferred Stock.
On
July 13, 2020, RespireRx entered into two Exchange Agreements (each an “Exchange Agreement” and collectively, the
“Exchange Agreements”) with Mr. Margolis, and Dr. Lippa (each an “Employee” and collectively, the “Employees”).
Pursuant
to the terms of the Exchange Agreements, each Employee exchanged his right to receive certain accrued compensation from the Company
in exchange for shares of Series H 2% Voting, Non-Participating, Convertible Preferred Stock (“Series H Preferred Stock”)
of the Company. Mr. Margolis exchanged his right to receive $500,000 of accrued compensation for 500 shares of the Series H Preferred
Stock, and Dr. Lippa exchanged his right to receive $600,000 of accrued compensation for 600 shares of the Series H Preferred
Stock. The Series H Preferred Stock is convertible into units consisting of one share of common stock of the Company and a warrant
exercisable into one share of common stock of the Company (such warrant having an initial exercise price of $0.007 per share).
The
agreement to accept the Employees’ offers to forgive compensation and to enter into Exchange Agreements was approved by
disinterested members of the Company’s Board of Directors; Mr. Margolis and Dr. Lippa recused themselves from voting. The
Company’s entry into the Exchange Agreements and resulting forgiveness of compensation reduced the accrued compensation
liabilities of the Company by $1,100,000.
Also,
on July 13, 2020, the Company filed a Certificate of Designation, Preferences, Rights and Limitations (the “Certificate
of Designation”) of its Series H Preferred Stock with the Secretary of State of the State of Delaware to amend the Company’s
certificate of incorporation. The filing of the Certificate of Designation was approved by the Company’s Board of Directors.
The Certificate of Designation sets forth the preferences, rights and limitations of the Series H Preferred Stock.
Entry
into Equity Purchase Agreement
On
July 28, 2020, RespireRx entered into an equity purchase agreement (the “EPA”) and a registration rights agreement
(the “Registration Rights Agreement”) with White Lion Capital, LLC (the “Investor”) pursuant to which
the Investor agreed to invest up to $2,000,000 to purchase the Company’s common stock at a purchase price of 85% of the
lowest daily volume weighted average price of the common stock for the five trading days prior to a given closing date related
to such purchase. Additionally, RespireRx issued to the Investor a convertible note (the “Commitment Note”) with a
face amount of $25,000.
The
Registration Rights Agreement was entered into as an inducement to the Investor to execute and deliver the EPA, whereby RespireRx
agreed to provide certain registration rights under the 1933 Act with respect to the shares of common stock issuable to the Investor
pursuant to the EPA. The EPA terminates on the earlier of (i) June 30, 2021, (ii) the date on which the Investor has purchased
$2,000,000 of the Company’s common stock, (iii) the date on which the registration statement agreed to in the Registration
Rights Agreement is no longer in effect, (iv) upon Investor’s material breach of the EPA, (v) in the event a voluntary or
involuntary bankruptcy petition is filed with respect to RespireRx, or (vi) if a custodian is appointed for RespireRx for all
or substantially all of its property or RespireRx makes a general assignment for the benefit of its creditors.
The
Commitment Note was issued in connection with the execution of the EPA and pursuant to the terms thereof, and obligates RespireRx
to pay by July 28, 2021 a principal amount of $25,000, together with a guaranteed interest payment of $2,000 representing an 8%
per annum interest rate applied regardless of any payments or prepayments other than payments made by conversion of the Commitment
Note. Upon an event of default, any amount of outstanding principal or interest would bear interest at the lower of 18% or the
highest rate permitted by law.
The
Investor has the right, at any time after the first 180 days, to convert any outstanding and unpaid amount (including accrued
interest and other fees) into shares of common stock, provided that such conversion would not result in the Investor beneficially
owning more than 9.99% of RespireRx’s then outstanding common stock. Unless an event of default has occurred, the Investor
may convert at a per share conversion price equal to $0.02. Upon such conversion, all rights with respect to the portion of the
Commitment Note being so converted terminate, except for the right to receive common stock.
The
Investor also has the right, at any time the Commitment Note is outstanding, to apply any outstanding principal or interest as
consideration for any equity, equity-linked and/or debt securities offered by RespireRx in any public offering or private placement,
subject to the terms of the Commitment Note.
RespireRx
may, with prior written notice to the Investor, prepay the entire outstanding principal amount under the Commitment Note at any
time by making a payment to the Investor of an amount in cash equal to 110% of the outstanding principal, guaranteed interest
amount, and any default interest or other amounts owed.
The
shares of common stock to be issued and sold to the Investor pursuant to the EPA, or issuable upon conversion of the Commitment
Note, and the Commitment Note are issued in reliance upon specific exemptions from the registration requirements of United States
federal and state securities laws, which include Section 4(a)(2) of the 1933 Act, and Rule 506 of Regulation D promulgated thereunder.
Pursuant to these exemptions, the Investor represented to the Company under the EPA, among other representations, that it was
an “accredited investor” as that term is defined in Rule 501(a) of Regulation D under the 1933 Act.
Approval
of Amendment of the Amended and Restated 2015 Stock and Stock Option Plan
On
July 31, 2020, the Board of Directors amended the 2015 Plan to increase the shares issuable under the 2015 Plan by 100,000,000,
from 58,985,260 shares to 158,985,260. Other than the change in the number of shares available under the 2015 Plan, no other changes
were made to the 2015 Plan by this amendment. See Note 6. Stockholders’ Deficiency – Stock Options.
Stock
options granted to Executive Officers and Others
On
July 31, 2020, the Board of Directors of the Company granted non-qualified options to two executive officers of the Company.
RespireRx
granted a non-qualified stock option to Mr. Jones to purchase 16,000,000 shares of common stock of the Company. The options vested
or will vest, as applicable, in four installments: 25% on issuance, 25% on September 30, 2020, 25% on December 31, 2020, and 25%
on March 31, 2021. The options will expire on July 31, 2025. The exercise price of the options is the closing per share market
price of shares of common stock of RespireRx as of the date of issuance, which was $0.0072 per share. The option contains a cashless
exercise provision.
RespireRx
granted non-qualified options to Richard Purcell to purchase 5,000,000 shares of common stock of the Company. The options vested
or will vest, as applicable, in four installments: 25% on issuance, 25% on September 30, 2020, 25% on December 31, 2020, and 25%
on March 31, 2020. The options will expire on July 31, 2025. The exercise price of the options is the closing per share market
price of shares of Common Stock of the Company as of the date of issuance, which was $0.0072 per share. The option contains a
cashless exercise provision.
On
July 31, 2020, the Board of Directors of the Company granted a non-qualified option exercisable into 7,500,000 shares of common
stock of the Company to Kathryn MacFarlane, a member of the Board of Directors and additional non-qualified options exercisable
into 21,000,000 shares of common stock of the Company in the aggregate to vendors, or assignees of vendors, in each case on either
a discretionary basis or for services rendered. The options vested on issuance and will expire on July 31, 2025. The exercise
price of the options is the closing per share market price of shares of common stock of RespireRx as of the date of issuance,
which was $0.0072 per share. These options contain a cashless exercise provision.
Amendment
to Timothy Jones Employment Contract and Extension Beyond Provisional Period
On
July 31, 2020, the employment agreement of Mr. Jones was amended to (i) decrease the threshold financing amount above which the
Board of Directors may exercise its discretion to withhold payment to Mr. Jones of his salary and bonus and (ii) adjust bonus
amounts paid without adjusting the aggregate dollar amount of these bonus amounts.
On
that same date, pursuant to employment agreement, (i) Mr. Jones’s employment with the Company was no longer considered “at
will” and all rights and obligations set forth in the Employment Agreement were deemed effective as of that date and (ii)
Mr. Jones was granted options to purchase 1,000,000 shares of common stock of RespireRx.
See
“Note 8. Significant Agreements and Contracts—Employment Agreements.” Also, see See Note 8. Commitments
and Contingencies – Significant Agreements and Contracts – Employment Agreements to our condensed consolidated
financial statements at March 31, 2020 for more information on the employment agreement of Mr. Jones.
Exercise
of Option pursuant to Option Agreement with UWMRF and Commencement of UWMRF Patent License Agreement.
On
August 1, 2020, RespireRx exercised its option pursuant to its option agreement dated March 2, 2020, between RespireRx and UWM
Research Foundation, an affiliate of the University of Wisconsin-Milwaukee (“UWMRF”). Upon exercise RespireRx and
UWMRF executed the UWMRF Patent License Agreement effective August 1, 2020 pursuant to which RespireRx licensed the identified
intellectual property. Under the terms of the exclusive, royalty bearing UWMRF Patent License Agreement, RespireRx licensed from
UWMRF, the Licensed Subject Matter which includes the patent rights, technology rights and improvements on a worldwide basis.
RespireRx is responsible to pay UWMRF 25% of past patent costs twelve months after the effective date of the UWMRF Patent License
Agreement and 25% twenty-four months after the effective and the balance of past patent costs thirty-six months after the effective
date. As of January 14, 2020, such past patent costs totaled $60,370. RespireRx is obligated to pay annual license maintenance
fees that very from year-to-year from the second anniversary date through the fifth anniversary date and the amount due on the
fifth anniversary date is due each anniversary date thereafter. Additionally, RespireRx is obligated to pay UWMRF one-time milestones
(i) upon the dosing of the first patient is a Phase II clinical trial, (ii) upon the dosing of the first patient in a Phase III
clinical trial and (iii) upon approval by the FDA” of a NDA. RespireRx is also obligated to pay annual royalties on net
sales of patented products, and other products as described and defined in the UWMRF Patent License Agreement, subject to reduction
due to royalty stacking provisions. The royalty percentages are also subject to annual minimum amounts after first commercial
sale of a licensed product of which annual minimums increase in two-year increments until they reach a fixed amount in
year six and thereafter. UWMRF was granted stock appreciation rights providing UWMRF with the right to receive an amount equal
to 4.9% of the consideration received upon the sale or assignment of one or more of the neuromodulator programs above $1 per program.
The Company must provide UWMRF with an annual development plan by September 30, 2021 and each September 30th thereafter.
The UWMRF Patent License Agreement will expand the Company’s neuromodulator platform which has historically included the
Company’s AMPAkine program and now includes a GABAA program as well. That platform, as expanded, is now called
EndeavourRx.
Conversions
of Certain Convertible Notes
The
table below summarizes the conversions of several convertible notes after June 30, 2020.
|
|
|
Date
|
|
|
Principal
|
|
|
|
Interest
|
|
|
|
|
|
|
|
Total
|
|
|
|
No.
Shares
|
|
|
|
|
2020
|
|
|
converted
|
|
|
|
converted
|
|
|
|
Costs
|
|
|
|
converted
|
|
|
|
issued
|
|
|
Convertible
note issued in November 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
1
|
|
$
|
20,500
|
|
|
$
|
1,348
|
|
|
$
|
-
|
|
|
$
|
21,848
|
|
|
|
9,103,313
|
|
|
|
|
July
7
|
|
$
|
10,000
|
|
|
$
|
674
|
|
|
|
-
|
|
|
$
|
10,674
|
|
|
|
4,447,488
|
|
|
Total
|
|
|
|
$
|
30,500
|
|
|
$
|
2,022
|
|
|
$
|
-
|
|
|
$
|
32,522
|
|
|
|
13,550,801
|
|
Exercises
of Certain Warrants on a Cashless Basis
The
table below summarizes the exercise of warrants after June 30, 2020.
|
Warrant
exercises
|
|
Date
2020
|
|
Number
of warrants
exercised on a cashless basis
|
|
|
Number
of shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
Associated With August 2019 Convertible Note
|
|
July
1
|
|
|
10,063,627
|
|
|
|
9,490,000
|
|
|
|
|
July
7
|
|
|
10,604,454
|
|
|
|
10,000,000
|
|
|
|
|
July
10
|
|
|
10,604,454
|
|
|
|
10,000,000
|
|
|
|
|
July
23
|
|
|
2,997,219
|
|
|
|
2,826,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
Associated With October 2019 Convertible Note
|
|
July
31
|
|
|
13,300,000
|
|
|
|
12,641,650
|
|
|
|
|
August
7
|
|
|
14,000,000
|
|
|
|
13,307,000
|
|
|
|
|
August
12
|
|
|
14,000,000
|
|
|
|
13,307,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
75,569,754
|
|
|
|
71,572,511
|
|
Reimbursement
of Advances made by Officers to the Company
Advances
to the Company, included in Notes payable to officers in the Company’s condensed consolidated balance sheet as of June 30,
2020, made by Jeff E. Margolis, were repaid, in part, such repayment being $4,000.
115,000,000
Shares of Common Stock
RespireRx
Pharmaceuticals Inc.
PROSPECTUS
October
28, 2020