NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2016 and 2015
1.
Organization and Basis of Presentation
RespireRx
Pharmaceuticals Inc. (“RespireRx”) was formed in 1987 under the name Cortex Pharmaceuticals, Inc. to engage in the
discovery, development and commercialization of innovative pharmaceuticals for the treatment of neurological and psychiatric disorders.
On December 16, 2015, RespireRx filed a Certificate of Amendment to its Second Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware to amend its Second Restated Certificate of Incorporation to change its name from
Cortex Pharmaceuticals, Inc. to RespireRx Pharmaceuticals Inc.
In
August 2012, RespireRx acquired Pier Pharmaceuticals, Inc. (“Pier”). RespireRx and its wholly-owned subsidiary, Pier,
are collectively referred to herein as the “Company.”
Reverse
Stock Split
On
August 16, 2016, at a special meeting of the stockholders of the Company, the stockholders approved an amendment to the Company’s
Second Restated Certificate of Incorporation (i) to effect, at the discretion of the Company’s Board of Directors, a three
hundred twenty five-to-one (325-to-1) reverse stock split of all of the outstanding shares of the Company’s common stock,
par value $0.001 per share, and (ii) to set the number of the Company’s authorized shares of stock at 70,000,000 shares,
consisting of 65,000,000 shares designated as common stock, par value $0.001 per share, and 5,000,000 shares designated as preferred
stock, par value $0.001 per share. On September 1, 2016, the Company filed a Certificate of Amendment to the Company’s Second
Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the approved amendment.
Pursuant
to the amendment, an aggregate of 191.068 fractional shares resulting from the reverse stock split were not issued, but were paid
out in cash (without interest or deduction) in an amount equal to the number of shares exchanged into such fractional share multiplied
by the average closing trading price of the Company’s common stock on the OTCQB for the five trading days immediately before
the Certificate of Amendment effecting the reverse stock split was filed with the Delaware Secretary of State ($6.7899 per share,
on a post reverse stock split basis) for an aggregate of $1,298.
All
share and per share amounts with respect to common stock presented herein have been retroactively restated to reflect the 325
to 1 reverse stock split as if it had been effected on the first day of the earliest period presented. Certain share amounts have
been rounded to whole shares in the process of recording the effect of the reverse stock split.
2.
Business
Since
its formation in 1987, RespireRx has been engaged in the research and clinical development of a class of proprietary compounds
known as ampakines, which act to enhance the actions of the excitatory neurotransmitter glutamate at AMPA glutamate receptors.
Several ampakines, in both oral and injectable form, are being developed by the Company for the treatment of a variety of breathing
disorders. In clinical studies, select ampakines have shown preliminary efficacy in central sleep apnea and in the control of
respiratory depression produced by opioids, without altering their analgesic effects. In animal models of orphan disorders, such
as Pompe Disease, spinal cord damage and perinatal respiratory distress, it has been demonstrated that certain ampakines improve
breathing function. The Company’s compounds belong to a new class of ampakines that do not display the undesirable side
effects previously reported in animal models of earlier generations.
The
Company owns patents and patent applications, or the rights thereto, for certain families of chemical compounds, including ampakines,
which claim the chemical structures, their actions as ampakines and their use in the treatment of various disorders. Patents claiming
a family of chemical structures, including CX1739 and CX1942, as well as their use in the treatment of various disorders extend
through at least 2028. Additional patents claiming a family of chemical structures, including CX717, as well as their use in the
treatment of various disorders expire in 2017 in the U.S. and in 2018 internationally.
In
2011, RespireRx conducted a re-evaluation of its strategic focus and determined that clinical development in the area of respiratory
disorders, particularly sleep apnea and drug-induced respiratory depression, provided the most cost-effective opportunities for
potential rapid development and commercialization of RespireRx’s compounds. Accordingly, RespireRx narrowed its clinical
focus at that time and sidelined other avenues of scientific inquiry. This re-evaluation provided the impetus for RespireRx’s
acquisition of Pier in August 2012, as described below.
The
Company has continued to implement this strategic focus, notwithstanding a change in management in March 2013, and has continued
its efforts to obtain the capital necessary to fund the clinical activities. As a result of the Company’s scientific discoveries
and the acquisition of strategic, exclusive license agreements, management believes that the Company is now a leader in developing
drugs for respiratory disorders, particularly sleep apneas and drug-induced respiratory depression.
On
May 8, 2007, RespireRx entered into a license agreement, as subsequently amended, with the University of Alberta granting RespireRx
exclusive rights to method of treatment patents held by the University of Alberta claiming the use of ampakines for the treatment
of various respiratory disorders. These patents, along with RespireRx’s own patents claiming chemical structures, comprise
RespireRx’s principal intellectual property supporting RespireRx’s research and clinical development program in the
use of ampakines for the treatment of respiratory disorders. RespireRx has completed pre-clinical studies indicating that several
of its ampakines, including CX717, CX1739 and CX1942, were efficacious in treating drug induced respiratory depression caused
by opioids or certain anesthetics without offsetting the analgesic effects of the opioids or the anesthetic effects of the anesthetics.
In two clinical Phase 2 studies, one of which was published in a peer-reviewed journal, CX717, a predecessor compound to CX1739
and CX1942, antagonized the respiratory depression produced by fentanyl, a potent narcotic, without affecting the analgesia produced
by this drug. In addition, RespireRx has conducted a Phase 2A clinical study in which patients with sleep apnea were administered
CX1739, RespireRx’s lead clinical compound. The results suggested that CX1739 might have use as a treatment for central
sleep apnea (“CSA”) and mixed sleep apnea, but not obstructive sleep apnea (“OSA”).
In
order to expand RespireRx’s respiratory disorders program, RespireRx acquired 100% of the issued and outstanding equity
securities of Pier effective August 10, 2012 pursuant to an Agreement and Plan of Merger. Pier was formed in June 2007 (under
the name SteadySleep Rx Co.) as a clinical stage pharmaceutical company to develop a pharmacologic treatment for OSA and had been
engaged in research and clinical development activities.
Prior
to the merger, Pier conducted a 21 day, randomized, double-blind, placebo-controlled, dose escalation Phase 2 clinical study in
22 patients with OSA, in which dronabinol produced a statistically significant reduction in the Apnea-Hypopnea Index, the primary
therapeutic end-point, and was observed to be safe and well tolerated.
Through
the merger, RespireRx gained access to an Exclusive License Agreement (as amended, the “2007 License Agreement”) that
Pier had entered into with the University of Illinois on October 10, 2007. The 2007 License Agreement covered certain patents
and patent applications in the United States and other countries claiming the use of certain compounds referred to as cannabinoids,
of which dronabinol is a specific example, for the treatment of sleep-related breathing disorders (including sleep apnea). Dronabinol
is a synthetic derivative of the naturally occurring substance in the cannabis plant, otherwise known as Δ9-THC (Δ9-tetrahydrocannabinol).
Pier’s business plan was to determine whether dronabinol would significantly improve subjective and objective clinical measures
in patients with OSA. In addition, Pier intended to evaluate the feasibility and comparative efficacy of a proprietary formulation
of dronabinol.
Dronabinol
is a Schedule III, controlled generic drug with a relatively low abuse potential that is approved by the U.S. Food and Drug Administration
(the “FDA”) for the treatment of AIDS-related anorexia and chemotherapy-induced emesis. The use of dronabinol for
the treatment of OSA is a novel indication for an already approved drug and, as such, the Company believes that it would only
require approval by the FDA of a 505(b)(2) application, as opposed to the submission and approval of a full new drug application.
The
2007 License Agreement was terminated effective March 21, 2013, due to the Company’s failure to make a required payment.
Subsequently, current management opened negotiations with the University of Illinois, and as a result, the Company entered into
a new license agreement (the “2014 License Agreement”) with the University of Illinois on June 27, 2014, the material
terms of which were similar to the previous 2007 License Agreement.
Similar
to the 2007 License Agreement, the 2014 License Agreement grants the Company, among other provisions, exclusive rights: (i) to
practice certain patents and patent applications, as defined in the 2014 License Agreement, that are held by the University of
Illinois; (ii) to identify, develop, make, have made, import, export, lease, sell, have sold or offer for sale any related licensed
products; and (iii) to grant sub-licenses of the rights granted in the 2014 License Agreement, subject to the provisions of the
2014 License Agreement. The Company is required under the 2014 License Agreement, among other terms and conditions, to pay the
University of Illinois a license fee, royalties, patent costs and certain milestone payments.
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 $9,229,760 and $5,961,892 and had negative operating cash flows of $1,328,684 and $1,296,100 for the fiscal years ended December
31, 2016 and 2015, respectively. The Company also had a stockholders’ deficiency of $5,493,377 at December 31, 2016, 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, 2016, has expressed substantial doubt about the Company’s ability to continue as a going
concern.
The
Company is currently, and has for some time, been in significant financial distress. It has limited cash resources and current
assets and has no ongoing source of sustainable revenue. Management is continuing to address various aspects of the Company’s
operations and obligations, including, without limitation, debt obligations, financing requirements, intellectual property, licensing
agreements, legal and patent matters and regulatory compliance, and has continued to raise new debt and equity capital to fund
the Company’s business activities from both related and unrelated parties, as described at Notes 4 and 6.
The
Company is continuing efforts to raise additional capital in order to pay its liabilities, fund its business activities and underwrite
its research and development programs. The Company regularly evaluates various measures to satisfy the Company’s liquidity
needs, including the development of agreements with collaborative partners and, when necessary, the exchange or restructuring
of the Company’s outstanding securities. As a result of the Company’s current financial situation, the Company has
limited access to external sources of debt and equity financing, and has recently utilized short-term borrowings from its Chief
Executive Officer and its Chief Scientific Officer to fund operations, although there can be no assurances that such borrowings
will continue to be available. Accordingly, there can be no assurances that the Company will be able to secure additional financing
in the amounts necessary to fund its operating and debt service requirements. If the Company is unable to access sufficient cash
resources on a timely basis, the Company may be forced to reduce or suspend operations indefinitely, or to discontinue operations
entirely and liquidate.
3.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements are prepared in accordance with United States generally accepted accounting principles
(“GAAP”) and include the financial statements of RespireRx and its wholly-owned subsidiary, Pier. Intercompany balances
and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates
include, among other things, accounting for potential liabilities, and the assumptions used in valuing stock-based compensation
issued for services. Actual amounts may differ from those estimates.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents.
The Company limits its exposure to credit risk by investing its cash with high quality financial institutions. The Company’s
cash balances may periodically exceed federally insured limits. The Company has not experienced a loss in such accounts to date.
Cash
Equivalents
The
Company considers all highly liquid short-term investments with maturities of less than three months when acquired to be cash
equivalents.
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below. Disclosure as to transfers into and out of Levels 1 and 2, and activity
in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying amount of financial instruments (consisting of cash, cash equivalents, advances on research grants and accounts payable
and accrued expenses) is considered by the Company to be representative of the respective fair values of these instruments due
to the short-term nature of those instruments. With respect to the note payable to SY Corporation and the convertible notes payable,
management does not believe that the credit markets have materially changed for these types of borrowings since the original borrowing
date.
Deferred
Financing Costs
Costs
incurred in connection with ongoing debt and equity financings, including legal fees, are deferred until the related financing
is either completed or abandoned.
Costs
related to abandoned debt or equity financings are charged to operations in the period of abandonment. Costs related to completed
debt financings are presented as a direct deduction from the carrying amount of the related debt liability (see “Capitalized
Financing Costs” below). Costs related to completed equity financings are charged directly to additional paid-in capital.
Capitalized
Financing Costs
Through
December 31, 2015, costs related to completed debt financings were capitalized on the balance sheet and amortized over the term
of the related debt agreements. Amortization of these costs was calculated on the straight-line basis, which approximated the
effective interest method, and was charged to interest expense in the consolidated statements of operations.
Pursuant
to Accounting Standards Update No. 2015-03 (ASU 2015-03), Interest – Imputation of Interest (Subtopic 835-30), effective
January 1, 2016, the Company is required to present debt issuance costs related to a debt liability in its consolidated balance
sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation for debt discounts.
The Company is required to apply the new accounting guidance on a retrospective basis, wherein the balance sheet of each individual
period presented is adjusted to reflect the period-specific effects of applying the new guidance, and is required to comply with
the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the
change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively
adjusted, and the effect of the change on the financial statement line items (i.e., the debt issuance cost asset and the debt
liability).
As
the Company did not have any capitalized financing costs on its consolidated balance sheet at December 31, 2015 or 2016, the implementation
of ASU 2015-03 did not have any impact on the Company’s financial statements as presented herein.
Series
G 1.5% Convertible Preferred Stock
The
shares of Series G 1.5% Convertible Preferred Stock (including accrued dividends) issued in 2014 were mandatorily convertible
into common stock at a fixed conversion rate on April 17, 2016 (if not converted earlier) and provided no right to receive a cash
payment. Additionally, the Series G 1.5% Convertible Preferred Stock included no participatory or reset rights, or other protections
(other than normal anti-dilution rights) based on subsequent events, including equity transactions. Accordingly, the Company categorized
the Series G 1.5% Convertible Preferred Stock in stockholders’ equity (deficiency), as there were no derivatives embedded
in such security that would require identification, bifurcation and valuation. The Company did not issue any warrants to investors
in conjunction with the Series G 1.5% Convertible Preferred Stock financing.
On
March 18, 2014 and April 17, 2014, the Company issued 753.22 shares and 175.28 shares, respectively, of Series G 1.5% Convertible
Preferred Stock at a purchase price of $1,000 per share. Each share of Series G 1.5% Convertible Preferred Stock had a stated
value of $1,000 per share and was convertible into shares of common stock at a fixed price of $1.0725 per share of common stock.
On March 18, 2014 and April 17, 2014, the per share fair value of the common stock into which the Series G 1.5% Convertible Preferred
Stock was convertible, determined by reference to the closing market prices of the Company’s common stock on such closing
dates, was $13.0000 per share and $11.3100 per share, respectively, which was greater than the effective purchase price of such
common shares of $1.0725 per share.
The
Company accounted for the beneficial conversion features in accordance with Accounting Standards Codification (“ASC”)
470-20, Accounting for Debt with Conversion and Other Options. The Company calculated a deemed dividend on the Series G 1.5% Convertible
Preferred Stock of $8,376,719 in March 2014 and $1,673,127 in April 2014, which equaled the amount by which the estimated fair
value of the common stock issuable upon conversion of the issued Series G 1.5% Convertible Preferred Stock exceeded the proceeds
from such issuances. The deemed dividend on the Series G 1.5% Convertible Preferred Stock was amortized on the straight-line basis
from the respective issuance dates through the earliest conversion date of June 16, 2014, in accordance with ASC 470-20. The difference
between the amortization of the deemed dividend calculated based on the straight-line method and the effective yield method was
not material.
Dr.
Arnold S. Lippa, Ph.D., the Chairman of the Company’s Board of Directors and Chief Executive Officer at that time, purchased
250 shares of Series G 1.5% Convertible Preferred Stock for $250,000, representing 33.2% of the 753.22 shares of Series G 1.5%
Convertible Preferred Stock sold in the initial closing of such financing on March 18, 2014. The second and final closing of the
financing consisted entirely of Series G 1.5% Convertible Preferred Stock sold to unaffiliated investors. Accordingly, Dr. Lippa
purchased 26.9% of the entire amount of Series G 1.5% Convertible Preferred Stock sold in the financing. Dr. Lippa had been an
officer and director of the Company for approximately one year when he purchased the 250 shares of Series G 1.5% Convertible Preferred
Stock, and his investment, which was only a portion of the first closing, was made on the same terms and conditions as those provided
to the other unaffiliated investors who made up the majority of the financing. Dr. Lippa did not control, directly or indirectly,
10% or more of the Company’s voting equity securities at the time of his investment. The proportionate share of the deemed
dividend attributable to Dr. Lippa’s investment in the Series G 1.5% Convertible Preferred Stock in March 2014 was $2,780,303.
On April 18, 2014, the shares of Series G 1.5% Convertible Preferred Stock originally purchased by Dr. Lippa were transferred
to the Arnold Lippa Family Trust of 2007. On April 15, 2015, these shares of Series G 1.5% Convertible Preferred Stock, plus accrued
dividends of $4,120, were converted into 236,942 shares of common stock.
Convertible
Notes Payable
Original
Issuance of Notes and Warrants
The
convertible notes sold to investors in 2014 and 2015 had a fixed interest rate of 10% per annum and are convertible into common
stock at a fixed price of $11.3750 per share. The convertible notes have no reset rights or other protections based on subsequent
equity transactions, equity-linked transactions or other events. The warrants issued in connection with the sale of the convertible
notes were exercisable at a fixed price of $11.3750 per share, provided no right to receive a cash payment, and included no reset
rights or other protections based on subsequent equity transactions, equity-linked transactions or other events. The Company determined
that there were no embedded derivatives to be identified, bifurcated and valued in connection with this financing.
On
November 5, 2014, the Company sold an aggregate principal amount of $238,500 of its convertible notes payable due September 15,
2015, which were subject to extension to September 15, 2016, at the option of the Company, subject to the issuance of additional
warrants, and warrants to purchase shares of common stock exercisable into a fixed number of shares of common stock of the Company
calculated as the principal amount of each convertible note divided by $11.3750 (reflecting 100% warrant coverage). The warrants
did not have any cashless exercise provisions and, when issued, were exercisable through September 30, 2015 at a fixed price of
$11.3750 per share. The shares of common stock issuable upon conversion of the notes payable and the exercise of the warrants
were not subject to any registration rights.
In
the same offering, on December 9, 2014, December 31, 2014, and February 2, 2015, the Company sold an additional $46,000, $85,000
and $210,000, respectively, of principal amount of the convertible notes and warrants to various accredited investors. The Company
terminated this financing effective February 18, 2015, which had generated aggregate gross proceeds of $579,500, and in connection
with which the Company had issued warrants to purchase 50,945 shares of common stock.
The
closing market prices of the Company’s common stock on the transaction closing dates of November 5, 2014, December 9, 2014,
December 31, 2014 and February 2, 2015 were $17.0300 per share, $13.3575 per share, $14.6575 per share and $13.9750 per share,
respectively, as compared to the fixed conversion price of the convertible notes and the fixed exercise price of the warrants
of $11.3750 per share. Accordingly, the Company has accounted for the beneficial conversion features with respect to the sale
of the convertible notes and the issuance of the warrants in accordance with ASC 470-20, Accounting for Debt with Conversion and
Other Options.
The
Company considered the face value of the convertible notes to be representative of their fair value. The Company determined the
fair value of the warrants based on the Black-Scholes option-pricing model. The relative fair value method generated respective
fair values for each of the convertible notes and the warrants of approximately 50% for the convertible notes and approximately
50% for the warrants sold with the convertible notes. Once these values were determined, the fair value of the warrants of $289,106
and the fair value of the beneficial conversion feature of $290,394 (which were calculated based on the effective conversion price)
were recorded as a reduction to the face value of the promissory note obligation. As a result, this aggregate debt discount reduced
the carrying value of the convertible notes to zero at each issuance date. The excess amount generated from this calculation was
not recorded, as the carrying value of a promissory note cannot be reduced below zero. The aggregate debt discount was amortized
as interest expense over the original term of the promissory notes. The difference between the amortization of the debt discount
calculated based on the straight-line method and the effective yield method was not material.
The
cash fees paid to placement agents and for legal costs incurred from November 5, 2014 through February 2, 2015 with respect to
this financing were deferred and capitalized as deferred offering costs and were amortized to interest expense over the original
term of the convertible notes through September 15, 2015 on the straight-line method. The placement agent warrants were considered
as an additional cost of the offering and were included in deferred offering costs at fair value. The difference between the amortization
of the deferred offering costs calculated based on the straight-line method and the effective yield method was not material.
Extension
of Notes and Original Warrants, and Issuance of New Warrants
On
August 13, 2015, pursuant to the terms of the convertible notes, the Company elected to extend the maturity date of the convertible
notes to September 15, 2016. Under the terms of the convertible notes, the Company was required to issue to note holders 27,396
additional warrants (the “New Warrants”) that were exercisable through September 15, 2016. The New Warrants were exercisable
for that number of shares of common stock of the Company calculated as the principal amount of the convertible notes (an aggregate
amount of $579,500), plus any accrued and unpaid interest (an aggregate amount of $43,758), multiplied by 50%, and then divided
by $11.3750. The New Warrants otherwise had terms substantially similar to the 50,945 original warrants issued to the investors.
In connection with the extension of the maturity date of the convertible notes, the Board of Directors of the Company also determined
to extend the termination date of the 50,945 original warrants to September 15, 2016, so that they were coterminous with the new
maturity date of the convertible notes.
The
Company reviewed the guidance in ASC 405-20, Extinguishment of Liabilities, and determined that the convertible notes had not
been extinguished. The Company therefore concluded that the guidance in ASC 470-50, Modifications and Extinguishments, should
be applied, which states that if the exchange or modification is not to be accounted for in the same manner as a debt extinguishment,
then the fees shall be associated with the replacement or modified debt instrument and, along with any existing unamortized premium
or discount, amortized as an adjustment of interest expense over the remaining term of the replacement or modified debt instrument
using the interest method.
The
Company deferred the debt modification costs related to the modification of the convertible notes and the issuance of the New
Warrants (consisting of the fair value of the New Warrants) over the remaining term of the extended notes. The Company accounted
for such costs as a discount to the convertible notes and amortized such costs to interest expense over the extended term of the
convertible notes on the straight-line method. The difference between the amortization of these costs calculated based on the
straight-line method and the effective yield method was not material.
The
Company deferred the debt modification costs related to the extension of the original warrants (consisting of the fair value of
the extension of the original warrants) over the remaining term of the extended convertible notes. The Company accounted for such
costs as a discount to the convertible notes and amortized such costs to interest expense over the extended term of the convertible
notes on the straight-line method. The difference between the amortization of these costs calculated based on the straight-line
method and the effective yield method was not material.
The
closing market price of the Company’s common stock on the extension date of September 15, 2015 was $10.0750 per share, as
compared to the fixed conversion price of the convertible notes and the fixed exercise price of both the original warrants and
the New Warrants of $10.0750 per share. The Company accounted for the beneficial conversion features with respect to the extension
of the convertible notes and the extension of the original warrants and the issuance of the New Warrants in accordance with ASC
470-20, Accounting for Debt with Conversion and Other Options.
The
Company considered the face value of the convertible notes, plus the accrued interest thereon, to be representative of their fair
value. The Company determined the fair value of the 27,396 New Warrants and the fair value of extending the 50,945 original warrants
based on the Black-Scholes option-pricing model. The relative fair value method generated respective fair values for each of the
convertible notes, including accrued interest, and the New Warrants and extension of the original warrants, of approximately 55%
for the convertible notes, including accrued interest, and approximately 45% for the New Warrants and extension of the original
warrants. Once these values were determined, the fair value of the New Warrants and extension of the original warrants of $277,918
and the fair value of the beneficial conversion feature of $206,689 (which were calculated based on the effective conversion price)
were recorded as a reduction to the face value of the promissory note obligation. The aggregate debt discount was amortized as
interest expense over the extended term of the promissory notes. The difference between the amortization of the debt discount
calculated based on the straight-line method and the effective yield method was not material.
Note
Exchange Agreements
During
April and May 2016, the Company entered into Note Exchange Agreements with certain note holders, including one non-officer/director
affiliate, as described below, representing an aggregate of $303,500 of principal amount of the convertible notes (out of a total
of $579,500 of original principal amount of the convertible notes payable). The Note Exchange Agreements were substantially similar,
and provided for the note holders to exchange their notes, original warrants and New Warrants (collectively, the “Exchanged
Securities”), plus cash, in exchange for shares of the Company’s common stock. In the aggregate, $344,483 of principal
amount (which included accrued interest of $40,983) of the convertible notes, original warrants to purchase 26,681 shares of the
Company’s common stock and New Warrants to purchase 14,259 shares of the Company’s common stock, plus an aggregate
of $232,846 in cash, were exchanged for 101,508 shares of the Company’s common stock, with a total market value of $631,023
(average $6.2075 per share), which resulted in a credit to total stockholders’ deficiency of $577,329. All of the Exchanged
Securities were cancelled as a result of the respective exchange transactions.
Among
the executed Note Exchange Agreements, the Company entered into one Note Exchange Agreement with a non-officer/director affiliate
effective May 4, 2016 (the financial information with respect thereto is included in the summary paragraph presented above), pursuant
to which this affiliate exchanged $28,498 of principal amount (which included accrued interest of $3,498) of the convertible notes,
original warrants to purchase 2,198 shares of the Company’s common stock and New Warrants to purchase 1,178 shares of the
Company’s common stock, plus $19,200 in cash, in return for 8,386 shares of the Company’s common stock.
In
this transaction, the exchanging note holders agreed to exchange their convertible notes (including accrued interest) into common
stock at a 50% discount to the conversion rate ($11.3750 per share) provided for by the terms of the convertible notes, if they
also exchanged all of their warrants associated with the convertible notes, plus paid cash equal to a 50% discount to the exercise
price ($11.3750 per share). For accounting purposes, the transactions have been treated as if (i) the participants had converted
the convertible notes (which included accrued but unpaid interest of $40,993) at a conversion price reduced from $11.3750 to $5.6875
per share, and that such conversions in the aggregate resulted in the issuance of an aggregate of 60,568 shares of common stock,
and (ii) the participants had exercised their original warrants to purchase an aggregate of 26,681 shares of common stock and
the New Warrants to purchase an aggregate of 14,259 shares of common stock, all at an exercise price reduced from $11.3750 to
$5.6875 per share, and that such exercise of the warrants generated an aggregate cash payment to the Company of $232,846 and resulted
in the issuance of an aggregate of 40,940 shares of common stock. In connection with the exchange of the convertible notes, original
warrants, New Warrants and the payment of cash, a total of 101,508 shares of common stock in the aggregate were issued. The closing
market price of the Company’s common stock during the period that these exchange transactions were entered into ranged from
$5.8500 to $7.7675 per share.
The
Company reviewed the guidance in ASC 470-20-40-13 through 17, Recognition of Expense Upon Conversion, and in ASC 470-20-40-26,
Induced Conversions. Pursuant to this accounting guidance, for those convertible note holders accepting the Company’s exchange
offer, the Company evaluated the fair value of the incremental consideration paid to induce the convertible note holders to exchange
their convertible notes for equity (i.e., 30,284 shares of common stock), based on the closing market price of the Company’s
common stock on the date of each transaction, and recorded a charge to operations of $188,274.
The
Company evaluated the warrants exchanged in conjunction with the Note Exchange Agreements. The Company calculated the fair value
of the warrants exchanged (consisting of the warrants issued in conjunction with the original issuance of the convertible notes)
as if the warrants were modified immediately before the theoretical warrant modification and immediately after such warrant modification.
As the fair value of the warrants immediately after the modifications was less than the fair value of the warrants immediately
before the modifications (both amounts calculated pursuant to the Black-Scholes option-pricing model), the Company did not record
any accounting entry with respect to the warrant exchange transactions.
The
fair value of the warrants subject to the Note Exchange Agreements was estimated using the Black-Scholes option-pricing model
utilizing the following assumptions:
|
|
Before
Warrant
Modifications
|
|
|
After
Warrant
Modifications
|
|
Exercise
price per warrant
|
|
$
|
11.3750
|
|
|
$
|
5.6875
|
|
Stock price
|
|
$
|
5.8500
to $7.5400
|
|
|
$
|
5.8500
to $7.5400
|
|
Risk-free
interest rate
|
|
|
0.23
|
%
|
|
|
0.23
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
201.59
|
%
|
|
|
201.59
|
%
|
Expected
life
|
|
|
4.4
to 4.5 months
|
|
|
|
0
months
|
|
2015
Unit Offering
Units
sold to investors on August 28, 2015, September 28, 2015 and November 2, 2015 were comprised of one share of the Company’s
common stock and one common stock purchase warrant to purchase two additional shares of the Company’s common stock. Units
were sold for $6.83475 per unit and the warrants issued in connection with the units were exercisable at a fixed price $6.83475
per share of the Company’s common stock. The warrants provided no right to receive a cash payment, and included no reset
rights or other protections based on subsequent equity transactions, equity-linked transactions or other events. The Company determined
that there were no embedded derivatives to be identified, bifurcated and valued in connection with this unit financing. The aggregate
gross proceeds of this unit financing was $1,194,710.
The
closing market prices of the Company’s common stock on the transaction closing dates of August 28, 2015, September 28, 2015
and November 2, 2015 were $12.50, $8.1169 and $8.1169 respectively compared to the fixed unit price per unit and warrant exercise
price per share of $6.83475.
Unit
Exchange Agreements
During
April and May 2016, the Company entered into Unit Exchange Agreements with certain warrant holders, including two affiliates,
one of whom was Dr. Manuso, and the other of whom was a non-officer/director affiliate, both as described below. The Unit Exchange
Agreements were substantially similar, and provided for the warrant holders to exchange (i) existing warrants to purchase an aggregate
of 217,188 shares of the Company’s common stock (which were cancelled as a result of the respective exchange transactions),
plus (ii) an aggregate of $529,394 in cash, in return for (i) an aggregate of 108,594 shares of the Company’s common stock,
and (ii) new warrants to purchase an aggregate of 108,594 shares of the Company’s common stock. The new warrants have the
same expiration date as the original warrants (September 30, 2020) and may be exercised for cash or on a cashless basis at $4.8750
per share.
Among
the executed Unit Exchange Agreements, the Company entered into a Unit Exchange Agreement with Dr. Manuso effective April 6, 2016
(the financial information with respect thereto is included in the summary paragraph presented above), pursuant to which Dr. Manuso
exchanged a warrant to purchase 73,156 shares of the Company’s common stock that was originally issued to him in the Company’s
August 28, 2015 unit offering (which was cancelled as a result of the exchange transaction), plus $178,317 in cash, in return
for 36,578 shares of the Company’s common stock and the issuance of a new warrant to purchase 36,578 shares of the Company’s
common stock. The new warrant has the same expiration date as the original warrant (September 30, 2020) and may be exercised for
cash or on a cashless basis at $4.8750 per share. The closing market price of the Company’s common stock on April 6, 2016
was $7.7675 per share.
Among
the executed Unit Exchange Agreements, the Company also entered into Unit Exchange Agreements (which are included in the summary
paragraph above) with a non-officer/director affiliate (and his affiliate) effective May 4, 2016 (the financial information with
respect thereto is included in the summary paragraph presented above), pursuant to which this affiliate exchanged warrants to
purchase 88,132 shares of the Company’s common stock that were originally issued to the affiliate in the Company’s
August 28, 2015 unit offering (which were cancelled as a result of the exchange transaction), plus $214,822 in cash, in return
for 44,066 shares of the Company’s common stock and the issuance of new warrants to purchase 44,066 shares of the Company’s
common stock. The new warrants have the same expiration date as the original warrants (September 30, 2020) and may be exercised
for cash or on a cashless basis at $4.8750 per share. The closing market price of the Company’s common stock on May 4, 2016
was $5.8500 per share.
In
this transaction, exchanging warrant holders who received their warrants in any of the three closings of the Company’s 2015
unit offering agreed to exchange their warrants associated with such financing, plus paid cash equal to a reduced exercise price
per share ($4.8750 per share) for 50% of such warrants, with 50% of the warrants replaced with similar warrants with the same
term at a reduced exercise price. For accounting purposes, the transactions have been treated as if (i) participants exercised
one-half of the existing warrants entitling them to purchase an aggregate of 217,188 shares of the Company’s common stock
that were originally issued to them in the Company’s unit offering, with closings on August 28, 2015, September 28, 2015
and November 2, 2015 (i.e., warrants to purchase 108,594 shares of common stock), at an exercise price reduced from $6.8348 to
$4.8750 per share, and (ii) the other one-half of the original warrants were cancelled. The Unit Exchange Agreements also provided
for the Company to issue new warrants to the participants to purchase an aggregate of 108,594 shares of common stock. The new
warrants have the same expiration date as the original warrants (September 30, 2020) and may be exercised for cash or on a cashless
basis at $4.8750 per share. For accounting purposes, the transaction was treated as if the warrant exercise price for all of the
warrants was reduced from $6.8348 to $4.8750 per share, in exchange for which 50% of the warrants were exercised for cash at the
reduced exercise price, and the remaining 50% of the warrants continued to remain outstanding through September 30, 2020 and gained
a cashless exercise provision. The closing market price of the Company’s common stock during the period that these exchange
transactions were entered into ranged from $5.8500 to $7.7675 per share.
The
Company evaluated the warrants exchanged in conjunction with the Unit Exchange Agreements. The Company calculated the fair value
of the warrants exchanged as if the warrants were modified immediately before the theoretical warrant modification and immediately
after such warrant modification. As the fair value of the warrants immediately after the modifications was less than the fair
value of the warrants immediately before the modifications (both amounts calculated pursuant to the Black-Scholes option-pricing
model), the Company did not record any accounting entry with respect to the warrant exchange transactions.
The
fair value of the warrants subject to the Unit Exchange Agreements was estimated using the Black-Scholes option-pricing model
utilizing the following assumptions:
|
|
Before
Warrant
Modifications
|
|
|
After
Warrant
Modifications
|
|
Exercise
price per warrant
|
|
$
|
6.8348
|
|
|
$
|
4.8750
|
|
Stock price
|
|
$
|
5.8500
to $7.7675
|
|
|
$
|
5.8500
to $7.7675
|
|
Risk-free
interest rate
|
|
|
1.12
|
%
|
|
|
0.23
% and 1.12
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
201.59
|
%
|
|
|
201.59
|
%
|
Expected
life
|
|
|
4.4
to 4.5 years
|
|
|
|
0
years to 4.5 years
|
|
1
st
2016 Unit Offering
Units
were sold to investors from January 8, 2016 through June 30, 2016. These units were comprised of one share of the Company’s
common stock and one common stock purchase warrant to purchase two additional shares of the Company’s common stock. Units
were sold for $7.2085 per unit and the warrants issued in connection with the units were exercisable at a fixed price $7.93 per
share of the Company’s common stock. The warrants provided no right to receive a cash payment, and included no reset rights
or other protections based on subsequent equity transactions, equity-linked transactions or other events. The warrants contained
a cashless exercise provision and certain blocker provisions preventing exercise during periods of time when the investor would
beneficially own more than 4.99% of the Company’s outstanding shares of common stock if such exercise were to occur. The
Company determined that there were no embedded derivatives to be identified, bifurcated and valued in connection with this unit
financing. The aggregate gross proceeds of this unit financing was $307,985.
The
closing market prices of the Company’s common stock on the transaction closing dates ranging from January 8, 2016 through
June 30, 2016, ranged from a low of $3.4416 on February 9, 2016 to a high of $9.7403 on February 29, 2016.
2
nd
2016 Unit Offering
On
December 29, 2016 and December 30, 2016, the Company sold units to investors for aggregate gross proceeds of $185,000, comprised
of one share of the Company’s common stock and one common stock purchase warrant to purchase one share of the Company’s
common stock. Units were sold for $1.42 per unit and the warrants issued in connection with the units are exercisable at a fixed
price $1.562 per share of the Company’s common stock. The warrants contain a cashless exercise provision and certain blocker
provisions preventing exercise during periods of time when the investor would beneficially own more than 4.99% of the Company’s
outstanding shares of common stock if such exercise were to occur. The 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 200% or more of the unit purchase
price for any five (5) consecutive trading days. Investors received an unlimited number of piggy-back registration rights.
Investors
received
an unlimited number of exchange rights to exchange such investor’s entire investment (and not less than
the entire investment) into subsequent offerings of the Company until the earlier of: (i) the completion of any number of subsequent
financings aggregating at least $15 million gross proceeds to the Company, or (ii) December 30, 2017. The dollar amount used to
determine the amount invested or exchanged into the subsequent financing will be 1.2 times the amount of the original investment.
Under certain circumstances, the ratio may be 1.4 instead of 1.2. The Company evaluated whether the warrants or the exchange rights
met criteria to be accounted for as a derivative in accordance with Accounting Standard Codification (ASC) 815, and determined
that the derivative criteria were not met. Therefore, the Company determined no bifurcation and separate valuation was necessary
and the warrants and exchange right should be accounted for with the host instrument. The Company then looked to how the host
instrument should be classified and determined that it cannot be classified as permanent equity as there is a potential that the
Unit investment amount could be exchanged for debt (convertible or otherwise) or for redeemable preferred stock. Since the exchange
right expires within one year, the Company concluded that the Unit investment would be appropriately classified as a current liability.
The closing market prices of the Company’s common stock on December 29, 2016 and December 30, 2016 were $2.85 and $2.80
respectively.
Equipment
Equipment
is recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which range from three to five
years.
Long-Term
Prepaid Insurance
Long-term
prepaid insurance represents the premium paid in March 2014 for directors and officers insurance tail coverage, which is being
amortized on a straight-line basis over the policy period of six years. The amount amortizable in the ensuing twelve month period
is recorded as a current asset in the Company’s consolidated balance sheet at each reporting date.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets, including long-term prepaid insurance, for impairment whenever events or changes in circumstances
indicate that the total amount of an asset may not be recoverable, but at least annually. An impairment loss is recognized when
estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than the asset’s
carrying amount. The Company has not deemed any long-lived assets as impaired at December 31, 2016.
Stock-Based
Compensation
The
Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Board members and consultants
for services rendered. Such issuances vest and expire according to terms established at the issuance date of each grant.
The
Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for
equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock-based
payments to Scientific Advisory Board members and consultants by determining the value of the stock compensation based upon the
measurement date at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary
performance to earn the equity instruments is complete.
Stock
grants, which are generally subject to time-based vesting, are measured at the grant date fair value and charged to operations
ratably over the vesting period.
Stock
options granted to members of the Company’s Scientific Advisory Board and to outside consultants are revalued each reporting
period until vested to determine the amount to be recorded as an expense in the respective period. As the stock options vest,
they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the
value on the date of vesting.
The
fair value of stock options granted as stock-based compensation is determined utilizing the Black-Scholes option-pricing model,
and is affected by several variables, the most significant of which are the life of the equity award, the exercise price of the
stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common
stock over the term of the equity award. Estimated volatility is based on the historical volatility of the Company’s common
stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The fair market value
of common stock is determined by reference to the quoted market price of the Company’s common stock.
Stock
options and warrants issued to non-employees as compensation for services to be provided to the Company or in settlement of debt
are accounted for based upon the fair value of the services provided or the estimated fair value of the stock option or warrant,
whichever can be more clearly determined. Management uses the Black-Scholes option-pricing model to determine the fair value of
the stock options and warrants issued by the Company. The Company recognizes this expense over the period in which the services
are provided.
For
stock options requiring an assessment of value during the year ended December 31, 2016, the fair value of each stock option award
was estimated using the Black-Scholes option-pricing model using the following assumptions:
Risk-free
interest rate
|
|
0.87%
to 1.93
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
173.87%
to 202.51
|
%
|
Expected
life
|
|
|
3.9
to 5 years
|
|
For
stock options requiring an assessment of value during the year ended December 31, 2015, the fair value of each stock option award
was estimated using the Black-Scholes option-pricing model using the following assumptions:
Risk-free
interest rate
|
|
0.30%
to 1.70
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatilityt
|
|
|
183.90%
to 249.00
|
%
|
Expected
life
|
|
|
5
to 7 years
|
|
The
Company recognizes the fair value of stock-based compensation in general and administrative costs and in research and development
costs, as appropriate, in the Company’s consolidated statements of operations. The Company issues new shares of common stock
to satisfy stock option and warrant exercises. There were no stock options exercised during the years ended December 31, 2016
and 2015.
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, 2016, 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, 2016, the Company had not recorded any liability for uncertain tax positions.
In subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income
tax expense.
Foreign
Currency Transactions
The
note payable to SY Corporation, which is denominated in a foreign currency (the South Korean Won), is translated into the Company’s
functional currency (the United States Dollar) at the exchange rate on the balance sheet date. The foreign currency exchange gain
or loss resulting from translation is recognized in the related consolidated statements of operations.
Research
Grants
The
Company recognizes revenues from research grants as earned based on the percentage-of-completion method of accounting and issues
invoices for contract amounts billed based on the terms of the grant agreement. Amounts recorded under research grants in excess
of amounts earned are classified as unearned grant revenue liability in the Company’s consolidated balance sheet. Grant
receivable reflects contractual amounts due and payable under the grant agreement. The payment of grants receivable are based
on progress reports provided to the grant provider by the Company. The research grant from the National Institute of Drug Abuse
was completed in April 2015. The Company has filed all required progress reports.
Research
grants are generally funded and paid through government or institutional programs. Amounts received under research grants are
nonrefundable, regardless of the success of the underlying research project, to the extent that such amounts are expended in accordance
with the approved grant project. The Company had no research grant revenue during the year ended December 31, 2016. During the
year ended December 31, 2015, the Company had research grant revenues of $86,916. At December 31, 2016 and 2015, the Company did
not have any grants receivable or unearned grant revenues.
Research
and Development
Research
and development costs include compensation paid to management directing the Company’s research and development activities,
and fees paid to consultants and outside service providers and organizations (including research institutes at universities),
patent fees and costs, and other expenses relating to the acquisition, design, development and clinical testing of the Company’s
treatments and product candidates.
Research
and development costs incurred by the Company under research grants are expensed as incurred over the life of the underlying contracts,
unless the terms of the contract indicate that a different expensing schedule is more appropriate.
The
Company reviews the status of its research and development contracts on a quarterly basis.
On
May 6, 2016, the Company made an advance payment to Duke University with respect to the Phase 2A clinical trial of CX1739. At
December 31, 2016, a balance of $48,912 remained from the advance payment.
License
Agreements
Obligations
incurred with respect to mandatory payments provided for in license agreements are recognized ratably over the appropriate period,
as specified in the underlying license agreement, and are recorded as liabilities in the Company’s consolidated balance
sheet, with a corresponding charge to research and development costs in the Company’s consolidated statement of operations.
Obligations incurred with respect to milestone payments provided for in license agreements are recognized when it is probable
that such milestone will be reached, and are recorded as liabilities in the Company’s consolidated balance sheet, with a
corresponding charge to research and development costs in the Company’s consolidated statement of operations. Payments of
such liabilities are made in the ordinary course of business.
Patent
Costs
Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on
the Company’s research efforts and any related patent applications, all patent costs, including patent-related legal and
filing fees, are expensed as incurred.
Comprehensive
Income (Loss)
Components
of comprehensive income or loss, including net income or loss, are reported in the financial statements in the period in which
they are recognized. Comprehensive income or loss is defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss) are reported net of any
related tax effect to arrive at comprehensive income (loss). The Company did not have any items of comprehensive income (loss)
for the years ended December 31, 2016 and 2015.
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, 2016 and 2015, 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,
|
|
|
|
2016
|
|
|
2015
|
|
Series
B convertible preferred stock
|
|
|
11
|
|
|
|
11
|
|
Series
G 1.5% convertible preferred stock
|
|
|
-
|
|
|
|
241,088
|
|
convertible
notes payable
|
|
|
29,768
|
|
|
|
56,342
|
|
Common
stock warrants
|
|
|
540,198
|
|
|
|
482,288
|
|
Common
stock options
|
|
|
1,307,749
|
|
|
|
774,842
|
|
Total
|
|
|
1,877,726
|
|
|
|
1,554,571
|
|
Reclassifications
Certain
comparative figures in 2015 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
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09),
Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance
under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09
also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from
customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain
or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
period. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of
the date of adoption. The adoption of ASU 2014-09 is not expected to have any impact on the Company’s financial statement
presentation or disclosures.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements - Going
Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is
substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.
In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued (or within one
year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should
be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are
issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s
ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that
it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the
financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December
15, 2016, and for annual periods and interim periods thereafter and therefore is effective for this annual period. The adoption
of ASU 2014-15 did not have any impact on the Company’s financial statement presentation or disclosures.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term. ASU 2016-02 requires classification of all cash payments within operating
activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows
arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is permitted. The Company is currently in the process of evaluating the impact
that the adoption of ASU 2016-02 will have on the Company’s financial statement presentation and disclosures.
In
March 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09), Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requires, among other things, that all income tax effects
of awards be recognized in the statement of operations when the awards vest or are settled. ASU 2016-09 also allows for an employer
to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting
and allows for a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for fiscal years beginning
after December 15, 2016 and therefore is effective for this annual period. The adoption of ASU 2016-09 has not had a significant
impact on the Company’s financial statement presentation or disclosures.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
4.
Notes Payable
Convertible
Notes Payable
On
November 5, 2014, the Company entered into a Convertible Note and Warrant Purchase Agreement (the “Purchase Agreement”)
with various accredited, non-affiliated investors (each, a “Purchaser”), pursuant to which the Company sold an aggregate
principal amount of $238,500 of its (i) Convertible Notes due September 15, 2015 (each a “Note”, and together, the
“Notes”) and (ii) Warrants to purchase shares of common stock (the “Warrants”) as described below. On
December 9, 2014, December 31, 2014, and February 2, 2015, the Company sold an additional $46,000, $85,000 and $210,000, respectively,
of principal amount of the Notes and Warrants to various accredited investors. This private placement, which generated aggregate
gross proceeds of $579,500, was terminated effective February 18, 2015. When initially issued, the outstanding principal balance
of each Note and all accrued and unpaid interest, compounded annually at 10%, was due and payable in full on September 15, 2015.
As discussed below, the maturity date of the Notes was subsequently extended to September 15, 2016, in accordance with the terms
of the Notes.
Each
Purchaser could elect, at any time, at its option and in its sole discretion, to convert the outstanding principal amount into
a fixed number of shares of the Company’s common stock equal to the quotient obtained by dividing the outstanding principal
amount, plus any accrued and unpaid interest, by $11.3750. In the case of a Qualified Financing (as defined in the Purchase Agreement),
the outstanding principal amount and accrued and unpaid interest under the Notes would automatically convert into common stock
at a common stock equivalent price of $11.3750. In the case of an Acquisition (as defined in the Purchase Agreement), the Company
could elect to either: (i) convert the outstanding principal amount and all accrued and unpaid interest under the Notes into shares
of common stock or (ii) accelerate the maturity date of the Notes to the date of closing of the Acquisition. Each Warrant to purchase
shares of common stock was exercisable into a fixed number of shares of common stock of the Company calculated as each Purchaser’s
investment amount divided by $11.3750. The Warrants were originally exercisable through September 15, 2015 at a fixed price of
$11.3750 per share and did not have any cashless exercise provisions. The shares of common stock issuable upon conversion of the
Notes and exercise of the Warrants were not subject to any registration rights.
Placement
agent fees, brokerage commissions, and similar payments were made in the form of cash and warrants to qualified referral sources
in connection with the sale of the Notes and Warrants. In connection with the initial closing on November 5, 2014, fees of $16,695
were paid in cash, based on 7% of the aggregate principal amount of the Notes issued to such referral sources, and the fees paid
in warrants (the “Placement Agent Warrants”) consisted of 1,467 warrants, reflecting warrants for that number of shares
equal to 7% of the number of shares of common stock into which the corresponding Notes are convertible. In connection with the
second closing, fees of $700 were paid in cash and 62 Placement Agent Warrants were issued. In connection with the third closing,
fees of $3,500 were paid in cash and 308 Placement Agent Warrants were issued. In connection with the fourth closing, fees of
$14,700 were paid in cash and 1,292 Placement Agent Warrants were issued. The Placement Agent Warrants have cashless exercise
provisions and were exercisable through September 15, 2015 at a fixed price of $11.3750 per share. The warrants issued to the
placement agent and/or its designees or affiliates in connection with the 2014 closings of the Purchase Agreement, to purchase
1,837 shares of the Company’s common stock, were valued pursuant to the Black-Scholes option-pricing model at $19,986, $614
and $3,340, respectively. The warrants issued to the placement agent and/or its designees or affiliates in connection with the
February 2, 2015 closing of the Purchase Agreement, to purchase 1,292 shares of the Company’s common stock, were valued
pursuant to the Black-Scholes option-pricing model at $12,726. Total financing costs relating to all closings of the Notes aggregated
$129,776, consisting of $93,110 paid in cash and $36,666 paid in the form of Placement Agent Warrants, and were being amortized
as additional interest expense over the original term of the Notes through September 15, 2015. During the years ended December
31, 2016 and 2015, zero dollars and $114,129, respectively, was charged to interest expense with respect to the amortization of
capitalized financing costs.
Aurora
Capital LLC (“Aurora”), a related party as described at Note 8, was the placement agent for this financing, and Aurora
and its designees and/or affiliates received aggregate fees in connection with this financing in the form of $33,425 in cash and
Placement Agent Warrants to purchase 2,938 shares of common stock in connection with the four closings.
The
Notes and 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 of Regulation
D promulgated thereunder. The Notes and Warrants and the shares of common stock issuable upon conversion of the Notes and exercise
of the Warrants were not registered under the Securities Act or any other applicable securities laws, and unless so registered,
may not be offered or sold in the United States except pursuant to an exemption from the registration requirements of the Securities
Act.
The
Company used the Black-Scholes option-pricing model to estimate the fair value of the Warrants to purchase 50,945 shares of the
Company’s common stock sold to investors in connection with the four closings at a fixed exercise price of $11.3750 per
share. The Company considered the face value of the Notes to be representative of their fair value. The Company applied the relative
fair value method to allocate the proceeds from the borrowing to the Notes and the Warrants. Consequently, approximately 50% of
the proceeds of the borrowing of $290,394 were attributed to the debt instrument. The 50% value attributed to the Warrants of
$289,106 was amortized as additional interest expense over the original term of the Notes. During the years ended December 31,
2016 and 2015, zero dollars and $267,822, respectively, was charged to interest expense from the amortization of debt discount
related to the value attributed to the Warrants. The carrying value of the Notes was further reduced by a discount for a beneficial
conversion feature of $290,394. The value attributed to the beneficial conversion feature was amortized as additional interest
expense over the original term of the Notes During the years ended December 31, 2016 and 2015, zero dollars and $265,529, respectively,
was charged to interest expense from the amortization of debt discount related to the value attributed to the beneficial conversion
feature.
On
August 13, 2015, the Company, pursuant to the terms of the Notes, gave the Note holders written notice, thirty days in advance
of the September 15, 2015 maturity date of the Notes, of the Company’s election to extend the maturity date of the Notes
to September 15, 2016. As a consequence of this election, under the terms of the Notes, the Company issued to Note holders 27,396
additional warrants (the “New Warrants”) that were exercisable through September 15, 2016. As set forth in the Notes,
the New Warrants were exercisable for that number of shares of common stock of the Company calculated as the principal amount
of the Notes (an aggregate amount of $579,500), plus any accrued and unpaid interest (an aggregate amount of $43,758), multiplied
by 50%, and then divided by $11.3750. The New Warrants otherwise had terms substantially similar to the 50,945 Warrants originally
sold to investors. In connection with the extension of the maturity date of the Notes, the Board of Directors of the Company also
determined to extend the termination date of the 50,945 original Warrants to September 15, 2016, so that they were coterminous
with the new maturity date of the Notes.
The
Company used the Black-Scholes option-pricing model to estimate the fair value of the New Warrants to purchase 27,396 shares of
the Company’s common stock and the fair value of extending the termination date of the 50,945 original Warrants sold to
investors. The Company considered the face value of the Notes, plus the accrued interest thereon, to be representative of their
fair value. The relative fair value method generated respective fair values for each of the Notes, including accrued interest,
and the New Warrants and extension of the original Warrants, of approximately 55% for the Notes, including accrued interest, and
approximately 45% for the New Warrants and extension of the original Warrants. The 45% value attributed to the New Warrants and
extension of the original Warrants of $277,918 was amortized as additional interest expense over the extended term of the Notes.
During
the years ended December 31, 2016 and 2015, $129,857 and $81,249, respectively, was charged to interest expense from the amortization
of debt discount related to the value attributed to the New Warrants and extension of the original Warrants. The carrying value
of the Notes was further reduced by a discount for a beneficial conversion feature of $206,689. The value attributed to the beneficial
conversion feature was amortized as additional interest expense over the extended term of the Notes. During the years ended December
31, 2016 and 2015, $45,186 and $60,425, respectively, was charged to interest expense from the amortization of debt discount related
to the value attributed to the beneficial conversion feature.
Effective
September 14, 2015, placement agent warrants previously issued in connection with the four closings of the Note and Warrant financing
in December 2014 through February 2015, representing the right to acquire a total of 3,129 shares of common stock, were exercised
on a cashless basis, resulting in the net issuance of 145 shares of common stock. The gross exercise price of the placement agent
warrants that were exercised on a cashless basis was $35,595.
During
April and May 2016, the Company entered into Note Exchange Agreements with certain note holders representing an aggregate of $303,500
of principal amount of the Notes (out of a total of $579,500 of original principal amount of the Notes). Pursuant to the Note
Exchange Agreements, an aggregate of $344,483, which included accrued interest of $40,983, of the Notes were exchanged (together
with original warrants to purchase 26,681 shares of the Company’s common stock, New Warrants to purchase 14,259 shares of
the Company’s common stock, and the payment of an aggregate of $232,846 in cash) into a total of 101,508 shares of the Company’s
common stock. None of the Notes had previously been converted into shares of the Company’s common stock. For accounting
purposes, for those convertible note holders accepting the Company’s exchange offer, the Company evaluated the fair value
of the incremental consideration paid to induce the convertible note holders to exchange their convertible notes for equity (i.e.,
30,284 shares of common stock), based on the closing market price of the Company’s common stock on the date of each transaction,
and recorded a charge to operations of $188,274. Information with respect to the Black-Scholes variables used in connection with
the evaluation of the fair value of the exchange consideration is provided at Note 3.
During
year ended December 31, 2016, in connection with the Note Exchange Agreements, the Company wrote off and charged to interest expense
the unamortized discount related to the value attributed to the New Warrants and the extension of the original Warrants of $66,811,
and the unamortized discount related to the value attributed to the related beneficial conversion feature of $49,688.
On
September 15, 2016, the remaining outstanding Notes previously issued by the Company on November 5, 2014, December 9, 2014, December
31, 2014, and February 2, 2015, matured and the principal and accrued interest under those remaining Notes became due and payable
upon demand. At the September 15, 2016 maturity date, Notes totaling $329,261, which included accrued interest of $53,261, became
due and payable upon demand. During October 2016, holders of four Notes issued formal notices of default, and as a result, those
four Notes were deemed to be in default under the terms of the Notes and began to accrue interest at the default rate of 12% per
annum from the default date in accordance with the terms of the Notes. As of December 31, 2016 such notes remained in default
and totaled $75,038, including accrued interest of $14,038.
Additionally,
on September 15, 2016, the remaining outstanding 13,137 New Warrants and 24,264 original Warrants (which had been previously extended)
expired.
The
Notes consist of the following at December 31, 2016 and 2015:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
Principal
amount of notes payable
|
|
$
|
276,000
|
|
|
$
|
579,500
|
|
Add
accrued interest payable
|
|
|
62,616
|
|
|
|
61,388
|
|
|
|
|
338,616
|
|
|
|
640,888
|
|
Less
unamortized costs:
|
|
|
|
|
|
|
|
|
Stock
warrant discounts
|
|
|
-
|
|
|
|
(196,669
|
)
|
Beneficial
conversion feature discounts
|
|
|
-
|
|
|
|
(146,263
|
)
|
Capitalized
financing costs
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
338,616
|
|
|
$
|
297,956
|
|
As
of December 31, 2016, the remaining outstanding Notes were convertible into 29,768 shares of the Company’s common stock,
including 5,505 shares attributable to accrued interest of $62,616 payable as of such date. As of December 31, 2015, the Notes
were convertible into 56,342 shares of the Company’s common stock, including 5,397 shares attributable to accrued interest
of $61,388 payable as of such date.
Note
Payable to SY Corporation Co., Ltd.
On
June 25, 2012, the Company borrowed 465,000,000 Won (the currency of South Korea, equivalent to approximately $400,000 United
States Dollars) from and executed a secured note payable to SY Corporation Co., Ltd., formerly known as Samyang Optics Co. Ltd.
(“SY Corporation”), an approximately 20% common stockholder of the Company at that time. SY Corporation was a significant
stockholder and a related party at the time of the transaction, but has not been a significant stockholder or related party of
the Company subsequent to December 31, 2014. The note accrues simple interest at the rate of 12% per annum and had a maturity
date of June 25, 2013. The Company has not made any payments on the promissory note. At June 30, 2013 and subsequently, the promissory
note was outstanding and in default, although SY Corporation has not issued a notice of default or a demand for repayment. The
Company believes that SY Corporation is in default of its obligations under its January 2012 license agreement, as amended, with
the Company, but the Company has not yet issued a notice of default. The Company is continuing efforts towards a comprehensive
resolution of the aforementioned matters involving SY Corporation.
The
promissory note is secured by collateral that represents a lien on certain patents owned by the Company, including composition
of matter patents for certain of the Company’s high impact ampakine compounds and the low impact ampakine compounds CX2007
and CX2076, and other related compounds. The security interest does not extend to the Company’s patents for its ampakine
compounds CX1739 and CX1942, or to the patent for the use of ampakine compounds for the treatment of respiratory depression.
Note
payable to SY Corporation consists of the following at December 31, 2016 and 2015:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
Principal
amount of note payable
|
|
$
|
399,774
|
|
|
$
|
399,774
|
|
Accrued
interest payable
|
|
|
219,362
|
|
|
|
171,257
|
|
Foreign
currency transaction adjustment
|
|
|
(25,129
|
)
|
|
|
(9,463
|
)
|
|
|
$
|
594,007
|
|
|
$
|
561,568
|
|
Interest
expense with respect to this promissory note was $48,105 and $48,639 for years ended December 31, 2016 and 2015, respectively.
Advances
and Notes Payable to Officers
On
June 16, 2015, Dr. Arnold S. Lippa, the Chairman of the Company’s Board of Directors and Chief Executive Officer at that
time, advanced $40,000 to the Company for working capital purposes. Such advance was due on demand with interest at 10% per annum.
On September 3, 2015, the Company repaid the working capital advance, which included accrued interest of $877, from the proceeds
from the August and September 2015 closings of the private placement of its units of common stock and warrants.
On
January 29, 2016, Dr. Arnold S. Lippa, the Company’s Chief Scientific Officer and Chairman of the Board of Directors, advanced
$52,600 to the Company for working capital purposes under a demand promissory note with interest at 10% per annum. The note was
secured by the assets of the Company. During the year ended December 31, 2016, $4,856 was charged to interest expense with respect
to the note. In connection with the loan, Dr. Lippa was issued a fully vested warrant to purchase 10,309 shares of the Company’s
common stock at an exercise price of $5.1025 per share, which was the closing market price of the Company’s common stock
on the date of grant. The warrant expires on January 29, 2019 and may be exercised on a cashless basis. The aggregate grant date
fair value of the warrant, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $48,245, and
was charged to interest expense as additional consideration for the loan during the year ended December 31, 2016.
On
February 2, 2016, Dr. James S. Manuso, the Company’s Chief Executive Officer and Vice Chairman of the Board of Directors,
advanced $52,600 to the Company for working capital purposes under a demand promissory note with interest at 10% per annum. The
note was secured by the assets of the Company. During the year ended December 31, 2016, $4,799 was charged to interest expense
with respect to the note. In connection with the loan, Dr. Manuso was issued a fully vested warrant to purchase 8,092 shares of
the Company’s common stock at an exercise price of $6.5000 per share, which was the closing market price of the Company’s
common stock on the date of grant. The warrant expires on February 2, 2019 and may be exercised on a cashless basis. The aggregate
grant date fair value of the warrant, as calculated pursuant to the Black-Scholes option pricing model, was determined to be $48,392,
and was charged to interest expense as additional consideration for the loan during the year ended December 31, 2016.
On
September 22, 2016, Dr. James S. Manuso, the Company’s Chief Executive Officer and Vice Chairman of the Board of Directors,
each advanced $25,000 to the Company for working capital purposes under a demand promissory note with interest at 10% per annum.
The note was secured by the assets of the Company. During the year ended December 31, 2016, $685 was charged to interest expense
with respect to the note. In connection with the loan, Dr. Manuso was issued a fully vested warrant to purchase 5,000 shares of
the Company’s common stock at an exercise price of $5.0000 per share, which was the closing market price of the Company’s
common stock on the date of grant. The warrant expires on September 22, 2019 and may be exercised on a cashless basis. The aggregate
grant date fair value of the warrant, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $22,151,
and was charged to interest expense as additional consideration for the loan during the year ended December 31, 2016.
On
September 23, 2016, Dr. Arnold S. Lippa, the Company’s Chief Scientific Officer and Chairman of the Board of Directors,
advanced $25,000 to the Company for working capital purposes under a demand promissory note with interest at 10% per annum. The
note was secured by the assets of the Company. During the year ended December 31, 2016, $678 was charged to interest expense with
respect to the note. In connection with the loan, Dr. Lippa was issued a fully vested warrant to purchase 5,155 shares of the
Company’s common stock at an exercise price of $4.8500 per share, which was the closing market price of the Company’s
common stock on the date of grant. The warrant expires on September 23, 2019 and may be exercised on a cashless basis. The aggregate
grant date fair value of the warrant, as calculated pursuant to the Black-Scholes option pricing model, was determined to be $22,152,
and was charged to interest expense as additional consideration for the loan during the year ended December 31, 2016.
Other
Short-Term Notes Payable
Other
short-term notes payable at December 31, 2016 and 2015 consisted of premium financing agreements with respect to various insurance
policies. At December 31, 2016, a premium financing agreement was payable, with interest at 6.21% per annum, in ten monthly installments
of $4,116 through January 14, 2017. At December 31, 2015, a premium financing agreement was payable, with interest at 5.08% per
annum, in ten monthly installments of $3,697 through January 14, 2016.
5.
Settlement and Payment Agreements
Effective
January 29, 2015, the Company executed a settlement agreement with its former Vice President and Chief Financial Officer, as amended
on February 4, 2015, that resulted in the settlement of potential claims for a total cash payment of $26,000 to be paid on or
before June 30, 2015 (of which $6,000 was paid on execution and $1,500 was paid in March 2015), plus the issuance of a stock option
to purchase 1,538 shares of common stock exercisable at $16.6400 (the closing market price on the date of grant) per share for
a period of five years, and valued pursuant to the Black-Scholes option-pricing model at $25,450. In addition to other provisions,
the settlement agreement included mutual releases. The Company owed $18,500 at March 31, 2015 for the remaining balance of the
cash portion of the settlement. On June 29, 2015, the settlement agreement was further amended, resulting in a cash payment of
$3,000 against the outstanding balance, an extension of the $15,500 remaining balance due through December 31, 2015, subject to
a further partial cash payment of $3,000, which was paid on September 28, 2015, plus the issuance of a stock option to purchase
154 shares of common stock exercisable at $5.8500 per share (the closing market price on the date of grant) for a period of five
years, and valued pursuant to the Black-Scholes option-pricing model at $840. Accordingly, during the year ended December 31,
2015, the Company recorded a net gain of $91,710 with respect to the settlement, as amended, with its former Vice President and
Chief Financial Officer. In December 2015, the remaining balance due of $12,500, plus accrued interest of $775, was paid as scheduled.
On
April 8, 2015, the Company entered into a Settlement Agreement with one of its patent law firms to settle amounts due to such
firm for services rendered and costs incurred with respect to foreign associates and outside vendors aggregating $194,736. Pursuant
to the terms of the Settlement Agreement, the law firm received a cash payment of $15,000, non-qualified stock options to purchase
7,755 shares of common stock exercisable at $15.4700 per share for a period of five years, and a short-term unsecured note payable
in the principal amount of $59,763. The stock options were valued pursuant to the Black-Scholes option-pricing model at $119,217,
based on the closing price of the Company’s common stock on April 8, 2015 of $15.4700 per share. The note payable, with
interest at 10% per annum, was paid as scheduled in December 2015. In addition to various other provisions, the Settlement Agreement
provides that the Company will have the option to pay for one-half of invoices for future legal services (excluding costs with
respect to foreign associates and outside vendors) in the form of stock options. The Settlement Agreement also includes a release
of the lien previously filed by the law firm against certain of the Company’s patents and patent applications relating to
its ampakine technology in the United States Patent and Trademark Office, as well as for mutual releases.
During
the three months ended December 31, 2015, the Company executed agreements with four current professional service providers (including
the Company’s patent law firm referred to above) that resulted in the partial settlement of amounts owed to them by the
Company. Obligations aggregating $916,827 were settled for $15,000 in cash, the issuance of a short-term note payable of $59,763
as described above, the issuance of 27,890 shares of common stock valued at $158,625 ($5.6875 per share), which was the then closing
market price of the Company’s common stock, and the issuance of stock options to purchase an aggregate of 97,288 shares
of common stock exercisable, in each case, at the closing market price of the Company’s common stock on the date of issuance
of the stock options. Options for 7,755 shares were exercisable at $15.4700 per share for a period of five years, and valued pursuant
to the Black-Scholes option-pricing model at an aggregate of $119,217 ($15.3725 per share). Options for 89,532 shares were exercisable
at $5.6875 per share for a period of five years, and valued pursuant to the Black-Scholes option-pricing model at an aggregate
of $488,847 ($5.4600 per share). The negotiated agreements resulted in the Company recognizing a gain of $75,375 during the year
ended December 31, 2015.
On
June 27, 2016, the Company issued 16,453 of its common stock valued at $96,250 ($5.8500 per share), which was the closing market
price of the Company’s common stock on that date, in partial payment of legal fees to one of its patent law firms.
On
September 2, 2016, the Company issued a stock option to purchase 7,222 shares of its common stock in partial payment of consulting
fees to one of its professional service providers. The stock option was fully vested on the date of grant and will expire on September
2, 2021. The exercise price of the stock option was established on the grant date at $4.50 per share, which was the closing market
price of the Company’s common stock on the date of grant. The aggregate grant date fair value of the stock option, calculated
pursuant to the Black-Scholes option-pricing model, was determined to be $31,174. The issuance of the stock option resulted in
a gain to the Company of $1,076 during the year ended December 31, 2016.
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, 2016 and
2015, 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,
2016, 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 outstanding as of December 31, 2016 and
2015.
Series
B Preferred Stock outstanding as of December 31, 2016 and 2015 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,
2016 and 2015, the shares of Series B Preferred Stock outstanding are convertible into 11 shares of common stock. The Company
may redeem the Series B Preferred Stock for $25,001, equivalent to $0.6667 per share, an amount equal to its liquidation preference,
at any time upon 30 days prior notice.
Series
G 1.5% Convertible Preferred Stock
On
March 18, 2014, the Company entered into Securities Purchase Agreements with various accredited investors (the “Initial
Purchasers”), pursuant to which the Company sold an aggregate of 753.22 shares of its Series G 1.5% Convertible Preferred
Stock for a purchase price of $1,000 per share, or an aggregate purchase price of $753,220. This financing represented the initial
closing on the private placement (the “Series G Private Placement”). The Initial Purchasers in this tranche of the
Series G Private Placement consisted of (i) Dr. Arnold S. Lippa, the Chairman of the Company’s Board of Directors and Chief
Executive Officer at that time, who invested $250,000 for 250 shares of Series G 1.5% Convertible Preferred Stock, and (ii) new,
non-affiliated, accredited investors. Neither the Series G 1.5% Convertible Preferred Stock nor the underlying shares of common
stock had any registration rights.
The
placement agents and selected dealers in connection with the initial tranche of the Series G Private Placement received cash fees
totaling $3,955 as compensation and an obligation of the Company to issue warrants to acquire 39,585 shares of common stock, totaling
approximately 5.6365% of the shares of common stock into which the Series G 1.5% Convertible Preferred Stock may convert, issuable
upon completion of all closings of the Series G Private Placement and exercisable for five years, at a fixed price of $1.287,
which is 120% of the conversion price at which the Series G 1.5% Convertible Preferred Stock may convert into the Company’s
common stock. The warrants issuable to the placement agents and selected dealers in connection with the initial tranche of the
Series G Private Placement were valued pursuant to the Black-Scholes option-pricing model at $443,848.
On
April 17, 2014, the Company entered into Securities Purchase Agreements with various accredited investors (together with the Initial
Purchasers as defined above, the “Purchasers”), pursuant to which the Company sold an aggregate of an additional 175.28
shares of its Series G 1.5% Convertible Preferred Stock, for a purchase price of $1,000 per share, or an aggregate purchase price
of $175,280. This was the second and final closing on the Series G Private Placement, in which a total of 928.5 shares of Series
G 1.5% Convertible Preferred Stock were sold for an aggregate purchase price of $928,500. The Purchasers in the second and final
tranche of the Series G Private Placement consisted of new, non-affiliated, accredited investors and non-management investors
who had also invested in the first closing of the Series G Private Placement. One of the investors in this second and final closing
of the Series G Private Placement was an affiliate of an associated person of Aurora, a related party (see Note 8). Neither the
Series G 1.5% Convertible Preferred Stock nor the underlying shares of common stock had any registration rights.
The
placement agents and selected dealers in connection with the second tranche of the Series G Private Placement received cash fees
of $3,465 as compensation and an obligation of the Company to issue warrants to acquire 19,650 shares of common stock, totaling
approximately 12% of the shares of common stock into which the Series G 1.5% Convertible Preferred Stock may convert, issuable
upon completion of all closings of the Series G Private Placement and exercisable for five years, at a fixed price of $1.287,
which is 120% of the conversion price at which the Series G 1.5% Convertible Preferred Stock may convert into the Company’s
common stock. The warrants issuable to the placement agents and selected dealers in connection with the second closing of the
Series G Private Placement were valued pursuant to the Black-Scholes option-pricing model at $220,321.
The
Series G 1.5% Convertible Preferred Stock had a stated value of $1,000 per share and a stated dividend at the rate per share (as
a percentage of the Stated Value per share) of 1.5% per annum, compounded quarterly, payable quarterly within 15 calendar days
of the end of each fiscal quarter of the Company, in duly authorized, validly issued, fully paid and non-assessable shares of
Series G 1.5% Convertible Preferred Stock, which may include fractional shares of Series G 1.5% Convertible Preferred Stock. As
the stated value of the Series G 1.5% Convertible Preferred Stock was $1,000 per share, and the fixed conversion price was $1.0725,
each share of Series G 1.5% Convertible Preferred Stock was convertible into 932.4 shares of common stock. The aggregate of 928.5
shares of Series G 1.5% Convertible Preferred Stock sold in all of the closings of the Series G Private Placement were initially
convertible into a total of 865,734 shares of common stock.
The
Series G 1.5% Convertible Preferred Stock became convertible, beginning 60 days after the last share of Series G 1.5% Convertible
Preferred Stock was issued in the Series G Private Placement, at the option of the holder, into common stock at the applicable
conversion price, at a rate determined by dividing the Stated Value of the shares of Series G 1.5% Convertible Preferred Stock
to be converted by the conversion price, subject to adjustments for stock dividends, splits, combinations and similar events as
described in the form of Certificate of Designation. In addition, the Company had the right to require the holders of the Series
G 1.5% Convertible Preferred Stock to convert such shares into common stock under certain enumerated circumstances as set forth
in the Certificate of Designation.
Upon
either (i) a Qualified Public Offering (as defined in the Certificate of Designation) or (ii) the affirmative vote of the holders
of a majority of the Stated Value of the Series G 1.5% Convertible Preferred Stock issued and outstanding, all outstanding shares
of Series G 1.5% Convertible Preferred Stock, plus all accrued or declared, but unpaid, dividends thereon, were mandatorily convertible
into such number of shares of common stock determined by dividing the Stated Value of such Series G 1.5% Convertible Preferred
Stock (together with the amount of any accrued or declared, but unpaid, dividends thereon) by the Conversion Price (as defined
in the Certificate of Designation).
Except
as described in the Certificate of Designation, holders of the Series G 1.5% Convertible Preferred Stock voted together with holders
of the Company common stock on all matters, on an as-converted to common stock basis, and not as a separate class or series (subject
to limited exceptions).
In
the event of any liquidation or winding up of the Company prior to and in preference to any Junior Securities (including common
stock), the holders of the Series G 1.5% Convertible Preferred Stock were entitled to receive, in preference to the holders of
the Company’s common stock, a per share amount equal to the Stated Value, plus any accrued and unpaid dividends thereon.
Purchasers
in the Series G Private Placement of the Series G 1.5% Convertible Preferred Stock executed written consents in favor of (i) approving
and adopting an amendment to the Company’s Second Restated Certificate of Incorporation that increased the number of authorized
shares of the Company to 1,405,000,000, of which 1,400,000,000 were shares of common stock and 5,000,000 were shares of preferred
stock, and (ii) approving and adopting the Cortex Pharmaceuticals, Inc. 2014 Equity, Equity-Linked and Equity Derivative Incentive
Plan. Subsequently, a Certificate of Amendment to the Company’s Second Restated Certificate of Incorporation, to effect
the decrease in the authorized shares to 70,000,000, of which 65,000,000 are shares of common stock and 5,000,000 are shares of
preferred stock, was filed with the Secretary of State of the State of Delaware on September 1, 2016.
The
shares of Series G 1.5% Convertible Preferred Stock were offered and sold without registration under the Securities Act in reliance
on the exemptions provided by Section 4(a)(2) of the Securities Act as provided in Rule 506(b) of Regulation D promulgated thereunder.
The shares of Series G 1.5% Convertible Preferred Stock and the Company’s common stock issuable upon conversion of the shares
of Series G 1.5% Convertible Preferred Stock were not registered under the Securities Act or any other applicable securities laws,
and unless so registered, may not be offered or sold in the United States except pursuant to an exemption from the registration
requirements of the Securities Act.
The
Company recorded dividends on the Series G 1.5% Convertible Preferred Stock of $1,165 and $6,867 for the years ended December
31, 2016 and 2015, respectively, which was paid through the issuance of an additional 1.1 shares and 6.9 shares, respectively,
of Series G 1.5% Convertible Preferred Stock.
The
warrants that the placement agents and selected dealers received in connection with all closings of the Series G Private Placement,
which were issued effective April 17, 2014, represent the right to acquire 59,235 shares of common stock exercisable for five
years at a fixed price of $1.287, which is 120% of the conversion price at which the Series G 1.5% Convertible Preferred Stock
may convert into the Company’s common stock.
Aurora,
a related party (see Note 8), was one of the placement agents for this financing, and Aurora and its designees and/or affiliates
received fees in connection with this financing in the form of cash of $2,800 and warrants to purchase 32,083 shares of common
stock during the year ended December 31, 2014. Both Dr. Arnold S. Lippa and Jeff E. Margolis, officers and directors of the Company
since March 22, 2013, have indirect ownership interests in Aurora through interests held in its members, and Jeff E. Margolis
is also an officer of Aurora.
Effective
August 25, 2015, a placement agent warrant issued on April 17, 2014 in conjunction with the Series G Private Placement of the
Series G 1.5% Convertible Preferred Stock, representing the right to acquire a total of 7,424 shares of common stock, was exercised
in part (50%, or 3,712 shares) on a cashless basis, resulting in the net issuance of 3,345 shares of common stock. The gross exercise
price of the placement agent warrant that was exercised on a cashless basis was $4,778.
During
the three months ended March 31, 2015, 25.323705 shares of Series G 1.5% Convertible Preferred Stock, including 0.323705 dividend
shares, were converted into 23,612 shares of common stock on a cashless basis. During the three months ended June 30, 2015, an
aggregate of 538.208190 shares of Series G 1.5% Convertible Preferred Stock, including 8.728190 dividend shares, were converted
into 501,826 shares of common stock on a cashless basis. During the three months ended September 30, 2015, an aggregate of 57.506190
shares of Series G 1.5% Convertible Preferred Stock, including 1.206190 dividend shares, were converted into 53,619 shares of
common stock on a cashless basis. There were no conversions of Series G 1.5% Convertible Preferred Stock into shares of common
stock during the three months ended December 31, 2015. Accordingly, during the year ended December 31, 2015, 621.038085 shares
of Series G 1.5% Convertible Preferred Stock, including 10.258085 dividend shares, were converted into 579,057 shares of common
stock on a cashless basis.
As
of December 31, 2015, the remaining outstanding shares of Series G 1.5% Convertible Preferred Stock were convertible into 241,088
shares of the Company’s common stock, including 6,384 shares attributable to the 1.5% dividend on such shares of $6,847
accrued as of such date.
On
April 17, 2016, the remaining unconverted 259.7 shares of Series G 1.5% Convertible Preferred Stock outstanding (including accrued
but unpaid dividends) were automatically and mandatorily redeemed by conversion into 242,173 newly issued shares of common stock
at a conversion price of $1.0725 per share.
Common
Stock
As
discussed above, the holders of the Series G 1.5% Convertible Preferred Stock approved and adopted an amendment to increase the
number of authorized shares of the Company to 1,405,000,000, of which 1,400,000,000 were shares of common stock and 5,000,000
were shares of preferred stock. The Company also sought, and on April 17, 2014 obtained by written consent, sufficient votes of
the holders of its common stock, voting as a separate class, to effect this amendment. A Certificate of Amendment to the Company’s
Certificate of Incorporation to effect the increase in the authorized shares was filed with the Secretary of State of the State
of Delaware on April 17, 2014.
On
August 16, 2016, at a special meeting of the stockholders of the Company, the stockholders approved an amendment to the Company’s
Second Restated Certificate of Incorporation (i) to effect, at the discretion of the Company’s Board of Directors, a three
hundred twenty five-to-one (325-to-1) reverse stock split of all of the outstanding shares of the Company’s common stock,
par value $0.001 per share, and (ii) to set the number of the Company’s authorized shares of stock at 70,000,000 shares,
consisting of 65,000,000 shares designated as common stock, par value $0.001 per share, and 5,000,000 shares designated as preferred
stock, par value $0.001 per share. On September 1, 2016, the Company filed a Certificate of Amendment to the Company’s Second
Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the approved amendment.
Pursuant
to the amendment, an aggregate of 191.068 fractional shares resulting from the reverse stock split were not issued, but were to
be paid out in cash (without interest or deduction) in an amount equal to the number of shares exchanged into such fractional
share multiplied by the average closing trading price of the Company’s common stock on the OTCQB for the five trading days
immediately before the Certificate of Amendment effecting the reverse stock split was filed with the Delaware Secretary of State
($6.7899 per share, on a post reverse stock split basis) for an aggregate of $1,298.
On
September 18, 2014, Dr. John Greer, Ph.D., was appointed to the position of Chairman of the Company’s Scientific Advisory
Board. Dr. Greer is Professor of Physiology and former Director of the Neuroscience and Mental Health Institute at the University
of Alberta, holds multiple grants regarding research into neuromuscular control of breathing, and is the inventor on the method
of treatment patents licensed by the Company with respect to ampakines. In connection with the appointment of Dr. Greer as Chairman
of the Company’s Scientific Advisory Board on September 18, 2014, the Board of Directors awarded 6,154 shares of common
stock of the Company to Dr. Greer (through his wholly-owned consulting company, Progress Scientific, Inc.), vesting 25% upon appointment,
25% on September 30, 2014, 25% on December 31, 2014, and 25% on March 31, 2015. The stock award was valued at $21.4500 per share,
which was the closing price of the Company’s common stock on September 18, 2014. This stock award was made under the Company’s
2014 Equity, Equity-Linked and Equity Derivative Incentive Plan. During the period September 18, 2014 through December 31, 2014,
the Company recorded a charge to operations of $99,000 with respect to this stock award. During the year ended December 31, 2015,
the Company recorded a final charge to operations of $33,000 with respect to this stock award.
Effective
October 15, 2014, Richard Purcell was appointed as the Company’s Senior Vice President of Research and Development. In conjunction
with his appointment, the Company agreed to issue to Mr. Purcell 6,154 shares of the Company’s common stock, with 25% of
such stock grant vesting and issuable every three months after the date of his appointment (i.e., on January 15, 2015, April 15,
2015, July 15, 2015 and October 15, 2015), subject to Mr. Purcell’s continued relationship with the Company on each of the
vesting dates. The stock grant was made under the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan.
Based on the Company’s closing stock price on October 15, 2014 of $25.3500 per share, during the year ended December 31,
2015, the Company recorded a charge to operations of $156,000, with respect to this stock award.
2015
Unit Offering
On
August 28, 2015, the Company entered into a Second Amended and Restated Common Stock and Warrant Purchase Agreement (the “Purchase
Agreement”) with various accredited investors (each, a “Purchaser”, and together with purchasers in subsequent
closings in the private placement, the “Purchasers”), pursuant to which the Company sold units for aggregate cash
consideration of $721,180, with each unit consisting of (i) one share of the Company’s common stock, representing an aggregate
of 105,517 shares of common stock, and (ii) one warrant to purchase two additional shares of common stock, representing an aggregate
of 211,034 warrants. This financing represented the initial closing of a private placement of up to $3,000,000. On September 28,
2015, the Company completed a second closing of the Purchase Agreement with various additional Purchasers, pursuant to which the
Company sold units for aggregate cash consideration of $218,530, with each unit consisting of (i) one share of the Company’s
common stock, representing an aggregate of 31,973 shares of common stock, and (ii) one warrant to purchase two additional shares
of common stock, representing an aggregate of 63,946 Warrants. On November 2, 2015, the Company completed a third closing of the
Purchase Agreement with various Purchasers, pursuant to which the Company sold units for aggregate cash consideration of $255,000,
with each unit consisting of (i) one share of the Company’s common stock, representing an aggregate of 37,309 shares of
common stock, and (ii) one warrant to purchase two additional shares of common stock, representing an aggregate of 74,618 warrants.
This third closing brought the aggregate amount raised under this private placement as of November 2, 2015 to $1,194,710.
The
unit price in each closing of the private placement was $6.8348 (the “Per Unit Price”). The Warrants are exercisable
through September 30, 2020 and may be exercised at a price of $6.8348 for each share of Common Stock to be acquired upon exercise.
The Purchasers consisted of non-affiliated investors, other than Dr. James S. Manuso, the current President and Chief Executive
Officer of the Company, who invested $250,000 in the initial closing of the private placement, and one other investor who invested
$301,180 in the private placement and became an affiliate of the Company by virtue of his aggregate stock holdings in the Company.
The Warrants do not contain any cashless exercise provisions or reset rights.
No
registration rights were granted to any Purchaser in this private placement with respect to (i) the shares of common stock issued
as part of the units, (ii) the warrants, or (iii) the shares of common stock issuable upon exercise of the warrants.
Placement
agent fees, brokerage commissions, and similar payments were made in the form of cash and warrants to qualified referral sources
in connection with certain sales of the shares of common stock and warrants, while other sales, including the sale to Dr. James
S. Manuso, did not result in any fees or commissions. Accordingly, the amount of such fees, on a percentage basis, varies in each
closing. The fees paid to such referral sources for the initial closing in cash totaled $47,118, or 6.5% of the aggregate amount
paid for the units sold. The fees paid in warrants for the initial closing to such referral sources (the warrants paid to qualified
referral sources are referred to herein as the “Placement Agent Warrants”) consist of warrants for 6,894 shares of
common stock, or that number of shares equal to 6.5% of the number of shares of common stock issued as part of the units, but
not the shares underlying the warrants. In connection with the second closing, fees paid to referral sources in cash totaled $18,603,
or 8.5% of the aggregate amount paid for the units sold, and 2,722 Placement Agent Warrants were issued, or warrants for that
number of shares equal to 8.5% of the number of shares of common stock issued as part of the units, but not the shares underlying
the Warrants. In connection with the third closing, fees paid to referral sources in cash totaled $25,500, or 10% of the aggregate
amount paid for the units sold, and 3,731 Placement Agent Warrants were issued, or warrants for that number of shares equal to
10% of the number of shares of common stock issued as part of the units, but not the shares underlying the Warrants. Placement
Agent Warrants are exercisable until September 30, 2020 at the Per Unit Price. The Placement Agent Warrants have cashless exercise
provisions. One of the placement agents that received Placement Agent Warrants is Aurora. Both Arnold S. Lippa and Jeff E. Margolis,
officers and directors of the Company, have indirect ownership interests in Aurora through interests held in its members, and
Jeff E. Margolis is also an officer of Aurora. As a result, both Arnold S. Lippa and Jeff E. Margolis, or entities in which they
have interests, will receive a portion of the Placement Agent Warrants awarded in this private placement.
In
addition to the above described placement agent fees, brokerage commissions, and similar payments that were made in the form of
cash and warrants to qualified referral sources, the Company also paid $10,164 in cash to other professionals for services related
to the three closings.
The
shares of common stock and warrants were offered and sold without registration under the Securities Act in reliance on the exemptions
provided by Section 4(a)(2) of the Securities Act as provided in Rule 506(b) of Regulation D promulgated thereunder. None of the
shares of common stock issued as part of the units, the warrants, the common stock issuable upon exercise of the warrants, the
Placement Agent Warrants or the shares of common stock issuable upon exercise of the Placement Agent Warrants were registered
under the Securities Act or any other applicable securities laws, and unless so registered, may not be offered or sold in the
United States except pursuant to an exemption from the registration requirements of the Securities Act.
Unit
Exchange Agreement
During
April and May 2016, the Company entered into Unit Exchange Agreements with certain warrant holders who had acquired units in connection
with the Second Amended and Restated Common Stock and Warrant Purchase Agreement on August 28, 2015, September 28, 2015 or November
2, 2015. The Unit Exchange Agreements provided for the warrant holders to exchange (i) existing warrants to purchase an aggregate
of 217,187 shares of the Company’s common stock, plus (ii) an aggregate of $529,394 in cash, in return for (i) an aggregate
of 108,594 shares of the Company’s common stock with a total market price of $728,859 (average $6.7275 per share), and (ii)
new warrants to purchase an aggregate of 108,594 shares of the Company’s common stock with an exercise price of $4.8750
per share, exercisable for cash or on a cashless basis through the original expiration date of September 30, 2020.
For
accounting purposes, for those unit warrant holders accepting the Company’s exchange offer, the Company evaluated the fair
value of the incremental consideration paid to induce the unit warrant holders to exchange their original warrants for exchanged
warrants and determined that the Company did not incur any cost with respect to the exchange transactions. Information with respect
to the Black-Scholes variables used in connection with the evaluation of the fair value of the exchange consideration is provided
at Note 2.
1st
2016 Unit Offering
On
January 8, 2016, the Company initiated a new equity private placement, consisting of units of common stock and warrants, up to
an aggregate of $2,500,000, with each unit consisting of (i) one share of common stock, and (ii) one warrant to purchase two additional
shares of common stock. During the nine months ended September 30, 2016, the Company entered into purchase agreements with nine
accredited and four non-accredited, non-affiliated investors, pursuant to which an aggregate of 43,003 shares of common stock
and an aggregate of 86,006 warrants were sold, generating gross proceeds of $309,985.
Included
in the gross proceeds of $309,985 received was $25,350 received on June 30, 2016 from the sale of 3,517 shares of common stock
and an aggregate of 7,034 warrants to an unrelated entity with which the Company simultaneously entered into one-year agreement
for investor relations services.
The
unit price in the private placement closings was $7.2085. The warrants are exercisable at $7.9300, for each share of common stock
to be acquired, and expire on February 28, 2021. The warrants have cashless exercise provisions and contain certain “blocker”
provisions limiting the percentage of shares of the Company’s common stock that the purchaser can beneficially own upon
conversion to not more than 4.99% of the issued and outstanding shares immediately after giving effect to the warrant exercise.
In
the case of an acquisition in which the Company is not the surviving entity, the holder of the warrant would receive from any
surviving entity or successor to the Company, in exchange for the warrant, a new warrant from the surviving entity or successor
to the Company, substantially in the form of the existing warrant and with an exercise price adjusted to reflect the nearest equivalent
exercise price of common stock (or other applicable equity interest) of the surviving entity that would reflect the economic value
of the warrant, but in the surviving entity.
No
registration rights were granted to the purchasers in the private placement with respect to (i) the shares of common stock issued
as part of the units, (ii) the warrants, or (iii) the shares of common stock issuable upon exercise of the warrants.
No
placement agent fees, brokerage commissions, finder’s fees or similar payments were made in the form of cash or warrants
to qualified referral sources in connection with the sale of the shares of common stock and warrants. The Company paid $3,429
in cash to other professionals for services related to the seven closings.
2nd
2016 Unit Offering
On
December 29, 2016, the Company entered into purchase agreements with certain accredited investors, pursuant to which, the Company
sold units in a private placement for aggregate cash consideration of $125,000, with each unit consisting of (i) one share of
common stock, and (ii) one warrant to purchase an additional share of common stock. On December 30, 2016, the Company sold additional
units to additional investors for aggregate cash consideration of $60,000 in a second and final closing, bringing the total aggregate
consideration paid in the private placement to $185,000 through December 31, 2016. On December 31, 2016, the private placement
terminated pursuant to its terms. The price per unit in the initial closing of the private placement was $1.42. The warrants are
exercisable until December 31, 2021 and may be exercised at 110% of the per unit price, or $1.562 per share of common stock. The
warrants have a cashless exercise provision and certain “blocker” provisions limiting the percentage of shares of
common stock of the Company that the purchaser can hold upon exercise. The warrants are also subject to a call by the Company
at $0.001 per share upon ten (10) days written notice if the Company’s common stock closes at 200% or more of the unit purchase
price for any five (5) consecutive trading days. The purchasers were non-affiliated investors. In total, 130,284 shares of common
stock were purchased in the private placement, together with warrants to purchase an additional 130,284 shares of Common Stock.
In
addition, as set forth in the purchase agreements, each purchaser has the option, but not the obligation, to exchange the entire
amount invested in the private placement (but not less than the entire amount), in such purchaser’s sole discretion, into
any subsequent offering of the Company until the earlier of (i) the completion of subsequent offerings by the Company aggregating
at least $15 million of gross proceeds to the Company, or (ii) December 31, 2017. If exchanged, the amount to be invested in a
subsequent offering will be 1.2 times the amount of the initial investment in the private placement, or 1.4 times the amount of
the initial investment if the Company has entered into financing transactions pursuant to Sections 3(a)(9) or 3(a)(10) of the
Securities Act of 1933, as amended, or other financing arrangements that have full-ratchet anti-dilution provisions (i) without
a floor, or (ii) with an indeterminate and potentially infinite number of shares issuable pursuant to such provisions. If neither
termination condition has been reached, and the Company has more than one subsequent offering, the purchaser may elect to exchange
into any subsequent offering, regardless of whether such purchaser has already exchanged into a subsequent offering; provided,
however, that the amount invested in such subsequent offering will only and always be 1.2 (or 1.4, as applicable) times the amount
of the initial investment.
In
the case of an acquisition, as defined in the agreement, in which the Company is not the surviving entity, the holder of each
warrant would receive from any surviving entity or successor to the Company, in exchange for such warrant, a new warrant from
the surviving entity or successor to the Company, substantially in the form of the existing warrant and with an exercise price
adjusted to reflect the nearest equivalent exercise price of common stock (or other applicable equity interest) of the surviving
entity that would reflect the economic value of the warrant, but in the surviving entity.
Unlimited
piggy-back registration rights have been granted with respect to the common stock, and the common stock underlying the warrants,
unless such common stock is eligible to be sold without 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.
The
Company is obligated to pay placement agent fees, brokerage commissions, finder’s fees or similar payments totaling up to
$13,875 to an unaffiliated qualified referral source as well as warrants up to 7.5% of number of units sold in the private placement.
The Company paid $4,000 in cash to other professionals for services related to the closings.
The
shares of common stock and warrants were offered and sold without registration under the Securities Act in reliance on the exemptions
provided by Section 4(a)(2) of the Securities Act as provided in Rule 506(b) of Regulation D promulgated thereunder. None of the
shares of common stock issued as part of the units, the warrants, the common stock issuable upon exercise of the warrants or any
warrants issued to a qualified referral source. have been registered under the Securities Act or any other applicable securities
laws, and unless so registered, may not be offered or sold in the United States except pursuant to an exemption from the registration
requirements of the Securities Act.
The
Company evaluated whether the warrants or the exchange rights met criteria to be accounted for as a derivative in accordance with
Accounting Standard Codification (ASC) 815, and determined that the derivative criteria were not met. Therefore, the Company determined
no bifurcation and separate valuation was necessary and the warrants and exchange right should be accounted for with the host
instrument. The Company then looked to how the host instrument should be classified and determined that it cannot be classified
as permanent equity as there is a potential that the Unit investment amount could be exchanged for debt (convertible or otherwise)
or for redeemable preferred stock. Since the exchange right expires within one year, the Company concluded that the Unit investment
would be appropriately classified as a current liability.
Information
with respect to the issuance of common stock in connection with the settlement of debt obligations is provided at Note 5.
Common
Stock Warrants
Information
with respect to the issuance and exercise of common stock purchase warrants with respect to placement agents in connection with
the Series G Private Placement of the Series G 1.5% Convertible Preferred Stock is provided above at “Series G 1.5% Convertible
Preferred Stock.” 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.
A
summary of warrant activity for the year ended December 31, 2016 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
Warrants
outstanding at December 31, 2015
|
|
|
482,288
|
|
|
$
|
7.10125
|
|
|
|
|
|
Issued
|
|
|
244,845
|
|
|
|
3.57665
|
|
|
|
|
|
Reduction
through transactions in conjunction with -
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
Exchange Agreements
|
|
|
(40,940
|
)
|
|
|
5.68750
|
|
|
|
|
|
Unit
Exchange Agreements
|
|
|
(108,594
|
)
|
|
|
4.87500
|
|
|
|
|
|
Expired
|
|
|
(37,401
|
)
|
|
|
-
|
|
|
|
|
|
Warrants
outstanding at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2015
|
|
|
482,288
|
|
|
$
|
7.10125
|
|
|
|
|
|
Warrants
exercisable at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2016:
Exercise
Price
|
|
|
Warrants
Outstanding
(Shares)
|
|
|
Warrants
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
1.2870
|
|
|
|
41,002
|
|
|
|
41,002
|
|
|
April
17, 2019
|
$
|
1.5620
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December
31, 2021
|
$
|
4.8500
|
|
|
|
5,155
|
|
|
|
5,155
|
|
|
September
23, 2019
|
$
|
4.8750
|
|
|
|
108,594
|
|
|
|
108,594
|
|
|
September
30, 2020
|
$
|
5.0000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
September
22, 2019
|
$
|
5.1025
|
|
|
|
10,309
|
|
|
|
10,309
|
|
|
January
29, 2019
|
$
|
6.5000
|
|
|
|
8,092
|
|
|
|
8,092
|
|
|
February
4, 2019
|
$
|
6.8348
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September
30, 2020
|
$
|
7.9300
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February
28, 2021
|
|
|
|
|
|
540,198
|
|
|
|
540,198
|
|
|
|
Based
on a fair market value of $2.8000 per share on December 31, 2016, the intrinsic value of exercisable in-the-money common stock
warrants was $223,328 as of December 31, 2016.
A
summary of warrant activity for the year ended December 31, 2015 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants
outstanding at December 31, 2014
|
|
|
79,034
|
|
|
$
|
5.66800
|
|
|
|
|
|
Issued
|
|
|
410,095
|
|
|
|
7.32225
|
|
|
|
|
|
Exercised
|
|
|
(6,841
|
)
|
|
|
5.90200
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Warrants
outstanding at December 31, 2015
|
|
|
482,288
|
|
|
$
|
7.10125
|
|
|
|
3.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2014
|
|
|
79,034
|
|
|
$
|
5.66800
|
|
|
|
|
|
Warrants
exercisable at December 31, 2015
|
|
|
482,288
|
|
|
$
|
7.10125
|
|
|
|
3.97
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2015:
Exercise
Price
|
|
|
Warrants
Outstanding
(Shares)
|
|
|
Warrants
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
1.2870
|
|
|
|
41,001
|
|
|
|
41,001
|
|
|
April
17, 2019
|
$
|
6.8348
|
|
|
|
362,946
|
|
|
|
362,946
|
|
|
September
30, 2020
|
$
|
11.3750
|
|
|
|
78,341
|
|
|
|
78,341
|
|
|
September
15, 2016
|
|
|
|
|
|
482,288
|
|
|
|
482,288
|
|
|
|
Based
on a fair market value of $6.0450 per share on December 31, 2015, the intrinsic value of exercisable in-the-money common stock
warrants was $195,086 as of December 31, 2015.
Stock
Options
In
connection with the initial closing of the Series G Private Placement completed on March 18, 2014, the stockholders of the Company
holding a majority of the votes to be cast on the issue approved the adoption of the Company’s 2014 Equity, Equity-Linked
and Equity Derivative Incentive Plan (the “2014 Plan”), which had been previously adopted by the Board of Directors
of the Company, subject to stockholder approval. The Plan permits the grant of options and restricted stock with respect to up
to 325,025 shares of common stock, in addition to stock appreciation rights and phantom stock, to directors, officers, employees,
consultants and other service providers of the Company.
On
June 30, 2015, the Board of Directors adopted the 2015 Stock and Stock Option Plan (the “2015 Plan”). The 2015 Plan
initially provided for, among other things, the issuance of either or any combination of restricted shares of common stock and
non-qualified stock options to purchase up to 461,538 shares of the Company’s common stock for periods up to ten years to
management, members of the Board of Directors, consultants and advisors. The Company has not and does not intend to present the
2015 Plan to stockholders for approval. On August 18, 2015, the Board of Directors increased the number of shares that may be
issued under the 2015 Plan to 769,231 shares of the Company’s common stock. On March 31, 2016, the Board of Directors further
increased the number of shares that may be issued under the 2015 Plan to 1,538,461 shares of the Company’s common stock.
On January 17, 2017, the Board of Directors further increased the number of shares that may be issued under the 2015 Plan to 3,038,461
shares of the Company’s common stock.
On
June 30, 2015, the Board of Directors of the Company awarded stock options to purchase a total of 169,232 shares of common stock,
consisting of options for 46,154 shares to each of the Company’s three executive officers, Dr. Arnold S. Lippa, Jeff E.
Margolis and Robert N. Weingarten, and options for 6,154 shares to each of five other individuals who are members of management,
the Company’s Scientific Advisory Board, or independent members of the Board of Directors. The stock options were awarded
as partial compensation for those individuals through December 31, 2015. The stock options vested 50% on June 30, 2015 (at issuance),
25% on September 30, 2015 and 25% on December 31, 2015, as a result of which they were fully vested at December 31, 2015, and
will expire on June 30, 2022. The exercise price of the stock options was established on the grant date at $8.125 per share, as
compared to the closing market price of the Company’s common stock on such date of $5.6875 per share, reflecting an exercise
price premium of $2.4375 per share or 42.9%. These awards were made under the Company’s 2015 Plan. The aggregate grant date
fair value of these stock options calculated pursuant to the Black-Scholes option-pricing model was $946,000. During the years
ended December 31, 2016 and 2015, the Company recorded charges to operations of $0 and $945,400, respectively, with respect to
these stock options.
On
August 18, 2015, the Company entered into an employment agreement with Dr. James S. Manuso to be its new President and Chief Executive
Officer. In connection therewith, and in addition to other provisions, the Board of Directors of the Company awarded Dr. Manuso
stock options to purchase a total of 261,789 shares of common stock, of which options for 246,154 shares were granted pursuant
to the Company’s 2015 Plan and options for 15,635 shares were granted pursuant to the Company’s 2014 Plan. The stock
options vested 50% on August 18, 2015 (at issuance), 25% on February 18, 2016, and 25% on August 18, 2016, and will expire on
August 18, 2025. The exercise price of the stock options was established on the grant date at $6.4025 per share, which is equal
to the simple average of the most recent four full trading weeks, weekly Volume Weighted Average Prices (“VWAPs”)
of the Company’s common stock price immediately preceding the date of grant as reported by OTC IQ, as compared to the closing
market price of the Company’s common stock on August 18, 2015 of $7.0200 per share. The aggregate grant date fair value
of these stock options calculated pursuant to the Black-Scholes option-pricing model was $1,786,707. During the years ended December
31, 2016 and 2015, the Company recorded charges to operations of $569,222 and $1,223,772, respectively, with respect to these
stock options. Additional information with respect to other provisions of the employment agreement is provided at Note 9.
On
August 18, 2015, the Company also entered into employment agreements with Dr. Arnold S. Lippa, its new Chief Scientific Officer,
Robert N. Weingarten, its Vice President and Chief Financial Officer, and Jeff E. Margolis, its Vice President, Treasurer and
Secretary. In connection therewith, and in addition to other provisions, the Board of Directors of the Company awarded to each
of those officers stock options to purchase a total of 30,769 shares of common stock pursuant to the Company’s 2015 Plan.
The stock options vested 25% on December 31, 2015, 25% on March 31, 2016, 25% on June 30, 2016, and 25% on September 30, 2016,
and will expire on August 18, 2022. The exercise price of the stock options was established on the grant date at $6.4025 per share,
which is equal to the simple average of the most recent four full trading weeks, weekly VWAPs of the Company’s common stock
price immediately preceding the date of grant as reported by OTC IQ, as compared to the closing market price of the Company’s
common stock on August 18, 2015 of $7.0200 per share. The aggregate grant date fair value of these stock options calculated pursuant
to the Black-Scholes option-pricing model was $609,000. During the years ended December 31, 2016 and 2015, the Company recorded
charges to operations of $407,493 and $210,510, respectively, with respect to these stock options. Additional information with
respect to other provisions of the employment agreement is provided at Note 9.
Additionally,
on August 18, 2015, the Board of Directors of the Company awarded stock options for 9,231 shares of common stock to each of seven
other individuals who are members of management, the Company’s Scientific Advisory Board, independent members of the Board
of Directors, or outside service providers pursuant to the Company’s 2015 Plan, representing stock options for a total of
64,617 shares of common stock. The stock options vested 25% on December 31, 2015, 25% on March 31, 2016, 25% on June 30, 2016,
and 25% on September 30, 2016, and will expire on August 18, 2020 as to stock options for 27,693 shares of common stock and August
18, 2022 as to stock options for 36,924 shares of common stock. The exercise price of the stock options was established on the
grant date at $6.4025 per share, which is equal to the simple average of the most recent four full trading weeks, weekly VWAPs
of the Company’s common stock price immediately preceding the date of grant as reported by OTC IQ, as compared to the closing
market price of the Company’s common stock on August 18, 2015 of $7.0200 per share. The aggregate grant date fair value
of these stock options calculated pursuant to the Black-Scholes option-pricing model was $430,800. During the years ended December
31, 2016 and 2015, the Company recorded charges to operations of $223,089 and $133,907, respectively, with respect to these stock
options.
On
December 11, 2015, the Company entered into a consulting agreement for investor relations services, which provided for the payment
of a fee for such services through the granting of non-qualified stock options to purchase a total of 8,791 shares of common stock
pursuant to the Company’s 2015 Plan. The stock options vested in equal installments on the last day of each month during
the term of the consulting agreement, ranging from December 11, 2015 through March 31, 2016, and will expire on December 11, 2020.
The exercise price of the stock options was established on the grant date at $6.825 per share, which was the closing market price
of the Company’s common stock on the date of grant. The aggregate grant date fair value of these stock options calculated
pursuant to the Black-Scholes option-pricing model was $58,286. During the years ended December 31, 2016 and 2015, the Company
recorded charges to operations of $50,286 and $12,857, respectively, with respect to these stock options.
On
March 31, 2016, the Board of Directors of the Company awarded stock options for a total of 523,075 shares of common stock in various
quantities to twelve individuals who are members of management, the Company’s Scientific Advisory Board, independent members
of the Board of Directors, or outside service providers pursuant to the Company’s 2015 Plan. The stock options vested 25%
on each of March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016, and will expire on March 31, 2021. The exercise
price of the stock options was established on the grant date at $7.3775 per share, which was the closing market price of the Company’s
common stock on such date. The aggregate grant date fair value of these stock options, as calculated pursuant to the Black-Scholes
option-pricing model, was $3,774,000. During the years ended December 31, 2016 and 2015, the Company recorded a charge to operations
of $3,469,500 and zero dollars, respectively, with respect to these stock options.
On
September 12, 2016, the Company entered into an agreement for consulting services, which provided for the payment of a fee through
the granting of a non-qualified stock option to purchase a total of 2,608 shares of common stock pursuant to the Company’s
2015 Plan. The stock option was fully vested on the date of grant and will expire on September 12, 2021. The exercise price of
the stock option was established on the grant date at $5.7500 per share, which was the closing market price of the Company’s
common stock on the date of grant. The aggregate grant date fair value of the stock option, calculated pursuant to the Black-Scholes
option-pricing model, was $14,384, which was charged to operations on the date of grant.
Information
with respect to the issuance of common stock options in connection with the settlement of debt obligations and as payment for
consulting services is provided at Note 5.
Information
with respect to common stock awards issued to officers and directors as compensation is provided above under “Common Stock.”
Information
with respect to the Black-Scholes variables used in connection with the evaluation of the fair value of stock-based compensation
is provided at Note 2.
A
summary of stock option activity for the year ended December 31, 2016 is presented below.
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options
outstanding at December 31, 2015
|
|
|
774,842
|
|
|
$
|
7.8325
|
|
|
|
|
|
Granted
|
|
|
532,907
|
|
|
|
7.3305
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options
outstanding at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6241
|
|
|
|
5.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2015
|
|
|
519,662
|
|
|
$
|
8.5150
|
|
|
|
|
|
Options
exercisable at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6515
|
|
|
|
5.31
|
|
There
was no deferred compensation expense for the outstanding and unvested stock options at December 30, 2016.
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2016:
Exercise
Price
|
|
|
Options
Outstanding
(Shares)
|
|
|
Options
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
4.5000
|
|
|
|
7,222
|
|
|
|
7,222
|
|
|
September
2, 2021
|
$
|
5.6875
|
|
|
|
89,686
|
|
|
|
89,686
|
|
|
June
30, 2020
|
$
|
5.7500
|
|
|
|
2,608
|
|
|
|
2,608
|
|
|
September
12, 2021
|
$
|
6.4025
|
|
|
|
27,692
|
|
|
|
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
|
|
|
|
|
|
1,307,749
|
|
|
|
1,307,749
|
|
|
|
Based
on a fair market value of $2.8000 per share on December 31, 2016, there were no exercisable in-the-money common stock options
as of December 31, 2016.
A
summary of stock option activity for the year ended December 31, 2015 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options
outstanding at December 31, 2014
|
|
|
79,128
|
|
|
$
|
16.3475
|
|
|
|
|
|
Granted
|
|
|
695,714
|
|
|
|
6.8575
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options
outstanding at December 31, 2015
|
|
|
774,842
|
|
|
$
|
7.8325
|
|
|
|
7.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2014
|
|
|
79,128
|
|
|
$
|
16.3475
|
|
|
|
|
|
Options
exercisable at December 31, 2015
|
|
|
519,662
|
|
|
$
|
8.5150
|
|
|
|
6.57
|
|
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2015:
Exercise
Price
|
|
|
Options
Outstanding
(Shares)
|
|
|
Options
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
5.6875
|
|
|
|
89,686
|
|
|
|
89,686
|
|
|
June
30, 2020
|
$
|
6.4025
|
|
|
|
27,692
|
|
|
|
6,923
|
|
|
August
18, 2020
|
$
|
6.4025
|
|
|
|
129,231
|
|
|
|
32,308
|
|
|
August
18, 2022
|
$
|
6.4025
|
|
|
|
261,789
|
|
|
|
130,894
|
|
|
August
18, 2025
|
$
|
6.8250
|
|
|
|
8,791
|
|
|
|
2,198
|
|
|
December
11, 2020
|
$
|
8.12500
|
|
|
|
169,231
|
|
|
|
169,231
|
|
|
June
30, 2022
|
$
|
13.0000
|
|
|
|
7,385
|
|
|
|
7,385
|
|
|
March
13, 2019
|
$
|
13.0000
|
|
|
|
3,846
|
|
|
|
3,846
|
|
|
April
14, 2019
|
$
|
13.9750
|
|
|
|
3,385
|
|
|
|
3,385
|
|
|
March
14, 2024
|
$
|
15.4700
|
|
|
|
7,755
|
|
|
|
7,755
|
|
|
April
8, 2020
|
$
|
15.9250
|
|
|
|
2,462
|
|
|
|
2,462
|
|
|
February
28, 2024
|
$
|
16.2500
|
|
|
|
46,154
|
|
|
|
46,154
|
|
|
July
17, 2019
|
$
|
16.6400
|
|
|
|
1,538
|
|
|
|
1,538
|
|
|
January
29, 2020
|
$
|
19.5000
|
|
|
|
9,487
|
|
|
|
9,487
|
|
|
July
17, 2022
|
$
|
19.5000
|
|
|
|
6,410
|
|
|
|
6,410
|
|
|
August
10, 2022
|
|
|
|
|
|
774,842
|
|
|
|
519,662
|
|
|
|
Based
on a fair market value of $6.0450 per share on December 30, 2015, the intrinsic value of exercisable in-the-money common stock
options was $32,063 as of December 30, 2015.
For
the years ended December 31, 2016 and 2015, stock-based compensation costs included in the consolidated statements of operations
consisted of general and administrative expenses of $3,406,232 and $2,326,388, respectively, and research and development expenses
of $1,327,742 and $380,058, respectively.
Pier
Contingent Stock Consideration
In
connection with the merger transaction with Pier effective August 10, 2012, RespireRx issued 179,747 newly issued shares of its
common stock with an aggregate fair value of $3,271,402 ($18.2000 per share), based upon the closing price of RespireRx’s
common stock on August 10, 2012. The shares of common stock were distributed to stockholders, convertible note holders, warrant
holders, option holders, and certain employees and vendors of Pier in satisfaction of their interests and claims. The common stock
issued by RespireRx represented approximately 41% of the 443,205 common shares outstanding immediately following the closing of
the transaction.
Pursuant
to the terms of the transaction, RespireRx agreed to issue additional contingent consideration, consisting of up to 56,351 shares
of common stock, to Pier’s former security holders and certain other creditors and service providers (the “Pier Stock
Recipients”) that received RespireRx’s common stock as part of the Pier transaction if certain of RespireRx’s
stock options and warrants outstanding immediately prior to the closing of the merger were subsequently exercised. In the event
that such contingent shares were issued, the ownership percentage of the Pier Stock Recipients, following their receipt of such
additional shares, could not exceed their ownership percentage as of the initial transaction date.
The
stock options and warrants outstanding at June 30, 2012 were all out-of-the-money on August 10, 2012. During late July and early
August 2012, shortly before completion of the merger, the Company issued options to officers and directors at that time to purchase
a total of 22,651 shares of common stock exercisable for ten years at $19.5000 per share. By October 1, 2012, these options, as
well as the options and warrants outstanding at June 30, 2012, were also out-of-the-money and continued to be out-of-the-money
through December 31, 2016.
There
were no stock options or warrants exercised subsequent to August 10, 2012 that triggered additional contingent consideration,
and the only remaining stock options outstanding that could still trigger the additional contingent consideration remained generally
out-of-the-money through December 31, 2016. As of December 31, 2016, due to the expirations and forfeitures of RespireRx stock
options and warrants occurring since August 10, 2012, 6,497 contingent shares of common stock remained issuable under the Pier
merger agreement.
The
Company concluded that the issuance of any of the contingent shares to the Pier Stock Recipients was remote, as a result of the
large spread between the exercise prices of these stock options and warrants as compared to the common stock trading range, the
subsequent expiration or forfeiture of most of the options and warrants, the Company’s distressed financial condition and
capital requirements, and that these stock options and warrants have generally remained significantly out-of-the-money through
December 31, 2016. Accordingly, the Company considered the fair value of the contingent consideration to be immaterial and therefore
did not ascribe any value to such contingent consideration. If any such shares are ultimately issued to the former Pier stockholders,
the Company will recognize the fair value of such shares as a charge to operations at that time.
Reserved
and Unreserved Shares of Common Stock
At
December 31, 2016, the Company had 65,000,000 shares of common stock authorized and 2,149,045 shares of common stock issued and
outstanding. Furthermore, as of December 31, 2016, the Company had reserved an aggregate of 11 shares for issuance upon conversion
of the Series B Preferred Stock; 540,198 shares for issuance upon exercise of warrants; 1,307,749 shares for issuance upon exercise
of outstanding stock options; 63,236 shares to cover equity grants available for future issuance pursuant to the 2014 Plan; 292,201
shares to cover equity grants available for future issuance pursuant to the 2015 Plan; 29,768 shares for issuance upon conversion
of the Convertible Notes; and 6,497 shares issuable as contingent shares pursuant to the Pier merger. Accordingly, as of December
31, 2016, the Company had an aggregate of 2,239,659 shares of common stock reserved for issuance and 60,611,296 shares of common
stock unreserved and available for future issuance. The Company expects to satisfy its future common stock commitments through
the issuance of authorized but unissued shares of common stock.
7.
Income Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
as of December 31, 2016 and 2015 are summarized below.
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Capitalized
research and development costs
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Research
and development credits
|
|
|
3,239,000
|
|
|
|
3,239,000
|
|
Stock-based
compensation
|
|
|
3,430,000
|
|
|
|
1,496,000
|
|
Stock
options issued in connection with the payment of debt
|
|
|
289,000
|
|
|
|
276,000
|
|
Net
operating loss carryforwards
|
|
|
37,745,000
|
|
|
|
36,663,000
|
|
Accrued
compensation
|
|
|
794,000
|
|
|
|
290,000
|
|
Accrued
interest due to related party
|
|
|
94,000
|
|
|
|
70,000
|
|
Other,
net
|
|
|
14,000
|
|
|
|
13,000
|
|
Total
deferred tax assets
|
|
|
45,755,000
|
|
|
|
42,197,000
|
|
Valuation
allowance
|
|
|
(45,755,000
|
)
|
|
|
(42,197,000
|
)
|
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, 2016 and 2015, 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, 2016 and 2015 due to the losses incurred during such
periods. The Company’s effective tax rate is different from the federal statutory rate of 35% due primarily to net losses
that receive no tax benefit as a result of a valuation allowance recorded for such losses.
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, 2016 and 2015.
|
|
Years
Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
U.
S. federal statutory tax rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
Stock-based
compensation
|
|
|
-
|
%
|
|
|
-
|
%
|
Change
in valuation allowance
|
|
|
33.0
|
%
|
|
|
31.1
|
%
|
Amortization
of warrant discounts
|
|
|
1.3
|
%
|
|
|
4.0
|
%
|
Fair
value of note payable conversion discounts
|
|
|
0.7
|
%
|
|
|
-
|
%
|
Other
|
|
|
-
|
%
|
|
|
(0.1
|
)%
|
Effective
tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
As
of December 31, 2016, the Company had federal and state tax net operating loss carryforwards of approximately $91,607,000 and
$97,352,000, respectively. The state tax net operating loss carryforward consists of $92,084,000 for California purposes and $5,268,000
for New Jersey purposes. The difference between the federal and state tax loss carryforwards was primarily attributable to the
capitalization of research and development expenses for California franchise tax purposes. The federal and state net operating
loss carryforwards will expire at various dates from 2017 through 2036. The Company also had federal and California research and
development tax credit carryforwards that totaled approximately $2,093,000 and $1,146,000, respectively, at December 31, 2016.
The federal research and development tax credit carryforwards will expire at various dates from 2017 through 2032. The California
research and development tax credit carryforward does not expire and will carryforward indefinitely until utilized.
While
the Company has not performed a formal analysis of the availability of its net operating loss carryforwards under Internal Revenue
Code Sections 382 and 383, management expects that the Company’s ability to use its net operating loss carryforwards will
be limited in future periods.
8.
Related Party Transactions
Dr.
Arnold S. Lippa and Jeff E. Margolis, officers and directors of the Company since March 22, 2013, have indirect ownership interests
and managing memberships in Aurora Capital LLC (“Aurora”) through interests held in its members, and Jeff. E. Margolis
is also an officer of Aurora. Aurora is a boutique investment banking firm specializing in the life sciences sector that is also
a full service brokerage firm.
On
March 31, 2013, the Company accrued $85,000 as reimbursement for legal fees incurred by Aurora in conjunction with the removal
of the Company’s prior Board of Directors on March 22, 2013, which amount has been included in accounts payable and accrued
expenses at December 31, 2016 and 2015.
On
June 30, 2015, the Board of Directors of the Company awarded, but did not pay, cash bonuses totaling $215,000, including an aggregate
of $195,000 to certain of the Company’s executive officers and an aggregate of $20,000 to the independent members of the
Company’s Board of Directors. The cash bonuses awarded to executive officers were as follows: Dr. Arnold S. Lippa - $75,000;
Jeff E. Margolis - $60,000; and Robert N. Weingarten - $60,000. The cash bonuses awarded to the two independent members of the
Company’s Board of Directors were as follows: James E. Sapirstein - $10,000; and Kathryn MacFarlane - $10,000. The cash
bonuses were awarded as partial compensation for services rendered by such persons from January 1, 2015 through June 30, 2015,
and are included in accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31,
2016 and 2015.
On
June 30, 2015, the Board of Directors also established cash compensation arrangements for certain of the Company’s executive
officers at the following monthly rates: Dr. Arnold S. Lippa - $12,500; Jeff E. Margolis - $10,000; and Robert N. Weingarten -
$10,000. In addition, the Company established quarterly cash board fees for the two independent members of the Company’s
Board of Directors as follows: James E. Sapirstein - $5,000; and Kathryn MacFarlane - $5,000. This compensation was payable in
arrears and commenced on July 1, 2015. These compensation arrangements have been extended through December 31, 2017. On August
18, 2015, the cash compensation arrangements for these executive officers were further revised as described below.
Both
the cash bonuses and the cash monthly compensation were accrued and will not paid until such time as the Board of Directors of
the Company determines that sufficient capital has been raised by the Company or is otherwise available to fund the Company’s
operations on an ongoing basis.
Effective
August 18, 2015, Company entered into employment agreements with Dr. Arnold S. Lippa, Robert N. Weingarten and Jeff E. Margolis,
which superseded the compensation arrangements previously established for those officers on June 30, 2015, excluding the cash
bonuses referred to above. Additional information with respect to these employment agreements entered into on August 18, 2015
is provided at Note 9.
During
the years ended December 31, 2016 and 2015, the Company recorded charges to operations of $20,464 and $24,875, respectively, for
consulting services rendered by an entity controlled by family members of Dr. Arnold S. Lippa.
A
description of other transactions between the Company and Aurora is provided at Notes 4, 6 and 10.
A
description of advances and notes payable to officers is provided at Note 4.
9.
Commitments and Contingencies
Pending
or Threatened Legal Actions and Claims
By
letter dated November 11, 2014, a former director of the Company, who joined the Company’s Board of Directors on August
10, 2012 in conjunction with the Pier transaction and who resigned from the Company’s Board of Directors on September 28,
2012, asserted a claim for unpaid consulting compensation of $24,000. The Company has not received any further communications
from the former director with respect to this matter.
By
letter dated February 5, 2016, the Company received a demand from a law firm representing a professional services vendor of the
Company alleging an amount due and owing for unpaid services rendered. On January 18, 2017, following an arbitration proceeding,
an arbitrator awarded the vendor the full amount sought in arbitration of $146,082. Additionally, the arbitrator granted the vendor
attorneys’ fees and costs of $47,930. All such amounts have been accrued at December 31, 2016.
By
e-mail dated July 21, 2016, the Company received a demand from an investment banking consulting firm that represented the Company
in 2012 in conjunction with the Pier transaction alleging that $225,000 is due and owing for unpaid investment banking services
rendered. The Company has been in discussions with this firm regarding this matter.
The
Company is periodically the subject of various pending and threatened legal actions and claims. In the opinion of management of
the Company, adequate provision has been made in the Company’s consolidated financial statements at December 31, 2016 and
2015 with respect to such matters, including, specifically, the matters noted above. The Company intends to vigorously defend
itself if any of the matters described above results in the filing of a lawsuit or formal claim.
Significant
Agreements and Contracts
Consulting
Agreement
Richard
Purcell was appointed as the Company’s Senior Vice President of Research and Development effective October 15, 2014. Mr.
Purcell provides his services to the Company on a month-to-month basis through his consulting firm, DNA Healthlink, Inc., through
which the Company has contracted for his services, for a monthly cash fee of $12,500. Additional information with respect to shares
of common stock issued to Mr. Purcell is provided at Note 6. Cash compensation expense pursuant to this agreement totaled $150,000
for the years ended December 31, 2016 and 2015, which is included in research and development expenses in the Company’s
consolidated statements of operations for such periods.
Employment
Agreements
On
August 18, 2015, the Company entered into an employment agreement with Dr. James S. Manuso, Ph.D., to be its new President and
Chief Executive Officer. Pursuant to the agreement, which is for an initial term through September 30, 2018 (and which will be
deemed to be automatically extended, upon the same terms and conditions, for successive periods of one year, unless either party
provides written notice of its intention not to extend the term of the agreement at least 90 days prior to the applicable renewal
date), Dr. Manuso received an annual base salary of $375,000. Dr. Manuso is also eligible to earn a performance-based annual bonus
award of up to 50% of his base salary, based upon the achievement of annual performance goals established by the Board of Directors
in consultation with the executive prior to the start of such fiscal year, or any amount at the discretion of the Board of Directors.
Additionally, Dr. Manuso was granted stock options to acquire 261,789 shares of common stock of the Company and is eligible to
receive additional awards under the Company’s Plans in the discretion of the Board of Directors. Dr. Manuso is also entitled
to receive, until such time as the Company establishes a group health plan for its employees, $1,200 per month, on a tax-equalized
basis, as additional compensation to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as
additional compensation for a term life insurance policy and disability insurance policy. Dr. Manuso is also entitled to be reimbursed
for business expenses. Additional information with respect to the stock options granted to Dr. Manuso is provided at Note 6. Cash
compensation accrued pursuant to this agreement totaled $421,350 for the year ended December 31, 2016, and $146,060 for the period
August 18, 2015 through December 31, 2015. Such amounts are included in accrued compensation and related expenses in the Company’s
consolidated balance sheet at December 31, 2016 and 2015, respectively, and in general and administrative expenses in the Company’s
consolidated statement of operations for the years ended December 31, 2016 and 2015. Dr. Manuso was also appointed to the Company’s
Board of Directors and elected as Vice Chairman of the Board of Directors. Dr. Manuso will not receive any additional compensation
for serving as Vice Chairman and on the Board of Directors. Such amounts have not been paid to Dr. Manuso.
Dr.
Manuso had also agreed to purchase newly issued securities of the Company in an amount of $250,000, which was accomplished by
Dr. Manuso’s participation in the first closing of the unit offering of common stock and warrants on August 28, 2015, as
described at Note 6.
On
August 18, 2015, concurrently with the hiring of Dr. James S. Manuso as the Company’s new President and Chief Executive
Officer, Dr. Arnold S. Lippa resigned as the Company’s President and Chief Executive Officer. Dr. Lippa continues to serve
as the Company’s Executive Chairman and as a member of the Board of Directors. Also on August 18, 2015, Dr. Lippa was named
Chief Scientific Officer of the Company, and the Company entered into an employment agreement with Dr. Lippa in that capacity.
Pursuant to the agreement, which is for an initial term through September 30, 2018 (and which will be deemed to be automatically
extended, upon the same terms and conditions, for successive periods of one year, unless either party provides written notice
of its intention not to extend the term of the agreement at least 90 days prior to the applicable renewal date), Dr. Lippa received
an annual base salary of $300,000. Dr. Lippa is also eligible to earn a performance-based annual bonus award of up to 50% of his
base salary, based upon the achievement of annual performance goals established by the Board of Directors in consultation with
the executive prior to the start of such fiscal year, or any amount at the discretion of the Board of Directors. Additionally,
Dr. Lippa was granted stock options to acquire 30,769 shares of common stock of the Company and is eligible to receive additional
awards under the Company’s Plans at the discretion of the Board of Directors. Dr. Lippa is also entitled to receive, until
such time as the Company establishes a group health plan for its employees, $1,200 per month, on a tax-equalized basis, as additional
compensation to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as reimbursement for a
term life insurance policy and disability insurance policy. Dr. Lippa is also entitled to be reimbursed for business expenses.
Additional information with respect to the stock options granted to Dr. Lippa is provided at Note 6. Cash compensation accrued
pursuant to this agreement totaled $254,700 and $118,438 for the years ended December 31, 2016 and 2015, respectively, which is
included in accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31, 2016 and
2015, and in research and development expenses in the Company’s consolidated statement of operations. Cash compensation
accrued to Dr. Lippa for bonuses and under a prior superseded arrangement, while still serving as the Company’s President
and Chief Executive Officer, totaled $94,758 and is included in accrued compensation and related expenses in the Company’s
consolidated balance sheet at December 31, 2016 and 2015, and in general and administrative expenses in the Company’s consolidated
statement of operations. Such amounts have not been paid to Dr. Lippa. Dr. Lippa does not receive any additional compensation
for serving as Executive Chairman and on the Board of Directors.
On
August 18, 2015, the Company also entered into employment agreements with Jeff E. Margolis, in his continuing role as Vice President,
Secretary and Treasurer, and Robert N. Weingarten, in his continuing role as Vice President and Chief Financial Officer. Pursuant
to the agreements, which are for initial terms through September 30, 2016 (and which will be deemed to be automatically extended
upon the same terms and conditions, for successive periods of one year, unless either party provides written notice of its intention
not to extend the term of the agreement at least 90 days prior to the applicable renewal date), Mr. Margolis and Mr. Weingarten
each received an annual base salary of $195,000, and each is also eligible to receive performance-based annual bonus awards ranging
from $65,000 to $125,000, based upon the achievement of annual performance goals established by the Board of Directors in consultation
with the executive prior to the start of such fiscal year, or any amount at the discretion of the Board of Directors. Additionally,
Mr. Margolis and Mr. Weingarten were each granted stock options to acquire 30,769 shares of common stock of the Company and both
are eligible to receive additional awards under the Company’s Plans at the discretion of the Board of Directors. Mr. Margolis
and Mr. Weingarten are also each entitled to receive, until such time as the Company establishes a group health plan for its employees,
$1,200 per month, on a tax-equalized basis, as additional compensation to cover the cost of health coverage and up to $1,000 per
month, on a tax-equalized basis, as reimbursement for a term life insurance policy and disability insurance policy. Both Mr. Margolis
and Mr. Weingarten are also each entitled to be reimbursed for business expenses. Additional information with respect to the stock
options granted to Mr. Margolis and Mr. Weingarten is provided at Note 6. Cash compensation accrued pursuant to these agreements
totaled $433,200 ($216,600 each) and $159,540 ($79,770 each) for the years ended December 31, 2016 and 2015, respectively, which
is included in accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31, 2016
and 2015, and in general and administrative expenses in the Company’s consolidated statement of operations. Cash compensation
accrued to Mr. Margolis and Mr. Weingarten for bonuses and under prior superseded arrangements totaled $151,612 ($75,806 each)
and is also included in accrued compensation and related expenses in the Company’s consolidated balance sheet at September
30, 2016, and in general and administrative expenses in the Company’s consolidated statement of operations. Such amounts
have not been paid to Mr. Margolis or Mr. Weingarten. Mr. Margolis and Mr. Weingarten also continue to serve as Directors of the
Company, but do not receive any additional compensation for serving on the Board of Directors.
The
employment agreements between the Company and each of Dr. Manuso, Dr. Lippa, Mr. Margolis and Mr. Weingarten, respectively, provided
that the payment obligations associated with the first year base salary were to accrue, but no payments were to be made, until
at least $2,000,000 of net proceeds from any offering or financing of debt or equity, or a combination thereof, was received by
the Company, at which time scheduled payments were to commence. As this financing milestone has not been achieved, Dr. Manuso,
Dr. Lippa, Mr. Margolis and Mr. Weingarten (who are each also directors of the Company) have each agreed, effective as of August
11, 2016, to continue to defer the payment of such amounts indefinitely, until such time as the Board of Directors of the Company
determines that sufficient capital has been raised by the Company or is otherwise available to fund the Company’s operations
on an ongoing basis.
University
of California, Irvine License Agreements
The
Company entered into a series of license agreements in 1993 and 1998 with the University of California, Irvine (“UCI”)
that granted the Company proprietary rights to certain chemical compounds that acted as ampakines and to their therapeutic uses.
These agreements granted the Company, among other provisions, exclusive rights: (i) to practice certain patents and patent applications,
as defined in the license agreement, that were then held by UCI; (ii) to identify, develop, make, have made, import, export, lease,
sell, have sold or offer for sale any related licensed products; and (iii) to grant sub-licenses of the rights granted in the
license agreements, subject to the provisions of the license agreements. The Company was required, among other terms and conditions,
to pay UCI a license fee, royalties, patent costs and certain additional payments.
Under
such license agreements, the Company was required to make minimum annual royalty payments of approximately $70,000. The Company
was also required to spend a minimum of $250,000 per year to advance the ampakine compounds until the Company began to market
an ampakine compound. The commercialization provisions in the agreements with UCI required the Company to file for regulatory
approval of an ampakine compound before October 2012. In March 2011, UCI agreed to extend the required date for filing regulatory
approval of an ampakine compound to October 2015. During December 2012, the Company informed UCI that it would be unable to make
the annual payment due to a lack of funds. The Company believes that this notice, along with its subsequent failure to make its
minimum annual payment obligation, constituted a default and termination of the license agreements.
On
April 15, 2013, the Company received a letter from UCI indicating that the license agreements between UCI and the Company had
been terminated due to the Company’s failure to make certain payments required to maintain the agreements. Since the patents
covered in these license agreements had begun to expire and the therapeutic uses described in these patents were no longer germane
to the Company’s new focus on respiratory disorders, the loss of these license agreements is not expected to have a material
impact on the Company’s current drug development programs. In the opinion of management, the Company has made adequate provision
for any liability relating to this matter in its consolidated financial statements at December 31, 2016 and 2015.
University
of Alberta License Agreement
On
May 8, 2007, the Company entered into a license agreement, as amended, with the University of Alberta granting the Company exclusive
rights to practice patents held by the University of Alberta claiming the use of ampakines for the treatment of various respiratory
disorders. The Company agreed to pay the University of Alberta a licensing fee and a patent issuance fee, which were paid, and
prospective payments consisting of a royalty on net sales, sublicense fee payments, maintenance payments and milestone payments.
The prospective maintenance payments commence on the enrollment of the first patient into the first Phase 2B clinical trial and
increase upon the successful completion of the Phase 2B clinical trial. As the Company does not at this time anticipate scheduling
a Phase 2B clinical trial in the near term, no maintenance payments to the University of Alberta are currently due and payable,
nor are any maintenance payments expected to be due in the near future in connection with the license agreement.
Transactions
with Biovail Laboratories International SRL
In
March 2010, the Company entered into an asset purchase agreement with Biovail Laboratories International SRL (“Biovail”).
Pursuant to the asset purchase agreement, Biovail acquired the Company’s interests in CX717, CX1763, CX1942 and the injectable
dosage form of CX1739, as well as certain of its other ampakine compounds and related intellectual property for use in the field
of respiratory depression or vaso-occlusive crises associated with sickle cell disease. The agreement provided the Company with
the right to receive milestone payments in an aggregate amount of up to $15,000,000 plus the reimbursement of certain related
expenses, conditioned upon the occurrence of particular events relating to the clinical development of certain assets that Biovail
acquired. None of these events occurred.
As
part of the transaction, Biovail licensed back to the Company certain exclusive and irrevocable rights to some acquired ampakine
compounds, other than CX717, an injectable dosage form of CX1739, CX1763 and CX1942, for use outside of the field of respiratory
depression or vaso-occlusive crises associated with sickle cell disease. Accordingly, following the transaction with Biovail,
the Company retained its rights to develop and commercialize the non-acquired ampakine compounds as a potential treatment for
neurological diseases and psychiatric disorders. Additionally, the Company retained its rights to develop and commercialize the
ampakine compounds as a potential treatment for sleep apnea disorders, including an oral dosage form of ampakine CX1739.
In
September 2010, Biovail’s parent corporation, Biovail Corporation, combined with Valeant Pharmaceuticals International in
a merger transaction and the combined company was renamed “Valeant Pharmaceuticals International, Inc.” (“Valeant”).
Following the merger, Valeant and Biovail conducted a strategic and financial review of their product pipeline and, as a result,
in November 2010, Biovail announced its intent to exit from the respiratory depression project acquired from the Company in March
2010.
Following
that announcement, the Company entered into discussions with Biovail regarding the future of the respiratory depression project.
In March 2011, the Company entered into a new agreement with Biovail to reacquire the ampakine compounds, patents and rights that
Biovail had acquired from the Company in March 2010. The new agreement provided for potential future payments of up to $15,150,000
by the Company based upon the achievement of certain developments, including new drug application submissions and approval milestones.
Biovail is also eligible to receive additional payments of up to $15,000,000 from the Company based upon the Company’s net
sales of an intravenous dosage form of the compounds for respiratory depression.
At
any time following the completion of Phase 1 clinical studies and prior to the end of Phase 2A clinical studies, Biovail retains
an option to co-develop and co-market intravenous dosage forms of an ampakine compound as a treatment for respiratory depression
and vaso-occlusive crises associated with sickle cell disease. In such an event, the Company would be reimbursed for certain development
expenses to date and Biovail would share in all such future development costs with the Company. If Biovail makes the co-marketing
election, the Company would owe no further milestone payments to Biovail and the Company would be eligible to receive a royalty
on net sales of the compound by Biovail or its affiliates and licensees.
University
of Illinois 2014 Exclusive License Agreement
On
June 27, 2014, the Company entered into an Exclusive License Agreement (the “2014 License Agreement”) with the University
of Illinois, the material terms of which were similar to a License Agreement between the parties that had been previously terminated
on March 21, 2013. The 2014 License Agreement became effective on September 18, 2014, upon the completion of certain conditions
set forth in the 2014 License Agreement, including: (i) the payment by the Company of a $25,000 licensing fee, (ii) the payment
by the Company of outstanding patent costs aggregating $15,840, and (iii) the assignment to the University of Illinois of rights
the Company held in certain patent applications, all of which conditions were fulfilled.
The
2014 License Agreement granted the Company (i) exclusive rights to several issued and pending patents in numerous jurisdictions
and (ii) the non-exclusive right to certain technical information that is generated by the University of Illinois in connection
with certain clinical trials as specified in the 2014 License Agreement, all of which relate to the use of cannabinoids for the
treatment of sleep related breathing disorders. The Company is developing dronabinol (Δ9-tetrahydrocannabinol), a cannabinoid,
for the treatment of OSA, the most common form of sleep apnea.
The
2014 License Agreement provides for various commercialization and reporting requirements commencing on June 30, 2015 and also
requires the Company to pay the University of Illinois a license fee, royalties, patent costs and certain milestone payments.
The 2014 License Agreement provides for various royalty payments by the Company, including a royalty on net sales of 4%, payment
on sub-licensee revenues of 12.5%, and a minimum annual royalty of $100,000 beginning in 2015, which is due and payable on December
31 of each year. The 2015 minimum annual royalty of $100,000 was paid as scheduled in December 2015, and the 2016 minimum annual
royalty of $100,000 was paid as scheduled in December 2016. In the year after the first application for market approval is submitted
to the FDA and until approval is obtained, the minimum annual royalty will increase to $150,000. In the year after the first market
approval is obtained from the FDA and until the first sale of a product, the minimum annual royalty payable by the Company will
increase to $200,000. In the year after the first commercial sale of a product, the minimum annual royalty will increase to $250,000.
The
2014 License Agreement also provides for certain one-time milestone payments by the Company. A payment of $75,000 is due within
five days after any one of the following: (a) dosing of the first patient with a product in a Phase 2 human clinical study anywhere
in the world that is not sponsored by the University of Illinois, (b) dosing of the first patient in a Phase 2 human clinical
study anywhere in the world with a low dose of dronabinol, or (c) dosing of the first patient in a Phase 1 human clinical study
anywhere in the world with a proprietary reformulation of dronabinol. A payment of $350,000 is due within five days after dosing
of the first patient with a product in a Phase 3 human clinical trial anywhere in the world. A payment of $500,000 is due within
five days after the first new drug application filing with the FDA or a foreign equivalent for a product. A payment of $1,000,000
is due within 12 months after the first commercial sale of a product.
During
the years ended December 31, 2016 and 2015, the Company recorded a charge to operations of $100,000 and $100,000, respectively,
with respect to its 2016 and 2015 minimum annual royalty obligation, which is included in research and development expenses in
the Company’s consolidated statement of operations for the years ended December 31, 2016 and 2015.
Research
Contract with the University of Alberta
On
January 12, 2016, the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of
ampakines at a variety of dosage and formulation levels in the potential treatment of Pompe Disease, apnea of prematurity and
spinal cord injury, as well as to conduct certain electrophysiological studies to explore the ampakine mechanism of action for
central respiratory depression. The Company agreed to pay the University of Alberta total consideration of approximately CAD$146,000
(approximately US$111,000), consisting of approximately CAD$85,000 (approximately US$65,000) of personnel funding in cash in four
installments during 2016, to provide approximately CAD$21,000 (approximately US$16,000) in equipment, to pay patent costs of CAD$20,000
(approximately US$15,000), and to underwrite additional budgeted costs of CAD$20,000 (approximately US$15,000). As of December
31, 2016, all payments required pursuant to this Research Contract had been made as required. The conversion to US dollars above
utilizes an exchange rate of approximately US$0.76 for every CAD$1.00.
The
University of Alberta will receive matching funds through a grant from the Canadian Institutes of Health Research in support of
the research. The Company will retain the rights to research results and any patentable intellectual property generated by the
research. Dr. John Greer, Chairman of the Company’s Scientific Advisory Board and faculty member of the Department of Physiology,
Perinatal Research Centre and Women & Children’s Health Research Institute, and Alberta Innovates - Health Sciences
Senior Scientist with the Neuroscience and Mental Health Institute at the University of Alberta, will collaborate on this research.
The studies were completed in 2016.
National
Institute of Drug Abuse Agreement
On
January 19, 2016, the Company announced that that it has reached an agreement with the Medications Development Program of the
National Institute of Drug Abuse (“NIDA”) to conduct research on the Company’s ampakine compounds CX717 and
CX1739. The agreement was entered into as of October 19, 2015, and on January 14, 2016, the Company and NIDA approved the proposed
protocols, allowing research activities to commence.
NIDA
will evaluate the compounds using pharmacologic, pharmacokinetic and toxicologic protocols to determine the potential effectiveness
of the ampakines for the treatment of drug abuse and addiction. Initial studies will focus on cocaine and methamphetamine addiction
and abuse, and will be contracted to outside testing facilities and/or government laboratories, with all costs to be paid by NIDA.
The Company will provide NIDA with supplies of CX717 and CX1739 and will work with the NIDA staff to refine the protocols and
dosing parameters. The Company will retain all intellectual property, as well as proprietary and commercialization rights to these
compounds.
Duke
University Clinical Trial Agreement
On
January 27, 2015, the Company entered into a Clinical Study and Research Agreement (the “Agreement”) with Duke University
to develop and conduct a protocol for a program of clinical study and research at a total cost of $50,579, which was completed
in March 2015 and charged to research and development expenses during the three months ended March 31, 2015. On October 30, 2015,
the Agreement was amended to provide for a Phase 2A clinical trial of CX1739 at a cost of $558,268. During March 2016, a Phase
2A clinical trial at Duke University School of Medicine was initiated, with the dosing portion of the clinical trial completed
in June 2016 and the clinical trial formally completed on July 11, 2016. On July 28, 2016, the Agreement was further amended to
reflect additional post-clinical trial costs of $120,059, increasing the total amount payable under the Agreement to $678,327.
During the year ended December 31, 2016, the Company recorded a charge to operations of $602,642 for research and development
expenses with respect to work conducted pursuant to the amended Agreement.
Sharp
Clinical Services, Inc. Agreement
The
Company has various agreements with Sharp Clinical Services, Inc. to provide packaging, labeling, distribution and analytical
services.
Covance
Laboratories Inc. Agreement
On
October 26, 2016, the Company entered into a twelve month agreement with Covance Laboratories Inc. to provide compound testing
and storage services with respect to CX1739, CX1866 and CX1929 at a total budgeted cost of $35,958.
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, 2016, aggregating $2,251,324.
|
|
|
|
|
Payments
Due By Year
|
|
|
|
Total
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Research
and development contracts
|
|
$
|
52,801
|
|
|
$
|
52,801
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Clinical
trial agreements (1)
|
|
|
26,773
|
|
|
|
26,773
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
License
agreements
|
|
|
500,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Employment
and consulting agreements (2)
|
|
|
1,671,750
|
|
|
|
1,106,100
|
|
|
|
5
65,650
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
2,251,324
|
|
|
$
|
1,285,674
|
|
|
$
|
665,650
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
(1)
The amount presented is net of the remaining balance of an advance payment of $48,912 made on May 6, 2016, which has been reflected
as advance payment on research contract in the Company’s consolidated balance sheet at December 31, 2016.
(2)
The payment of such amounts has been deferred indefinitely, as described above at “Employment Agreements”.
10.
Subsequent Events
2017
Unit Offering
On
March 10, 2017, the Company entered into a private placement agreement with an accredited investor, pursuant to which, the Company
sold units for aggregate cash consideration of $50,000 in the first closing of an offering of up to $1,500,000. On March 28, 2017,
the Company entered into private placement agreements with two additional accredited investors, pursuant to which the Company
sold additional units for aggregate cash consideration of $300,000. Each unit consists of (i) one share of common stock, and (ii)
one warrant to purchase an additional share of common stock. The price per unit in the initial and second closing which will be
the price per unit in subsequent closings of the private placement, was $2.50. The warrants are exercisable until December 31,
2021 and may be exercised at 110% of the per unit price, or $2.75 per share of common stock. The warrants have a cashless exercise
provision and certain “blocker” provisions limiting the percentage of shares of common stock of the Company that the
purchaser can hold upon exercise. The warrants are also subject to a call by the Company at $0.001 per share upon ten (10) days
written notice if the Company’s common stock closes at 200% or more of the unit purchase price for any five (5) consecutive
trading days. The purchaser is a non-affiliated investor. 20,000 shares of common stock were purchased in the private placement,
together with warrants to purchase an additional 20,000 shares of Common Stock.
In
addition, the purchaser has the option, but not the obligation, to exchange the entire amount invested in the private placement
(but not less than the entire amount), in such purchaser’s sole discretion, into any subsequent equity offering accounted
for in the equity section of the Company’s Statement of Financial Condition, until the earlier of (i) the completion of
subsequent offerings by the Company aggregating at least $15 million of gross proceeds to the Company, or (ii) December 31, 2017.
If exchanged, the amount to be invested in a subsequent offering will be 1.2 times the amount of the initial investment in the
private placement, or 1.4 times the amount of the initial investment if the Company has entered into financing transactions pursuant
to Sections 3(a)(9) or 3(a)(10) of the Securities Act of 1933, as amended, or other financing arrangements that have full-ratchet
anti-dilution provisions (i) without a floor, or (ii) with an indeterminate and potentially infinite number of shares issuable
pursuant to such provisions. If neither termination condition has been reached, and the Company has more than one subsequent offering,
the purchaser may elect to exchange into any subsequent offering, regardless of whether such purchaser has already exchanged into
a subsequent offering; provided, however, that the amount invested in such subsequent offering will only and always be 1.2 (or
1.4, as applicable) times the amount of the initial investment. These exchange rights are effective until the earlier of: (i)
the completion of any number of Subsequent Equity Financings that
aggregate at least $15 million of gross proceeds, or (ii) December 31, 2017.
In
the case of an acquisition, as defined in the agreement, in which the Company is not the surviving entity, the holder of each
warrant would receive from any surviving entity or successor to the Company, in exchange for such warrant, a new warrant from
the surviving entity or successor to the Company, substantially in the form of the existing warrant and with an exercise price
adjusted to reflect the nearest equivalent exercise price of common stock (or other applicable equity interest) of the surviving
entity that would reflect the economic value of the warrant, but in the surviving entity.
Unlimited
piggy-back registration rights have been granted with respect to the common stock, and the common stock underlying the warrants,
unless such common stock is eligible to be sold without 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.
The
Company is not obligated to pay placement agent fees, brokerage commissions, finder’s fees or similar payments or warrants
in respect to the closing, but is obligated to pay $20,000 in placement agent fees and issue placement agent warrants to purchase
8,000 shares of common stock to Aurora in connection with the second closing. Placement agent warrants are exercisable through
December 31, 2021 at $2.75 per share of common stock.
The Company
also may be obligated to pay such fees including warrant fees in subsequent closings.
The
shares of common stock and 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 warrants, the
common stock issuable upon exercise of the warrants or any warrants issued to a qualified referral source. have been registered
under the Securities Act or any other applicable securities laws, and unless so registered, may not be offered or sold in the
United States except pursuant to an exemption from the registration requirements of the Securities Act.
Approval
of Amendment of the Amended and Restated 2015 Stock and Stock Option Plan
On
January 17, 2017, the Board of Directors of the Company approved the adoption of the Amendment of the Amended and Restated RespireRx
Pharmaceuticals, Inc. 2015 Stock and Stock Option Plan (the “2015 Plan”). As a result of the 325-to-1 reverse stock
split of the Company’s issued and outstanding common stock on September 1, 2016, the shares issuable under the 2015 Plan
had effectively been reduced from 500,000,000 to 1,538,461 by the terms of the 2015 Plan. The Amendment increases the shares issuable
under the plan by 1,500,000, from 1,538,461 to 3,038,461. Other than the change in the number of shares available under the 2015
Plan, no other changes were made to the 2015 Plan by the Amendment.
Award
of Common Stock Options
On
January 17, 2017, the Board of Directors of the Company awarded stock options for a total of 395,000 shares of common stock in
various quantities to seventeen individuals who are members of management, the Company’s Scientific Advisory Board, independent
members of the Board of Directors, or outside service providers pursuant to the Company’s 2015 Plan. The stock options vested
25% on January 17, 2017, 25% on March 31, 2017, and will vest 50% on June 30, 2017, and will expire on January 17, 2022. The exercise
price of the stock options was established on the grant date at $3.9000 per share, which was the closing market price of the Company’s
common stock on such date. The aggregate grant date fair value of these stock options, as calculated pursuant to the Black-Scholes
option-pricing model, was $1,464,305.
Arbitration
Award
By
letter dated February 5, 2016, the Company received a demand from a law firm representing a professional services vendor of the
Company alleging an amount due and owing for unpaid services rendered. On January 18, 2017, an arbitrator awarded the vendor the
full amount sought in arbitration of $146,082. The arbitrator granted the vendor attorneys’ fees and costs of $47,930. All
such amounts have been accrued at December 31, 2016.
The
Company performed an evaluation of subsequent events through the date of filing of these financial statements with the SEC. Other
than the above, there were no material subsequent events which affected, or could affect, the amounts or disclosures in the condensed
consolidated financial statements.