NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three-months
Ended March 31, 2019 and 2018
1.
Organization and Basis of Presentation
Organization
RespireRx
Pharmaceuticals Inc. (“RespireRx”) was formed in 1987 under the name Cortex Pharmaceuticals, Inc. to engage in the
discovery, development and commercialization of innovative pharmaceuticals for the treatment of neurological and psychiatric disorders.
On December 16, 2015, RespireRx filed a Certificate of Amendment to its Second Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware to amend its Second Restated Certificate of Incorporation to change its name from
Cortex Pharmaceuticals, Inc. to RespireRx Pharmaceuticals Inc. While developing potential applications for respiratory disorders,
RespireRx has retained and expanded its ampakine intellectual property and data with respect to neurological and psychiatric disorders
and is considering developing certain potential products in this platform, pending additional financing and/or strategic relationships.
In
August 2012, RespireRx acquired Pier Pharmaceuticals, Inc. (“Pier”), which is now its wholly-owned subsidiary.
Basis
of Presentation
The
condensed consolidated financial statements are of RespireRx and its wholly-owned subsidiary, Pier (collectively referred to
herein as the “Company,” “we” or “our,” unless the context indicates otherwise).
The condensed consolidated financial statements of the Company at March 31, 2019 and for the three-months ended March
31, 2019 and 2018, are unaudited. In the opinion of management, all adjustments (including normal recurring adjustments) have
been made that are necessary to present fairly the condensed consolidated financial position of the Company as of March 31,
2019, the results of its condensed consolidated operations for the three-months ended March 31, 2019 and 2018, changes
in its condensed consolidated statements of stockholders’ deficiency for the three-months ended March 31, 2019 and
2018 and its condensed consolidated cash flows for the three-months ended March 31, 2019 and 2018. Condensed
consolidated operating results for the interim periods presented are not necessarily indicative of the results to be expected
for a full fiscal year. The consolidated balance sheet at December 31, 2018 has been derived from the Company’s audited
consolidated financial statements at such date.
The
condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”). Accordingly, certain information and note disclosures normally included
in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements and other information included in the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2018, as filed with the SEC.
2.
Business
The
mission of the Company is to develop innovative and revolutionary treatments to combat diseases caused by disruption of neuronal
signaling. We are developing treatment options that address conditions that affect millions of people, but for which there are
few or poor treatment options, including obstructive sleep apnea (“OSA”), attention deficit hyperactivity disorder
(“ADHD”) and recovery from spinal cord injury (“SCI”), as well as certain neurological orphan diseases
such as Fragile X Syndrome. RespireRx is developing a pipeline of new drug products based on our broad patent portfolios for two
drug platforms: cannabinoids, including dronabinol (“∆9-THC”), and the ampakines, proprietary compounds that
positively modulate AMPA-type glutamate receptors to promote neuronal function.
RespireRx
is developing a number of potential products. From the cannabinoid platform, two Phase 2 clinical trials have been completed demonstrating
the ability of dronabinol to significantly reduce the symptoms of OSA, which management believes is potentially a multi-billion-dollar
market. Subject to raising sufficient financing, we believe that we have put most of the necessary pieces into place to rapidly
initiate a Phase 3 clinical trial program. By way of definition, when a new drug is allowed by the United States Food and Drug
Administration (“FDA”) to be tested in humans, Phase 1 clinical trials are conducted in healthy people to determine
safety and pharmacokinetics. If successful, Phase 2 clinical trials are conducted in patients to determine safety and preliminary
efficacy. Phase 3 trials, large scale studies to determine efficacy and safety, are the final step prior to seeking FDA approval
to market a drug.
From
our ampakine platform, our lead clinical compounds, CX717 and CX1739, have successfully completed multiple Phase 1 safety trials.
Both compounds have also completed Phase 2 efficacy trials demonstrating target engagement, by antagonizing the ability of opioids
to induce respiratory depression. CX717 has completed a Phase 2 trial demonstrating the ability to significantly reduce the symptoms
of adult ADHD. In an early Phase 2 study, CX1739 improved breathing in patients with central sleep apnea. Preclinical studies
have highlighted the potential ability of these ampakines to improve motor function in animals with spinal injury. Subject to
raising sufficient financing (of which no assurance can be provided), we believe that we will be able to rapidly initiate a human
Phase 2 study with CX1739 and/or CX717 in patients with spinal cord injury and a human Phase 2B study in patients with ADHD with
either CX717 or CX1739.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred
net losses of $540,332 for the three-months ended March 31, 2019 and $2,591,790 for the fiscal year ended December
31, 2018, and negative operating cash flows of $137,786 for the three-months ended March 31, 2019 and $427,368 for the
fiscal year ended December 31, 2018. The Company also had a stockholders’ deficiency of $6,227,775 at March 31, 2019
and expects to continue to incur net losses and negative operating cash flows for at least the next few years. As a result, management
has concluded that there is substantial doubt about the Company’s ability to continue as a going concern, and the Company’s
independent registered public accounting firm, in its report on the Company’s consolidated financial statements for the
year ended December 31, 2018, expressed substantial doubt about the Company’s ability to continue as a going concern.
The
Company is currently, and has for some time, been in significant financial distress. It has extremely limited cash resources and
current assets and has no ongoing source of sustainable revenue. Management is continuing to address various aspects of the Company’s
operations and obligations, including, without limitation, debt obligations, financing requirements, intellectual property, licensing
agreements, legal and patent matters and regulatory compliance, and has taken steps to continue to raise new debt and equity capital
to fund the Company’s business activities from both related and unrelated parties.
The
Company is continuing its efforts to raise additional capital in order to be able to pay its liabilities and fund its business
activities on a going forward basis, including the pursuit of the Company’s planned research and development activities.
The Company regularly evaluates various measures to satisfy the Company’s liquidity needs, including development and other
agreements with collaborative partners and, when necessary, seeking to exchange or restructure the Company’s outstanding
securities. The Company is evaluating certain changes to its operations and structure to facilitate raising capital from sources
that may be interested in financing only discrete aspects of the Company’s development programs. Such changes could include
a significant reorganization, which may include the formation of one or more subsidiaries into which one or more programs may
be contributed. As a result of the Company’s current financial situation, the Company has limited access to external sources
of debt and equity financing. Accordingly, there can be no assurances that the Company will be able to secure additional financing
in the amounts necessary to fully fund its operating and debt service requirements. If the Company is unable to access sufficient
cash resources, the Company may be forced to discontinue its operations entirely and liquidate.
3.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed consolidated financial statements are prepared in accordance with United States generally accepted accounting
principles (“GAAP”) and include the financial statements of RespireRx and its wholly-owned subsidiary, Pier. Intercompany
balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates
include, among other things, accounting for potential liabilities, and the assumptions used in valuing stock-based compensation
issued for services. Actual amounts may differ from those estimates.
Concentration of Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company
limits its exposure to credit risk by investing its cash with high credit quality financial institutions.
The Company’s
research and development efforts and potential products rely on licenses from research institutions and if the Company loses access
to these technologies or applications, its business could be substantially impaired.
By letter dated May
18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of the University of Alberta,
which purports to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 between the Company and The
Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for termination and notified the
representative that it invoked Section 13 of that license agreement, which mandates a meeting to be attended by individuals with
decision-making authority to attempt in good faith to negotiate a resolution to the dispute. In February 2019, the Company and
TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license agreement and the form of a new
license agreement. However, the parties have not signed the draft new license agreement pending the Company’s payment of
the agreed amount of historical unreimbursed patent fees, of approximately CAD$23,000 (approximately US$17,000 as of December
31, 2018). No assurance can be provided that the Company will or will not be able to remit the historical license fees or that
the draft new license agreement will be executed and become effective. If we do not remit the historical fees and the new license
agreement does not become effective, we cannot estimate the possible adverse impact on the Company’s operations or business
prospects.
Through the merger
with Pier, the Company gained access to the Old License Agreement that Pier had entered into with the University of Illinois on
October 10, 2007. The Old License Agreement covered certain patents and patent applications in the United States and other countries
claiming the use of certain compounds referred to as cannabinoids for the treatment of sleep related breathing disorders (including
sleep apnea), of which dronabinol is a specific example of one type of cannabinoid. Dronabinol is a synthetic derivative of the
naturally occurring substance in the cannabis plant, otherwise known as Δ9-THC (Δ9-tetrahydrocannabinol). Dronabinol
is currently approved by the FDA and is sold generically for use in refractory chemotherapy-induced nausea and vomiting, as well
as for anorexia in patients with AIDS. Pier’s business plan was to determine whether dronabinol would significantly improve
subjective and objective clinical measures in patients with OSA. The Old License Agreement was terminated effective March 21,
2013 due to the Company’s failure to make a required payment and on June 27, 2014, the Company entered into the 2014 License
Agreement with the University of Illinois, the material terms of which were similar to the Old License Agreement that had been
terminated and also included the assignment of rights to the University of Illinois, to certain patent applications filed by RespireRx.
If the Company is unable to comply with the terms of the 2014 License Agreement, such as an inability to make the payments required
thereunder, the Company would be at risk of the 2014 License Agreement being terminated.
Cash
Equivalents
The
Company considers all highly liquid short-term investments with maturities of less than three-months when acquired to be
cash equivalents.
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value of financial instruments established a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value into three levels and requires that assets and liabilities carried
at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers into and
out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying amounts of financial instruments (consisting of cash, cash equivalents, advances on research grants and accounts payable
and accrued expenses) are considered by the Company to be representative of the respective fair values of these instruments due
to the short-term nature of those instruments. With respect to the note payable to SY Corporation and the convertible notes payable,
management does not believe that the credit markets have materially changed for these types of borrowings since the original borrowing
date. The Company considers the carrying amounts of the notes payable to officers, inclusive of accrued interest, to be representative
of the respective fair values of such instruments due to the short-term nature of those instruments and their terms.
Convertible
Notes Payable
Convertible
notes are evaluated to determine if they should be recorded at amortized cost. To the extent that there are associated warrants
or a beneficial conversion feature, the convertible notes and warrants are evaluated to determine if there are embedded derivatives
to be identified, bifurcated and valued at fair value in connection with and at the time of such financing.
Notes
Exchanges
In
cases where debt or other liabilities are exchanged for equity, the Company compares the carrying value of debt, inclusive of
accrued interest, if applicable, being exchanged, to the fair value of the equity issued and records any loss or gain as a result
of such exchange. See Note 4. Notes Payable.
Extinguishment
of Debt
The
Company accounts for the extinguishment of debt in accordance with GAAP by comparing the carrying value of the debt to the fair
value of consideration paid or assets given up and recognizing a loss or gain in the condensed consolidated statement of operations
in the amount of the difference in the period in which such transaction occurs.
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. All equipment was fully depreciated as of March 31, 2019.
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 condensed consolidated balance sheet at each reporting date. As of
March 31, 2019, all such prepaid amounts have been reclassified as current since the policy will expire within one year.
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 March 31, 2019.
Stock-Based
Awards
The
Company periodically issues common stock and stock options to officers, directors, outside consultants and vendors for
services rendered. Such issuances vest and expire according to terms established at the issuance date of each grant.
The
Company accounts for stock-based payments to officers, directors, outside consultants and vendors by measuring the
cost of services received in exchange for equity awards based on the grant date fair value of the awards, with the cost recognized
as compensation expense on the straight-line basis in the Company’s consolidated financial statements over the vesting period
of the awards.
The
fair value of stock options granted as stock-based payments is determined utilizing the Black-Scholes option-pricing model,
and is affected by several variables, the most significant of which are the life of the equity award, the exercise price of the
stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common
stock over the term of the equity award. Estimated volatility is based on the historical volatility of the Company’s common
stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The fair market value
of common stock is determined by reference to the quoted market price of the Company’s common stock.
There
were no stock or stock option grants during the three-months ended March 31, 2019.
For
stock options requiring an assessment of value during the three-months ended March 31, 2018, 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
|
|
|
2.56
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
185.41
|
%
|
Expected
life
|
|
|
4.7
|
|
The
Company recognizes the fair value of stock-based payments in general and administrative costs and in research and development
costs, as appropriate, in the Company’s condensed consolidated statements of operations. The Company issues new shares of
common stock to satisfy stock option and warrant exercises. There were no stock options exercised during the three-months
ended March 31, 2019 and 2018.
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 March 31, 2019, the Company did not have any unrecognized tax benefits related to various federal and state income tax matters
and does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The
Company is subject to U.S. federal income taxes and income taxes of various state tax jurisdictions. As the Company’s net
operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions
in which the Company currently operates or has operated in the past.
The
Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.
The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority
as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits
of the position are recognized. As of March 31, 2019, the Company had not recorded any liability for uncertain tax positions.
In subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income
tax expense.
Foreign
Currency Transactions
The
note payable to SY Corporation, which is denominated in a foreign currency (the South Korean Won), is translated into the Company’s
functional currency (the United States Dollar) at the exchange rate on the balance sheet date. The foreign currency exchange gain
or loss resulting from translation is recognized in the related condensed consolidated statements of operations.
Research
and Development
Research
and development costs include compensation paid to management directing the Company’s research and development activities,
and fees paid to consultants and outside service providers and organizations (including research institutes at universities),
and other expenses relating to the acquisition, design, development and clinical testing of the Company’s treatments and
product candidates.
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
March 31, 2019, an asset 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 condensed consolidated
balance sheet, with a corresponding charge to research and development costs in the Company’s condensed consolidated statement
of operations. Obligations incurred with respect to milestone payments provided for in license agreements are recognized when
it is probable that such milestone will be reached and are recorded as liabilities in the Company’s condensed consolidated
balance sheet, with a corresponding charge to research and development costs in the Company’s condensed consolidated statement
of operations. Payments of such liabilities are made in the ordinary course of business.
Patent
Costs
Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on
the Company’s research efforts and any related patent applications, all patent costs, including patent-related legal and
filing fees, are expensed as incurred and recorded as general and administrative expenses.
Earnings
per Share
The
Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as
the income (loss) attributable to common stockholders divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants
and options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common
shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.
Net loss attributable
to common stockholders consists of net loss, as adjusted for actual and deemed preferred stock dividends declared, amortized or
accumulated.
Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the respective periods. Basic and diluted loss per common share is the same for all periods presented because all warrants and
stock options outstanding are anti-dilutive.
At
March 31, 2019 and 2018, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to
acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Series
B convertible preferred stock
|
|
|
11
|
|
|
|
11
|
|
Convertible
notes payable
|
|
|
16,893
|
|
|
|
29,957
|
|
Common
stock warrants
|
|
|
1,874,828
|
|
|
|
1,464,415
|
|
Common
stock options
|
|
|
4,337,609
|
|
|
|
4,012,929
|
|
Total
|
|
|
6,229,341
|
|
|
|
5,507,312
|
|
Reclassifications
Certain
comparative figures in 2018 have been reclassified to conform to the current quarter’s presentation. These reclassifications
were immaterial, both individually and in the aggregate.
Recent
Accounting Pronouncements
In
June 2018, the FASB issued Accounting Standards Update No. 2018-07 (“ASU 2018-07”),
Compensation-Stock
Compensation (Topic 718)—Improvements to Nonemployee Share-Based Payment Accounting.
ASU 2018-07 are amendments
to Topic 718 that become effective for public entities like the Company for fiscal years beginning after December 15, 2018, including
interim periods within that fiscal year. This update applies to nonemployee share-based awards within the scope of Topic 718.
Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards are
measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered
or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been
satisfied. Equity-classified nonemployee share- based payment awards are measured at the grant date. The definition of the term
grant date has been amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key
terms and conditions of a share- based payment award. An entity considers the probability of satisfying performance conditions
when nonemployee share-based payment awards contain such conditions. This is consistent with the treatment for employee-based
awards. Generally, the classification of equity- classified nonemployee share-based payment awards will continue to be subject
to the requirements of Topic 718 unless modified after the good has been delivered, the service has been rendered, any other conditions
necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods
or services. This eliminates the requirement to reassess classification of such awards upon vesting. This standard will change
the valuation of applicable awards granted in subsequent periods.
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11 (“ASU 2017-11”),
Earnings Per Share (Topic 260):
Distinguishing Liabilities from Equity (Topic 480): Derivatives and Hedging (Topic 815)
. The relevant section for the Company
is Topic 815 where it pertains to accounting for certain financial instruments with down round features. Until the issuance of
this ASU, financial instruments with down round features required fair value measurement and subsequent changes in fair value
were recognized in earnings. As a result of the ASU, financial instruments with down round features are no longer treated as a
derivative liability measured at fair value. Instead, when the down round feature is triggered, the effect is treated as a dividend
and as a reduction of income available to common shareholders in basic earnings per share. For public entities, the ASU is effective
for fiscal years beginning after December 15, 2018. Early adoption is permitted including adoption in an interim period. The adoption
of ASU 2017-11 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
4.
Notes Payable
Convertible
Notes Payable
On
January 2, 2019, February 27, 2019, March 6, 2019 and March 14, 2019, the Company issued convertible notes
(“2019 Convertible Notes”) bearing interest at 10% per year. The January 2, 2019 Convertible Note matured on
February 28, 2019 with a face amount of $10,000. The February 27, 2019, March 6, 2019 and March 14, 2019, 2019 Convertible Notes
matured on April 30, 2019 with an aggregate face amount of $100,000. Investors also received an aggregate of
110,000 common stock purchase warrants. The warrants were valued using the Black Scholes option pricing model calculated on
the date of each grant and had an aggregate value of $78,780. Total value received by the investors was $188,780, the sum of
the face value of the convertible note and the value of the warrant. Therefore, the Company recorded an initial original
issue discount of $45,812 and an initial value of the convertible notes of $64,188 using the relative fair
value method. $24,883 of the original issue discount was amortized to interest expense through March 31, 2019. An additional
$1,061 of interest expense was recorded based upon the 10% annual rate. The 2019 Convertible Note that matured on February
28, 2019 was not paid and remain outstanding and continue to accrue interest. The 2019 Convertible Notes that matured on
April 30, 2019 were not paid and remain outstanding and continue to accrue interest. Although the 2019 Convertible Notes are
in default, the Company has not received any notices of default from any of the note holders. The 2019 Convertible Notes have
no reset rights or other protections based on subsequent equity transactions, equity-linked transactions or other events
other than the right, but not the obligation, for each investor to convert or exchange his or her 2019 Convertible
Note, but not the warrant, into the next exempt private securities offering, which offering has not occurred as of March 31,
2019 or as of the date of the issuance of these financial statements. Therefore, the number of shares of common stock (or
preferred stock) into which the 2019 Convertible Notes may convert is not determinable and the Company has not accounted for
any beneficial conversion feature. The warrants to purchase 110,000 shares of common stock issued in connection with the sale
of the 2019 Convertible Notes are exercisable at a fixed price of $1.50 per share of common stock, provide no right to
receive a cash payment, and included no reset rights or other protections based on subsequent equity transactions,
equity-linked transactions or other events. The Company determined that there were no embedded derivatives to be identified,
bifurcated and valued in connection with this financing.
During
December 2018, convertible notes (“2018 Convertible Notes”) bearing interest at 10% per year and maturing on February
28, 2019 and warrants were sold to investors with an aggregate face amount of $80,000. Investors also received 80,000 common stock
purchase warrants. The warrants were valued using the Black Scholes option pricing model calculated on the date of each grant
and had an aggregate value of $68,025. Total value received by the investors was $148,025, the sum of the face value of the convertible
note and the value of the warrant. Therefore, the Company recorded an initial original issue discount of $36,347 and an initial
value of the convertible notes of $43,653 using the relative fair value method. $27,969 of the original issue discount
was amortized to interest expense for the three-months ended March 31, 2019 and $8,379 was amortized from inception through
December 31, 2018. An additional $2,000 of interest expense was recorded based upon the 10% annual rate for the three-months
ended March 31, 2019 and $401 of interest expense was recorded from inception through December 31, 2018. The 2018 Convertible
Notes matured on February 28, 2019, were not paid, remain outstanding and continue to accrue interest. Although
the 2018 Convertible Notes are in default, the Company has not received any notices of default from any of the note holders. The
2018 Convertible Notes have no reset rights or other protections based on subsequent equity transactions, equity-linked transactions
or other events other than the right, but not the obligation for each investor to convert or exchange his or her 2018 Convertible
Note, but not the warrant, into the next exempt private securities offering, which offering has not occurred as of March 31, 2019
or as of the date of the issuance of these financial statements. Therefore, the number of shares of common stock (or preferred
stock) into which the 2018 Convertible Notes may convert is not determinable and the Company has not accounted for any beneficial
conversion feature. The warrants to purchase 80,000 shares of common stock issued in connection with the sale of the 2018 Convertible
Notes are exercisable at a fixed price of $1.50 per share of common stock, provide no right to receive a cash payment, and included
no reset rights or other protections based on subsequent equity transactions, equity-linked transactions or other events. The
Company determined that there were no embedded derivatives to be identified, bifurcated and valued in connection with this financing.
The
2018 and 2019 Convertible Notes consist of the following at March 31, 2019 and December 31, 2018:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Principal
amount of notes payable
|
|
$
|
190,000
|
|
|
$
|
80,000
|
|
Original
issue discount net of amortization of $8,379
|
|
|
(20,928
|
)
|
|
|
(27,968
|
)
|
A
ccrued
interest payable
|
|
|
3,462
|
|
|
|
401
|
|
|
|
$
|
172,534
|
|
|
$
|
52,433
|
|
C
onvertible
notes were also sold to investors in 2014 and 2015 (“Original Convertible Notes), which aggregated a total of $579,500,
had a fixed interest rate of 10% per annum and those that remain outstanding are convertible into common stock at a fixed price
of $11.3750 per share. The Original Convertible Notes have no reset rights or other protections based on subsequent equity transactions,
equity-linked transactions or other events. The warrants to purchase 50,945 shares of common stock issued in connection with the
sale of the convertible notes were exercisable at a fixed price of $11.3750 per share. All such warrants have either been exchanged
as part of April and May 2016 note and warrant exchange agreements or expired on September 15, 2016.
The
maturity date of the Original Convertible Notes was extended to September 15, 2016 and included the issuance of 27,936 additional
warrants to purchase common stock, exercisable at $11.375 per share of common stock, which expired on September 15, 2016.
The
remaining outstanding Original Convertible Notes (including those for which default notices have been received) consist
of the following at March 31, 2019 and December 31, 2018:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Principal
amount of notes payable
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
A
ccrued
interest payable
|
|
|
67,016
|
|
|
|
62,233
|
|
|
|
$
|
192,016
|
|
|
$
|
187,233
|
|
As
of March 31, 2019, principal and accrued interest on the one remaining outstanding Original Convertible Note subject to a default
notice, which therefore accrues annual interest at 12% instead of 10%, totaled $40,518, of which $16,143 was accrued
interest. As of December 31, 2018, principal and accrued interest on convertible notes subject to default notices totaled $38,292
of which $13,292 was accrued interest.
As
of March 31, 2019, the remaining total outstanding Original Convertible Notes, inclusive of accrued interest, were convertible
into 16,881 shares of the Company’s common stock, including 5,892 shares attributable to accrued interest of $67,016 payable
as of such date. As of December 31, 2018, the outstanding Original Convertible Notes were convertible into 16,460 shares of the
Company’s common stock, including 5,471 shares attributable to accrued interest of $62,233 payable as of such date. Such
Original Convertible Notes will continue to accrue interest until exchanged, paid or otherwise discharged. There can be no assurance
that any of the additional holders of the remaining Original Convertible Notes will exchange their notes.
Note
Payable to SY Corporation Co., Ltd.
On
June 25, 2012, the Company borrowed 465,000,000 Won (the currency of South Korea, equivalent to approximately $400,000 United
States Dollars) from and executed a secured note payable to SY Corporation Co., Ltd., formerly known as Samyang Optics Co. Ltd.
(“SY Corporation”), an approximately 20% common stockholder of the Company at that time. SY Corporation was a significant
stockholder and a related party at the time of the transaction but has not been a significant stockholder or related party of
the Company subsequent to December 31, 2014. The note accrues simple interest at the rate of 12% per annum and had a maturity
date of June 25, 2013. The Company has not made any payments on the promissory note. At June 30, 2013 and subsequently, the promissory
note was outstanding and in default, although SY Corporation has not issued a notice of default or a demand for repayment. Management
believes that SY Corporation is in default of its obligations under its January 2012 license agreement, as amended, with the Company,
but the Company has not yet issued a notice of default. The Company has in the past made several efforts towards a comprehensive
resolution of the aforementioned matters involving SY Corporation. During the three-months ended March 31, 2019, there
were no further communications between the Company and SY Corporation.
The
promissory note is secured by collateral that represents a lien on certain patents owned by the Company, including composition
of matter patents for certain of the Company’s high impact ampakine compounds and the low impact ampakine compounds CX2007
and CX2076, and other related compounds. The security interest does not extend to the Company’s patents for its ampakine
compounds CX1739 and CX1942, or to the patent for the use of ampakine compounds for the treatment of respiratory depression.
Note
payable to SY Corporation consists of the following at March 31, 2019 and December 31, 2018:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Principal
amount of note payable
|
|
$
|
399,774
|
|
|
$
|
399,774
|
|
Accrued
interest payable
|
|
|
327,136
|
|
|
|
315,307
|
|
Foreign
currency transaction adjustment
|
|
|
14,717
|
|
|
|
29,360
|
|
|
|
$
|
741,627
|
|
|
$
|
744,441
|
|
Interest
expense with respect to this promissory note was $11,829 and $11,829 for the three-months ended March 31, 2019 and 2018,
respectively.
Notes
Payable to Officers and Former Officers
For
the three-months ended March 31, 2019 and 2018, $2,533 and $2,255 was charged to interest expense with respect to
Dr. Arnold S. Lippa’s notes, respectively.
For
the three-months ended March 31, 2019 and 2018, $3,801 and $2,254 was charged to interest expense with respect to
Dr. James S. Manuso’s notes, respectively.
As
of September 30, 2018, Dr. James S. Manuso resigned as executive officer in all capacities and as a member of the
Board of Directors of the Company. All of the $3,801 of interest expense noted above for the three-months ended March 31, 2019,
was incurred while Dr. Manuso was no longer an officer.
Other
Short-Term Notes Payable
Other
short-term notes payable at March 31, 2019 and December 31, 2018 consisted of premium financing agreements with respect to various
insurance policies. At March 31, 2019, a premium financing agreement was payable in the initial amount of $61,746, with interest
at 9% per annum, in nine monthly installments of $7,120. At March 31, 2019 and December 31, 2018, the aggregate amount of the
short-term notes payable was $61,746 and $8,907 respectively.
5.
Settlement and Payment Agreements
There
were no settlement or payment agreements during the three-month periods ended March 31, 2019 or 2018.
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 March 31, 2019
and December 31, 2018, 1,250,000 shares were designated as 9% Cumulative Convertible Preferred Stock (non-voting, “9%
Preferred Stock”); 37,500 shares were designated as Series B Convertible Preferred Stock (non-voting, “Series B Preferred
Stock”); 205,000 shares were designated as Series A Junior Participating Preferred Stock (non-voting, “Series A Junior
Participating Preferred Stock”); and 1,700 shares were designated as Series G 1.5% Convertible Preferred Stock. Accordingly,
as of March 31, 2019 and December 31, 2018, 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.
Series
B Preferred Stock outstanding as of March 31, 2019 and 2018 consisted of 37,500 shares issued in a May 1991 private placement.
Each share of Series B Preferred Stock is convertible into approximately 0.00030 shares of common stock at an effective conversion
price of $2,208.375 per share of common stock, which is subject to adjustment under certain circumstances. As of March 31, 2019
and December 31, 2018, the shares of Series B Preferred Stock outstanding are convertible into 11 shares of common stock.
The Company may redeem the Series B Preferred Stock for $25,001, equivalent to $0.6667 per share, an amount equal to its liquidation
preference, at any time upon 30 days prior notice.
Common
Stock
There
are 3,872,076 shares of the Company’s Common Stock outstanding as of March 31, 2019. After reserving an aggregate of
10,726,417 for conversions of convertible debt as well as common stock purchase options and warrants exercises, there are
50,401,507 shares of the Company’s Common Stock available for future issuances.
Common
Stock Warrants
Information
with respect to the issuance and exercise of common stock purchase warrants in connection with the Convertible Note Payable and
Warrant Purchase Agreement, and Notes Payable to Officers, is provided at Note 4.
A
summary of warrant activity for the three-months ended March 31, 2019 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants
outstanding at December 31, 2018
|
|
|
1,783,229
|
|
|
$
|
2.20393
|
|
|
|
|
|
Issued
|
|
|
110,000
|
|
|
|
1.50000
|
|
|
|
|
|
Expired
|
|
|
(18,401
|
)
|
|
|
5.71706
|
|
|
|
|
|
Warrants
outstanding at March 31, 2019
|
|
|
1,874,828
|
|
|
$
|
2.12815
|
|
|
|
2.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at March 31, 2019
|
|
|
1,874,828
|
|
|
$
|
2.12815
|
|
|
|
2.96
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at March 31, 2019:
Exercise
Price
|
|
|
Warrants
Outstanding
(Shares)
|
|
|
Warrants
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
1.0000
|
|
|
|
916,217
|
|
|
|
916,217
|
|
|
September
20, 2022
|
$
|
1.2870
|
|
|
|
41,002
|
|
|
|
41,002
|
|
|
April
17, 2019
|
$
|
1.5000
|
|
|
|
190,000
|
|
|
|
190,000
|
|
|
December
30, 2023
|
$
|
1.5620
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December
31, 2021
|
$
|
1.5750
|
|
|
|
238,814
|
|
|
|
238,814
|
|
|
April
30, 2023
|
$
|
2.7500
|
|
|
|
8,000
|
|
|
|
8000
|
|
|
September
20, 2022
|
$
|
4.8500
|
|
|
|
5,155
|
|
|
|
5,155
|
|
|
September
23, 2019
|
$
|
4.8750
|
|
|
|
108,594
|
|
|
|
108,594
|
|
|
September
30, 2020
|
$
|
5.0000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
September
22, 2019
|
$
|
6.8348
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September
30, 2020
|
$
|
7.9300
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February
28, 2021
|
|
|
|
|
|
1,874,
828
|
|
|
|
1,874,828
|
|
|
|
Based
on a fair market value of $0.85000 per share on March 31, 2019, there was no intrinsic value of exercisable in-the-money common
stock warrants as of March 31, 2019.
A
summary of warrant activity for the three-months ended March 31, 2018 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants
outstanding at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Warrants
outstanding at March 31, 2018
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
4.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at March 31, 2018
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
4.59
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at March 31, 2018:
Exercise
Price
|
|
|
Warrants
Outstanding
(Shares)
|
|
|
Warrants
Exercisable
(Shares)
|
|
|
Expiration
Date
|
$
|
1.0000
|
|
|
|
916,217
|
|
|
|
916,217
|
|
|
September
20, 2022
|
$
|
1.2870
|
|
|
|
41,002
|
|
|
|
41,002
|
|
|
April
17, 2019
|
$
|
1.5620
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December
31, 2021
|
$
|
2.7500
|
|
|
|
8,000
|
|
|
|
8000
|
|
|
September
20, 2022
|
$
|
4.8500
|
|
|
|
5,155
|
|
|
|
5,155
|
|
|
September
23, 2019
|
$
|
4.8750
|
|
|
|
108,594
|
|
|
|
108,594
|
|
|
September
30, 2020
|
$
|
5.0000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
September
22, 2019
|
$
|
5.1025
|
|
|
|
10,309
|
|
|
|
10,309
|
|
|
January
29, 2019
|
$
|
6.5000
|
|
|
|
8,092
|
|
|
|
8,092
|
|
|
February
4, 2019
|
$
|
6.8348
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September
30, 2020
|
$
|
7.9300
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February
28, 2021
|
|
|
|
|
|
1,464,415
|
|
|
|
1,464,415
|
|
|
|
Based
on a fair market value of $1.3100 per share on March 31, 2018, the intrinsic value of exercisable in-the-money common stock warrants
was $284,970 as of March 31, 2018.
Stock
Options
On
March 18, 2014, the stockholders of the Company holding a majority of the votes to be cast on the issue approved the adoption
of the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan (the “2014 Plan”), which had
been previously adopted by the Board of Directors of the Company, subject to stockholder approval. The Plan permits the grant
of options and restricted stock with respect to up to 325,025 shares of common stock, in addition to stock appreciation rights
and phantom stock, to directors, officers, employees, consultants and other service providers of the Company.
On
June 30, 2015, the Board of Directors adopted the 2015 Stock and Stock Option Plan (the “2015 Plan”). The 2015 Plan
initially provided for, among other things, the issuance of either or any combination of restricted shares of common stock and
non-qualified stock options to purchase up to 461,538 shares of the Company’s common stock for periods up to ten years to
management, members of the Board of Directors, consultants and advisors. The Company has not and does not intend to present the
2015 Plan to stockholders for approval. On August 18, 2015, the Board of Directors increased the number of shares that may be
issued under the 2015 Plan to 769,231 shares of the Company’s common stock. On March 31, 2016, the Board of Directors further
increased the number of shares that may be issued under the 2015 Plan to 1,538,461 shares of the Company’s common stock.
On January 17, 2017, the Board of Directors further increased the number of shares that may be issued under the 2015 Plan to 3,038,461
shares of the Company’s common stock. On December 9, 2017, the Board of Directors further increased the number of shares
that may be issued under the 2015 Plan to 6,985,260 shares of the Company’s common stock. On December 28, 2018, the Board
of Directors further increased the number of shares that may be issued under the 2015 Plan to 8,985,260 shares of the Company’s
common stock.
Information
with respect to the Black-Scholes variables used in connection with the evaluation of the fair value of stock-based compensation
is provided at Note 3.
There
were no grants of common stock options or of stock for the three-month period ended March 31, 2019.
The
exercise prices of common stock options outstanding and exercisable were as follows at March 31, 2019:
Exercise
Price
|
|
|
Options
Outstanding (Shares)
|
|
|
Options
Exercisable (Shares)
|
|
|
Expiration
Date
|
$
|
0.7000
|
|
|
|
21,677
|
|
|
|
21,677
|
|
|
November
21, 2023
|
$
|
1.1200
|
|
|
|
310,388
|
|
|
|
310,388
|
|
|
April
5, 2023
|
$
|
1.2500
|
|
|
|
16,762
|
|
|
|
16,762
|
|
|
December
7, 2022
|
$
|
1.3500
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
July
28, 2022
|
$
|
1.4500
|
|
|
|
1,849,418
|
|
|
|
1,849,418
|
|
|
December
9, 2027
|
$
|
1.4500
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
December
9, 2027
|
$
|
2.0000
|
|
|
|
285,000
|
|
|
|
285,000
|
|
|
June
30, 2022
|
$
|
2.0000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
July
26, 2022
|
$
|
3.9000
|
|
|
|
395,000
|
|
|
|
395,000
|
|
|
January
17, 2022
|
$
|
4.5000
|
|
|
|
7,222
|
|
|
|
7,222
|
|
|
September
2, 2021
|
$
|
5.6875
|
|
|
|
89,686
|
|
|
|
89,686
|
|
|
June
30, 2020
|
$
|
5.7500
|
|
|
|
2,608
|
|
|
|
2,608
|
|
|
September
12, 2021
|
$
|
6.4025
|
|
|
|
27,692
|
|
|
|
27,692
|
|
|
August
18, 2020
|
$
|
6.4025
|
|
|
|
129,231
|
|
|
|
129,231
|
|
|
August
18, 2022
|
$
|
6.4025
|
|
|
|
261,789
|
|
|
|
261,789
|
|
|
August
18, 2025
|
$
|
6.8250
|
|
|
|
8,791
|
|
|
|
8,791
|
|
|
December
11, 2020
|
$
|
7.3775
|
|
|
|
523,077
|
|
|
|
523,077
|
|
|
March
31, 2021
|
$
|
8.1250
|
|
|
|
169,231
|
|
|
|
169,231
|
|
|
June
30, 2022
|
$
|
13.0000
|
|
|
|
3,846
|
|
|
|
3,846
|
|
|
April
14, 2019
|
$
|
13.9750
|
|
|
|
3,385
|
|
|
|
3,385
|
|
|
March
14, 2024
|
$
|
15.4700
|
|
|
|
7,755
|
|
|
|
7,755
|
|
|
April
8, 2020
|
$
|
15.9250
|
|
|
|
2,462
|
|
|
|
2,462
|
|
|
February
28, 2024
|
$
|
16.0500
|
|
|
|
46,154
|
|
|
|
46,154
|
|
|
July
17, 2019
|
$
|
16.6400
|
|
|
|
1,538
|
|
|
|
1,538
|
|
|
January
29, 2020
|
$
|
19.5000
|
|
|
|
9,487
|
|
|
|
9,487
|
|
|
July
17, 2022
|
$
|
19.5000
|
|
|
|
6,410
|
|
|
|
6,410
|
|
|
August
10, 2022
|
|
|
|
|
|
4,337,609
|
|
|
|
4,337,609
|
|
|
|
There was no deferred
compensation expense for the outstanding stock options at March 31, 2019.
Based
on a fair market value of $0.8500 per share on March 31, 2019, the intrinsic value of exercisable in-the-money options was $3,252
as of March 31, 2019.
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 March 31, 2019.
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 out-of-the-money
through March 31, 2019. As of March 31, 2019, 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 potentially 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 remained significantly out-of-the-money through March 31,
2019. Accordingly, the Company considered the fair value of the contingent consideration to be immaterial and therefore did not
ascribe any value to such contingent consideration. If any such shares are ultimately issued to the former Pier stockholders,
the Company will recognize the fair value of such shares as a charge to operations at that time.
Reserved
and Unreserved Shares of Common Stock
On
January 17, 2017, the Board of Directors of the Company approved the adoption of an amendment of the Amended and Restated RespireRx
Pharmaceuticals, Inc. 2015 Stock and Stock Option Plan (as amended, the “2015 Plan”). That amendment increases the
shares issuable under the plan by 1,500,000, from 1,538,461 to 3,038,461. On December 9, 2017, the Board of Directors further
amended the 2015 Plan to increase the number of shares that may be issued under the 2015 Plan to 6,985,260 shares of the Company’s
common stock. On December 28, 2018, the Board of Directors further amended the 2015 Plan to increase the number of shares that
may be issued under the 2015 Plan to 8,985,260 shares of the Company’s common stock.
Other
than the change in the number of shares available under the 2015 Plan, no other changes were made to the 2015 Plan by these
amendments noted above.
At
March 31, 2019, the Company had 65,000,000 shares of common stock authorized and 3,872,076 shares of common stock issued and outstanding.
Furthermore, as of March 31, 2019, the Company had reserved an aggregate of 11 shares for issuance upon conversion of the Series
B Preferred Stock; 1,874,828 shares for issuance upon exercise of warrants; 4,337,609 shares for issuance upon exercise of outstanding
stock options; 63,236 shares to cover equity grants available for future issuance pursuant to the Company’s 2014 Equity,
Equity-linked and Equity Derivative Incentive Plan; 4,427,343 shares to cover equity grants available for future issuance pursuant
to the 2015 Plan; 16,893 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 March 31, 2019, the Company had an aggregate of 10,726,417 shares
of common stock reserved for issuance and 50,401,507 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.
Related Party Transactions
Dr.
Arnold S. Lippa and Jeff E. Margolis, officers and directors of the Company since March 22, 2013, have indirect ownership interests
and managing memberships in Aurora Capital LLC (“Aurora”) through interests held in its members, and Jeff. E. Margolis
is also an officer of Aurora. Aurora is a boutique investment banking firm specializing in the life sciences sector that is also
a full-service brokerage firm.
A
description of advances and notes payable to officers is provided at Note 4.
8.
Commitments and Contingencies
Pending
or Threatened Legal Action and Claims
By
letter dated May 18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of the
University of Alberta, which purported to terminate, effective December 12, 2017, the license agreement dated May 9, 2007
between the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for
termination and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting to
be attended by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute. In
February 2019, the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license agreement
and the form of a new license agreement. However, the parties have not signed the draft new license agreement pending the Company’s
payment of the agreed amount of historical unreimbursed patent fees of approximately CAD$23,000 (approximately US$17,000 as of
March 31, 2019). No assurance can be provided that the Company will or will not be able to remit the historical license fees or
that the draft new license agreement will be executed and become effective. If we do not remit the historical fees and the new
license agreement does not become effective, we cannot estimate the possible adverse impact on the Company’s operations
or business prospects.
By
e-mail dated July 21, 2016, the Company received a demand from an investment banking consulting firm that represented the Company
in 2012 in conjunction with the Pier transaction alleging that $225,000 is due and payable for investment banking services rendered.
Such amount has been included in accrued expenses at March 31, 2019 and December 31, 2018.
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 payable for services rendered. On January 18, 2017, following an arbitration proceeding, an
arbitrator awarded the vendor the full amount sought in arbitration of $146,082. Additionally, the arbitrator granted the vendor
attorneys’ fees and costs of $47,937. All such amounts have been included in accrued expenses at March 31, 2019 and December
31, 2018, including accrued interest at 4.5% annually from February 26, 2018, the date of the judgment, through March 31, 2019,
totaling $9,652 and which amounts at December 31, 2018 totaled $7,470.
The
Company is periodically the subject of various pending and threatened legal actions and claims. In the opinion of management of
the Company, adequate provision has been made in the Company’s consolidated financial statements as of March 31, 2019 and
December 31, 2018 with respect to such matters, including, specifically, the matters noted above. The Company intends to vigorously
defend itself if any of the matters described above results in the filing of a lawsuit or formal claim.
Significant
Agreements and Contracts
Consulting
Agreement
Richard
Purcell, the Company’s Senior Vice President of Research and Development since October 15, 2014, provides his services to
the Company on a month-to-month basis through his consulting firm, DNA Healthlink, Inc., through which the Company has contracted
for his services, for a monthly cash fee of $12,500. Additional information with respect to shares of common stock that have been
issued to Mr. Purcell is provided at Note 6. Cash compensation expense pursuant to this agreement totaled $37,500 for the three-months
ended March 31, 2019 and 2018, which is included in research and development expenses in the Company’s consolidated
statements of operations for such periods.
Employment
Agreements
On
October 12, 2018, Dr. Lippa was named Interim President and Interim Chief Executive Officer to replace Dr. Manuso who resigned
effective September 30, 2018. 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 automatically extended on September 30, 2018 and will automatically extend annually, upon the same terms and
conditions, for successive periods of one year, unless either party provides written notice of its intention not to extend the
term of the agreement at least 90 days prior to the applicable renewal date), Dr. Lippa 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 $84,900
for the three-months ended March 31, 2019 and 2018, respectively, which amounts are included in accrued compensation and
related expenses in the Company’s consolidated balance sheet at March 31, 2019 and December 31, 2018, and in research and
development expenses in the Company’s consolidated statement of operations. Dr. Lippa does not receive any additional compensation
for serving as Executive Chairman and on the Board of Directors.
On
August 18, 2015, the Company also entered into an employment agreement with Jeff E. Margolis, in his continuing role as Vice President,
Secretary and Treasurer. Pursuant to the agreement, which was for an initial term through September 30, 2016 (and which automatically
extended on September 30, 2016 and will automatically extend annually upon the same terms and conditions, for successive periods
of one year, unless either party provides written notice of its intention not to extend the term of the agreement at least 90
days prior to the applicable renewal date), Mr. Margolis received an annual base salary of $195,000, and 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 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. Mr. Margolis is also entitled to receive, until such time as the Company establishes a group health plan
for its employees, $1,200 per month, on a tax-equalized basis, as additional compensation to cover the cost of health coverage
and up to $1,000 per month, on a tax-equalized basis, as reimbursement for a term life insurance policy and disability insurance
policy. Mr. Margolis is also entitled to be reimbursed for business expenses. Additional information with respect to the stock
options granted to Mr. Margolis is provided at Note 6. Mr. Margolis’ employment agreement was amended effective July 1,
2017. The employment agreement amendment called for payment in three installments in cash of the $60,000 bonus granted on June
30, 2015. A minimum of $15,000 was to be payable in cash as follows: (a) $15,000 payable in cash upon the next closing (after
July 1, 2017) of any financing in excess of $100,000 (b) $15,000 payable by the end of the following month assuming cumulative
closings (beginning with the closing that triggered (a)) in excess of $200,000 and (c) $30,000 payable in cash upon the next closing
of any financing in excess of an additional $250,000. The conditions of (a), (b) and (c) above were met as of December 31, 2017,
however Mr. Margolis has waived the Company’s obligation to make any payments of the cash bonus until the Board of Directors
of the Company determines that sufficient capital has been raised by the Company or is otherwise available to fund the Company’s
operations on an ongoing basis. Recurring cash compensation accrued pursuant to this amended agreement totaled $80,400 for the
three-months ended March 31, 2019 and 2018 and were $321,600 for the fiscal year ended December 31, 2018. Such amounts are included
in accrued compensation and related expenses in the Company’s consolidated balance sheet at March 31, 2019 and December
31, 2018 respectively, and in general and administrative expenses in the Company’s consolidated statement of operations.
The
employment agreements between the Company and each of Dr. Lippa and Mr. Margolis (prior to the 2017 amendment), respectively,
provided that the payment obligations associated with the first year base salary were to accrue, but no payments were to be made,
until at least $2,000,000 of net proceeds from any offering or financing of debt or equity, or a combination thereof, was received
by the Company, at which time scheduled payments were to commence. Dr. Lippa and Mr. Margolis (who are each also directors of
the Company), and prior to his resignation, Dr. James S. Manuso, 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 Alberta License Agreement
On
May 9, 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. On May 18, 2018,
the Company received a letter from counsel claiming to represent TEC Edmonton and The Governors of the University of Alberta,
which purported to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 (as subsequently amended)
between the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for
termination and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting to
be attended by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute. In
February 2019, the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license agreement
and the form of a new license agreement. However, the parties have not signed the draft new license agreement pending the Company’s
payment of the agreed amount of historical unreimbursed patent fees, of approximately CAD$23,000 (approximately US$17,000 as of
March 31, 2019). No assurance can be provided that the Company will or will not be able to remit the historical license fees or
that the draft new license agreement will be executed and become effective. If we do not remit the historical fees and the new
license agreement does not become effective, we cannot estimate the possible adverse impact on the Company’s operations
or business prospects.
University
of Illinois 2014 Exclusive License Agreement
On
June 27, 2014, the Company entered into an Exclusive License Agreement (the “2014 License Agreement”) with the University
of Illinois, the material terms of which were similar to a License Agreement between the parties that had been previously terminated
on March 21, 2013. The 2014 License Agreement became effective on September 18, 2014, upon the completion of certain conditions
set forth in the 2014 License Agreement, including: (i) the payment by the Company of a $25,000 licensing fee, (ii) the payment
by the Company of outstanding patent costs aggregating $15,840, and (iii) the assignment to the University of Illinois of rights
the Company held in certain patent applications, all of which conditions were fulfilled.
The
2014 License Agreement granted the Company (i) exclusive rights to several issued and pending patents in numerous jurisdictions
and (ii) the non-exclusive right to certain technical information that is generated by the University of Illinois in connection
with certain clinical trials as specified in the 2014 License Agreement, all of which relate to the use of cannabinoids for the
treatment of sleep related breathing disorders. The Company is developing dronabinol (Δ9-tetrahydrocannabinol), a cannabinoid,
for the treatment of OSA, the most common form of sleep apnea.
The
2014 License Agreement provides for various commercialization and reporting requirements commencing on June 30, 2015. In addition,
the 2014 License Agreement provides for various royalty payments, including a royalty on net sales of 4%, payment on sub-licensee
revenues of 12.5%, and a minimum annual royalty beginning in 2015 of $100,000, which is due and payable on December 31 of each
year beginning on December 31, 2015. The minimum annual royalty obligation of $100,000 due on December 31, 2018, was extended
to February 28, 2019, when such payment obligation was paid by the Company. The minimum annual royalty obligation was paid as
scheduled in December 2017. One-time milestone payments may become due based upon the achievement of certain development milestones.
$350,000 will be due within five days after the dosing of the first patient is a Phase III human clinical trial anywhere in the
world. $500,000 will be due within five days after the first NDA filing with FDA or a foreign equivalent. $1,000,000 will be due
within twelve months of the first commercial sale. One-time royalty payments may also become due and payable. Annual royalty payments
may also become due. In the year after the first application for market approval is submitted to the FDA or a foreign equivalent
and until approval is obtained, the minimum annual royalty will increase to $150,000. In the year after the first market approval
is obtained from the FDA or a foreign equivalent and until the first sale of a product, the minimum annual royalty will increase
to $200,000. In the year after the first commercial sale of a product, the minimum annual royalty will increase to $250,000. For
each of the three-month periods ending March 31, 2019 and 2018, the Company recorded a charge to operations of $25,000 with
respect to its minimum annual royalty obligation, which is included in research and development expenses in the Company’s
consolidated statements of operations for the three-months ended March 31, 2019 and 2018.
As of December 31,
2018, the Company received an extension of time to make a $100,000 payment that would have due on such date. An additional extension
was granted until February 28, 2019, on which date the Company made the required payment.
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). The final amount
payable in respect to this Research Contract of US$16,207 (CAD$21,222) was paid in US dollars in January 2018 and completed the
payments under the contract. The conversion to US dollars above utilizes an exchange rate of approximately US$0.76 for every CAD$1.00.
The
University of Alberta received matching funds through a grant from the Canadian Institutes of Health Research in support of this
research. The Company retained the rights to research results and any patentable intellectual property generated by the research.
Dr. John Greer, faculty member of the Department of Physiology, Perinatal Research Centre and Women & Children’s Health
Research Institute at the University of Alberta collaborated on this research. The studies were completed in 2016.
See
“University of Alberta License Agreement” above for more information on the related license agreement.
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
March 31, 2019, aggregating $805,600. License agreement amounts included in the 2019 column represents amounts contractually due
from April 1, 2019 through December 31, 2019 (nine months) and in each of the subsequent years, represents the full year. Employment
agreement amounts included in the 2019 column represent amounts contractually due at from April 1, 2019 through September 30,
2019 (six months) when such contracts expire unless extended pursuant to the terms of the contracts.
|
|
|
|
|
Payments
Due By Year
|
|
|
|
Total
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
License
agreements
|
|
$
|
475,000
|
|
|
$
|
75,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Employment
agreements (1)
|
|
|
330,600
|
|
|
|
330,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
805,600
|
|
|
$
|
405,600
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
(1) The payment of such amounts has been deferred
indefinitely, as described above at “Employment Agreements.” The 2019 amounts include six-months of employment
agreement obligations for Dr. Lippa and Mr. Margolis as their employment contracts renewed on September 30, 2018 and the 2019
obligations include the six months of obligations through September 30, 2019.
9.
Subsequent Events
Arnold
S. Lippa, the Company’s Interim Chief Executive Officer, Interim President and Chief Scientific Officer extended credit
to the Company on April 15, 2019 for operating expenses by making a payment of $25,000 to the Company’s auditors which amount
has been accounted for by the Company as an advance by Dr. Lippa payable on demand. The balance of the amount payable to the auditors
has been paid directly by the Company.
On
April 24, 2019, the Company issued a new convertible note for $58,500 in face amount, payable on April 24, 2020 and bearing interest
at a rate equal to 12% per annum, with any amount of principal or interest which is not paid when due bearing interest at the
rate of 22% per annum. At any time during the period beginning on the date that is 180 days following the date of the note and
ending on the later of (i) April 24, 2020 and (ii) the date of payment of the Default Amount (as defined in the note), any outstanding
and unpaid amount of the note may be converted into shares of the Company’s common stock or securities convertible into
the Company’s common stock, provided that such conversion would not result in the lender beneficially owning more than 4.99%
of the Company’s common stock. The note also contains provisions that permit the Company to prepay the note inclusive of
accrued interest. Upon such conversion, the note would be deemed repaid and terminated.