NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three
Months and Six Months Ended June 30, 2018 and 2017
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” or “we” or “our” unless the context indicates otherwise). The condensed
consolidated financial statements of the Company at June 30, 2018 and for the three and six month periods ended
June 30, 2018 and 2017, are unaudited. In the opinion of management, all adjustments (including normal recurring adjustments)
have been made that are necessary to present fairly the condensed consolidated financial position of the Company as of June 30,
2018, the results of its condensed consolidated operations for the three and six month periods ended June 30, 2018
and 2017, and its condensed consolidated cash flows for the six months ended June 30, 2018 and 2017. 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, 2017 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 footnote 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, 2017, 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 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 in patients with spinal cord injury and a human
Phase 2B study in patients with ADHD with either CX717 or CX1739.
RespireRx
is considering an internal restructuring plan that contemplates spinning out the cannabinoid platform into what would initially
be a wholly-owned subsidiary that the Company currently intends would ultimately have its own management team and board of directors.
This spin-out company would be tasked with raising financing in order to develop and commercialize the dronabinol platform for
the treatment of OSA.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred
net losses of $1,382,042 for the six months ended June 30, 2018 and $4,291,483 for the fiscal year ended December 31, 2017, and
negative operating cash flows of $184,028 for the six months ended June 30, 2018 and $697,009 for the fiscal year ended
December 31, 2017. The Company also had a stockholders’ deficiency of $5,069,128 at June 30, 2018 and expects to continue
to incur net losses and negative operating cash flows for at least the next few years. As a result, management has concluded that
there is substantial doubt about the Company’s ability to continue as a going concern, and the Company’s independent
registered public accounting firm, in its report on the Company’s consolidated financial statements for the year ended December
31, 2017, 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.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents.
The Company limits its exposure to credit risk by investing its cash with high quality financial institutions. The Company’s
cash balances may periodically exceed federally insured limits. The Company has not experienced a loss in such accounts to date.
Cash
Equivalents
The
Company considers all highly liquid short-term investments with maturities of less than three months when acquired to be cash
equivalents.
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value of financial instruments established a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value into three levels and requires that assets and liabilities carried
at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers into and
out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying 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.
Deferred
Financing Costs
Costs
incurred in connection with ongoing debt and equity financings, including legal fees, are deferred until the related financing
is either completed or abandoned.
Costs
related to abandoned debt or equity financings are charged to operations in the period of abandonment. Costs related to completed
debt financings are presented as a direct deduction from the carrying amount of the related debt liability (see “Capitalized
Financing Costs” below). Costs related to completed equity financings are charged directly to additional paid-in capital.
Capitalized Financing
Costs
The Company presents
debt issuance costs related to debt liability in its condensed consolidated balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with the presentation for debt discounts.
Convertible
Notes Payable
Original
Issuance of Notes and Warrants
Convertible
notes are evaluated to determine if they should be recorded at amortized cost. To the extent that there are associated warrants,
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.
2018
Notes Exchange
In
cases where debt or other liabilities are exchanged for equity, the Company compares the value of debt, inclusive of accrued interest,
if applicable, being exchanged for equity to the value of the equity issued and records any loss or gain
as a result of such exchange. See Note 4. Notes Payable.
Extinguishment
of Debt
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 June 30, 2018.
Long-Term
Prepaid Insurance
Long-term
prepaid insurance represents the premium paid in March 2017 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.
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 June 30, 2018.
Stock-Based
Compensation
The
Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Board members, consultants
and other vendors for services rendered. Such issuances vest and expire according to terms established at the issuance date of
each grant.
The
Company accounts for stock-based payments to officers and directors by measuring the 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, consultants and other vendors 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, outside consultants and other vendors 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 six months ended June 30, 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
|
|
2.64-2.68
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
186.00
to 190.55
|
%
|
Expected
life in years
|
|
|
4.52
to 5.00
|
|
For
stock options requiring an assessment of value during the six months ended June 30, 2017, the fair value of each stock option
award was estimated using the Black-Scholes option-pricing model using the following assumptions:
Risk-free interest rate
|
|
|
1.89
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
140.00
|
%
|
Expected life
|
|
|
3.4 to 5 years
|
|
The
Company recognizes the fair value of stock-based compensation in general and administrative costs and in research and development
costs, as appropriate, in the Company’s 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 six months ended
June 30, 2018 and 2017.
There
were no warrants issued in the six months ended June 30, 2018 and 2017 requiring such assessment.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes.
Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities.
The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of
its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination
was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.
Pursuant
to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss and credit carryforwards may be limited
if a cumulative change in ownership of more than 50% occurs within any three-year period since the last ownership change. The
Company may have had a change in control under these Sections. However, the Company does not anticipate performing a complete
analysis of the limitation on the annual use of the net operating loss and tax credit carryforwards until the time that it anticipates
it will be able to utilize these tax attributes.
As
of June 30, 2018, the Company did not have any unrecognized tax benefits related to various federal and state income tax matters
and does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The
Company is subject to U.S. federal income taxes and income taxes of various state tax jurisdictions. As the Company’s net
operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions
in which the Company currently operates or has operated in the past.
The
Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.
The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority
as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits
of the position are recognized. As of June 30, 2018, 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
June 30, 2018, 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.
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
June 30, 2018 and 2017, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to
acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
June,
|
|
|
|
2018
|
|
|
2017
|
|
Series B convertible preferred stock
|
|
|
11
|
|
|
|
11
|
|
Convertible notes payable
|
|
|
15,669
|
|
|
|
31,398
|
|
Common stock warrants
|
|
|
1,464,415
|
|
|
|
688,198
|
|
Common stock options
|
|
|
4,323,317
|
|
|
|
1,987,749
|
|
Total
|
|
|
5,803,412
|
|
|
|
2,707,356
|
|
Reclassifications
Certain
comparative figures in 2017 have been reclassified to conform to the current quarter’s presentation. These reclassifications
were immaterial, both individually and in the aggregate.
Recent
Accounting Pronouncements
Management
does not believe that any recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material
impact on the Company’s financial statement presentation or disclosures.
4.
Notes Payable
Convertible
Notes Payable
The
convertible notes sold to investors in 2014 and 2015, which aggregated a total of $579,500, had a fixed interest rate of 10% per
annum and those that remain outstanding are convertible into common stock at a fixed price of $11.3750 per share. The convertible
notes have no reset rights or other protections based on subsequent equity transactions, equity-linked transactions or other events.
The warrants to purchase 50,945 shares of common stock issued in connection with the sale of the convertible notes were exercisable
at a fixed price of $11.3750 per share, provided no right to receive a cash payment, and included no reset rights or other protections
based on subsequent equity transactions, equity-linked transactions or other events. 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 Company determined that
there were no embedded derivatives to be identified, bifurcated and valued in connection with this financing.
The
maturity date of the 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 expiring on September 15, 2016.
The
convertible notes (including those for which default notices have been received) consist of the following at June 30, 2018 and
December 31, 2017:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Principal amount of notes payable
|
|
$
|
125,000
|
|
|
$
|
276,000
|
|
Add accrued interest payable
|
|
|
53,205
|
|
|
|
98,646
|
|
|
|
$
|
178,205
|
|
|
$
|
374,646
|
|
Between
October 3, 2016 and October 25, 2016, the Company received several notices of default from holders of convertible notes. The effect
of such notices of default was to increase the annual interest rate from 10% to 12% with respect to the convertible notes to which
such notices applied. On February 28, 2018, two of such convertible notes were exchanged for common stock of the Company and were
extinguished. The Company measured the fair value of the shares of common stock issued to the holder in respect to the extinguishment
of the two convertible notes as compared to the aggregate of principal and interest on such notes and recorded a loss of 66,782
which is the amount of the excess fair value paid as compared to the aggregate principal and interest extinguished. The total
amount of principal and accrued interest that was due and payable was $43,552. The convertible notes were exchanged for
58,071 shares of the Company’s common stock. The effective exchange rate was $0.75 per share of the Company’s common
stock. The closing price of the Company’s common stock on February 28, 2018, was $1.90 as reported by the OTC Markets.
On
February 28, 2018, the Board of Directors authorized the offering of a similar exchange arrangement at the same effective exchange
rate of $0.75 per share of the Company’s common stock to all remaining holders of 10% Convertible Notes (some of which convertible
notes are the subject of notices of default and therefore accruing annual interest at 12%); however, as of March 31, 2018, no
other holders of convertible notes have elected to exchange their convertible notes on such terms.
On
May 31, 2018, the Company entered into exchange agreements with four holders of convertible notes who agreed to exchange their
convertible notes for the Company’s common stock at an exchange rate of $0.75 per share. The note holders, in the aggregate,
agreed to exchange $169,715 of principal and accrued interest for 226,288 shares of the Company’s common stock. The closing
price of the Company’s common stock on May 31, 2018 was $0.92 per share. As a result of the exchange, $169,715 of convertible
notes, inclusive of accrued interest, were cancelled and $208,185 market value of common stock was issued, resulting in a loss
on extinguishment of debt of $38,470.
As
of June 30, 2018, principal and accrued interest on the remaining outstanding convertible note subject to a default notice totaled
$36,772, of which $11,772 was accrued interest. As of December 31, 2017, principal and accrued interest on convertible notes subject
to default notices totaled $91,028 of which $25,028 was accrued interest.
As
of June 30, 2018, the remaining outstanding convertible notes were convertible into 15,669 shares of the Company’s common
stock, including 2,811 shares attributable to accrued interest of $53,205 payable as of such date. As of December 31, 2017, the
outstanding convertible notes were convertible into 32,941 shares of the Company’s common stock, including 8,677 shares
attributable to accrued interest of $98,646 payable as of such date. Such notes will continue to accrue interest until exchanged,
if exchanged. If such notes are not exchanged, they will continue to accrue interest until either paid or otherwise discharged.
There can be no assurance that any of the additional holders of the remaining 10% 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 six months ended June 30, 2018, 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 CX717, CX1739 and CX1942, or to the patent for the use of ampakine compounds for the treatment of respiratory depression.
Note
payable to SY Corporation consists of the following at June 30, 2018 and December 31, 2017:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Principal amount of note payable
|
|
$
|
399,774
|
|
|
$
|
399,774
|
|
Accrued interest payable
|
|
|
291,124
|
|
|
|
267,335
|
|
Foreign currency transaction adjustment
|
|
|
28,284
|
|
|
|
(83,282
|
)
|
|
|
$
|
719,182
|
|
|
$
|
583,827
|
|
Interest
expense with respect to this promissory note was $23,789 and $23,789 for the six months ended June 30, 2018 and 2017, respectively.
Advances
and Notes Payable to Officers
On
January 29, 2016, Dr. Arnold S. Lippa, the Company’s Chief Scientific Officer and Chairman of the Board of Directors,
advanced $52,600 to the Company for working capital purposes under a demand promissory note with interest at 10% per annum.
On September 23, 2016, Dr. Lippa advanced $25,000 to the Company for working capital purposes under a second demand
promissory note with interest at 10% per annum. The notes are secured by the assets of the Company. Additionally, on April
9, 2018, Dr. Lippa advanced another $50,000 to the Company as discussed in more detail below. During the six
months ended June 30, 2018 and 2017, $6,198 and $3,848 was charged to interest expense with respect to
these notes, respectively. In connection with the loans, Dr. Lippa was issued fully vested warrants to purchase 15,464
shares of the Company’s common stock, 10,309 of which have an exercise price of $5.1025 per share and 5,155 of which
have an exercise price of $4.85 which were the closing prices of the Company’s common stock on the respective dates of
grant. The warrants expire on January 29, 2019 and September 23, 2019 respectively and may be exercised on a cashless
basis.
On
February 2, 2016, Dr. James S. Manuso, the Company’s Chief Executive Officer and Vice Chairman of the Board of Directors,
advanced $52,600 to the Company for working capital purposes under a demand promissory note with interest at 10% per annum. On
September 22, 2016, Dr. Manuso, advanced $25,000 to the Company for working capital purposes under a demand promissory note with
interest at 10% per annum. The notes are secured by the assets of the Company. Additionally, on April 9, 2018, Dr. Manuso advanced
another $50,000 to the Company as discussed in more detail below. During the six months ended June 30, 2018
and 2017, $6,190 and $3,848 was charged to interest expense with respect to these notes, respectively. In connection
with the loans, Dr. Manuso was issued fully vested warrants to purchase 13,092 shares of the Company’s common stock,
8,092 of which have an exercise price of $6.5000 per share and 5,000 of which have an exercise price of $5.00, which were the
closing market prices of the Company’s common stock on the respective dates of grant. The warrants expire on February 2,
2019 and September 22, 2019, respectively, and may be exercised on a cashless basis.
On
April 9, 2018, Dr. Arnold S. Lippa and Dr. James S. Manuso, the Company’s Chief Scientific Officer and Chairman of the Board
of Directors and the Company’s Chief Executive Officer and Vice Chairman of the Board of Directors, advanced $50,000 each,
for a total of $100,000, to the Company for working capital purposes. Each note is payable on demand after June 30,
2018. Each note was subject to a mandatory exchange provision that provided that the principal amount of the note would be mandatorily
exchanged into a board approved offering of the Company’s securities, if such offering held its first closing on or before
June 30, 2018 and the amount of proceeds from such first closing was at least $150,000, not including the principal amounts
of the notes that would be exchanged, or $250,000 including the principal amounts of such notes. Upon such exchange, the notes
would be deemed repaid and terminated. Any accrued but unpaid interest outstanding at the time of such exchange will be (i) repaid
to the note holder or (ii) invested in the offering, at the note holder’s election. A first closing did not occur on or
before June 30, 2018. Dr. Arnold S. Lippa agreed to exchange his note into the board approved offering that had its
initial closing on September 12, 2018 (See Note 9. Subsequent Events). Accrued interest on Dr. Lippa’s note did not exchange.
Other
Short-Term Notes Payable
Other
short-term notes payable at June 30, 2018 and December 31, 2017 consisted of premium financing agreements with respect to various
insurance policies. At June 30, 2018, a premium financing agreement was payable in the initial amount of $63,750, with interest
at 8.930% per annum, in ten monthly installments of $6,639. At June 30, 2018, the aggregate amount of the short-term notes payable
was $49,272.
5.
Settlement and Payments
On
April 5, 2018, the Company issued 185,388 common stock purchase options to Robert N. Weingarten, the Company’s former Chief
Financial Officer and 125,000 common stock purchase options to Pharmaland Executive Consulting Services LLC (“Pharmaland”)
exercisable until April 5, 2023 at $1.12 per share of common stock which was the closing price of the common stock as quoted on
the OTC QB on that date. All of these common stock purchase options vested immediately. Each of the common stock purchase options
were valued on the issuance date based upon a Black-Scholes valuation method at $1.081. The assumptions used for the Black Scholes
calculation were a volatility of 186.07%, a risk-free rate of 2.64%, a zero dividend yield and a five year period to option maturity.
Mr. Weingarten simultaneously with the issuance of the common stock purchase options, agreed to forgive $200,350 of accrued compensation
owed to him. The value of the options granted to Mr. Weingarten was $200,404. The resulting loss on extinguishment of the accrued
liability was $54. The common stock purchase options issued to Pharmaland was in partial payment of accounts payable owed. The
common stock purchase options issued to Pharmaland had a value of $135,125 and the accounts payable paid was $124,025. The loss
on extinguishment of this accounts payable was $11,100.
The
Company continues to explore ways to reduce its indebtedness, and might in the future enter additional settlements of potential
claims or payments with respect to outstanding debts.
6.
Stockholders’ Deficiency
Company
has 70,000,000 authorized shares of stock, 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. As of June 30, 2018 and December 31, 2017, total
stockholders’ deficiency was $5,069,128 and 4,355,384 respectively.
Preferred
Stock
The
Company has authorized a total of 5,000,000 shares of preferred stock, par value $0.001 per share. As of June 30, 2018 and December
31, 2017, 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 June 30, 2018
and December 31, 2017, 3,505,800 shares of preferred stock were undesignated and may be issued with such rights and powers as
the Board of Directors may designate.
There
were no shares of 9% Preferred Stock, Series A Junior Participating Preferred Stock, or Series G 1.5% Convertible Preferred Stock
outstanding as of June 30, 2018 and December 31, 2017.
Series
B Preferred Stock outstanding as of June 30, 2018 and December 31, 2017 consisted of 37,500 shares issued in a May 1991 private
placement. Each share of Series B Preferred Stock is convertible into approximately 0.00030 shares of common stock at an effective
conversion price of $2,208.375 per share of common stock, which is subject to adjustment under certain circumstances. As of June
30, 2018 and December 31, 2017, 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 of Series B Preferred Stock,
an amount equal to its liquidation preference, at any time upon 30 days prior notice.
Common
Stock
There
are 3,349,620 shares of the Company’s Common Stock outstanding as of June 30, 2018. After reserving for conversions of convertible
debt as well as common stock purchase options and warrants exercises, there are 53,044,573 shares of the Company’s Common
Stock available for future issuances.
1
st
2017 Unit Offering
On
March 10, 2017 and March 28, 2017, the Company sold units to investors for aggregate gross proceeds of $350,000, with each unit
consisting of one share of the Company’s common stock and one common stock purchase warrant to purchase one share of the
Company’s common stock (the “1
st
2017 Unit Offering”). Units were sold for $2.50 per unit and the
warrants issued in connection with the units were exercisable through December 31, 2021 at a fixed price $2.75 per share of the
Company’s common stock. The warrants contained a cashless exercise provision and certain blocker provisions preventing exercise
if the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a result of
such exercise. The warrants were also subject to redemption by the Company at $0.001 per share upon ten (10) days written notice
if the Company’s common stock closed at 200% or more of the unit purchase price for any five (5) consecutive trading days.
Investors were not affiliates of the Company. The investors received an unlimited number of piggy-back registration rights. Investors
also received an unlimited number of exchange rights, which were options and not obligations, to exchange such investor’s
entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting solely of
convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only
into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion of any number of subsequent
financings aggregating at least $15 million gross proceeds to the Company, or (ii) December 30, 2017. The dollar amount used to
determine the amount invested or exchanged into the subsequent financing would be 1.2 times the amount of the original investment.
Under certain circumstances, the ratio might have been 1.4 instead of 1.2. The exchange right did not permit the investors to
exchange into a debt offering or into redeemable preferred stock, therefore, unlike the 2
nd
2016 Unit Offering, the
2017 Unit Offering resulted in the issuance of permanent equity. The Company evaluated whether the warrants or the exchange rights
met criteria to be accounted for as a derivative in accordance with Accounting Standard Codification Topic (ASC) 815 and determined
that the derivative criteria were not met. Therefore, the Company determined no bifurcation and separate valuation was necessary
and that the warrants and exchange right should be accounted for with the host instrument. The closing market prices of the Company’s
common stock on March 10, 2017 and March 28, 2017 were $4.05 and $3.80 respectively. In connection with this transaction, Aurora
Capital LLC (“Aurora”) served as a placement agent and earned $20,000 fees and 8,000 placement agent common stock
warrants associated with the closing of 1
st
2017 Unit Offering. The fees were unpaid as of June 30, 2018 and
have been accrued in accounts payable and accrued expenses and charged against Additional paid-in capital as of December 31, 2017
and June 30, 2018. The placement agent common stock warrants were valued at $27,648 and were accounted for in Additional
paid-in capital as of June 30, 2017 and remain valued at that amount as of June 30, 2018.
On
July 26, 2017, the Company’s Board approved an offering of securities conducted via private placement (the “2
nd
2017 Unit Offering” described below) that, because of the terms of the 2
nd
2017 Unit Offering as compared
to the terms of the 1
st
2017 Unit Offering, resulted in an exchange of all of the units from the 1
st
2017
Unit Offering into equity securities of the Company in the 2
nd
2017 Unit Offering by all of the investors in the 1
st
2017 Unit Offering.
2
nd
2017 Unit Offering
On
August 29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017,
December 21, 2017, December 22, 2017 and December 29, 2017 the Company sold units in the 2
nd
2017 Unit Offering to
investors for aggregate gross proceeds of $404,500, with each unit consisting of one share of the Company’s common stock
and one common stock purchase warrant to purchase one share of the Company’s common stock. Units were sold for $1.00 per
unit and the warrants issued in connection with the units are exercisable through September 29, 2022 at a fixed price $1.10 per
share of the Company’s common stock. The warrants contain a cashless exercise provision and certain blocker provisions preventing
exercise if the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a
result of such exercise. The warrants are also subject to redemption by the Company at $0.001 per share upon ten (10) days written
notice if the Company’s common stock closes at 250% or more of the unit purchase price for any five (5) consecutive trading
days. The investors were not affiliates of the Company. Investors received an unlimited number of piggy-back registration rights.
Investors also received an unlimited number of exchange rights, which were options and not obligations, to exchange such investor’s
entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting solely of
convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only
into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing” as in the 1
st
2017 Unit Offering). These exchange rights were effective until the earlier of:
(i) the completion of any number of subsequent financings aggregating at least $15 million gross proceeds to the Company, or (ii)
December 30, 2017 and have therefore expired. The dollar amount used to determine the amount invested or exchanged into the subsequent
financing would have been 1.2 times the amount of the original investment. Under certain circumstances, the ratio might have been
1.4 instead of 1.2. The exchange right did not permit the investors to exchange into a debt offering or into redeemable preferred
stock, therefore, unlike the 2
nd
2016 Unit Offering, the 2
nd
2017 Unit Offering resulted in the issuance
of permanent equity. All exchange rights have expired as of December 30, 2017. The Company evaluated whether the warrants or the
exchange rights met criteria to be accounted for as a derivative in accordance with Accounting Standard Codification Topic (ASC)
815 and determined that the derivative criteria were not met. Therefore, the Company determined no bifurcation and separate valuation
was necessary and that the warrants and exchange right should be accounted for with the host instrument. The closing market prices
of the Company’s common stock on August 29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017,
November 29, 2017, December 13, 2017, December 21, 2017, December 22, 2017 and December 29, 2017 were $1.00, $1.40, $1.40, $1.50,
$0.80, $1.05, $1.45, $1.51, $1.45 and $1.14, respectively. There was no placement agent and therefore no fees associated with
the 2
nd
2017 Unit Offering.
The
terms of the 2
nd
2017 Unit Offering, as compared to the terms of the 2
nd
2016 Unit Offering and the 1
st
2017 Unit Offering, resulted in an exchange of all of the units from each of the 2
nd
2016 Unit Offering and the
1
st
2017 Unit Offering into equity securities of the 2
nd
2017 Unit Offering. The 1
st
2017 Unit
Offering and the 2
nd
2017 Unit Offering were both originally accounted for as equity.
See
Note 9 – Subsequent Events for a description of the 2018 Unit Offering.
Common
Stock Warrants
A
summary of warrant activity for the six months ended June 30, 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
|
|
|
|
4.88
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Warrants
outstanding at June 30, 2018
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
4.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2,68146
|
|
|
|
4.88
|
|
Warrants
exercisable at June 30, 2018
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
4.29
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at June 30, 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 $1.00 per share on June 30, 2018, there were no exercisable in-the money common stock warrants as of
June 30, 2018.
A
summary of warrant activity for the six months ended June 30, 2017 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining
Contractual Life
(in Years)
|
|
Warrants
outstanding at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
Issued
|
|
|
148,000
|
|
|
|
2.75000
|
|
|
|
|
|
Warrants
outstanding at June 30, 2017
|
|
|
688,198
|
|
|
$
|
4.39715
|
|
|
|
3.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
Warrants
exercisable at June 30, 2017
|
|
|
688,198
|
|
|
$
|
4.39715
|
|
|
|
3.67
|
|
The
exercise prices of common stock warrants outstanding and exercisable were as follows at June 30, 2017:
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
|
|
$
|
2.7500
|
|
|
|
148,000
|
|
|
|
148,000
|
|
|
|
December
31, 2021
|
|
|
|
|
|
|
688,198
|
|
|
|
688,198
|
|
|
|
|
|
Based
on a fair market value of $2.00 per share on June 30, 2017, the intrinsic value of exercisable in-the-money common stock warrants
was $86,299 as of June 30, 2017.
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.
Information
with respect to the Black-Scholes variables used in connection with the evaluation of the fair value of stock-based compensation
is provided at Note 3.
A
summary of stock option activity for the six months ended June 30, 2018 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options
outstanding at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
7.38
|
|
Granted
|
|
|
327,150
|
|
|
|
1.1267
|
|
|
|
4.75
|
|
Options
outstanding at June 30, 2018
|
|
|
4,323,317
|
|
|
$
|
3.5855
|
|
|
|
6.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
7.38
|
|
Options
exercisable at June 30, 2018
|
|
|
4,323,317
|
|
|
$
|
3.5855
|
|
|
|
6.42
|
|
A
summary of stock option activity for the six months ended June 30, 2017 is presented below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options
outstanding at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6515
|
|
|
|
|
|
Granted
|
|
|
680,000
|
|
|
|
3.1037
|
|
|
|
|
|
Options
outstanding at June 30, 2017
|
|
|
1,987,749
|
|
|
$
|
6.0957
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6515
|
|
|
|
|
|
Options
exercisable at June 30, 2017
|
|
|
1,987,749
|
|
|
$
|
6.0957
|
|
|
|
5.00
|
|
There
was no deferred compensation expense for outstanding and unvested stock options at either June 30, 2018 or December 31, 2017,
respectively.
The
exercise prices of common stock options outstanding and exercisable were as follows at June 30, 2018:
Exercise
Price
|
|
|
Options
Outstanding (Shares)
|
|
|
Options
Exercisable (Shares)
|
|
|
Expiration
Date
|
|
$
|
1.1200
|
|
|
|
310,388
|
|
|
|
310,388
|
|
|
|
April
5, 2023
|
|
$
|
1.2500
|
|
|
|
16,762
|
|
|
|
16,762
|
|
|
|
December
7, 2022
|
|
$
|
1.3500
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
July
28, 2022
|
|
$
|
1.4500
|
|
|
|
1,849,418
|
|
|
|
1,849,418
|
|
|
|
December
9, 2027
|
|
$
|
1.4500
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
December
9, 2027
|
|
$
|
2.0000
|
|
|
|
285,000
|
|
|
|
285,000
|
|
|
|
June
30, 2022
|
|
$
|
2.0000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
July
26, 2022
|
|
$
|
3.9000
|
|
|
|
395,000
|
|
|
|
395,000
|
|
|
|
January
17, 2022
|
|
$
|
4.5000
|
|
|
|
7,222
|
|
|
|
7,222
|
|
|
|
September
2, 2021
|
|
$
|
5.6875
|
|
|
|
89,686
|
|
|
|
89,686
|
|
|
|
June
30, 2020
|
|
$
|
5.7500
|
|
|
|
2,608
|
|
|
|
2,608
|
|
|
|
September
12, 2021
|
|
$
|
6.4025
|
|
|
|
27,692
|
|
|
|
27,692
|
|
|
|
August
18, 2020
|
|
$
|
6.4025
|
|
|
|
129,231
|
|
|
|
129,231
|
|
|
|
August
18, 2022
|
|
$
|
6.4025
|
|
|
|
261,789
|
|
|
|
261,789
|
|
|
|
August
18, 2025
|
|
$
|
6.8250
|
|
|
|
8,791
|
|
|
|
8,791
|
|
|
|
December
11, 2020
|
|
$
|
7.3775
|
|
|
|
523,077
|
|
|
|
523,077
|
|
|
|
March
31, 2021
|
|
$
|
8.1250
|
|
|
|
169,231
|
|
|
|
169,231
|
|
|
|
June
30, 2022
|
|
$
|
13.0000
|
|
|
|
7,385
|
|
|
|
7,385
|
|
|
|
March
13, 2019
|
|
$
|
13.0000
|
|
|
|
3,846
|
|
|
|
3,846
|
|
|
|
April
14, 2019
|
|
$
|
13.9750
|
|
|
|
3,385
|
|
|
|
3,385
|
|
|
|
March
14, 2024
|
|
$
|
15.4700
|
|
|
|
7,755
|
|
|
|
7,755
|
|
|
|
April
8, 2020
|
|
$
|
15.9250
|
|
|
|
2,462
|
|
|
|
2,462
|
|
|
|
February
28, 2024
|
|
$
|
16.0500
|
|
|
|
46,154
|
|
|
|
46,154
|
|
|
|
July
17, 2019
|
|
$
|
16.6400
|
|
|
|
1,538
|
|
|
|
1,538
|
|
|
|
January
29, 2020
|
|
$
|
19.5000
|
|
|
|
9,487
|
|
|
|
9,487
|
|
|
|
July
17, 2022
|
|
$
|
19.5000
|
|
|
|
6,410
|
|
|
|
6,410
|
|
|
|
August
10, 2022
|
|
|
|
|
|
|
4,323,317
|
|
|
|
4,323,317
|
|
|
|
|
|
Based
on a fair market value of $1.00 per share on June 30, 2018, there were no exercisable in-the-money common stock options as of
June 30, 2018.
The
exercise prices of common stock options outstanding and exercisable were as follows at June 30, 2017:
Exercise
Price
|
|
|
Options
Outstanding (Shares)
|
|
|
Options
Exercisable (Shares)
|
|
|
Expiration
Date
|
|
$
|
2.0000
|
|
|
|
285,000
|
|
|
|
285,000
|
|
|
|
June
30, 2022
|
|
$
|
3.9000
|
|
|
|
395,000
|
|
|
|
395,000
|
|
|
|
January
17, 2022
|
|
$
|
4.5000
|
|
|
|
7,222
|
|
|
|
7,222
|
|
|
|
September
2, 2021
|
|
$
|
5.6875
|
|
|
|
89,686
|
|
|
|
89,686
|
|
|
|
June
30, 2020
|
|
$
|
5.7500
|
|
|
|
2,608
|
|
|
|
2,608
|
|
|
|
September
12, 2021
|
|
$
|
6.4025
|
|
|
|
27,692
|
|
|
|
27,692
|
|
|
|
August
18, 2020
|
|
$
|
6.4025
|
|
|
|
129,231
|
|
|
|
129,231
|
|
|
|
August
18, 2022
|
|
$
|
6.4025
|
|
|
|
261,789
|
|
|
|
261,789
|
|
|
|
August
18, 2025
|
|
$
|
6.8250
|
|
|
|
8,791
|
|
|
|
8,791
|
|
|
|
December
11, 2020
|
|
$
|
7.3775
|
|
|
|
523,077
|
|
|
|
523,077
|
|
|
|
March
31, 2021
|
|
$
|
8.1250
|
|
|
|
169,231
|
|
|
|
169,231
|
|
|
|
June
30, 2022
|
|
$
|
13.0000
|
|
|
|
7,385
|
|
|
|
7,385
|
|
|
|
March
13, 2019
|
|
$
|
13.0000
|
|
|
|
3,846
|
|
|
|
3,846
|
|
|
|
April
14, 2019
|
|
$
|
13.9750
|
|
|
|
3,385
|
|
|
|
3,385
|
|
|
|
March
14, 2024
|
|
$
|
15.4700
|
|
|
|
7,755
|
|
|
|
7,755
|
|
|
|
April
8, 2020
|
|
$
|
15.9250
|
|
|
|
2,462
|
|
|
|
2,462
|
|
|
|
February
28, 2024
|
|
$
|
16.0500
|
|
|
|
46,154
|
|
|
|
46,154
|
|
|
|
July
17, 2019
|
|
$
|
16.6400
|
|
|
|
1,538
|
|
|
|
1,538
|
|
|
|
January
29, 2020
|
|
$
|
19.5000
|
|
|
|
9,487
|
|
|
|
9,487
|
|
|
|
July
17, 2022
|
|
$
|
19.5000
|
|
|
|
6,410
|
|
|
|
6,410
|
|
|
|
August
10, 2022
|
|
|
|
|
|
|
1,987,749
|
|
|
|
1,987,749
|
|
|
|
|
|
Based
on a fair market value of $2.00 per share on June 30, 2017, there were no exercisable in-the-money common stock options as of
June 30, 2017.
For
the six months ended June 30, 2018 and 2017, stock-based compensation costs included in the condensed consolidated statements
of operations consisted of general and administrative expenses of $0 and $1,127,052, respectively, and research and development
expenses of $0 and $595,201, 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 June 30, 2018.
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 June 30, 2018. As of June 30, 2018, 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 June 30,
2018. 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.
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.
At
June 30, 2018, the Company had 65,000,000 shares of common stock authorized and 3,349,620 shares of common stock issued and outstanding.
Furthermore, as of June 30, 2018, the Company had reserved an aggregate of 11 shares for issuance upon conversion of the Series
B Preferred Stock; 1,464,415 shares for issuance upon exercise of warrants; 4,323,317 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; 2,732,662 shares
to cover equity grants available for future issuance pursuant to the 2015 Plan; 15,669 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 June 30,
2018, the Company had an aggregate of 8,605,807 shares of common stock reserved for issuance and 53,044,573 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.
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 June 30, 2018 and December 31, 2017.
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 (resigned as an officer and director of the Company in February 2017, but
remains a consultant to the Company) - $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.
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 (resigned
as an officer and director of the Company in February 2017, but remains a consultant to the Company) - $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. On August 18, 2015, the cash compensation arrangements for these executive officers were further revised as described
below in Note 8. These new compensation arrangements have been extended through September 30, 2018.
Both
the cash bonuses and the cash monthly compensation were accrued and will not be paid in cash 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. Such amounts of accrued compensation through September 30, 2017 were forgiven on December 9, 2017
when, on the same date certain amounts were granted as options, as further described below, and therefore such amounts are no
longer included in accrued compensation and related expenses as of June 30, 2018 or December 31, 2017.
Effective
August 18, 2015, Company entered into employment agreements with Dr. Arnold S. Lippa, Robert N. Weingarten and Jeff E. Margolis,
which superseded the compensation arrangements previously established for those officers on June 30, 2015, excluding the cash
bonuses referred to above.
On
February 17, 2017, Robert N. Weingarten resigned as a director and as the Company’s Vice President and Chief Financial Officer,
but remains a consultant to the Company.
Jeff
E. Margolis’ employment agreement was amended effective July 1, 2017. The employment agreement amendment called for payment
in three installments in cash of the $60,000 bonus granted on June 30, 2015. A minimum of $15,000 was to be payable in cash as
follows: (a) $15,000 payable in cash upon the next closing (after July 1, 2017) of any financing in excess of $100,000 (b) $15,000
payable by the end of the following month assuming cumulative closings (beginning with the closing that triggered (a)) in excess
of $200,000 and (c) $30,000 payable in cash upon the next closing of any financing in excess of an additional $250,000. The conditions
of (a), (b) and (c) above were met as of December 31, 2017, however Mr. Margolis has waived the Company’s obligation to
make any payments of the cash bonus until the Board of Directors of the Company determines that sufficient capital has been raised
by the Company or is otherwise available to fund the Company’s operations on an ongoing basis. Obligations through September
30, 2017 were forgiven by Mr. Margolis as described below.
On
March 28, 2017, Aurora earned $20,000 of cash fees and 8,000 placement agent common stock warrants associated with the closing
of 1
st
2017 Unit Offering. The cash fees were unpaid as of June 30, 2018 and have been included in accounts payable
and accrued expenses and charged against Additional paid-in capital as of June 30, 2018 and December 31, 2017. The placement agent
common stock warrants were valued at $27,648 and were accounted for in “Additional paid-in capital” as of June 30,
2018 and December 31, 2017.
On
December 9, 2017, the Company accepted offers from Dr. Arnold S. Lippa, Dr. James S. Manuso, Jeff E. Margolis, James E. Sapirstein,
Kathryn MacFarlane and Robert N. Weingarten (former Chief Financial Officer) pursuant to which such individuals would forgive
accrued compensation and related accrued expenses as of September 30, 2017 in the following amounts: $807,497; $878,360; $560,876;
$55,000; $55,000 and $200,350 respectively for a total of $2,557,083. On the same date, the Company granted to the same individuals,
or designees of such individuals from the 2015 Plan, non-qualified stock options, exercisable for 10 years with an exercise price
of $1.45 per share of common stock, among other terms and features as follows: 559,595; 608,704; 388,687; 38114; 38,114 and 138,842
respectively, for options exercisable into a total of 1,772,055 shares of common stock with a total value of $2,475,561.
As
a result of his resignation in February 2017, Mr. Weingarten is no longer considered a related party of the Company as of June
30, 2018.
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 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. The Company is
in discussions with TEC Edmonton to determine whether and under what conditions a resolution to the dispute can be reached and
the parties have extended the applicable deadlines under the license agreement to continue those discussions, but a resolution
has not yet been reached. No assurance can be provided that the parties will reach an acceptable resolution and, in light of the
early stages of the disagreement, we cannot estimate the possible impact of this disagreement 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 owing for unpaid investment banking services
rendered. Such amount has been accrued at June 30, 2018 and December 31, 2017.
By
letter dated February 5, 2016, the Company received a demand from a law firm representing a professional services vendor of the
Company alleging an amount due and owing for unpaid services rendered. On January 18, 2017, following an arbitration proceeding,
an arbitrator awarded the vendor the full amount sought in arbitration of $146,082. Additionally, the arbitrator granted the vendor
attorneys’ fees and costs of $47,937. All such amounts have been accrued at June 30, 2018 and December 31, 2017.
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 June 30, 2018, December
31, 2017 and June 30, 2017 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 June 30, 2018 and 2017 and $75,000 for the six months ended June 30, 2018 and 2017, which is included
in research and development expenses in the Company’s condensed 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. Dr. Manuso resigned as President and Chief Executive Officer effective September 30, 2018 (See 9. Subsequent
Events) and therefore Dr. Manuso’s employment agreement was not automatically extended as described below. Pursuant to the
agreement, which was for an initial term through September 30, 2018 (and which would have been deemed to be automatically extended,
upon the same terms and conditions, for successive periods of one year, unless either party provided written notice of
its intention not to extend the term of the agreement at least 90 days prior to the applicable renewal date, except that Dr. Manuso
resigned effective September 30, 2018), Dr. Manuso received an annual base salary of $375,000. Dr. Manuso was, through September
30, 2018, 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. No such bonuses were earned or granted during the three
and six month periods ended June 30, 2018 and June 30, 2017. Additionally, Dr. Manuso was granted stock options to acquire 261,789
shares of common stock of the Company and was eligible to receive additional awards under the Company’s Plans in the discretion
of the Board of Directors. No such awards were granted to Dr. Manuso granted during the three and six month periods ended June
30, 2018 and June 30, 2017. Dr. Manuso was also entitled to receive, until such time as the Company established 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. Such amounts were accrued for the three and six month periods ended June 30, 2018 and June 30, 2017. Dr. Manuso
was also entitled to be reimbursed for business expenses. The Company has accrued all submitted and approved business expenses
as of June 30, 2018, December 30, 2017 and June 30, 2017. 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 $103,650 for each of the three
months ended June, 2018, and 2017, respectively and $207,300 for the six months ended June 30, 2018 and 2017, respectively. Such
amounts were included in accrued compensation and related expenses in the Company’s condensed consolidated balance sheet
at June 30, 2018 and 2017, respectively, and in general and administrative expenses in the Company’s consolidated statement
of operations for the three and six months ended June 30, 2018 and 2017, as appropriate. On December 9, 2017, Dr. Manuso forgave
$878,360 of accrued compensation and related expenses which was the amount owed by the Company as of September 30, 2017, as described
in more detail below. On the same date, Dr. Manuso received options to purchase 608,704 shares of common stock, as described in
more detail below. Dr. Manuso did not receive any additional compensation for serving as Vice Chairman or a member of on the Board
of Directors. Amounts accruing after September 30, 2017 have not been paid to Dr. Manuso. Effective on September 30, 2018, Dr.
Manuso also resigned as Vice Chairman and as a member of the Board of Directors (See Note 9. Subsequent Events).
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. On October 12, 2018,
Dr. Lippa was named Interim President and Interim Chief Executive Officer (see Note 9. Subsequent Events) 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 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 $84,900 for each of the
three months ended June 30, 2018 and 2017, respectively, and $169,800 for the six months ended June 30, 2018 and 2017, respectively,
which amounts are included in accrued compensation and related expenses in the Company’s consolidated balance sheet at June
30, 2018 and December 31, 2017, 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 was part of the amount forgiven on December 9, 2017 and therefore is
no longer included in accrued compensation and related expenses as of June 30, 2018 and December 31, 2017. Dr. Lippa does not
receive any additional compensation for serving as Executive Chairman and on the Board of Directors. On December 9, 2017, Dr.
Lippa forgave $807,497 of accrued compensation and related expenses which was the amount owed by the Company as of September 30,
2017. On the same date, Dr. Lippa received options to purchase 559,595 shares of common stock, as described in more detail below.
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 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 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 each entitled to be reimbursed
for business expenses. Additional information with respect to the stock options granted to Mr. Margolis is provided at Note 6.
Jeff E. Margolis’ employment agreement was amended effective July 1, 2017. The employment agreement amendment called for
payment in three installments in cash of the $60,000 bonus granted on June 30, 2015. A minimum of $15,000 was to be payable in
cash as follows: (a) $15,000 payable in cash upon the next closing (after July 1, 2017) of any financing in excess of $100,000
(b) $15,000 payable by the end of the following month assuming cumulative closings (beginning with the closing that triggered
(a)) in excess of $200,000 and (c) $30,000 payable in cash upon the next closing of any financing in excess of an additional $250,000.
The conditions of (a), (b) and (c) above were met as of December 31, 2017, however Mr. Margolis has waived the Company’s
obligation to make any payments of the cash bonus until the Board of Directors of the Company determines that sufficient capital
has been raised by the Company or is otherwise available to fund the Company’s operations on an ongoing basis.
The
employment agreements between the Company and each of Dr. Manuso, Dr. Lippa, and Mr. Margolis, 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, and
Mr. Margolis (who are each also directors of the Company) have each agreed, effective as of August 11, 2016, to continue to defer
the payment of such amounts indefinitely, until such time as the Board of Directors of the Company determines that sufficient
capital has been raised by the Company or is otherwise available to fund the Company’s operations on an ongoing basis.
On
December 9, 2017, the Company accepted offers from Dr. Arnold S. Lippa, Dr. James S. Manuso, Jeff E. Margolis, James E. Sapirstein,
Kathryn MacFarlane and Robert N. Weingarten (former Chief Financial Officer) pursuant to which such individuals would forgive
accrued compensation and related accrued expenses as of September 30, 2017 in the following amounts: $807,497, $878,360, $560,876,
$55,000, $55,000, and $200,350, respectively, for a total of $2,557,083. On the same date, the Company granted to
the same individuals, or designees of such individuals from the 2015 Plan, non-qualified stock options, exercisable for 10 years
with an exercise price of $1.45 per share of common stock, among other terms and features as follows: 559,595, 608,704, 388,687,
38114, 38,114, and 138,842, respectively, for options exercisable into a total of 1,772,055 shares of common stock with
a total value of $2,475,561.
University
of California, Irvine License Agreements
The
Company entered into a series of license agreements in 1993 and 1998 with the University of California, Irvine (“UCI”)
that granted the Company proprietary rights to certain chemical compounds that acted as ampakines and to their therapeutic uses.
These agreements granted the Company, among other provisions, exclusive rights: (i) to practice certain patents and patent applications,
as defined in the license agreement, that were then held by UCI; (ii) to identify, develop, make, have made, import, export, lease,
sell, have sold or offer for sale any related licensed products; and (iii) to grant sub-licenses of the rights granted in the
license agreements, subject to the provisions of the license agreements. The Company was required, among other terms and conditions,
to pay UCI a license fee, royalties, patent costs and certain additional payments.
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 June 30, 2018 and December 31, 2017.
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 purports 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. The Company is
in discussions with TEC Edmonton to determine whether and under what conditions a resolution to the dispute can be reached and
the parties have extended the applicable deadlines under the license agreement to continue those discussions. No assurance can
be provided that the parties will reach an acceptable resolution and, in light of the early stages of the disagreement, we cannot
estimate the possible impact of this disagreement on the Company’s operations or business prospects. See Note 9. Subsequent
Events.
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 2017 minimum annual royalty of $100,000 was paid as scheduled in December 2017. In the year after the first
application for market approval is submitted to the FDA and until approval is obtained, the minimum annual royalty will increase
to $150,000. In the year after the first market approval is obtained from the FDA and until the first sale of a product, the minimum
annual royalty payable by the Company will increase to $200,000. In the year after the first commercial sale of a product, the
minimum annual royalty will increase to $250,000.
The
2014 License Agreement also provides for certain one-time milestone payments by the Company. A payment of $75,000 is due within
five days after any one of the following: (a) dosing of the first patient with a product in a Phase 2 human clinical study anywhere
in the world that is not sponsored by the University of Illinois, (b) dosing of the first patient in a Phase 2 human clinical
study anywhere in the world with a low dose of dronabinol, or (c) dosing of the first patient in a Phase 1 human clinical study
anywhere in the world with a proprietary reformulation of dronabinol. A payment of $350,000 is due within five days after dosing
of the first patient with a product in a Phase 3 human clinical trial anywhere in the world. A payment of $500,000 is due within
five days after the first new drug application filing with the FDA or a foreign equivalent for a product. A payment of $1,000,000
is due within 12 months after the first commercial sale of a product.
During
the three and six months ended June 30, 2018 and 2017, the Company recorded charges to operations of $25,000 and $50,000, respectively,
with respect to its 2018 and 2017 minimum annual royalty obligation, which is included in research and development expenses in
the Company’s condensed consolidated statement of operations for the three and six months ended June 30, 2018 and 2017.
Research
Contract with the University of Alberta
On
January 12, 2016, the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of
ampakines at a variety of dosage and formulation levels in the potential treatment of Pompe Disease, apnea of prematurity and
spinal cord injury, as well as to conduct certain electrophysiological studies to explore the ampakine mechanism of action for
central respiratory depression. The Company agreed to pay the University of Alberta total consideration of approximately CAD$146,000
(approximately US$111,000), consisting of approximately CAD$85,000 (approximately US$65,000) of personnel funding in cash in four
installments during 2016, to provide approximately CAD$21,000 (approximately US$16,000) in equipment, to pay patent costs of CAD$20,000
(approximately US$15,000), and to underwrite additional budgeted costs of CAD$20,000 (approximately US$15,000). As of December
31, 2017, the Company had recorded final amounts payable in respect to this Research Contract of US$16,207 (CAD$21,222) which
amount was paid in US dollars in January 2018 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.
National
Institute of Drug Abuse Agreement
As
a result of agreements entered into on October 19, 2015 and January 19, 2016, the Medications Development Program of the National
Institute of Drug Abuse (“NIDA”) funded and conducted research on the Company’s ampakine compounds CX717 and
CX1739 to determine their potential usefulness for the treatment of cocaine and methamphetamine addiction and abuse. The Company
retains all intellectual property resulting from this research, as well as proprietary and commercialization rights to these compounds.
In
general, the ampakines did not produce behavioral effects in rats and mice that are commonly associated with administration of
stimulants such as cocaine or amphetamines. Instead, the ampakines reduced the stimulation produced by both of these drugs. In
addition, the ampakines were not recognized as cocaine- or amphetamine-like when administered to rats that had been trained to
recognize whether they had been administered these drugs. The absence of stimulant properties on the part of the ampakines may
confirm their value as potential non-stimulant treatments for ADHD.
Duke
University Clinical Trial Agreement
On
January 27, 2015, the Company entered into a Clinical Study and Research Agreement with Duke University (as amended, the “Duke
Agreement”) to develop and conduct a protocol for a program of clinical study and research which was amended on October
30, 2015 and further amended on July 28, 2016, which agreement, as amended, resulted in a total amount payable under the Agreement
to $678,327. During the six months ended June 30, 2018 and 2017, the Company charged $0 to research and development expenses with
respect to work conducted pursuant to the Duke Agreement. The clinical trial completed in October 2016 and the Company announced
the study results on December 15, 2016. Amounts still owing under this agreement are in the Company’s balance sheets at
June 30, 2018 and December 31, 2017
Sharp
Clinical Services, Inc. Agreement
The
Company has various agreements with Sharp Clinical Services, Inc. to provide packaging, labeling, distribution and analytical
services.
Covance
Laboratories Inc. Agreement
On
October 26, 2016, the Company entered into a twelve month agreement with Covance Laboratories Inc. to provide compound testing
and storage services with respect to CX1739, CX1866 and CX1929 at a total budgeted cost of $35,958. This agreement was renewed
in October 2017.
Summary
of Principal Cash Obligations and Commitments
The
following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of
June 30, 2018, aggregating $1,380,150. Amounts included in the 2018 column represent amounts contractually due at June 30, 2018
during the remainder of the 2018 fiscal year ending December 31, 2018.
|
|
|
|
|
Payments
Due By Year
|
|
|
|
Total
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
Research
and development contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Clinical
trial agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
License
agreements
|
|
|
450,000
|
|
|
|
50,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Employment
and consulting agreements (1)
|
|
|
930,150
|
|
|
|
434,250
|
|
|
|
495,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,380,150
|
|
|
$
|
484,250
|
|
|
$
|
595,900
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
(1)
The payment of such amounts has been deferred indefinitely, as described above at “Employment Agreements”.
Does not include amounts after September 30, 2018 for Dr. Manuso as his resignation was effective on such date. 2018 obligations
include six months of employment agreement obligations for Dr. Lippa and Mr. Margolis as their employment contracts
renewed on September 30, 2018 (See Note 9. Subsequent Events) and 2019 obligations include nine months of obligations through
September 30, 2019.
9.
Subsequent Events
The
Company performed an evaluation of subsequent events through the date of filing these financial statements with the SEC. There
were no material subsequent events which affected, or could affect, the amounts or disclosures in the condensed consolidated financial
statements, other than those discussed below.
Resignation
of James S. Manuso, President and Chief Executive Officer, Vice Chairman and Member of the Board of Directors
The
resignation of Dr. James S. Manuso as the Company’s President and Chief Executive Officer, Vice Chairman and member of the
Board of Directors became effective on September 30, 2018, the end of the term of his employment agreement. Dr. Manuso did not
resign because of any disagreement with the Company relating to the Company’s operations, policies or practices.
Dronabinol
Development and Supply Agreement
On
September 4, 2018, RespireRx entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Under the terms of the Agreement, Noramco agreed to (i) provide all of the active pharmaceutical
ingredient (“API”) estimated to be needed for the clinical development process for both the first- and second-generation
products (each a “Product” and collectively, the “Products”), three validation batches for NDA filing(s)
and adequate supply for the initial inventory stocking for the wholesale and retail channels, subject to certain limitations,
(ii) maintain or file valid drug master files (“DMFs”) with the FDA or any other regulatory authority and provide
the Company with access or a right of reference letter entitling the Company to make continuing reference to the DMFs during the
term of the agreement in connection with any regulatory filings made with the FDA by the Company, (iii) participate on a development
committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting firms engaged by the
Company and participate in all FDA or Drug Enforcement Agency (“DEA”) meetings as appropriate and as related to the
API.
In
consideration for these supplies and services, the Company has agreed to purchase exclusively from Noramco during the commercialization
phase all API for its Products at a pre-determined price subject to certain producer price adjustments, and agreed to Noramco’s
participation in the economic success of the commercialized Product or Products up to the earlier of the achievement of a maximum
dollar amount or the expiration of a period of time.
2018
Unit Offering
On
September 12, 2018, the Company consummated an initial closing on an offering (“2018 Unit Offering”) of Units comprised
of one share of the Company’s common stock and one common stock purchase warrant. The 2018 Unit Offering may be up to $1.5
million and has a final closing date of October 15, 2018. The initial closing was for $250,750 of which $200,750 was the gross
cash proceeds. The additional $50,000 was represented by the conversion or exchange into the 2018 Unit Offering of the principal
amount of the Arnold S. Lippa, Demand Promissory Note described below. Units were sold for $1.05 per unit and the warrants issued
in connection with the units are exercisable through April 30, 2023 at a fixed price of 150% of the unit purchase price. The warrants
contain a cashless exercise provision and certain blocker provisions preventing exercise if the investor would beneficially own
more than 4.99% of the Company’s outstanding shares of common stock as a result of such exercise. The warrants are also
subject to redemption by the Company at $0.001 per share upon ten (10) days written notice if the Company’s common stock
closes at $3.00 or more for any five (5) consecutive trading days. In total, 238,814 shares of the Company’s common stock
and 238,814 common stock purchase warrants were purchased. Other than Arnold S. Lippa, the investors in the offering were not
affiliates of the Company. Investors also received an unlimited number of piggy-back registration rights in respect to the shares
of common stock and the shares of common stock underlying the common stock purchase warrants, unless such common stock is eligible
to be sold with volume limits under an exemption from registration under any rule or regulation of the SEC that permits the holder
to sell securities of the Company to the public without registration and without volume limits (assuming the holder is not an
affiliate).
The
shares of common stock and common stock purchase warrants were offered and sold without registration under the Securities Act
of 1933, as amended (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities
Act as provided in Rule 506(b) of Regulation D promulgated thereunder. None of the shares of common stock issued as part of the
units, the common stock purchase warrants, the Common Stock issuable upon exercise of the common stock purchase warrants or any
warrants issued to a qualified referral source (of which there were none in the initial closing) have been registered under the
Securities Act or any other applicable securities laws, and unless so registered, may not be offered or sold in the United States
except pursuant to an exemption from the registration requirements of the Securities Act.
Prior
to the initial closing of the 2018 Unit Offering, the Company issued to Arnold S. Lippa, Ph.D, and James S. Manuso, Ph.D., the
Company’s Executive Chairman and Chief Scientific Officer and Vice Chairman and Chief Executive Officer, respectively, $100,000
aggregate principal amount ($50,000 each) of demand promissory notes bearing interest at 10% (the “Demand Promissory Notes”).
The Demand Promissory Note issued to Dr. Lippa, exclusive of any interest accrued, was exchanged or converted into the 2018 Unit
Offering simultaneously with its initial closing. The principal amount of, but not the interest on, the Demand Promissory Note
was taken into consideration when determining if the Company had achieved the minimum amount necessary to effect the initial closing
of the 2018 Unit Offering. The Demand Promissory Note issued to Dr. Manuso was not exchanged or converted in connection with the
initial closing of the 2018 Unit Offering, but the Company currently anticipates that it will be exchanged or converted in connection
with a future closing of the 2018 Unit Offering or a subsequent offering.
In
addition, as set forth in the Purchase Agreements, each Purchaser has an unlimited number of exchange rights, which are options
and not obligations, to exchange such Purchaser’s entire investment (but not less than the entire investment) into one or
more subsequent equity financings (consisting solely of convertible preferred stock or common stock or units containing preferred
stock or common stock and warrants exercisable only into preferred stock or common stock) that would be considered as “permanent
equity” under United States Generally Accepted Accounting Principles and the rules and regulations of the United States
Securities and Exchange Commission, and therefore classified within stockholders’ equity, and excluding any form of debt
or convertible debt or preferred stock redeemable at the discretion of the holder (each such financing a “Subsequent Equity
Financing”). 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 30, 2018. For clarity, a Purchaser’s
entire investment is the entire amount invested (“Investment Amount”) (for purposes of the multiple described below)
and all of the Common Stock and Warrants purchased (for purposes of the exchange) pursuant to the Purchase Agreement of such Purchaser,
however, if the Warrants have been exercised in part or in whole on a cashless basis, then the Investment Amount (for purposes
of the multiple described below) will be the Investment Amount (for purposes of the multiple described below) and all of the Common
Stock initially purchased pursuant to the Purchase Agreement of such Purchaser plus any shares of Common Stock issued pursuant
to a cashless exercise and any Warrants remaining after such cashless exercise (for purposes of the exchange), or, if the Warrants
have been exercised for cash, then the entire investment will be the Investment Amount plus the amount of cash paid upon cash
exercise (for purposes of the multiple described below) and all of the Common Stock initially purchased pursuant to the Purchase
Agreement of such Purchaser plus any shares of Common Stock issued pursuant to the cash exercise and any Warrants remaining after
such cash exercise (for purposes of the exchange).