NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
1.
Organization and Business
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, the Company filed a Certificate of Amendment to its Second Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware to amend the Company’s Second Restated Certificate of Incorporation to change
the name of the Company from Cortex Pharmaceuticals, Inc. to RespireRx Pharmaceuticals Inc.
In
2011, prior management conducted a re-evaluation of RespireRx’s strategic focus and determined that clinical development
in the area of respiratory disorders, particularly sleep apnea and drug-induced respiratory depression, provided the most cost-effective
opportunities for potential rapid development and commercialization of RespireRx’s compounds. Accordingly, RespireRx narrowed
its clinical focus at that time and sidelined other avenues of scientific inquiry. This re-evaluation provided the impetus for
RespireRx’s acquisition of Pier Pharmaceuticals, Inc. (“Pier”) in August 2012. RespireRx and its wholly-owned
subsidiary, Pier, are collectively referred to herein as the “Company.”
The
Company underwent a change in management in March 2013, and since then the Company’s current management has continued to
implement this strategic focus, including seeking the capital to fund such efforts. As a result of the Company’s scientific
discoveries and the acquisition of strategic, exclusive license agreements, management believes that the Company is now a leader
in developing drugs for respiratory disorders, particularly sleep apneas and drug-induced respiratory depression.
Business
Since
its formation in 1987, RespireRx has been engaged in the research and clinical development of a class of proprietary compounds
known as ampakines, which act to enhance the actions of the excitatory neurotransmitter glutamate at AMPA glutamate receptors.
Several ampakines, in both oral and injectable form, are being developed by the Company for the treatment of a variety of breathing
disorders. In clinical studies, select ampakines have shown preliminary efficacy in central sleep apnea and in the control of
respiratory depression produced by opioids, without altering their analgesic effects. In animal models of orphan disorders, such
as Pompé Disease, spinal cord damage and perinatal respiratory distress, it has been demonstrated that certain ampakines
improve breathing function. The Company’s compounds belong to a new class of ampakines that do not display the undesirable
side effects previously reported in animal models of earlier generations
RespireRx
owns patents and patent applications for certain families of chemical compounds, including ampakines, which claim the chemical
structures and their use in the treatment of various disorders. These patents cover, among other compounds, the Company’s
lead ampakines CX1739 and CX1942, and extend through at least 2028.
On
May 8, 2007, RespireRx entered into a license agreement, as subsequently amended, with the University of Alberta granting RespireRx
exclusive rights to method of treatment patents held by the University of Alberta claiming the use of ampakines for the treatment
of various respiratory disorders. These patents, along with RespireRx’s own patents claiming chemical structures, comprise
RespireRx’s principal intellectual property supporting RespireRx’s research and clinical development program in the
use of ampakines for the treatment of respiratory disorders. RespireRx has completed pre-clinical studies indicating that several
of its ampakines, including CX717, CX1739 and CX1942, were efficacious in treating drug induced respiratory depression caused
by opioids or certain anesthetics without offsetting the analgesic effects of the opioids or the anesthetic effects of the anesthetics.
In two clinical Phase 2 studies, one of which was published in a peer-reviewed journal, CX717, a predecessor compound to CX1739
and CX1942, antagonized the respiratory depression produced by fentanyl, a potent narcotic, without affecting the analgesia produced
by this drug. In addition, RespireRx has conducted a Phase 2A clinical study in which patients with sleep apnea were administered
CX1739, RespireRx’s lead clinical compound. The results suggested that CX1739 might have use for the treatment of central
sleep apnea (“CSA”) and mixed sleep apnea, but not obstructive sleep apnea (“OSA”).
In
order to expand RespireRx’s respiratory disorders program, RespireRx acquired 100% of the issued and outstanding equity
securities of Pier effective August 10, 2012 pursuant to an Agreement and Plan of Merger. Pier was formed in June 2007 (under
the name SteadySleep Rx Co.) as a clinical stage pharmaceutical company to develop a pharmacologic treatment for OSA and had been
engaged in research and clinical development activities since formation.
Through
the merger, RespireRx gained access to an Exclusive License Agreement (as amended, the “License Agreement”) that Pier
had entered into with the University of Illinois on October 10, 2007. The License Agreement covered certain patents and patent
applications in the United States and other countries claiming the use of certain compounds referred to as cannabinoids, of which
dronabinol is a specific example, for the treatment of sleep-related breathing disorders (including sleep apnea). Dronabinol is
a synthetic derivative of the naturally occurring substance in the cannabis plant, otherwise known as Δ9-THC (Δ9-tetrahydrocannabinol).
Pier’s business plan was to determine whether dronabinol would significantly improve subjective and objective clinical measures
in patients with OSA. In addition, Pier intended to evaluate the feasibility and comparative efficacy of a proprietary formulation
of dronabinol.
The
License Agreement granted Pier, among other provisions, exclusive rights: (i) to practice certain patents and patent applications,
as defined in the License Agreement, that were then held by the University of Illinois; (ii) to identify, develop, make, have
made, import, export, lease, sell, have sold or offer for sale any related licensed products; and (iii) to grant sub-licenses
of the rights granted in the License Agreement, subject to the provisions of the License Agreement. Pier was required under the
License Agreement, among other terms and conditions, to pay the University of Illinois a license fee, royalties, patent costs
and certain milestone payments.
Prior
to the merger, Pier conducted a 21 day, randomized, double-blind, placebo-controlled, dose escalation Phase 2 clinical study in
22 patients with OSA, in which dronabinol produced a statistically significant reduction in the Apnea-Hypopnea Index, the primary
therapeutic end-point, and was observed to be safe and well tolerated. The University of Illinois and three other research centers
are currently investigating dronabinol in a potentially pivotal, six week, double-blind, placebo-controlled Phase 2B clinical
trial in 120 patients with OSA. This study, which the University of Illinois has indicated it expects to be completed during the
second quarter of 2016, is fully funded by the National Heart, Lung and Blood Institute of the National Institutes of Health.
The Company is not managing or funding this ongoing clinical trial.
Dronabinol
is a Schedule III, controlled generic drug with a relatively low abuse potential that is approved by the U.S. Food and Drug Administration
(the “FDA”) for the treatment of AIDS-related anorexia and chemotherapy-induced emesis. The use of dronabinol for
the treatment of OSA is a novel indication for an already approved drug and, as such, the Company believes that it would only
require approval by the FDA of a supplemental new drug application.
Subsequent
to the termination of the License Agreement effective March 21, 2013, due to the Company’s failure to make a required payment,
current management opened negotiations with the University of Illinois. As a result, the Company entered into a new license agreement
with the University of Illinois on June 27, 2014, the material terms of which were similar to the License Agreement that was terminated
on March 21, 2013.
The
Company filed an Investigational New Drug (“IND”) application with the FDA in September 2015 to conduct a double-blind,
placebo-controlled, dose-ascending Phase 2A clinical trial in approximately 18 subjects to determine the ability of orally administered
CX1739, the Company’s proprietary lead ampakine, to prevent the respiratory depression produced by remifentanyl, a potent
opioid, without altering remifentanyl’s analgesic properties. The clinical protocol was designed to evaluate the safety
and efficacy of three escalating doses of CX1739 versus placebo when administered prior to remifentanyl, with respiration, analgesia
and a number of other clinical measures being taken after administration of both drugs. The commencement of this clinical trial
was subject to resolution of two deficiencies raised by the FDA in its clinical hold letter issued in November 2015, which were
satisfactorily resolved in early 2016, as a result of which the FDA removed the clinical hold on the Company’s IND for CX1739
on February 25, 2016, thus allowing for the initiation of the clinical trial
. During March
2016, upon receiving unconditional approval from the Institutional Review Board (“IRB”) of the Duke Clinical Research
Unit, this Phase 2A clinical trial at Duke University School of Medicine was initiated. The Company
expects to incur approximately
$750,000 of direct costs in 2016 with respect to this clinical trial, and to complete the clinical trial in approximately four
months.
Going
Concern
The
Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses
of $5,961,892 and $2,707,535 and negative operating cash flows of $1,296,100 and $885,869 for the fiscal years ended December
31, 2015 and 2014, respectively, had a stockholders’ deficiency of $2,862,209 at December 31, 2015, 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 their report on the Company’s consolidated financial statements for the year ended
December 31, 2015, has expressed substantial doubt about the Company’s ability to continue as a going concern.
The
Company is currently, and has for some time, been in significant financial distress. It has limited cash resources and current
assets and has no ongoing source of revenue. Current management is continuing to address various aspects of the Company’s
operations and obligations, including, without limitation, debt obligations, financing requirements, intellectual property, licensing
agreements, legal and patent matters and regulatory compliance, and has continued to raise new debt and equity capital to fund
the Company’s business activities.
From
June 2013 through March 2014, the Company’s Chairman and then Chief Executive Officer advanced short-term loans to the Company
aggregating $150,000 for working capital purposes. In March and April 2014, the Company completed a private placement by selling
928.5 shares of its Series G 1.5% Convertible Preferred Stock for gross proceeds of $928,500 and repaid the aggregate advances.
The Company’s Chairman and then Chief Executive Officer invested $250,000 in the Series G 1.5% Convertible Preferred Stock
private placement. During November and December 2014, the Company sold short-term convertible notes and warrants in an aggregate
principal amount of $369,500 to various accredited investors and an additional $210,000 of such short-term convertible notes and
warrants in February 2015. The Company terminated this financing, which generated aggregate gross proceeds of $579,500, effective
February 18, 2015. In June 2015, the Company’s Chairman and then Chief Executive Officer advanced $40,000 to the Company
in the form of a short-term loan for working capital purposes. In August through November 2015, the Company completed three closings
of a private placement by selling 56,809,802 units of its common stock and warrants for gross proceeds of $1,194,710 and repaid
the short-term loan of $40,000 plus accrued interest of $877. The Company’s current President and Chief Executive Officer
invested $250,000 in the August 2015 closing of this private placement (see Note 6). Subsequent to December 31, 2015, the Company
initiated a new private placement of common stock and warrants that generated gross proceeds of $194,635 (see Note 10) and the
Company’s Chief Executive Officer and Chief Scientific Officer each advanced $52,600 to the Company for working capital
purposes under secured short-term promissory notes payable aggregating $105,200 (see Note 10).
The
Company is continuing its efforts to raise additional capital in order to be able to pay its liabilities and fund its business
activities on a going forward basis, including an increase in the Company’s research and development activities. As a result
of the Company’s current financial situation, the Company has limited access to external sources of debt and equity financing.
Accordingly, there can be no assurances that the Company will be able to secure additional financing in the amounts necessary
to fully fund its operating and debt service requirements. If the Company is unable to access sufficient cash resources, the Company
may be forced to discontinue its operations entirely and liquidate.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements are prepared in accordance with United States generally accepted accounting principles
(“GAAP”) and include the financial statements of RespireRx and its wholly-owned subsidiary, Pier. Intercompany balances
and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts
may differ from those estimates.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents.
The Company limits its exposure to credit risk by investing its cash with high quality financial institutions. The Company’s
cash balances may periodically exceed federally insured limits. The Company has not experienced a loss in such accounts to date.
Cash
Equivalents
The
Company considers all highly liquid short-term investments with maturities of less than three months when acquired to be cash
equivalents.
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below. Disclosure as to transfers into and out of Levels 1 and 2, and activity
in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying amount of financial instruments (consisting of cash, cash equivalents, grants receivable and accounts payable) is considered
to be representative of their respective fair values due to the short-term nature of those instruments. With respect to the note
payable to a related party and the convertible notes payable, management does not believe that the credit markets have materially
changed for these types of speculative borrowings since the original borrowing date.
Deferred
and Capitalized Financing Costs
Costs
incurred in connection with ongoing debt and equity financing activities, including legal and other professional fees, placement
agent fees and escrow agent fees, are deferred until the related financing is either completed or abandoned.
Through
December 31, 2015, costs related to completed debt financings have been capitalized on the balance sheet and amortized over the
term of the related debt agreements. Amortization of these costs is calculated on the straight-line basis, which approximates
the effective interest method, and is charged to interest expense in the consolidated statements of operations.
Pursuant
to revised accounting guidance as described below at “Recent Accounting Pronouncements”, effective January 1, 2016,
the Company will be required to present debt issuance costs related to a debt liability in its consolidated balance sheet as a
direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company will be required
to apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted
to reflect the period-specific effects of applying the new guidance, and will be required to comply with the applicable disclosures
for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle,
the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of
the change on the financial statement line items (i.e., the debt issuance cost asset and the debt liability).
Costs
related to completed equity financings are charged directly to additional paid-in capital. Costs related to abandoned financings
are charged to operations.
Series
G 1.5% Convertible Preferred Stock
The
Series G 1.5% Convertible Preferred Stock (including accrued dividends) issued in 2014 is mandatorily convertible into common
stock at a fixed conversion rate on April 17, 2016 (if not converted earlier) and has no right to cash at any time or for any
reason. Additionally, the Series G 1.5% Convertible Preferred Stock has no participatory or reset rights, or other protections
(other than normal anti-dilution rights) based on subsequent events, including equity transactions. Accordingly, the Company has
determined that the Series G 1.5% Convertible Preferred Stock should be categorized in stockholders’ equity (deficiency),
and that there are no derivatives embedded in such security that would require identification, bifurcation and valuation. The
Company did not issue any warrants to investors in conjunction with the Series G 1.5% Convertible Preferred Stock financing.
On
March 18, 2014 and April 17, 2014, the Company issued 753.22 shares and 175.28 shares, respectively, of Series G 1.5% Convertible
Preferred Stock at a purchase price of $1,000 per share. Each share of Series G 1.5% Convertible Preferred Stock has a stated
value of $1,000 per share and is convertible into shares of common stock at a fixed price of $0.0033 per share. On March 18, 2014
and April 17, 2014, the per share fair value of the common stock into which the Series G 1.5% Convertible Preferred Stock was
convertible, determined by reference to the closing market prices of the Company’s common stock on such closing dates, was
$0.04 per share and $0.0348 per share, respectively, which was greater than the effective purchase price of such common shares
of $0.0033 per share.
The
Company accounted for the beneficial conversion features in accordance with Accounting Standards Codification (“ASC”)
470-20, Accounting for Debt with Conversion and Other Options. The Company calculated a deemed dividend on the Series G 1.5% Convertible
Preferred Stock of $8,376,719 in March 2014 and $1,673,127 in April 2014, which equals the amount by which the estimated fair
value of the common stock issuable upon conversion of the issued Series G 1.5% Convertible Preferred Stock exceeded the proceeds
from such issuances. The deemed dividend on the Series G 1.5% Convertible Preferred Stock was amortized on the straight-line basis
from the respective issuance dates through the earliest conversion date of June 16, 2014, in accordance with ASC 470-20. The difference
between the amortization of the deemed dividend calculated based on the straight-line method and the effective yield method was
not material. The amortization of the deemed dividend for the years ended December 31, 2015 and 2014 was $0 and $10,049,846, respectively.
Dr.
Arnold S. Lippa, Ph.D., the Company’s Chairman, then Chief Executive Officer and a member of the Company’s Board of
Directors, purchased 250 shares for $250,000, representing 33.2% of the 753.22 shares of Series G 1.5% Convertible Preferred Stock
sold in the initial closing of such financing on March 18, 2014. The second (and final) closing of such financing consisted entirely
of Series G 1.5% Convertible Preferred Stock sold to unaffiliated investors. Accordingly, Dr. Lippa purchased 26.9% of the entire
amount of Series G 1.5% Convertible Preferred Stock sold in the financing. Dr. Lippa had been an officer and director of the Company
for approximately one year when he purchased the 250 shares of Series G 1.5% Convertible Preferred Stock, and his investment,
which was only a portion of the first closing, was made on the same terms and conditions as those provided to the other unaffiliated
investors who made up the majority of the financing. Dr. Lippa did not control, directly or indirectly, 10% or more of the Company’s
voting equity securities at the time of his investment. The proportionate share of the deemed dividend attributable to Dr. Lippa’s
investment in the Series G 1.5% Convertible Preferred Stock in March 2014 was $2,780,303. On April 18, 2014, the shares of Series
G 1.5% Convertible Preferred Stock originally purchased by Dr. Lippa were transferred to the Arnold Lippa Family Trust of 2007.
On April 15, 2015, these shares of Series G 1.5% Convertible Preferred Stock, plus accrued dividends of $4,120, were converted
into 77,006,072 shares of common stock.
10%
Convertible Notes Payable
Original
Issuance of Notes and Warrants
The
convertible notes sold to investors in 2014 and 2015 have an interest rate of 10% per annum and are convertible into common stock
at a fixed price of $0.035 per share. The convertible notes have no reset rights or other protections based on subsequent equity
transactions, equity-linked transactions or other events. The warrants issued in connection with the sale of the convertible notes
are exercisable at a fixed price of $0.035 per share, have no right to cash at any time or under any circumstances, and have no
reset rights or other protections based on subsequent equity transactions, equity-linked transactions or other events. The Company
has determined that there are no embedded derivatives to be identified, bifurcated and valued in connection with this financing.
On
November 5, 2014, the Company sold an aggregate principal amount of $238,500 of its 10% convertible notes payable due September
15, 2015, which were subject to extension to September 15, 2016, at the option of the Company, subject to the issuance of additional
warrants, and warrants to purchase shares of common stock exercisable into a fixed number of shares of common stock of the Company
calculated as the principal amount of each convertible note divided by $0.035 (reflecting 100% warrant coverage). The warrants
do not have any cashless exercise provisions and, when issued, were exercisable through September 30, 2015 at a fixed price of
$0.035 per share. The shares of common stock issuable upon conversion of the notes payable and the exercise of the warrants are
not subject to any registration rights.
On
December 9, 2014, December 31, 2014, and February 2, 2015, the Company sold an additional $46,000, $85,000 and $210,000, respectively,
of principal amount of the convertible notes and warrants to various accredited investors. The Company terminated this financing,
which had generated aggregate gross proceeds of $579,500, and in connection with which the Company had issued 16,557,142 warrants,
effective February 18, 2015.
The
closing market prices of the Company’s common stock on the transaction closing dates of November 5, 2014, December 9, 2014,
December 31, 2014 and February 2, 2015 were $0.0524 per share, $0.0411 per share, $0.0451 per share and $0.043 per share, respectively,
as compared to the fixed conversion price of the convertible notes and the fixed exercise price of the warrants of $0.035 per
share. Accordingly, the Company has accounted for the beneficial conversion features with respect to the sale of the convertible
notes and the issuance of the warrants in accordance with ASC 470-20, Accounting for Debt with Conversion and Other Options.
The
Company considered the face value of the convertible notes to be representative of their fair value. The Company determined the
fair value of the warrants based on the Black-Scholes option-pricing model. The relative fair value method generated respective
fair values for each of the convertible notes and the warrants of approximately 50% for the convertible notes and approximately
50% for the warrants. Once these values were determined, the fair value of the warrants of $289,106 and the fair value of the
beneficial conversion feature of $290,394 (which were calculated based on the effective conversion price) were recorded as a reduction
to the face value of the promissory note obligation. As a result, this aggregate debt discount reduced the carrying value of the
convertible notes to zero at each issuance date. The excess amount generated from this calculation was not recorded, as the carrying
value of a promissory note cannot be reduced below zero. The aggregate debt discount was amortized as interest expense over the
original term of the promissory notes. The difference between the amortization of the debt discount calculated based on the straight-line
method and the effective yield method was not material.
The
cash fees paid to placement agents and for legal costs were deferred and capitalized as deferred offering costs and were amortized
to interest expense over the original term of the convertible notes on the straight-line method. The placement agent warrants
were considered as an additional cost of the offering and were included in deferred offering costs at fair value. The difference
between the amortization of the deferred offering costs calculated based on the straight-line method and the effective yield method
was not material.
Extension
of Notes and Old Warrants, and Issuance of New Warrants
On
August 13, 2015, the Company elected to extend the maturity date of the convertible notes to September 15, 2016. As a consequence
of this election, under the terms of the convertible notes, the Company was required to issue to note holders 8,903,684 additional
warrants (the “New Warrants”) that are exercisable through September 15, 2016. As set forth in the convertible notes,
the New Warrants are exercisable for that number of shares of common stock of the Company calculated as the principal amount of
the convertible notes (an aggregate amount of $579,500), plus any accrued and unpaid interest (an aggregate amount of $43,758),
multiplied by 50%, and then divided by $0.035. The New Warrants otherwise have terms substantially similar to the 16,557,142 original
warrants issued to the investors. In connection with the extension of the maturity date of the convertible notes, the Board of
Directors of the Company also determined to extend the termination date of the 16,557,142 original warrants to September 15, 2016
(the “Old Warrants”), so that they are coterminous with the new maturity date of the convertible notes.
The
Company reviewed the guidance in ASC 405-20, Extinguishment of Liabilities, and determined that the convertible notes had not
been extinguished. The Company therefore concluded that the guidance in ASC 470-50, Modifications and Extinguishments, should
be applied, which states that if the exchange or modification is not to be accounted for in the same manner as a debt extinguishment,
then the fees shall be associated with the replacement or modified debt instrument and, along with any existing unamortized premium
or discount, amortized as an adjustment of interest expense over the remaining term of the replacement or modified debt instrument
using the interest method.
With
regard to the modification of the convertible notes and the issuance of the New Warrants, the Company deferred the debt modification
costs over the remaining term of the extended notes. The Company is accounting for such costs as a discount to the notes and is
amortizing such costs to interest expense over the extended term of the notes on the straight-line method. The difference between
the amortization of these costs calculated based on the straight-line method and the effective yield method was not material.
With
regard to the extension of the Old Warrants, the Company deferred the debt modification costs over the remaining term of the extended
convertible notes. The Company is accounting for such costs as a discount to the notes and is amortizing such costs to interest
expense over the extended term of the convertible notes on the straight-line method. The difference between the amortization of
these costs calculated based on the straight-line method and the effective yield method was not material.
The
closing market price of the Company’s common stock on the extension date of September 15, 2015 was $0.031 per share, as
compared to the fixed conversion price of the convertible notes and the fixed exercise price of both the Old Warrants and the
New Warrants of $0.035 per share. The Company has accounted for the beneficial conversion features with respect to the extension
of the convertible notes and the extension of the Old Warrants and the issuance of the New Warrants in accordance with ASC 470-20,
Accounting for Debt with Conversion and Other Options.
The
Company considered the face value of the convertible notes, plus the accrued interest thereon, to be representative of their fair
value. The Company determined the fair value of the 8,903,684 New Warrants and the fair value of extending the 16,557,142 Old
Warrants based on the Black-Scholes option-pricing model. The relative fair value method generated respective fair values for
each of the convertible notes, including accrued interest, and the New Warrants and extension of the Old Warrants, of approximately
55% for the convertible notes, including accrued interest, and approximately 45% for the New Warrants and extension of the Old
Warrants. Once these values were determined, the fair value of the New Warrants and extension of the Old Warrants of $277,918
and the fair value of the beneficial conversion feature of $206,689 (which were calculated based on the effective conversion price)
were recorded as a reduction to the face value of the promissory note obligation. The aggregate debt discount is being amortized
as interest expense over the extended term of the promissory notes. The difference between the amortization of the debt discount
calculated based on the straight-line method and the effective yield method was not material.
Equipment
Equipment
is recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which range from three to five
years.
Long-Term
Prepaid Insurance
Long-term
prepaid insurance represents the premium paid for directors and officer’s insurance tail coverage, which is being amortized
on a straight-line basis over the policy period of six years. The amount amortizable in the ensuing twelve month period is recorded
as a current asset in the Company’s consolidated balance sheet at each reporting date.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets, including long-term prepaid insurance, for impairment whenever events or changes in circumstances
indicate that the total amount of an asset may not be recoverable, but at least annually. An impairment loss is recognized when
estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than the asset’s
carrying amount. The Company has not deemed any long-lived assets as impaired at December 31, 2015.
Stock-Based
Compensation
The
Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Board members and consultants
for services rendered. Such issuances vest and expire according to terms established at the issuance date of each grant.
The
Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for
equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock-based
payments to Scientific Advisory Board members and consultants by determining the value of the stock compensation based upon the
measurement date at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary
performance to earn the equity instruments is complete.
Stock
grants, which are generally time vested, are measured at the grant date fair value and charged to operations ratably over the
vesting period.
Stock
options granted to members of the Company’s Scientific Advisory Board and to outside consultants are revalued each reporting
period until vested to determine the amount to be recorded as an expense in the respective period. As the stock options vest,
they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the
value on the date of vesting.
The
fair value of stock options 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 utilizes the Black-Scholes option-pricing model to determine the fair value
of the stock options and warrants issued by the Company. The Company recognizes this expense over the period in which the services
are provided.
For
stock options granted during the year ended December 31, 2015, the fair value of each option award was estimated using the Black-Scholes
option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
0.3%
to 1.7
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
184%
to 249
|
%
|
Expected life
|
|
|
5-7
years
|
|
For
stock options granted during the year ended December 31, 2014, the fair value of each option award was estimated using the Black-Scholes
option-pricing model with the following assumptions:
Risk-free
interest rate
|
|
|
1.5%
to 2.7
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
200%
to 249
|
%
|
Expected
life
|
|
|
5-10
years
|
|
The
Company recognizes the fair value of stock-based compensation in general and administrative costs and in research and development
costs, as appropriate, in the Company’s consolidated statements of operations. The Company issues new shares of common stock
to satisfy stock option and warrant exercises. There were no stock options exercised during the years ended December 31, 2015
and 2014.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes.
Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities.
The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of
its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination
was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.
Pursuant
to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss and credit carryforwards may be limited
if a cumulative change in ownership of more than 50% occurs within any three-year period since the last ownership change. The
Company may have had a change in control under these Sections. However, the Company does not anticipate performing a complete
analysis of the limitation on the annual use of the net operating loss and tax credit carryforwards until the time that it anticipates
it will be able to utilize these tax attributes.
As
of December 31, 2015, the Company did not have any unrecognized tax benefits related to various federal and state income tax matters
and does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The
Company is subject to U.S. federal income taxes and income taxes of various state tax jurisdictions. As the Company’s net
operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions
in which the Company currently operates or has operated in the past.
The
Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.
The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority
as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits
of the position are recognized. As of December 31, 2015, 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 related party, which is denominated in a foreign currency (the South Korean Won), is translated into the Company’s
functional currency (the United States Dollar) at the exchange rate on the balance sheet date. The foreign currency exchange gain
or loss resulting from translation is recognized in the related consolidated statements of operations.
Research
Grants
The
Company recognizes revenues from research grants as earned based on the percentage-of-completion method of accounting and issues
invoices for contract amounts billed based on the terms of the grant agreement. Revenues recorded under research grants in excess
of amounts earned are classified as unearned grant revenue liability in the Company’s consolidated balance sheet. Grant
receivable reflects contractual amounts due and payable under the grant agreement. The payment of grants receivables are based
on progress reports provided to the grant provider by the Company. The research grant was completed in April 2015. The Company
has filed all required progress reports.
Research
grants are generally funded and paid through government or institutional programs. Amounts received under research grants are
nonrefundable, regardless of the success of the underlying research project, to the extent that such amounts are expended in accordance
with the approved grant project. During the years ended December 31, 2015 and 2014, the Company had research grant revenues of
$86,916 and $61,667, respectively. At December 31, 2014, the Company had grant receivable of $48,000, and unearned grant revenues
of $34,333. At December 31, 2015, the Company did not have any grant receivable or unearned grant revenues.
Research
and Development Costs
Research
and development costs consist primarily of fees paid to consultants and outside service providers and organizations (including
research institutes at universities), patent fees and costs, and other expenses relating to the acquisition, design, development
and 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.
License
Agreements
Obligations
incurred with respect to mandatory payments provided for in license agreements are recognized ratably over the appropriate period,
as specified in the underlying license agreement, and are recorded as liabilities in the Company’s consolidated balance
sheet, with a corresponding charge to research and development costs in the Company’s consolidated statement of operations.
Obligations incurred with respect to milestone payments provided for in license agreements are recognized when it is probable
that such milestone will be reached, and are recorded as liabilities in the Company’s consolidated balance sheet, with a
corresponding charge to research and development costs in the Company’s consolidated statement of operations. Payments of
such liabilities are made in the ordinary course of business.
Patent
Costs
Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on
the Company’s research efforts and any related patent applications, all patent costs, including patent-related legal and
filing fees, are expensed as incurred.
Comprehensive
Income (Loss)
Components
of comprehensive income or loss, including net income or loss, are reported in the financial statements in the period in which
they are recognized. Comprehensive income or loss is defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss) are reported net of any
related tax effect to arrive at comprehensive income (loss). The Company did not have any items of comprehensive income (loss)
for the years ended December 31, 2015 and 2014.
Earnings
per Share
The
Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as
the income (loss) attributable to common stockholders divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants
and options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common
shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.
Net
income (loss) attributable to common stockholders consists of net income or loss, as adjusted for actual and deemed preferred
stock dividends declared, amortized or accumulated.
Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the respective periods. Basic and diluted loss per common share is the same for all periods presented because all warrants and
stock options outstanding are anti-dilutive.
At
December 31, 2015 and 2014, the Company excluded the outstanding securities summarized below, which entitle the holders thereof
to acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Series B convertible preferred stock
|
|
|
3,679
|
|
|
|
3,679
|
|
Series G 1.5% convertible preferred stock
|
|
|
78,353,485
|
|
|
|
264,465,728
|
|
10% convertible notes payable
|
|
|
18,311,079
|
|
|
|
10,674,107
|
|
Common stock warrants
|
|
|
156,743,609
|
|
|
|
25,686,096
|
|
Common stock options
|
|
|
251,823,581
|
|
|
|
25,716,668
|
|
Total
|
|
|
505,235,433
|
|
|
|
326,546,278
|
|
Reclassifications
Certain
comparative figures in 2014 have been reclassified to conform to the current year’s presentation. These reclassifications
were immaterial, both individually and in the aggregate.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09 (ASU
2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition
guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will
require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU
2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. Based on the FASB’s Exposure Draft Update issued on April 29, 2015, and approved in July 2015,
Revenue from Contracts With Customers (Topic 606): Deferral of the Effective Date, ASU 2014-09 is now effective for reporting
periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December
15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard
either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 is not expected
to have any impact on the Company’s financial statement presentation or disclosures.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements - Going
Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is
substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.
In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued (or within one
year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should
be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are
issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s
ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that
it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the
financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December
15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of ASU 2014-15 is
not expected to have any impact on the Company’s financial statement presentation and disclosures.
In
January 2015, the FASB issued Accounting Standards Update No. 2015-01 (ASU 2015-01), Income Statement - Extraordinary and Unusual
Items (Subtopic 225-20). ASU 2015-01 eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement
- Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and
transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless
evidence clearly supports its classification as an extraordinary item. Paragraph 225-20-45-2 contains the following criteria that
must both be met for extraordinary classification: (1) Unusual nature. The underlying event or transaction should possess a high
degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities
of the entity, taking into account the environment in which the entity operates. (2) Infrequency of occurrence. The underlying
event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into
account the environment in which the entity operates. If an event or transaction meets the criteria for extraordinary classification,
an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately
in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable
income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. ASU 2015-01 is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply
the guidance prospectively. A reporting entity also may apply the guidance retrospectively to all prior periods presented in the
financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year
of adoption. The adoption of ASU 2015-01 is not expected to have any impact on the Company’s financial statement presentation
or disclosures.
In
February 2015, the FASB issued Accounting Standards Update No. 2015-02 (ASU 2015-02), Consolidation (Topic 810)
.
ASU 2015-02
changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate
certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation mode. ASU 2015-02
affects the following areas: (1) limited partnerships and similar legal entities; (2) evaluating fees paid to a decision maker
or a service provider as a variable interest; (3) the effect of fee arrangements on the primary beneficiary determination; (4)
the effect of related parties on the primary beneficiary determination; and (5) certain investment funds. ASU 2015-02 is effective
for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15,
2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting
entity may apply the amendments in this guidance using a modified retrospective approach by recording a cumulative-effect adjustment
to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively.
The adoption of ASU 2015-02 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
In
April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03), Interest - Imputation of Interest (Subtopic
835-30). ASU 2015-03 simplifies the presentation of debt issuance costs and requires that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent
with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the new guidance. ASU
2015-3 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within
that fiscal year. Early adoption is permitted for financial statements that have not been previously issued. An entity is required
to apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted
to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the
applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change
in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted,
and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The
adoption of ASU 2015-03 is expected to have an impact on the presentation of the Company’s current and future debt issuance
costs beginning in 2016.
In
November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17), Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in
a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning
of an interim or annual reporting period. The adoption of ASU 2015-17 is not expected to have any impact on Company’s financial
statement presentation or disclosures.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification
of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount,
timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has
not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s financial statement presentation or disclosures.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
3.
Notes Payable
10%
Convertible Notes Payable
On
November 5, 2014, the Company entered into a Convertible Note and Warrant Purchase Agreement (the “Purchase Agreement”)
with various accredited, non-affiliated investors (each, a “Purchaser”), pursuant to which the Company sold an aggregate
principal amount of $238,500 of its (i) 10% Convertible Notes due September 15, 2015 (each a “Note”, and together,
the “Notes”) and (ii) Warrants to purchase shares of common stock (the “Warrants”) as described below.
On December 9, 2014, December 31, 2014, and February 2, 2015, the Company sold an additional $46,000, $85,000 and $210,000, respectively,
of principal amount of the Notes and Warrants to various accredited investors. This private placement, which generated aggregate
gross proceeds of $579,500, was terminated effective February 18, 2015. Unless otherwise provided for in the Notes, the outstanding
principal balance of each Note and all accrued and unpaid interest, compounded annually at 10%, when issued, was due and payable
in full on September 15, 2015.
At
any time, each Purchaser may elect, at its option and in its sole discretion, to convert the outstanding principal amount into
a fixed number of shares of the Company’s common stock equal to the quotient obtained by dividing the outstanding principal
amount by $0.035, plus any accrued and unpaid interest, which is treated in the same manner as the outstanding principal amount.
In the case of a Qualified Financing (as defined in the Purchase Agreement), the outstanding principal amount and accrued and
unpaid interest under the Notes automatically convert into common stock at a common stock equivalent price of $0.035. In the case
of an Acquisition (as defined in the Purchase Agreement), the Company may elect to either: (i) convert the outstanding principal
amount and all accrued and unpaid interest under the Notes into shares of common stock or (ii) accelerate the maturity date of
the Notes to the date of closing of the Acquisition. Each Warrant to purchase shares of common stock is exercisable into a fixed
number of shares of common stock of the Company calculated as each Purchaser’s investment amount divided by $0.035. The
Warrants, when issued, were exercisable through September 15, 2015 at a fixed price of $0.035 per share. The Warrants do not have
any cashless exercise provisions. The shares of common stock issuable upon conversion of the Notes and exercise of the Warrants
are not subject to any registration rights.
Placement
agent fees, brokerage commissions, and similar payments were made in the form of cash and warrants to qualified referral sources
in connection with the sale of the Notes and Warrants. In connection with the initial closing on November 5, 2014, fees of $16,695
were paid in cash, based on 7% of the aggregate principal amount of the Notes issued to such referral sources, and the fees paid
in warrants (the “Placement Agent Warrants”) consisted of 477,000 warrants, reflecting warrants for that number of
shares equal to 7% of the number of shares of common stock into which the corresponding Notes are convertible. In connection with
the second closing, fees of $700 were paid in cash and 20,000 Placement Agent Warrants were issued. In connection with the third
closing, fees of $3,500 were paid in cash and 100,000 Placement Agent Warrants were issued. In connection with the fourth closing,
fees of $14,700 were paid in cash and 420,000 Placement Agent Warrants were issued. The Placement Agent Warrants have cashless
exercise provisions and were exercisable through September 15, 2015 at a fixed price of $0.035 per share. The stock warrants issued
to the placement agent and/or its designees or affiliates in connection with the 2014 closings of the Purchase Agreement, to purchase
597,000 shares of the Company’s common stock, were valued pursuant to the Black-Scholes option-pricing model at $19,986,
$614 and $3,340, respectively. The stock warrants issued to the placement agent and/or its designees or affiliates in connection
with the February 2, 2015 closing of the Purchase Agreement, to purchase 420,000 shares of the Company’s common stock, were
valued pursuant to the Black-Scholes option-pricing model at $12,726. Total financing costs relating to all closings of the Notes
aggregated $129,776, consisting of $93,110 paid in cash and $36,666 paid in the form of Placement Agent Warrants, and were being
amortized as additional interest expense over the original term of the Notes. During the years ended December 31, 2015 and 2014,
$114,128 and $15,648, respectively, was charged to interest expense with respect to the amortization of capitalized financing
costs.
Aurora
Capital LLC, a related party as described at Note 8 (“Aurora”), was the placement agent for this financing, and Aurora
and its designees and/or affiliates received aggregate fees in connection with this financing in the form of $33,425 in cash and
Placement Agent Warrants to purchase 955,000 shares of common stock in connection with the four closings.
The
Notes and Warrants were offered and sold without registration under the Securities Act in reliance on the exemptions provided
by Section 4(a)(2) of the Securities Act as provided in Rule 506 of Regulation D promulgated thereunder. The Notes and Warrants
and the shares of common stock issuable upon conversion of the Notes and exercise of the Warrants have not been registered under
the Securities Act or any other applicable securities laws, and unless so registered, may not be offered or sold in the United
States except pursuant to an exemption from the registration requirements of the Securities Act.
The
Company used the Black-Scholes option-pricing model to estimate the fair value of the Warrants to purchase 16,557,142 shares of
the Company’s common stock sold to investors in connection with the four closings at a fixed exercise price of $0.035 per
share. The Company considered the face value of the Notes to be representative of their fair value. The Company applied the relative
fair value method to allocate the proceeds from the borrowing to the Notes and the Warrants. Consequently, approximately 50% of
the proceeds of the borrowing of $290,394 were attributed to the debt instrument. The 50% value attributed to the Warrants of
$289,106 is being amortized as additional interest expense over the original term of the Notes. During the years ended December
31, 2015 and 2014, $267,821 and $21,285 was charged to interest expense from the amortization of debt discount related to the
value attributed to the Warrants. The carrying value of the Notes was further reduced by a discount for a beneficial conversion
feature of $290,394. The value attributed to the beneficial conversion feature is being amortized as additional interest expense
over the original term of the Notes. During the years ended December 31, 2015 and 2014, $265,529 and $24,865, respectively, was
charged to interest expense from the amortization of debt discount related to the value attributed to the beneficial conversion
feature.
On
August 13, 2015, the Company, pursuant to the terms of the Notes, gave the Note holders written notice, thirty days in advance
of the September 15, 2015 maturity date of the Notes, of the Company’s election to extend the maturity date of the Notes
to September 15, 2016. As a consequence of this election, under the terms of the Notes, the Company was required to issue to Note
holders 8,903,684 additional warrants (the “New Warrants”) that are exercisable through September 15, 2016. As set
forth in the Notes, the New Warrants are exercisable for that number of shares of common stock of the Company calculated as the
principal amount of the Note (an aggregate amount of $579,500), plus any accrued and unpaid interest (an aggregate amount of $43,758),
multiplied by 50%, and then divided by $0.035. The New Warrants otherwise have terms substantially similar to the 16,557,142 Warrants
originally sold to investors. In connection with the extension of the maturity date of the Notes, the Board of Directors of the
Company also determined to extend the termination date of the 16,557,142 original Warrants to September 15, 2016, so that they
are coterminous with the new maturity date of the Notes.
The
Company used the Black-Scholes option-pricing model to estimate the fair value of the New Warrants to purchase 8,903,684 shares
of the Company’s common stock and the fair value of extending the termination date of the 16,557,142 original Warrants sold
to investors. The Company considered the face value of the Notes, plus the accrued interest thereon, to be representative of their
fair value. The relative fair value method generated respective fair values for each of the Notes, including accrued interest,
and the New Warrants and extension of the original Warrants, of approximately 55% for the Notes, including accrued interest, and
approximately 45% for the New Warrants and extension of the original Warrants. The 45% value attributed to the New Warrants and
extension of the original Warrants of $277,918 is being amortized as additional interest expense over the extended term of the
Notes. During the year ended December 31, 2015, $81,249 was charged to interest expense from the amortization of debt discount
related to the value attributed to the New Warrants and extension of the original Warrants. The carrying value of the Notes was
further reduced by a discount for a beneficial conversion feature of $206,689. The value attributed to the beneficial conversion
feature is being amortized as additional interest expense over the extended term of the Notes. During the year ended December
31, 2015, $60,425 was charged to interest expense from the amortization of debt discount related to the value attributed to the
beneficial conversion feature.
The
10% Convertible Notes Payable consist of the following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Principal amount of notes payable
|
|
$
|
579,500
|
|
|
$
|
369,500
|
|
Add accrued interest payable
|
|
|
61,388
|
|
|
|
4,093
|
|
|
|
|
640,888
|
|
|
|
373,593
|
|
Less unamortized discounts:
|
|
|
|
|
|
|
|
|
Stock warrants
|
|
|
(196,669
|
)
|
|
|
(155,264
|
)
|
Beneficial conversion feature
|
|
|
(146,263
|
)
|
|
|
(168,086
|
)
|
|
|
$
|
297,956
|
|
|
$
|
50,243
|
|
None
of the 10% Convertible Notes Payable had been converted into shares of the Company’s common stock through December 31, 2015.
As of December 31, 2015, the 10% Convertible Notes Payable were convertible into 18,311,079 shares of the Company’s common
stock, including 1,753,936 shares attributable to accrued interest of $61,388 payable as of such date. As of December 31, 2014,
the 10% Convertible Notes Payable were convertible into 10,674,107 shares of the Company’s common stock, including 116,964
shares attributable to accrued interest of $4,093 payable as of such date.
Effective
September 14, 2015, placement agent warrants previously issued in connection with the four closings of the Note and Warrant financing
in December 2014 through February 2015, representing the right to acquire a total of 1,017,000 shares of common stock, were exercised
on a cashless basis, resulting in the net issuance of 47,109 shares of common stock. The gross exercise price of the placement
agent warrants that were exercised on a cashless basis was $35,595.
Note
Payable to Related Party
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.
(“Samyang”), an approximately 20% common stockholder of the Company at that time. The note accrues simple interest
at the rate of 12% per annum and has a maturity date of June 25, 2013, although Samyang was permitted to demand early repayment
of the promissory note on or after December 25, 2012. Samyang did not demand early repayment. The Company has not made any payments
on the promissory note. At June 30, 2013 and subsequently, the promissory note was outstanding and in technical default, although
Samyang has not issued a notice of default or a demand for repayment. The Company believes that Samyang is in default of its obligations
under its January 2012 license agreement, as amended, with the Company, but the Company has not yet issued a notice of default.
The Company is continuing efforts towards a comprehensive resolution of the aforementioned matters involving Samyang.
The
promissory note is secured by collateral that represents a lien on certain patents owned by the Company, including composition
of matter patents for certain of the Company’s high impact ampakine compounds and the low impact ampakine compounds CX2007
and CX2076, and other related compounds. The security interest does not extend to the Company’s patents for its ampakine
compounds CX1739 and CX1942, or to the patent for the use of ampakine compounds for the treatment of respiratory depression.
In
connection with this financing, the Company issued to Samyang two-year detachable warrants to purchase 4,000,000 shares of the
Company’s common stock at a fixed exercise price of $0.056 per share. The warrants had a call right for consideration of
$0.001 per share, in favor of the Company, to the extent that the weighted average closing price of the Company’s common
stock exceeds $0.084 per share for each of ten consecutive trading days, subject to certain circumstances. Additionally, an existing
license agreement with Samyang was expanded to include rights to ampakine CX1739 in South Korea for the treatment of sleep apnea
and respiratory depression. The warrants expired unexercised on June 25, 2014.
The
Company used the Black-Scholes option-pricing model to estimate the fair value of the two-year detachable warrants to purchase
4,000,000 shares of the Company’s common stock at a fixed exercise price of $0.056 per share. The Company applied the relative
fair value method to allocate the proceeds from the borrowing to the note payable and the detachable warrants. The Company did
not consider the expansion of the existing license agreement with Samyang to have any significant value. Consequently, approximately
64% of the proceeds of the borrowing were attributed to the debt instrument.
The
36% value attributed to the warrant was amortized as additional interest expense over the expected life of the note. Additionally,
financing costs aggregating $21,370 incurred in connection with the transaction were also amortized over the expected life of
the note. In that repayment could be demanded after six months, that period was used as the expected life of the note payable
for amortization purposes.
Note
payable to Samyang consists of the following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Principal amount of note payable
|
|
$
|
399,774
|
|
|
$
|
399,774
|
|
Accrued interest payable
|
|
|
171,257
|
|
|
|
122,618
|
|
Foreign currency transaction adjustment
|
|
|
(9,463
|
)
|
|
|
3,865
|
|
|
|
$
|
561,568
|
|
|
$
|
526,257
|
|
Advances
from the Chairman
On
June 25, 2013, the Arnold Lippa Family Trust of 2007, of which Dr. Arnold S. Lippa, the Company’s Chairman and then Chief
Executive Officer is the settlor, began advancing funds to the Company for working capital purposes. At December 31, 2013, the
trust had advanced a total of $75,000 to the Company. Such advances reached a maximum of $150,000 on March 3, 2014 and were due
on demand with interest at a rate per annum equal to the “Blended Annual Rate”, as published by the U.S. Internal
Revenue Service of approximately 0.22% for the period outstanding. In March 2014, the Company repaid the working capital advances,
including accrued interest of $102, from the proceeds from the private placement of its Series G 1.5% Convertible Preferred Stock.
On
June 16, 2015, Dr. Lippa advanced $40,000 to the Company for working capital purposes. Such advance was due on demand with interest
at 10% per annum. On September 3, 2015, the Company repaid the working capital advance, including accrued interest of $877, from
the proceeds from the August and September 2015 closings of the private placement of its units of common stock and warrants.
Other
Short-Term Notes Payable
Other
short-term notes payable at December 31, 2015 consisted of a premium financing agreement with respect to an insurance policy.
The premium financing agreement dated March 14, 2015 is payable, with interest at 5.08% per annum, in ten monthly installments
of $3,697 through February 14, 2016.
4.
Project Advance
In
June 2000, the Company received $247,300 from the Institute for the Study of Aging (the “Institute”) pursuant to a
note (the “Note”) and Agreement to Accept Conditions of Loan Support (the “Loan Support Agreement”) to
fund testing of CX516, one of the Company’s ampakine compounds, in patients with mild cognitive impairment (“MCI”).
Patients with MCI represent the earliest clinically-defined group with memory impairment beyond that expected for normal individuals
of the same age and education, but such patients do not meet the clinical criteria for Alzheimer’s disease. During 2002
and 2003, the Company conducted a double-blind, placebo-controlled clinical study with 175 elderly patients displaying MCI and
issued a final report on June 21, 2004. CX516 did not improve the memory impairments observed in these patients.
Pursuant
to the Note and Loan Support Agreement, if the Company complied with certain conditions, including the completion of the MCI clinical
trial, the Company would not be required to make any repayments unless and until the Company enters one of its ampakine compounds
into a Phase 3 clinical trials for Alzheimer’s disease. Upon initiation of such clinical trials, repayment would include
the principal amount plus accrued interest computed at a rate equal to one-half of the prime lending rate. In the event of repayment,
the Institute could elect to receive the outstanding principal balance and any accrued interest thereon in shares of the Company’s
common stock. The conversion price for such form of repayment was fixed at $4.50 per share and was subject to adjustment if the
Company paid a dividend or distribution in shares of common stock, effected a stock split or reverse stock split, effected a reorganization
or reclassification of its capital stock, or effected a consolidation or merger with or into another corporation or entity.
On
September 2, 2014, the Company entered into a Release Agreement (the “Release Agreement”) with the Institute to settle
this outstanding obligation, which had an outstanding balance of $336,809, including accrued interest of $89,509, on such date.
Pursuant to the terms of the Release Agreement, the Institute received 1,000,000 shares of the Company’s common stock as
settlement of all obligations of the Company under the Note and the Loan Support Agreement. Such common shares are “restricted
securities” as defined under Rule 144 promulgated under the Securities Act of 1933, as amended, and are not subject to any
registration rights. The Release Agreement also includes a mutual release between the Company and the Institute, releasing each
party from all claims up until the date of the Release Agreement. The 1,000,000 common shares issued were valued at $49,000, based
on the closing price of the Company’s common stock on September 2, 2014 of $0.049 per share. The settlement resulted in
the Company recognizing a gain of $287,809 during the year ended December 31, 2014.
5.
Settlements
During
the year ended December 31, 2014, the Company executed settlement agreements with four former executives that resulted in the
settlement of potential claims totaling $1,336,264 that had been previously accrued in 2012 and 2013. The Company made cash payments
of $118,084 and issued stock options to purchase 4,300,000 shares of common stock exercisable at $0.04 per share for periods ranging
from five to ten years. The stock options were valued pursuant to the Black-Scholes option-pricing model at $179,910. In addition
to other provisions, the settlement agreements included mutual releases. The settlements resulted in the Company recognizing a
gain of $1,038,270 during the year ended December 31, 2014.
During
the year ended December 31, 2014, the Company executed settlement agreements with two former professional service providers that
resulted in the settlement of potential claims totaling $496,514 for a cost of $60,675 in cash, plus the issuance of stock options
to purchase 1,250,000 shares of common stock exercisable at $0.04 per share for a period of five years, and valued pursuant to
the Black-Scholes option-pricing model at $42,250 in the aggregate. In addition to other provisions, the settlement agreements
included mutual releases. The settlements resulted in the Company recognizing a gain of $393,590 during the year ended December
31, 2014.
On
September 2, 2014, the Company recognized a gain of $287,809 resulting from the settlement of an obligation to the Institute for
the Study of Aging. Additional information with respect to this settlement is provided at Note 4.
Effective
January 29, 2015, the Company executed a settlement agreement with its former Vice President and Chief Financial Officer, as amended
on February 4, 2015, that resulted in the settlement of potential claims for a total cash payment of $26,000 to be paid on or
before June 30, 2015 (of which $6,000 was paid on execution and $1,500 was paid in March 2015), plus the issuance of a stock option
to purchase 500,000 shares of common stock exercisable at $0.0512 (the closing market price on the date of grant) per share for
a period of five years, and valued pursuant to the Black-Scholes option-pricing model at $25,450. In addition to other provisions,
the settlement agreement included mutual releases. The settlement resulted in the Company recognizing a gain of $92,550 on January
29, 2015. On June 29, 2015, the settlement agreement was further amended, resulting in a cash payment of $3,000, an extension
of the $15,500 remaining balance due through December 31, 2015, subject to a further partial cash payment of $3,000, which was
paid on September 28, 2015, plus the issuance of a stock option to purchase 50,000 shares of common stock exercisable at $0.018
per share (the closing market price on the date of grant) for a period of five years, and valued pursuant to the Black-Scholes
option-pricing model at $840. Accordingly, during the year ended December 31, 2015, the Company recorded a net gain of $91,710
with respect to the settlement, as amended, with its former Vice President and Chief Financial Officer. In December 2015, the
remaining balance due of $12,500, plus accrued interest of $775, was paid as scheduled.
On
April 8, 2015, the Company entered into a Settlement Agreement with one of its patent law firms to settle amounts due to such
firm for services rendered and costs incurred with respect to foreign associates and outside vendors aggregating $194,736. Pursuant
to the terms of the Settlement Agreement, the law firm received a cash payment of $15,000, non-qualified stock options to purchase
2,520,442 shares of common stock exercisable at $0.0476 per share for a period of five years, and a short-term unsecured note
payable in the principal amount of $59,763. The stock options were valued pursuant to the Black-Scholes option-pricing model at
$119,217, based on the closing price of the Company’s common stock on April 8, 2015 of $0.0476 per share. The note payable
bears interest at 10% per annum, which accrues and is payable at maturity, and is due at the earlier of (i) the closing of a transaction
for the sale of the Company’s capital stock that results in net proceeds to the Company of at least $2,000,000, or (ii)
December 31, 2015. In addition to various other provisions, the Settlement Agreement provides that the Company will have the option
to pay for one-half of invoices for future legal services (excluding costs with respect to foreign associates and outside vendors)
in the form of stock options. The Settlement Agreement also includes a release of the lien previously filed by the law firm against
certain of the Company’s patents and patent applications relating to its ampakine technology in the United States Patent
and Trademark Office, as well as for mutual releases. The Company paid the note payable in December 2015 as scheduled.
During
the year ended December 31, 2015, the Company executed agreements with four current professional service providers (including
the Company’s patent law firm referred to above) that resulted in the partial settlement of amounts owed to them by the
Company. Obligations in the amount of $916,827 were settled for $15,000 in cash, the issuance of a short-term note payable in
the amount of $59,763 as described above, the issuance of 9,064,286 shares of common stock valued at $158,625 ($0.0175 per share),
which was the then closing market price of the Company’s common stock, and the issuance of stock options to purchase 31,618,470
shares of common stock exercisable at the closing market price of the Company’s common stock on the date of issuance. Options
for 2,520,442 shares were exercisable at $0.0476 per share for a period of five years, and valued pursuant to the Black-Scholes
option-pricing model at an aggregate of $119,217 ($0.0473 per share). Options for 29,098,028 shares were exercisable at $0.0175
per share for a period of five years, and valued pursuant to the Black-Scholes option-pricing model at an aggregate of $488,847
($0.0168 per share). The negotiated agreements resulted in the Company recognizing a gain of $75,375 during the year ended December
31, 2015.
The
Company continues to explore ways to reduce its indebtedness, and might in the future enter additional settlements of potential
claims, including, without limitation, those by other former executives or third party creditors.
6.
Stockholders’ Deficiency
Preferred
Stock
The
Company has authorized a total of 5,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2015 and
2014, 1,250,000 shares were designated as 9% Cumulative Convertible Preferred Stock (non-voting, “9% Preferred Stock”);
37,500 shares were designated as Series B Convertible Preferred Stock (non-voting, “Series B Preferred Stock”); 205,000
shares were designated as Series A Junior Participating Preferred Stock (non-voting, “Series A Junior Participating Preferred
Stock”); and 1,700 shares were designated as Series G 1.5% Convertible Preferred Stock. Accordingly, as of December 31,
2015, 3,505,800 shares of preferred stock were undesignated and may be issued with such rights and powers as the Board of Directors
may designate.
There
were no shares of 9% Preferred Stock or Series A Junior Participating Preferred Stock outstanding as of December 31, 2015 or 2014.
Series
B Preferred Stock outstanding as of December 31, 2015 and 2014 consisted of 37,500 shares issued in a May 1991 private placement.
Each share of Series B Preferred Stock is convertible into approximately 0.09812 shares of common stock at an effective conversion
price of $6.795 per share of common stock, which is subject to adjustment under certain circumstances. As of December 31, 2015
and 2014, the shares of Series B Preferred Stock outstanding are convertible into 3,679 shares of common stock. The Company may
redeem the Series B Preferred Stock for $25,001, equivalent to $0.6667 per share, an amount equal to its liquidation preference,
at any time upon 30 days prior notice.
Series
G 1.5% Convertible Preferred Stock
On
March 18, 2014, the Company entered into Securities Purchase Agreements with various accredited investors (the “Initial
Purchasers”), pursuant to which the Company sold an aggregate of 753.22 shares of its Series G 1.5% Convertible Preferred
Stock for a purchase price of $1,000 per share, or an aggregate purchase price of $753,220. This financing represented the initial
closing on the private placement (the “Series G Private Placement”). The Initial Purchasers in this tranche of the
Series G Private Placement consisted of (i) Dr. Arnold S. Lippa, the Company’s Chairman, then Chief Executive Officer and
a member of the Company’s Board of Directors, who invested $250,000 for 250 shares of Series G 1.5% Convertible Preferred
Stock, and (ii) new, non-affiliated, accredited investors. Neither the Series G 1.5% Convertible Preferred Stock nor the underlying
shares of common stock have any registration rights.
The
placement agents and selected dealers in connection with the initial tranche of the Series G Private Placement received cash fees
totaling $3,955 as compensation and an obligation of the Company to issue warrants to acquire 12,865,151 shares of common stock,
totaling approximately 5.6365% of the shares of common stock into which the Series G 1.5% Convertible Preferred Stock may convert,
issuable upon completion of all closings of the Series G Private Placement and exercisable for five years, at a fixed price of
$0.00396, which is 120% of the conversion price at which the Series G 1.5% Convertible Preferred Stock may convert into the Company’s
common stock. The stock warrants issuable to the placement agents and selected dealers in connection with the initial tranche
of the Series G Private Placement were valued pursuant to the Black-Scholes option-pricing model at $443,848.
The
Series G 1.5% Convertible Preferred Stock has a stated value of $1,000 per share and a stated dividend at the rate per share (as
a percentage of the Stated Value per share) of 1.5% per annum, compounded quarterly, payable quarterly within 15 calendar days
of the end of each fiscal quarter of the Company, in duly authorized, validly issued, fully paid and non-assessable shares of
Series G 1.5% Convertible Preferred Stock, which may include fractional shares of Series G 1.5% Convertible Preferred Stock.
The
Series G 1.5% Convertible Preferred Stock became convertible, beginning 60 days after the last share of Series G 1.5% Convertible
Preferred Stock was issued in the Series G Private Placement, at the option of the holder, into common stock at the applicable
conversion price, at a rate determined by dividing the Stated Value of the shares of Series G 1.5% Convertible Preferred Stock
to be converted by the conversion price, subject to adjustments for stock dividends, splits, combinations and similar events as
described in the form of Certificate of Designation. As the stated value of the Series G 1.5% Convertible Preferred Stock is $1,000
per share, and the fixed conversion price is $0.0033, each share of Series G 1.5% Convertible Preferred Stock is convertible into
303,030.3 shares of common stock. In addition, the Company has the right to require the holders of the Series G 1.5% Convertible
Preferred Stock to convert such shares into common stock under certain enumerated circumstances as set forth in the Certificate
of Designation.
Upon
either (i) a Qualified Public Offering (as defined in the Certificate of Designation) or (ii) the affirmative vote of the holders
of a majority of the Stated Value of the Series G 1.5% Convertible Preferred Stock issued and outstanding, all outstanding shares
of Series G 1.5% Convertible Preferred Stock, plus all accrued or declared, but unpaid, dividends thereon, shall be mandatorily
converted into such number of shares of common stock determined by dividing the Stated Value of such Series G 1.5% Convertible
Preferred Stock (together with the amount of any accrued or declared, but unpaid, dividends thereon) by the Conversion Price (as
defined in the Certificate of Designation).
If
not earlier converted, the remaining outstanding shares of Series G 1.5% Convertible Preferred Stock will be automatically and
mandatorily redeemed by conversion into shares of common stock on April 17, 2016, the two year anniversary of the date that the
last shares of Series G 1.5% Convertible Preferred Stock were issued in the Series G Private Placement, at the Conversion Price
of $0.0033 per share.
Except
as described in the Certificate of Designation, holders of the Series G 1.5% Convertible Preferred Stock will vote together with
holders of the Company common stock on all matters, on an as-converted to common stock basis, and not as a separate class or series
(subject to limited exceptions).
In
the event of any liquidation or winding up of the Company prior to and in preference to any Junior Securities (including common
stock), the holders of the Series G 1.5% Convertible Preferred Stock will be entitled to receive in preference to the holders
of the Company common stock a per share amount equal to the Stated Value, plus any accrued and unpaid dividends thereon.
Purchasers
in the Series G Private Placement of the Series G 1.5% Convertible Preferred Stock executed written consents in favor of (i) approving
and adopting an amendment to the Company’s certificate of incorporation that increases the number of authorized shares of
the Company to 1,405,000,000, 1,400,000,000 of which are shares of common stock and 5,000,000 of which are shares of preferred
stock, and (ii) approving and adopting the Cortex Pharmaceuticals, Inc. 2014 Equity, Equity-Linked and Equity Derivative Incentive
Plan.
The
shares of Series G 1.5% Convertible Preferred Stock 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. The shares of Series G 1.5% Convertible Preferred Stock and
the Company’s common stock issuable upon conversion of the shares of Series G 1.5% Convertible Preferred Stock have not
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.
On
April 17, 2014, the Company entered into Securities Purchase Agreements with various accredited investors (together with the Initial
Purchasers as defined above, the “Purchasers”), pursuant to which the Company sold an aggregate of an additional 175.28
shares of its Series G 1.5% Convertible Preferred Stock, for a purchase price of $1,000 per share, or an aggregate purchase price
of $175,280. This was the second and final closing on the Series G Private Placement, in which a total of 928.5 shares of Series
G 1.5% Convertible Preferred Stock were sold for an aggregate purchase price of $928,500. The Purchasers in the second and final
tranche of the Series G Private Placement consisted of new, non-affiliated, accredited investors and non-management investors
who had also invested in the first closing of the Series G Private Placement. One of the investors in this second and final closing
of the Series G Private Placement was an affiliate of an associated person of Aurora, a related party (see Note 8). Neither the
Series G 1.5% Convertible Preferred Stock nor the underlying shares of common stock have any registration rights.
The
placement agents and selected dealers in connection with the second tranche of the Series G Private Placement received cash fees
of $3,465 as compensation and an obligation of the Company to issue warrants to acquire 6,386,120 shares of common stock, totaling
approximately 12% of the shares of common stock into which the Series G 1.5% Convertible Preferred Stock may convert, issuable
upon completion of all closings of the Series G Private Placement and exercisable for five years, at a fixed price of $0.00396,
which is 120% of the conversion price at which the Series G 1.5% Convertible Preferred Stock may convert into the Company’s
common stock. The stock warrants issuable to the placement agents and selected dealers in connection with the second closing of
the Series G Private Placement were valued pursuant to the Black-Scholes option-pricing model at $220,321.
As
the stated value of the Series G 1.5% Convertible Preferred Stock is $1,000 per share, and the fixed conversion price is $0.0033,
each share of Series G 1.5% Convertible Preferred Stock is convertible into 303,030.3 shares of common stock. The aggregate of
928.5 shares of Series G 1.5% Convertible Preferred Stock sold in all of the closings of the Series G Private Placement were initially
convertible into a total of 281,363,634 shares of common stock.
The
Company recorded a dividend on the Series G 1.5% Convertible Preferred Stock of $6,867 and $10,926 for the years ended December
31, 2015 and 2014, respectively, which was paid through the issuance of an additional 6.9 shares and 10.9 shares, respectively,
of Series G 1.5% Convertible Preferred Stock.
The
warrants that the placement agents and selected dealers received in connection with all closings of the Series G Private Placement,
which were issued effective April 17, 2014, represent the right to acquire 19,251,271 shares of common stock exercisable for five
years at a fixed price of $0.00396, which is 120% of the conversion price at which the Series G 1.5% Convertible Preferred Stock
may convert into the Company’s common stock.
Aurora,
a related party (see Note 8), was one of the placement agents for this financing, and Aurora and its designees and/or affiliates
received fees in connection with this financing in the form of cash of $2,800 and warrants to purchase 10,427,029 shares of common
stock during the year ended December 31, 2014. Both Dr. Arnold S. Lippa and Jeff E. Margolis, officers and directors of the Company
since March 22, 2013, have indirect ownership interests in Aurora through interests held in its members, and Jeff E. Margolis
is also an officer of Aurora.
Effective
August 25, 2014, a placement agent warrant issued on April 17, 2014 in conjunction with the Series G Private Placement of the
Series G 1.5% Convertible Preferred Stock, representing the right to acquire a total of 2,112,879 shares of common stock, was
exercised in full on a cashless basis, resulting in the net issuance of 1,942,124 shares of common stock. The gross exercise price
of the placement agent warrant that was exercised on a cashless basis was $8,367.
Effective
September 5, 2014, a placement agent warrant issued on April 17, 2014 in conjunction with the Series G Private Placement of the
Series G 1.5% Convertible Preferred Stock, representing the right to acquire a total of 2,412,878 shares of common stock, was
exercised in part (50%, or 1,206,439 shares) on a cashless basis, resulting in the net issuance of 1,126,814 shares of common
stock. The gross exercise price of the placement agent warrant that was exercised on a cashless basis was $4,778.
Effective
September 26, 2014, a placement agent warrant issued on April 17, 2014 in conjunction with the Series G Private Placement of the
Series G 1.5% Convertible Preferred Stock, representing the right to acquire a total of 1,400,000 shares of common stock, was
exercised in full on a cashless basis, resulting in the net issuance of 1,326,080 shares of common stock. The gross exercise price
of the placement agent warrant that was exercised on a cashless basis was $5,544.
During
the year ended December 31, 2014, placement warrants issued on April 17, 2014 in conjunction with the Series G Private Placement
of the Series G 1.5% Convertible Preferred Stock were exercised on a cashless basis, resulting in the net issuance of 4,395,018
shares of common stock. The gross exercise price of the placement agent warrants that were exercised on a cashless basis was $18,689.
Effective
August 25, 2015, a placement agent warrant issued on April 17, 2014 in conjunction with the Series G Private Placement of the
Series G 1.5% Convertible Preferred Stock, representing the right to acquire a total of 2,412,878 shares of common stock, was
exercised in part (50%, or 1,206,439 shares) on a cashless basis, resulting in the net issuance of 1,087,001 shares of common
stock. The gross exercise price of the placement agent warrant that was exercised on a cashless basis was $4,778.
Effective
December 16, 2014, 66.68888 shares of Series G 1.5% Convertible Preferred Stock, including 0.68888 dividend shares, were converted
into 20,208,752 shares of common stock on a cashless basis.
During
the three months ended March 31, 2015, 25.323705 shares of Series G 1.5% Convertible Preferred Stock, including 0.323705 dividend
shares, were converted into 7,673,850 shares of common stock on a cashless basis. During the three months ended June 30, 2015,
an aggregate of 538.208190 shares of Series G 1.5% Convertible Preferred Stock, including 8.728190 dividend shares, were converted
into 163,093,392 shares of common stock on a cashless basis. During the three months ended September 30, 2015, an aggregate of
57.506190 shares of Series G 1.5% Convertible Preferred Stock, including 1.206190 dividend shares, were converted into 17,426,119
shares of common stock on a cashless basis. Accordingly, during the year ended December 31, 2015, 621.038085 shares of Series
G 1.5% Convertible Preferred Stock, including 10.258085 dividend shares, were converted into 188,193,359 shares of common stock
on a cashless basis.
As
of December 31, 2015, the remaining outstanding shares of Series G 1.5% Convertible Preferred Stock were convertible into 78,353,485
shares of the Company’s common stock, including 2,074,698 shares attributable to the 1.5% dividend on such shares of $6,847
accrued as of such date. As of December 31, 2014,
the
remaining outstanding shares of Series G 1.5% Convertible Preferred Stock were convertible into 264,465,728 shares of the Company’s
common stock, including 3,102,094 shares attributable to the 1.5% dividend on such shares of $10,237 accrued as of such date.
Common
Stock
As
discussed above, the holders of the Series G 1.5% Convertible Preferred Stock approved and adopted an amendment to increase the
number of authorized shares of the Company to 1,405,000,000, 1,400,000,000 of which are shares of common stock and 5,000,000 of
which are shares of preferred stock. The Company also sought, and on April 17, 2014 obtained by written consent, sufficient votes
of the holders of its common stock, voting as a separate class, to effect this amendment. A certificate of Amendment to the Company’s
Certificate of Incorporation to effect the increase in the authorized shares was filed with the Secretary of State of the State
of Delaware on April 17, 2014.
On
April 14, 2014, the Board of Directors of the Company awarded a total of 57,000,000 shares of common stock of the Company, including
awards of 15,000,000 shares to each of the Company’s three executive officers, who were also all of the directors of the
Company at that time, and 4,000,000 shares and 8,000,000 shares to two other individuals. The individual who received the 8,000,000
shares was an associated person of Aurora. These awards were made to those individuals on that date as compensation for services
rendered through March 31, 2014. Prior to these awards, none of the officers or directors of the Company at that time had earned
or received any cash compensation from the Company since joining the Company in March and April 2013, and there were no prior
compensation arrangements or agreements with such individuals. As the initial closing of the Series G 1.5% Convertible Preferred
Stock was completed on March 18, 2014, and such closing represented approximately 81% of the total amount of such financing, the
Company’s Board of Directors determined that it was appropriate at that time to compensate such officers for the period
since they joined the Company in March and April 2013 through March 31, 2014. Such compensation was concluded on April 14, 2014
with the issuance of the aforementioned stock awards. Accordingly, as a result of these factors, the fair value of these stock
awards of $2,280,000 was charged to operations effective as of March 18, 2014. The stock awards were valued at $0.04 per share,
which was the closing price of the Company’s common stock on March 18, 2014. These stock awards were made under the Company’s
2014 Equity, Equity-Linked and Equity Derivative Incentive Plan.
On
September 3, 2014, James Sapirstein and Kathryn MacFarlane were appointed to the Board of Directors of the Company, and in connection
therewith, they were awarded an aggregate of 4,000,000 shares of common stock of the Company under the Company’s 2014 Equity,
Equity-Linked and Equity Derivative Incentive Plan, consisting of 2,000,000 shares to each new director, vesting 50% upon appointment
to the Board of Directors, 25% on September 30, 2014 and 25% on December 31, 2014. The stock awards were valued at $0.049 per
share, which was the closing price of the Company’s common stock on September 3, 2014. During the period September 3, 2014
through December 31, 2014, the Company recorded charges to operations of $196,000 with respect to these stock awards.
On
September 18, 2014, Dr. John Greer, Ph.D. was appointed to the position of Chairman of the Company’s Scientific Advisory
Board. Dr. Greer is Professor of Physiology and Alberta Innovates - Health Solutions Senior Scientist with the Neuroscience and
Mental Health Institute at the University of Alberta, holds two grants regarding research into neuromuscular control of breathing,
and is the inventor on the method of treatment patents licensed by the Company with respect to ampakines. In connection with the
appointment of Dr. Greer as Chairman of the Company’s Scientific Advisory Board on September 18, 2014, the Board of Directors
awarded 2,000,000 shares of common stock of the Company to Dr. Greer (through his wholly-owned consulting company, Progress Scientific,
Inc.), vesting 25% upon appointment, 25% on September 30, 2014, 25% on December 31, 2014, and 25% on March 31, 2015. The stock
award was valued at $0.066 per share, which was the closing price of the Company’s common stock on September 18, 2014. This
stock award was made under the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan. During the period
September 18, 2014 through December 31, 2014, the Company recorded charges to operations of $99,000 with respect to this stock
award. During the year ended December 31, 2015, the Company recorded a final charge to operations of $33,000 with respect to this
stock award.
Effective
October 15, 2014, Richard Purcell was appointed as the Company’s Senior Vice President of Research and Development. In conjunction
with his appointment, the Company agreed to issue to Mr. Purcell 2,000,000 shares of the Company’s common stock, with 25%
of such stock grant vesting and issuable every three months after the date of his appointment (i.e., on January 15, 2015, April
15, 2015, July 15, 2015 and October 15, 2015), subject to Mr. Purcell’s continued relationship with the Company on each
of the vesting dates. The stock grant was made under the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive
Plan. Based on the Company’s closing stock price on October 15, 2014 of $0.078 per share, during the year ended December
31, 2015, the Company recorded a charge to operations of $156,000 with respect to this stock award.
On
August 28, 2015, the Company entered into a Second Amended and Restated Common Stock and Warrant Purchase Agreement (the “Purchase
Agreement”) with various accredited investors (each, a “Purchaser”, and together with purchasers in subsequent
closings in the private placement, the “Purchasers”), pursuant to which the Company sold units for aggregate cash
consideration of $721,180, with each unit consisting of (i) one share of the Company’s common stock, representing an aggregate
of 34,292,917 shares of common stock, and (ii) one warrant to purchase two additional shares of common stock, representing an
aggregate of 68,585,834 warrants. This financing represented the initial closing of a private placement of up to $3,000,000. On
September 28, 2015, the Company entered into a second closing of the Purchase Agreement with various additional Purchasers, pursuant
to which the Company sold units for aggregate cash consideration of $218,530, with each unit consisting of (i) one share of the
Company’s common stock, representing an aggregate of 10,391,349 shares of common stock, and (ii) one warrant to purchase
two additional shares of common stock, representing an aggregate of 20,782,698 Warrants. On November 2, 2015, the Company entered
into a third closing of the Purchase Agreement with various Purchasers, pursuant to which the Company sold units for aggregate
cash consideration of $255,000, with each unit consisting of (i) one share of the Company’s common stock, representing an
aggregate of 12,125,536 shares of common stock, and (ii) one warrant to purchase two additional shares of common stock, representing
an aggregate of 24,251,072 Warrants. This third closing brought the aggregate amount raised under this private placement as of
November 2, 2015 to $1,194,710.
The
price per unit in each closing of the private placement was $0.02103 (the “Per Unit Price”). The Warrants are exercisable
through September 30, 2020 and may be exercised at a price of $0.02103 for each share of Common Stock to be acquired upon exercise.
The Purchasers consisted of non-affiliated investors, other than Dr. James S. J. Manuso, the current President and Chief Executive
Officer of the Company, who invested $250,000 in the initial closing of the private placement. The Warrants do not contain any
cashless exercise provision or reset rights.
No
registration rights were granted to any Purchaser in this private placement with respect to (i) the shares of common stock issued
as part of the units, (ii) the warrants, or (iii) the shares of common stock issuable upon exercise of the warrants.
Placement
agent fees, brokerage commissions, and similar payments were made in the form of cash and warrants to qualified referral sources
in connection with certain sales of the shares of common stock and warrants, while other sales, including the sale to James S.
J. Manuso, did not result in any fees or commissions. Accordingly, the amount of such fees, on a percentage basis, varies in each
closing. The fees paid to such referral sources for the initial closing in cash totaled $47,118, or 6.5% of the aggregate amount
paid for the units sold. The fees paid in warrants for the initial closing to such referral sources (the warrants paid to qualified
referral sources are referred to herein as the “Placement Agent Warrants”) consist of warrants for 2,240,517 shares
of common stock, or that number of shares equal to 6.5% of the number of shares of common stock issued as part of the units, but
not the shares underlying the warrants. In connection with the second closing, fees paid to referral sources in cash totaled $18,603,
or 8.5% of the aggregate amount paid for the units sold, and 884,594 Placement Agent Warrants were issued, or warrants for that
number of shares equal to 8.5% of the number of shares of common stock issued as part of the units, but not the shares underlying
the Warrants. In connection with the third closing, fees paid to referral sources in cash totaled $25,500, or 10% of the aggregate
amount paid for the units sold, and 1,212,553 Placement Agent Warrants were issued, or warrants for that number of shares equal
to 10% of the number of shares of common stock issued as part of the units, but not the shares underlying the Warrants. Placement
Agent Warrants are exercisable until September 30, 2020 at the Per Unit Price. The Placement Agent Warrants have a cashless exercise
provision. One of the placement agents that received Placement Agent Warrants is Aurora. Both Arnold S. Lippa and Jeff E. Margolis,
officers and directors of the Company, have indirect ownership interests in Aurora through interests held in its members, and
Jeff E. Margolis is also an officer of Aurora. As a result, both Arnold S. Lippa and Jeff E. Margolis, or entities in which they
have interests, will receive a portion of the Placement Agent Warrants awarded in this private placement.
In
addition to the above described placement agent fees, brokerage commissions, and similar payments that were made in the form of
cash and warrants to qualified referral sources, the Company also paid $10,164 in cash to other professionals for services related
to the three closings.
The
shares of common stock and warrants were offered and sold without registration under the Securities Act of 1933, as amended (the
“Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as provided in Rule
506(b) of Regulation D promulgated thereunder. None of the shares of common stock issued as part of the units, the warrants, the
common stock issuable upon exercise of the warrants, the Placement Agent Warrants or the shares of common stock issuable upon
exercise of the Placement Agent Warrants 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.
See
Note 5 for information with respect to the issuance of common stock in connection with the settlement of debt obligations.
Information
with respect to the issuance of common stock upon the exercise of common stock purchase warrants issued to placement agents in
connection with the Series G Private Placement of the Series G 1.5% Convertible Preferred Stock is provided above at “Series
G 1.5% Convertible Preferred Stock.”
Common
Stock Warrants
In
connection with a private placement of debt on June 25, 2012, the Company issued to Samyang two-year detachable warrants to purchase
4,000,000 shares of the Company’s common stock at a fixed exercise price of $0.056 per share. The warrants had a call right
for consideration of $0.001 per share, in favor of the Company, to the extent that the weighted average closing price of the Company’s
common stock exceeded $0.084 per share for each of ten consecutive trading days, subject to certain circumstances. The warrants
expired unexercised in June 2014.
Information
with respect to the issuance and exercise of common stock purchase warrants with respect to placement agents in connection with
the Series G Private Placement of the Series G 1.5% Convertible Preferred Stock is provided above at “Series G 1.5% Convertible
Preferred Stock.” Information with respect to the issuance and exercise of common stock purchase warrants in connection
with the 10% Convertible Note Payable and Warrant Purchase Agreement is provided at Note 3.
A
summary of warrant activity for the year ended December 31, 2015 is presented below.
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants outstanding at December 31, 2014
|
|
|
25,686,096
|
|
|
$
|
0.01744
|
|
|
|
|
|
Issued
|
|
|
133,280,952
|
|
|
|
0.02253
|
|
|
|
|
|
Exercised
|
|
|
(2,223,439
|
)
|
|
|
0.01816
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Warrants outstanding at December 31, 2015
|
|
|
156,743,609
|
|
|
$
|
0.02185
|
|
|
|
3.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at December 31, 2014
|
|
|
25,686,096
|
|
|
$
|
0.01744
|
|
|
|
|
|
Warrants exercisable at December 31, 2015
|
|
|
156,743,609
|
|
|
$
|
0.02185
|
|
|
|
3.97
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2015:
Exercise Price
|
|
|
Warrants Outstanding
(Shares)
|
|
|
Warrants Exercisable
(Shares)
|
|
|
Expiration Date
|
$
|
0.00396
|
|
|
|
13,325,514
|
|
|
|
13,325,514
|
|
|
April 17, 2019
|
$
|
0.02103
|
|
|
|
117,957,268
|
|
|
|
117,957,268
|
|
|
September 30, 2020
|
$
|
0.03500
|
|
|
|
25,460,827
|
|
|
|
25,460,827
|
|
|
September 15, 2016
|
|
|
|
|
|
156,743,609
|
|
|
|
156,743,609
|
|
|
|
Based
on a fair market value of $0.0186 per share on December 31, 2015, the intrinsic value of exercisable in-the-money common stock
warrants was $195,086 as of December 31, 2015.
A
summary of warrant activity for the year ended December 31, 2014 is presented below.
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants outstanding at December 31, 2013
|
|
|
4,000,000
|
|
|
$
|
0.05600
|
|
|
|
|
|
Issued
|
|
|
30,405,414
|
|
|
|
0.01535
|
|
|
|
|
|
Exercised
|
|
|
(4,719,318
|
)
|
|
|
0.00396
|
|
|
|
|
|
Expired
|
|
|
(4,000,000
|
)
|
|
|
0.05600
|
|
|
|
|
|
Warrants outstanding at December 31, 2014
|
|
|
25,686,096
|
|
|
$
|
0.01744
|
|
|
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at December 31, 2013
|
|
|
4,000,000
|
|
|
$
|
0.05600
|
|
|
|
|
|
Warrants exercisable at December 31, 2014
|
|
|
25,686,096
|
|
|
$
|
0.01744
|
|
|
|
2.74
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2014:
Exercise Price
|
|
|
Warrants Outstanding
(Shares)
|
|
|
Warrants Exercisable
(Shares)
|
|
|
Expiration Date
|
$
|
0.00396
|
|
|
|
14,531,953
|
|
|
|
14,531,953
|
|
|
April 17, 2019
|
$
|
0.03500
|
|
|
|
11,154,143
|
|
|
|
11,154,143
|
|
|
September 15, 2016
|
|
|
|
|
|
25,686,096
|
|
|
|
25,686,096
|
|
|
|
Based
on a fair market value of $0.0451 per share on December 31, 2014, the intrinsic value of exercisable in-the-money common stock
warrants was $710,501 as of December 31, 2014.
Stock
Options
In
connection with the initial closing of the Series G Private Placement completed on March 18, 2014, the stockholders of the Company
holding a majority of the votes to be cast on the issue approved the adoption of the Company’s 2014 Equity, Equity-Linked
and Equity Derivative Incentive Plan (the “2014 Plan”), which had been previously adopted by the Board of Directors
of the Company, subject to stockholder approval. The Plan permits the grant of options and restricted stock with respect to up
to 105,633,002 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
July 17, 2014, the Board of Directors of the Company awarded stock options to purchase a total of 15,000,000 shares of common
stock of the Company, consisting of options for 5,000,000 shares to each of the Company’s then three executive officers,
who were also all of the directors of the Company at that time. The stock options were awarded as compensation for those individuals
through December 31, 2014. The stock options vested in three equal installments on July 17, 2014 (at issuance), September 30,
2014 and December 31, 2014, and expire on July 17, 2019. The exercise price of the stock options was established on the grant
date at $0.05 per share, as compared to the closing market price of the Company’s common stock on such date of $0.044 per
share, reflecting an exercise price premium of $0.006 per share or 13.6%. These awards were made under the Company’s 2014
Plan. During the period July 17, 2014 through December 31, 2014, the Company recorded charges to operations of $655,500 with respect
to these stock options, reflecting the grant date fair value of the stock options calculated pursuant to the Black-Scholes option-pricing
model.
On
June 30, 2015, the Board of Directors adopted the 2015 Stock and Stock Option Plan (the “2015 Plan”). The 2015 Plan
provides 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 150,000,000 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 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 250,000,000 shares of the Company’s common stock.
On
June 30, 2015, the Board of Directors of the Company awarded stock options to purchase a total of 55,000,000 shares of common
stock, consisting of options for 15,000,000 shares to each of the Company’s then three executive officers, Dr. Arnold S.
Lippa, Jeff E. Margolis and Robert N. Weingarten, and options for 2,000,000 shares to each of five other individuals who are members
of management, the Company’s Scientific Advisory Board, or independent members of the Board of Directors. The stock options
were awarded as partial compensation for those individuals through December 31, 2015. The stock options vested 50% on June 30,
2015 (at issuance), 25% on September 30, 2015 and 25% on December 31, 2015, and will expire on June 30, 2022. The exercise price
of the stock options was established on the grant date at $0.025 per share, as compared to the closing market price of the Company’s
common stock on such date of $0.0175 per share, reflecting an exercise price premium of $0.0075 per share or 42.9%. These awards
were made under the Company’s 2015 Plan. The aggregate grant date fair value of these stock options calculated pursuant
to the Black-Scholes option-pricing model was $946,000. During the year ended December 31, 2015, the Company recorded a charge
to operations of $945,400 with respect to these stock options.
On
August 18, 2015, the Company entered into an employment agreement with Dr. James S. J. Manuso to be its new President and Chief
Executive Officer. In connection therewith, and in addition to other provisions, the Board of Directors of the Company awarded
Dr. Manuso stock options to purchase a total of 85,081,300 shares of common stock, of which options for 80,000,000 shares were
granted pursuant to the Company’s 2015 Plan and options for 5,081,300 shares were granted pursuant to the Company’s
2014 Plan. The stock options vested 50% on August 18, 2015 (at issuance), and will vest 25% on February 18, 2016 and 25% on August
18, 2016, and will expire on August 18, 2025. The exercise price of the stock options was established on the grant date at $0.0197
per share, which is equal to the simple average of the most recent four full trading weeks, weekly Volume Weighted Average Prices
(“VWAPs”) of the Company’s common stock price immediately preceding the date of grant as reported by OTC IQ,
as compared to the closing market price of the Company’s common stock on August 18, 2015 of $0.0216 per share. The aggregate
grant date fair value of these stock options calculated pursuant to the Black-Scholes option-pricing model was $1,786,707. During
the year ended December 31, 2015, the Company recorded a charge to operations of $1,223,772, with respect to these stock options.
See Note 9 for additional information with respect to other provisions of the employment agreement.
On
August 18, 2015, the Company also entered into employment agreements with Dr. Arnold S. Lippa, its new Chief Scientific Officer,
Robert N. Weingarten, its Vice President and Chief Financial Officer, and Jeff E. Margolis, its Vice President, Treasurer and
Secretary. In connection therewith, and in addition to other provisions, the Board of Directors of the Company awarded to each
of those officers stock options to purchase a total of 10,000,000 shares of common stock pursuant to the Company’s 2015
Plan. The stock options vested 25% on December 31, 2015, and will vest 25% on March 31, 2016, 25% on June 30, 2016 and 25% on
September 30, 2016, and will expire on August 18, 2022. The exercise price of the stock options was established on the grant date
at $0.0197 per share, which is equal to the simple average of the most recent four full trading weeks, weekly VWAPs of the Company’s
common stock price immediately preceding the date of grant as reported by OTC IQ, as compared to the closing market price of the
Company’s common stock on August 18, 2015 of $0.0216 per share. The aggregate grant date fair value of these stock options
calculated pursuant to the Black-Scholes option-pricing model was $609,000. During the year ended December 31, 2015, the Company
recorded a charge to operations of $201,510, with respect to these stock options. See Note 9 for additional information with respect
to other provisions of the employment agreements.
Additionally,
on August 18, 2015, the Board of Directors of the Company awarded stock options for 3,000,000 shares of common stock to each of
seven other individuals who are members of management, the Company’s Scientific Advisory Board, independent members of the
Board of Directors, or outside service providers pursuant to the Company’s 2015 Plan, representing stock options for a total
of 21,000,000 shares of common stock. The stock options vested 25% on December 31, 2015, and will vest 25% on March 31, 2016,
25% on June 30, 2016 and 25% on September 30, 2016, and will expire on August 18, 2020 as to stock options for 9,000,000 shares
of common stock and August 18, 2022 as to stock options for 12,000,000 shares of common stock. The exercise price of the stock
options was established on the grant date at $0.0197 per share, which is equal to the simple average of the most recent four full
trading weeks, weekly VWAPs of the Company’s common stock price immediately preceding the date of grant as reported by OTC
IQ, as compared to the closing market price of the Company’s common stock on August 18, 2015 of $0.0216 per share. The aggregate
grant date fair value of these stock options calculated pursuant to the Black-Scholes option-pricing model was $430,800. During
the year ended December 31, 2015, the Company recorded a charge to operations of $133,907, with respect to these stock options.
On
December 11, 2015, the Company entered into a consulting agreement for investor relations services, which provided for the payment
of a fee for such services through the granting of non-qualified stock options to purchase a total of 2,857,143 shares of common
stock pursuant to the Company’s 2015 Plan. The stock options will vest in equal installments on the last day of each month
during the term of the consulting agreement, ranging from December 11, 2015 through March 31, 2016, and will expire on December
11, 2020. The exercise price of the stock options was established on the grant date at $0.021 per share, which was the closing
market price of the Company’s common stock on the date of grant. The aggregate grant date fair value of these stock options
calculated pursuant to the Black-Scholes option-pricing model was $58,286. During the year ended December 31, 2015, the Company
recorded a charge to operations of $12,857, with respect to these stock options.
See
Note 5 for information with respect to the issuance of common stock options in connection with the settlement of debt obligations.
Information
with respect to common stock awards issued to officers and directors as compensation is provided above under “Common Stock.”
A
summary of stock option activity for the year ended December 31, 2015 is presented below.
|
|
Number of Shares
|
|
|
Weighted Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual
Life (in Years)
|
|
Options outstanding at December 31, 2014
|
|
|
25,716,668
|
|
|
$
|
0.0503
|
|
|
|
|
|
Granted
|
|
|
226,106,913
|
|
|
|
0.0211
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options outstanding at December 31, 2015
|
|
|
251,823,581
|
|
|
$
|
0.0241
|
|
|
|
7.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2014
|
|
|
25,716,668
|
|
|
$
|
0.0503
|
|
|
|
|
|
Options exercisable at December 31, 2015
|
|
|
168,890,074
|
|
|
$
|
0.0262
|
|
|
|
6.57
|
|
Total
deferred compensation expense for the outstanding value of 82,933,507 unvested stock options was approximately $1,280,000 at December
31, 2015, which is being recognized subsequent to December 31, 2015 over a weighted-average period of approximately 8.2 months.
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2015:
Exercise Price
|
|
|
Options
Outstanding
(Shares)
|
|
|
Options
Exercisable
(Shares)
|
|
|
Expiration Date
|
$
|
0.0175
|
|
|
|
29,148,028
|
|
|
|
29,148,028
|
|
|
June 30, 2020
|
$
|
0.0197
|
|
|
|
9,000,000
|
|
|
|
2,250,000
|
|
|
August 18, 2020
|
$
|
0.0197
|
|
|
|
42,000,000
|
|
|
|
10,500,000
|
|
|
August 18, 2022
|
$
|
0.0197
|
|
|
|
85,081,300
|
|
|
|
42,540,650
|
|
|
August 18, 2025
|
$
|
0.0210
|
|
|
|
2,857,143
|
|
|
|
714,286
|
|
|
December 11, 2020
|
$
|
0.0250
|
|
|
|
55,000,000
|
|
|
|
55,000,000
|
|
|
June 30, 2022
|
$
|
0.0400
|
|
|
|
2,400,000
|
|
|
|
2,400,000
|
|
|
March 13, 2019
|
$
|
0.0400
|
|
|
|
1,250,000
|
|
|
|
1,250,000
|
|
|
April 14, 2019
|
$
|
0.0430
|
|
|
|
1,100,000
|
|
|
|
1,100,000
|
|
|
March 14, 2024
|
$
|
0.0476
|
|
|
|
2,520,442
|
|
|
|
2,520,442
|
|
|
April 8, 2020
|
$
|
0.0490
|
|
|
|
800,000
|
|
|
|
800,000
|
|
|
February 28, 2024
|
$
|
0.0500
|
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
July 17, 2019
|
$
|
0.0512
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
January 29, 2020
|
$
|
0.0600
|
|
|
|
3,083,334
|
|
|
|
3,083,334
|
|
|
July 17, 2022
|
$
|
0.0600
|
|
|
|
2,083,334
|
|
|
|
2,083,334
|
|
|
August 10, 2022
|
|
|
|
|
|
251,823,581
|
|
|
|
168,890,074
|
|
|
|
Based
on a fair market value of $0.0186 per share on December 31, 2015, the intrinsic value of exercisable in-the-money common stock
options was $32,063 as of December 31, 2015.
A
summary of stock option activity for the year ended December 31, 2014 is presented below.
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options outstanding at December 31, 2013
|
|
|
5,166,668
|
|
|
$
|
0.0600
|
|
|
|
|
|
Granted
|
|
|
20,550,000
|
|
|
|
0.0480
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options outstanding at December 31, 2014
|
|
|
25,716,668
|
|
|
$
|
0.0500
|
|
|
|
5.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2013
|
|
|
5,166,668
|
|
|
$
|
0.0600
|
|
|
|
|
|
Options exercisable at December 31, 2014
|
|
|
25,716,668
|
|
|
$
|
0.0500
|
|
|
|
5.45
|
|
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2014:
Exercise Price
|
|
|
Options
Outstanding
(Shares)
|
|
|
Options
Exercisable
(Shares)
|
|
|
Expiration Date
|
$
|
0.0400
|
|
|
|
2,400,000
|
|
|
|
2,400,000
|
|
|
March 13, 2019
|
$
|
0.0400
|
|
|
|
1,250,000
|
|
|
|
1,250,000
|
|
|
April 14, 2019
|
$
|
0.0430
|
|
|
|
1,100,000
|
|
|
|
1,100,000
|
|
|
March 14, 2024
|
$
|
0.0490
|
|
|
|
800,000
|
|
|
|
800,000
|
|
|
February 28, 2024
|
$
|
0.0500
|
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
July 17, 2019
|
$
|
0.0600
|
|
|
|
3,083,334
|
|
|
|
3,083,334
|
|
|
July 17, 2022
|
$
|
0.0060
|
|
|
|
2,083,334
|
|
|
|
2,083,334
|
|
|
August 10, 2022
|
|
|
|
|
|
25,716,668
|
|
|
|
25,716,668
|
|
|
|
Based
on a fair market value of $0.0451 per share on December 31, 2014, the intrinsic value of exercisable in-the-money common stock
options was $20,925 as of December 31, 2014.
For
the years ended December 31, 2015 and 2014, stock-based compensation costs included in the consolidated statements of operations
consisted of general and administrative expenses of $2,342,895 and $3,131,500, respectively, and research and development expenses
of $363,551 and $99,000, respectively.
Pier
Contingent Stock Consideration
In
connection with the merger transaction with Pier effective August 10, 2012, the Company issued 58,417,893 newly issued shares
of its common stock with an aggregate fair value of $3,271,402 ($0.056 per share), based upon the closing price of the Company’s
common stock on August 10, 2012. The shares of common stock were issued 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 the Company represented approximately 41% of the 144,041,556 common shares outstanding immediately following the closing of
the transaction.
Pursuant
to the terms of the transaction, the Company agreed to issue additional contingent consideration, consisting of up to 18,314,077
shares of common stock, to Pier’s former security holders and certain other creditors and service providers (the “Pier
Stock Recipients”) that received the Company’s common stock as part of the Pier transaction if certain of the Company’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, the Company issued options to officers and directors at that time to purchase a total of 7,361,668 shares of common
stock exercisable for ten years at $0.06 per share. By October 1, 2012, these options, as well as the options and warrants outstanding
at June 30, 2012, were also out-of-the-money and continued to be out-of-the-money through December 31, 2015.
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 generally remained
out-of-the-money through December 31, 2015. As of December 31, 2015, 2,111,445 contingent shares of common stock remained issuable
under the Pier merger agreement due to expirations and forfeitures of stock options and warrants occurring since August 10, 2012.
The
Company concluded that the issuance of any of the contingent shares to the Pier Stock Recipients was remote, as a result of the
large spread between the exercise prices of these stock options and warrants as compared to the common stock trading range, the
subsequent expiration or forfeiture of most of the options and warrants, the Company’s distressed financial condition and
capital requirements, and that these stock options and warrants have generally remained out-of-the-money (and increasingly so)
through December 31, 2015. Accordingly, the Company considered the fair value of the contingent consideration to be immaterial
and therefore did not ascribe any value to such contingent consideration. If any such shares are ultimately issued to the former
Pier stockholders, the Company will recognize the fair value of such shares as a charge to operations at that time.
Reserved
and Unreserved Shares of Common Stock
At
December 31, 2015, the Company had 1,400,000,000 shares of common stock authorized and 489,846,883 shares of common stock issued
and outstanding. Furthermore, as of December 31, 2015, the Company had reserved an aggregate of 3,679 shares for issuance upon
conversion of the Series B Preferred Stock; 156,743,609 shares for issuance upon exercise of warrants; 251,823,581 shares for
issuance upon exercise of outstanding stock options; 20,551,702 shares to cover equity grants available for future issuance pursuant
to the 2014 Plan; 23,507,142 shares to cover equity grants available for future issuance pursuant to the 2015 Plan; 78,353,485
shares for issuance upon conversion of the Series G 1.5% Convertible Preferred Stock; 18,311,079 shares for issuance upon conversion
of the 10% Convertible Notes; and 2,111,445 shares issuable as contingent shares pursuant to the Pier merger. Accordingly, as
of December 31, 2015, the Company had an aggregate of 551,405,722 shares of common stock reserved for issuance and 358,747,395
shares of common stock unreserved and available for future issuance. The Company expects to satisfy its future common stock commitments
through the issuance of authorized but unissued shares of common stock.
7.
Income Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
as of December 31, 2015 and 2014 are summarized below.
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Capitalized research and development costs
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Research and development credits
|
|
|
3,239,000
|
|
|
|
3,239,000
|
|
Stock-based compensation
|
|
|
1,496,000
|
|
|
|
468,000
|
|
Stock options issued in connection with the payment of debt
|
|
|
276,000
|
|
|
|
-
|
|
Net operating loss carryforwards
|
|
|
36,663,000
|
|
|
|
35,977,000
|
|
Accrued compensation
|
|
|
290,000
|
|
|
|
59,000
|
|
Accrued interest due to related party
|
|
|
70,000
|
|
|
|
109,000
|
|
Other, net
|
|
|
13,000
|
|
|
|
32,000
|
|
Total deferred tax assets
|
|
|
42,197,000
|
|
|
|
40,034,000
|
|
Valuation allowance
|
|
|
(42,197,000
|
)
|
|
|
(40,034,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
In
assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon
the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December
31, 2015 and 2014, management was unable to determine that it was more likely than not that the Company’s deferred tax assets
will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates.
No
federal tax provision has been provided for the years ended December 31, 2015 and 2014 due to the losses incurred during such
periods. The Company’s effective tax rate is different from the federal statutory rate of 35% due primarily to net losses
that receive no tax benefit as a result of a valuation allowance recorded for such losses.
Reconciled
below is the difference between the income tax rate computed by applying the U.S. federal statutory rate and the effective tax
rate for the years ended December 31, 2015 and 2014.
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
U. S. federal statutory tax rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
Stock-based compensation
|
|
|
-
|
%
|
|
|
27.5
|
%
|
Change in valuation allowance
|
|
|
31.1
|
%
|
|
|
7.6
|
%
|
Amortization of warrant discounts
|
|
|
4.0
|
%
|
|
|
-
|
%
|
Fair value of stock options issued in payment of debt
|
|
|
-
|
%
|
|
|
0.5
|
%
|
Other
|
|
|
(0.1
|
)%
|
|
|
(0.6
|
)%
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
As
of December 31, 2015, the Company had federal and state tax net operating loss carryforwards of approximately $88,965,000 and
$94,668,000, respectively. The state tax net operating loss carryforward consists of $92,084,000 for California purposes and $2,584,000
for New Jersey purposes. The difference between the federal and state tax loss carryforwards was primarily attributable to the
capitalization of research and development expenses for California franchise tax purposes. The federal and state net operating
loss carryforwards will expire at various dates from 2016 through 2035. The Company also had federal and California research and
development tax credit carryforwards that totaled approximately $2,093,000 and $1,146,000, respectively, at December 31, 2015.
The federal research and development tax credit carryforwards will expire at various dates from 2016 through 2032. The California
research and development tax credit carryforward does not expire and will carryforward indefinitely until utilized.
While
the Company has not performed a formal analysis of the availability of its net operating loss carryforwards under Internal Revenue
Code Sections 382 and 383, management expects that the Company’s ability to use its net operating loss carryforwards will
be limited in future periods.
8.
Related Party Transactions
Dr.
Arnold S. Lippa and Jeff E. Margolis, officers and directors of the Company since March 22, 2013, have indirect ownership interests
and managing memberships in Aurora Capital LLC through interests held in its members, and Jeff. E. Margolis is also an officer
of Aurora Capital LLC. Aurora Capital LLC 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 Capital LLC in conjunction with
the removal of the Company’s prior Board of Directors on March 22, 2013, which amount has been included in accounts payable
and accrued expenses at December 31, 2015 and 2014.
On
June 30, 2015, the Board of Directors of the Company awarded cash bonuses totaling $215,000, including an aggregate of $195,000
to certain of the Company’s executive officers and an aggregate of $20,000 to the independent members of the Company’s
Board of Directors. The cash bonuses awarded to executive officers were as follows: Dr. Arnold S. Lippa - $75,000; Jeff E. Margolis
- $60,000; and Robert N. Weingarten - $60,000. The cash bonuses awarded to the two independent members of the Company’s
Board of Directors were as follows: James E. Sapirstein - $10,000; and Kathryn MacFarlane - $10,000. The cash bonuses totaling
$215,000 were awarded as partial compensation for services rendered by such persons from January 1, 2015 through June 30, 2015,
and are included in accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31,
2015, and in general and administrative expenses in the Company’s consolidated statement of operations for the year ended
December 31, 2015.
On
June 30, 2015, the Board of Directors also established cash compensation arrangements for certain of the Company’s executive
officers at the following monthly rates: Dr. Arnold S. Lippa - $12,500; Jeff E. Margolis - $10,000; and Robert N. Weingarten -
$10,000. In addition, the Company established quarterly cash board fees for the two independent members of the Company’s
Board of Directors as follows: James E. Sapirstein - $5,000; and Kathryn MacFarlane - $5,000. This compensation was payable in
arrears and commenced on July 1, 2015 and was scheduled to continue through December 31, 2015. On August 18, 2015, the cash compensation
arrangements for these executive officers were further revised as described below.
Both
the cash bonuses and the cash monthly compensation will be accrued but not paid until such time as the Board of Directors of the
Company determines that sufficient capital has been raised by the Company or is otherwise available to fund the Company’s
operations on an ongoing basis.
Effective
August 18, 2015, Company entered into new 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. See Note 9 for additional information with respect to the employment agreements entered into on August
18, 2015.
During
the years ended December 31, 2015 and 2014, the Company charged $23,595 and $33,280, respectively, to operations for consulting
services rendered by an entity controlled by family members of Dr. Arnold S. Lippa.
See
Notes 3 and 6 for a description of other transactions between the Company and Aurora Capital LLC.
See
Notes 3 and 6 for a description of transactions with Samyang, a significant stockholder of and lender to the Company.
9.
Commitments and Contingencies
Pending
or Threatened Legal Actions and Claims
The
Company is periodically the subject of various pending and threatened legal actions and claims. In the opinion of management of
the Company, adequate provision has been made in the Company’s consolidated financial statements at December 31, 2015 and
2014 with respect to such matters, including, specifically, the matters noted below. The Company intends to vigorously defend
itself in the event that either of the matters described below results in the filing of a lawsuit.
By
letter dated November 11, 2014, a former director of the Company, who joined the Company’s Board of Directors on August
10, 2012 in conjunction with the Pier transaction and who resigned from the Company’s Board of Directors on September 28,
2012, asserted a claim for unpaid consulting compensation of $24,000.
By
letter dated February 5, 2016, the Company received a demand from a law firm representing a professional services vendor of the
Company alleging that approximately $146,000 is due and owing for unpaid services rendered.
Significant
agreements and contracts are summarized as follows:
Employment
and Consulting Agreements
Richard
Purcell was appointed as the Company’s Senior Vice President of Research and Development effective October 15, 2014. Mr.
Purcell provides his services to the Company on a month-to-month basis through his consulting firm, DNA Healthlink, Inc., through
which the Company has contracted for his services, for a monthly cash fee of $12,500. Additional information with respect to shares
of common stock issued to Mr. Purcell is provided at Note 6. Cash compensation expense pursuant to this agreement totaled $150,000
and $25,000 for the years ended December 31, 2015 and 2014, respectively, and is included research and development expenses in
the Company’s consolidated statements of operations for such years.
On
August 18, 2015, the Company entered into an employment agreement with Dr. James S. J. Manuso to be its new President and Chief
Executive Officer. Pursuant to the agreement, which is for an initial term of three years, Dr. Manuso is to receive an initial
annual base salary of $375,000, subject to certain conditions, which will increase to $450,000 annually upon the first anniversary
of his contract, again subject to certain conditions being met. Dr. Manuso will also be eligible to receive bonuses ranging from
$100,000 to $300,000, once certain conditions have been met or at the discretion of the Board of Directors. Additionally, Dr.
Manuso was granted stock options to acquire 85,081,300 shares of common stock of the Company and is eligible to receive additional
awards under the Company’s Plans in the discretion of the Board of Directors. Dr. Manuso had also agreed to purchase newly
issued securities of the Company in an amount of $250,000, which was accomplished by Dr. Manuso’s participation in the first
closing of the unit offering of common stock and warrants on August 28, 2015, as described at Note 6. Dr. Manuso will also receive,
beginning on the first anniversary of the agreement, additional compensation to cover automobile lease expenses (up to a maximum
of $16,000 annually, on a tax-equalized basis) if certain conditions are met, and, until such time as the Company establishes
a group health plan for its employees, $1,200 per month, on a tax-equalized basis, to cover the cost of health coverage and up
to $1,000 per month, on a tax-equalized basis, for a term life insurance policy and disability insurance policy. He will also
be reimbursed for business expenses. Additional information with respect to the stock options granted to Dr. Manuso is provided
at Note 6. The payment obligation associated with the first year base salary is to accrue, but no payments are 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, is received by
the Company, at which time, scheduled payments are to commence. Cash compensation accrued pursuant to this agreement totaled $146,060
for the period August 18, 2015 through December 31, 2015 and is included in accrued compensation and related expenses in the Company’s
consolidated balance sheet at December 31, 2015, and in general and administrative expenses in the Company’s consolidated
statement of operations for the year ended December 31, 2015. Dr. Manuso was also appointed to the Company’s Board of Directors
and elected as Vice Chairman of the Board of Directors. Dr. Manuso will not receive any additional compensation for serving as
Vice Chairman and on the Board of Directors.
On
August 18, 2015, concurrently with the hiring of Dr. James S. J. Manuso as its new President and Chief Executive Officer, the
Company accepted the resignation of Dr. Arnold S. Lippa, as President and Chief Executive Officer. Dr. Lippa will continue to
serve as the Company’s Executive Chairman and 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 of three years, Dr. Lippa is to receive an initial annual base salary
of $300,000, subject to certain conditions, which will increase to $375,000 annually upon the first anniversary of his contract,
again subject to certain conditions being met. Dr. Lippa will also be eligible to receive bonuses ranging from $75,000 to $150,000,
once certain conditions have been met or at the discretion of the Board of Directors. Additionally, Dr. Lippa was granted stock
options to acquire 10,000,000 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 will also receive, beginning on the first anniversary of the agreement,
additional compensation to cover automobile lease expenses (up to a maximum of $12,000 annually, on a tax-equalized basis) if
certain conditions are met, and, until such time as the Company establishes a group health plan for its employees, $1,200 per
month, on a tax-equalized basis, to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, for
a term life insurance policy and disability insurance policy. He will also be reimbursed for business expenses. Additional information
with respect to the stock options granted to Dr. Lippa is provided at Note 6. The payment obligation associated with the first
year base salary is to accrue, but no payments are 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, is received by the Company, at which time, scheduled payments are to commence.
Cash compensation accrued pursuant to this agreement totaled $118,439 for the period August 18, 2015 through December 31, 2015
and is included in accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31,
2015, and in research and development expenses in the Company’s consolidated statement of operations for the year ended
December 31, 2015. Cash compensation accrued to Dr. Lippa under a prior superseded arrangement, while still serving as the Company’s
President and Chief Executive Officer, totaled $19,758 for the period July 1, 2015 through August 17, 2015 and is included in
accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31, 2015, and in general
and administrative expenses in the Company’s consolidated statement of operations for the year ended December 31, 2015.
Dr. Lippa will not receive any additional compensation for serving as Executive Chairman and on the Board of Directors.
On
August 18, 2015, the Company also entered into employment agreements with Jeff E. Margolis, in his continuing role as Vice President,
Secretary and Treasurer, and Robert N. Weingarten, in his continuing role as Vice President and Chief Financial Officer. Pursuant
to the agreements, which are for initial terms of one year, Mr. Margolis and Mr. Weingarten are each to receive an initial annual
base salary of $195,000, subject to certain conditions, and each will also be eligible to receive bonuses ranging from $65,000
to $125,000, once certain conditions have been met or at the discretion of the Board of Directors. Additionally, Mr. Margolis
and Mr. Weingarten each were granted stock options to acquire 10,000,000 shares of common stock of the Company and both are eligible
to receive additional awards under the Company’s Plans at the discretion of the Board of Directors. Mr. Margolis and Mr.
Weingarten will also each receive, beginning on the first anniversary of the agreement, additional compensation to cover automobile
lease expenses (up to a maximum of $9,000 annually, on a tax-equalized basis) if certain conditions are met, and, until such time
as the Company establishes a group health plan for its employees, $1,200 per month, on a tax-equalized basis, to cover the cost
of health coverage and up to $1,000 per month, on a tax-equalized basis, for a term life insurance policy and disability insurance
policy. Both will also be reimbursed for business expenses. Additional information with respect to the stock options granted to
Mr. Margolis and Mr. Weingarten is provided at Note 6. The payment obligations associated with both of their first year base salaries
is to accrue, but no payments are 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, is received by the Company, at which time, scheduled payments are to commence. Cash compensation
accrued pursuant to these agreements totaled $159,540 ($79,770 each) for the period August 18, 2015 through December 31, 2015
and is included in accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31,
2015, and in general and administrative expenses in the Company’s consolidated statement of operations for the year ended
December 31, 2015. Cash compensation accrued to Mr. Margolis and Mr. Weingarten under prior superseded arrangements totaled $31,612
($15,806 each) for the period July 1, 2015 through August 17, 2015 and is also included in accrued compensation and related expenses
in the Company’s consolidated balance sheet at December 31, 2015, and in general and administrative expenses in the Company’s
consolidated statement of operations for the year ended December 31, 2015. Mr. Margolis and Mr. Weingarten also continue to serve
as Directors of the Company, but will not receive any additional compensation for serving on the Board of Directors.
University
of California, Irvine License Agreements
The
Company entered into a series of license agreements in 1993 and 1998 with the University of California, Irvine (“UCI”)
that granted the Company proprietary rights to certain chemical compounds that acted as ampakines and their therapeutic uses.
These agreements granted the Company, among other provisions, exclusive rights: (i) to practice certain patents and patent applications,
as defined in the license agreement, that were then held by UCI; (ii) to identify, develop, make, have made, import, export, lease,
sell, have sold or offer for sale any related licensed products; and (iii) to grant sub-licenses of the rights granted in the
license agreements, subject to the provisions of the license agreements. The Company was required, among other terms and conditions,
to pay UCI a license fee, royalties, patent costs and certain additional payments.
Under
such license agreements, the Company was required to make minimum annual royalty payments of approximately $70,000. The Company
was also required to spend a minimum of $250,000 per year to advance the ampakine compounds until the Company began to market
an ampakine compound. The commercialization provisions in the agreements with UCI required the Company to file for regulatory
approval of an ampakine compound before October 2012. In March 2011, UCI agreed to extend the required date for filing regulatory
approval of an ampakine compound to October 2015. During December 2012, the Company informed UCI that it would be unable to make
the annual payment due to a lack of funds. The Company believes that this notice, along with its subsequent failure to make its
minimum annual payment obligation, constituted a default and termination of the license agreements.
On
April 15, 2013, the Company received a letter from UCI indicating that the license agreements between UCI and the Company had
been terminated due to the Company’s failure to make certain payments required to maintain the agreements. Since the patents
covered in these license agreements had begun to expire and the therapeutic uses described in these patents were no longer germane
to the Company’s new focus on respiratory disorders, the loss of these license agreements is not expected to have a material
impact on the Company’s current drug development programs. In the opinion of management, the Company has made adequate provision
for any liability relating to this matter in its consolidated financial statements at December 31, 2015 and 2014.
University
of Alberta License Agreement
On
May 8, 2007, the Company entered into a license agreement, as amended, with the University of Alberta granting the Company exclusive
rights to practice patents held by the University of Alberta claiming the use of ampakines for the treatment of various respiratory
disorders. The Company agreed to pay the University of Alberta a licensing fee and a patent issuance fee, which were paid, and
prospective payments consisting of a royalty on net sales, sublicense fee payments, maintenance payments and milestone payments.
The prospective maintenance payments commence on the enrollment of the first patient into the first Phase 2B clinical trial and
increase upon the successful completion of the Phase 2B clinical trial. As the Company does not at this time anticipate scheduling
a Phase 2B clinical trial in the near term, no maintenance payments to the University of Alberta are currently due and payable,
nor are any maintenance payments expected to be due in the near future in connection with the license agreement.
Transactions
with Biovail Laboratories International SRL
In
March 2010, the Company entered into an asset purchase agreement with Biovail Laboratories International SRL (“Biovail”).
Pursuant to the asset purchase agreement, Biovail acquired the Company’s interests in CX717, CX1763, CX1942 and the injectable
dosage form of CX1739, as well as certain of its other ampakine compounds and related intellectual property for use in the field
of respiratory depression or vaso-occlusive crises associated with sickle cell disease. The agreement provided the Company with
the right to receive milestone payments in an aggregate amount of up to $15,000,000 plus the reimbursement of certain related
expenses, conditioned upon the occurrence of particular events relating to the clinical development of certain assets that Biovail
acquired. None of these events occurred.
As
part of the transaction, Biovail licensed back to the Company certain exclusive and irrevocable rights to some acquired ampakine
compounds, other than CX717, an injectable dosage form of CX1739, CX1763 and CX1942, for use outside of the field of respiratory
depression or vaso-occlusive crises associated with sickle cell disease. Accordingly, following the transaction with Biovail,
the Company retained its rights to develop and commercialize the non-acquired ampakine compounds as a potential treatment for
neurological diseases and psychiatric disorders. Additionally, the Company retained its rights to develop and commercialize the
ampakine compounds as a potential treatment for sleep apnea disorders, including an oral dosage form of ampakine CX1739.
In
September 2010, Biovail’s parent corporation, Biovail Corporation, combined with Valeant Pharmaceuticals International in
a merger transaction and the combined company was renamed “Valeant Pharmaceuticals International, Inc.” (“Valeant”).
Following the merger, Valeant and Biovail conducted a strategic and financial review of their product pipeline and, as a result,
in November 2010, Biovail announced its intent to exit from the respiratory depression project acquired from the Company in March
2010.
Following
that announcement, the Company entered into discussions with Biovail regarding the future of the respiratory depression project.
In March 2011, the Company entered into a new agreement with Biovail to reacquire the ampakine compounds, patents and rights that
Biovail 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. In addition,
the 2014 License Agreement provides for various royalty payments, including a royalty on net sales of 4%, payment on sub-licensee
revenues of 12.5%, and a minimum annual royalty beginning in 2015 of $100,000, which is due and payable on December 31 of each
year beginning on December 31, 2015. The 2015 minimum annual royalty of $100,000 was paid as scheduled in December 2015. In the
year after the first application for market approval is submitted to the FDA and until approval is obtained, the minimum annual
royalty will increase to $150,000. In the year after the first market approval is obtained from the FDA and until the first sale
of a product, the minimum annual royalty will increase to $200,000. In the year after the first commercial sale of a product,
the minimum annual royalty will increase to $250,000. The Company recorded a charge to operations of $100,000 with respect to
its 2015 minimum annual royalty obligation, which is included in research and development expenses in the Company’s consolidated
statement of operations for the year ended December 31, 2015.
The
2014 License Agreement also provides for certain one-time milestone payments. A payment of $75,000 is due within five days after
any one of the following: (a) dosing of the first patient with a product in a Phase 2 human clinical study anywhere in the world
that is not sponsored by the University of Illinois, (b) dosing of the first patient in a Phase 2 human clinical study anywhere
in the world with a low dose of dronabinol, or (c) dosing of the first patient in a Phase 1 human clinical study anywhere in the
world with a proprietary reformulation of dronabinol. A payment of $350,000 is due within five days after dosing of the first
patient with a product in a Phase 3 human clinical trial anywhere in the world. A payment of $500,000 is due within five days
after the first new drug application filing with the FDA or a foreign equivalent for a product. A payment of $1,000,000 is due
within 12 months after the first commercial sale of a product.
Research
Contract with the University of Alberta
On
January 12, 2016, the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of
ampakines at a variety of dosage and formulation levels in the potential treatment of Pompé 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
(currently approximately US$110,000), consisting of approximately CAD$85,000 (currently approximately US$64,000) of personnel
funding in cash in four installments during 2016, to provide approximately CAD$21,000 (currently approximately US$16,000) in equipment,
to pay patent costs of CAD$20,000 (currently approximately US$15,000), and to underwrite additional budgeted costs of CAD$20,000
(currently approximately US$15,000). All but US$64,000 of the total consideration has already been incurred and paid for directly
or in-kind. The conversion to US dollars above utilizes an exchange rate of US$0.7548 for every CAD$1.00.
The
University of Alberta will receive matching funds through a grant from the Canadian Institutes of Health Research in support of
the research. The Company will retain the rights to research results and any patentable intellectual property generated by the
research. Dr. John Greer, Ph.D., Chairman of the Company’s Scientific Advisory Board and faculty member of the Department
of Physiology, Perinatal Research Centre and Women & Children’s Health Research Institute, and Alberta Innovates - Health
Sciences Senior Scientist with the Neuroscience and Mental Health Institute at the University of Alberta, will collaborate on
this research. The studies are expected to be completed in 2016.
National
Institute of Drug Abuse Agreement
On
January 19, 2016, the Company announced that that it has reached an agreement with the Medications Development Program of the
National Institute of Drug Abuse (“NIDA”) to conduct research on the Company’s ampakine compounds CX717 and
CX1739. The agreement was entered into as of October 19, 2015, and on January 14, 2016, the Company and NIDA approved the proposed
protocols, allowing research activities to commence. NIDA will evaluate the compounds using pharmacologic, pharmacokinetic and
toxicologic protocols to determine the potential effectiveness of the ampakines for the treatment of drug abuse and addiction.
Initial studies will focus on cocaine and methamphetamine addiction and abuse, and will be contracted to outside testing facilities
and/or government laboratories, with all costs to be paid by NIDA. The Company will provide NIDA with supplies of CX717 and CX1739
and will work with the NIDA staff to refine the protocols and dosing parameters. The Company will retain all intellectual property,
as well as proprietary and commercialization rights to these compounds.
Duke
University Clinical Trial Agreement
On
January 27, 2015, the Company entered into a Clinical Study and Research Agreement (the “Agreement”) with Duke University
to develop and conduct a protocol for a program of clinical study and research at a total cost of $50,579, which was completed
in March 2015. On October 30, 2015, the Agreement was amended to provide for additional services with respect to the Company’s
Phase 2A clinical trial of CX1739 at a cost of $558,268, which services are expected to be provided in 2016 (see Note 1).
Sharp
Clinical Services, Inc. Agreement
On
August 31, 2015, the Company entered into an agreement with Sharp Clinical Services, Inc. to provide packaging, labeling, distribution
and analytical services for the Company with respect to CX1739 at a budgeted cost of $109,833, of which $45,041 of such services
is expected to be provided in 2016.
The
following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of
December 31, aggregating $3,641,259.
|
|
|
|
|
Payments Due By Year
|
|
|
|
Total
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development contracts
|
|
$
|
157,041
|
|
|
$
|
157,041
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Clinical trial agreements
|
|
|
558,268
|
|
|
|
558,268
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
License agreements
|
|
|
500,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Employment and consulting agreements*
|
|
|
2,425,950
|
|
|
|
1,106,100
|
|
|
|
754,200
|
|
|
|
565,650
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,641,259
|
|
|
$
|
1,921,409
|
|
|
$
|
854,200
|
|
|
$
|
665,650
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
*The
payment of such amounts is subject to the Company reaching certain financing milestones, as described above.
10.
Subsequent Events
Common
Stock and Warrant Financing
On
January 6, 2016, the Company entered into a Common Stock and Warrant Purchase Agreement (the “Purchase Agreement”)
with an investor, pursuant to which, in a closing on January 8, 2016, the Company sold units for aggregate cash consideration
of $100,000, with each unit consisting of (i) one share of common stock, representing an aggregate of 4,508,567 shares of common
stock, and (ii) one warrant to purchase two additional shares of common stock, representing an aggregate of 9,017,133 warrants.
This financing represented the initial closing of a private placement of up to $2,500,000 (the “Private Placement”).
The
price per unit in the initial closing of the Private Placement was $0.02218. The warrants are exercisable at $0.0244, for each
share of common stock to be acquired, and expire on February 28, 2021. The warrants have a cashless exercise provision and contain
certain “blocker” provisions limiting the percentage of shares of the Company’s common stock that the purchaser
can beneficially own upon conversion to not more than 4.99% of the issued and outstanding shares immediately after giving effect
to the warrant exercise. The purchaser was an accredited, non-affiliated investor.
In
addition, from January 29, 2016 through March 3, 2016, the Company received subscriptions totaling $94,635 for the purchase of
units, representing an aggregate of 4,266,683 shares of common stock and warrants to purchase an additional 8,533,366 shares of
common stock. The purchasers were accredited, non-affiliated investors.
In
the case of an acquisition, as defined in the Purchase Agreement, in which the Company is not the surviving entity, the holder
of the warrant would receive from any surviving entity or successor to the Company, in exchange for the warrant, a new warrant
from the surviving entity or successor to the Company, substantially in the form of the existing warrant and with an exercise
price adjusted to reflect the nearest equivalent exercise price of common stock (or other applicable equity interest) of the surviving
entity that would reflect the economic value of the warrant, but in the surviving entity.
No
registration rights were granted to the purchaser in the Private Placement with respect to (i) the shares of common stock issued
as part of the units, (ii) the warrants, or (ii) the shares of common stock issuable upon exercise of the warrants.
No
placement agent fees, brokerage commissions, finder’s fees or similar payments were made in the form of cash and warrants
to qualified referral sources in connection with the sale of the shares of common stock and warrants.
Short-Term
Loans from Related Parties
On
January 29, 2016, the Company issued a demand promissory note in the principal amount of $52,600 to the Company’s Executive
Chairman and Chief Scientific Officer, Dr. Arnold S. Lippa, Ph.D., who is a director and significant stockholder of the Company,
in exchange for $52,600 that was loaned by Dr. Lippa to the Company on January 28, 2016. The proceeds of the loan were used to
pay a vendor of the Company.
On
February 2, 2016, the Company’s President and Chief Executive Officer, Dr. James Manuso, agreed to loan the Company an additional
$52,600 at a future date for working capital and other general corporate purposes, in exchange for a demand promissory note in
the same amount. Dr. Manuso made his loan to the Company on February 4, 2016.
Each
note shall be payable on demand and bear interest at a rate equal to 10% per annum, with any accrued but unpaid interest added
to principal at the end of each year that the balance is outstanding. Each note grants a security interest in the assets of the
Company, subject to certain conditions as set forth therein. The Company intends to repay the loans within six months from the
proceeds of a separate financing transaction.
Under
the notes, the terms of which have been reviewed and approved by the Company’s independent directors, each lender is to
receive three-year warrants covering an aggregate number of shares of the Company’s common stock equal to the principal
amount of the loan funded by the applicable lender divided by the closing price of the Company’s common stock on the date
the loan was made. As such, in connection with Dr. Lippa’s note, Dr. Lippa received a warrant to purchase 3,350,319 shares
of the Company’s common stock at an exercise price of $0.0157 per share. Based on the date of Dr. Manuso’s loan of
February 4, 2016, Dr. Manuso received a warrant to purchase 2,630,000 shares of the Company’s common stock at an exercise
price of $0.02 per share.
The
Company performed an evaluation of subsequent events through the date of filing of these financial statements with the SEC. Other
than the above, there were no material subsequent events which affected the amounts or disclosures in the consolidated financial
statements.