UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2014
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission
file number: 1-16467
CORTEX
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
Delaware |
|
33-0303583 |
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
Identification
Number) |
126
Valley Road, Suite C
Glen
Rock, New Jersey 07452
(Address
of principal executive offices)
(201)
444-4947
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
[ ] No [X]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes
[ ] No [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Large accelerated filer [ ] |
Accelerated
filer [ ] |
Non-accelerated filer [ ] |
Smaller reporting
company [X] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
[ ] No [X]
As
of March 31, 2014, the Company had 201,041,556 shares of common stock, $0.001 par value, issued and outstanding.
Documents
incorporated by reference: None
CORTEX
PHARMACEUTICALS, INC.
AND SUBSIDIARY
TABLE
OF CONTENTS
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, and Section 21E of the Securities Exchange Act of 1934. For example, statements regarding the Company’s financial
position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future
product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. These statements
are generally accompanied by words such as “intend,” anticipate,” “believe,” “estimate,”
“potential(ly),” “continue,” “forecast,” “predict,” “plan,” “may,”
“will,” “could,” “would,” “should,” “expect” or the negative of such
terms or other comparable terminology. The Company believes that the assumptions and expectations reflected in such forward-looking
statements are reasonable, based on information available to it on the date hereof, but the Company cannot provide assurances
that these assumptions and expectations will prove to have been correct or that the Company will take any action that the Company
may presently be planning. However, these forward-looking statements are inherently subject to known and unknown risks and uncertainties.
Actual results or experience may differ materially from those expected, anticipated or implied in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, regulatory policies, available cash,
research and development results, competition from other similar businesses, and market and general economic factors. This discussion
should be read in conjunction with the condensed consolidated financial statements (unaudited) and notes thereto included in Item
1 of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2013, including the section entitled “Item 1A. Risk Factors.” The Company does not intend to update or revise
any forward-looking statements to reflect new information, future events or otherwise.
PART
I - FINANCIAL INFORMATION
ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CORTEX
PHARMACEUTICALS, INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
| |
March
31, 2014 | | |
December
31, 2013 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and
cash equivalents | |
$ | 311,932 | | |
$ | 14,352 | |
Deferred financing
costs | |
| — | | |
| 35,120 | |
Prepaid insurance,
including current portion of long-term prepaid insurance of $14,945 at March 31, 2014 | |
| 53,278 | | |
| 2,383 | |
| |
| | | |
| | |
Total current assets | |
| 365,210 | | |
| 51,855 | |
Equipment, net of accumulated depreciation
of $17 | |
| 1,908 | | |
| — | |
Long-term prepaid insurance, net of current
portion of $14,945 | |
| 74,103 | | |
| — | |
| |
| | | |
| | |
Total assets | |
$ | 441,221 | | |
$ | 51,855 | |
| |
| | | |
| | |
LIABILITIES AND
STOCKHOLDERS’ DEFICIENCY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and
accrued expenses | |
$ | 1,891,229 | | |
$ | 1,829,616 | |
Accrued compensation
and related expenses | |
| 144,000 | | |
| 1,480,264 | |
Notes payable to Chairman,
including accrued interest of $48 | |
| — | | |
| 75,048 | |
Note payable to related
party, including accrued interest of $85,972 and $73,980 at March 31, 2014 and December 31, 2013, respectively | |
| 526,971 | | |
| 521,255 | |
Project advance, including
accrued interest of $87,801 and $86,796 at March 31, 2014 and December 31, 2013, respectively | |
| 335,101 | | |
| 334,096 | |
| |
| | | |
| | |
Total current liabilities | |
| 2,897,301 | | |
| 4,240,279 | |
| |
| | | |
| | |
Commitments and contingencies (Note 9) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ deficiency: | |
| | | |
| | |
Series B convertible
preferred stock, $0.001 par value; $0.6667 per share liquidation preference; aggregate liquidation preference $25,001; shares
authorized: 37,500; shares issued and outstanding: 37,500; common shares issuable upon conversion at 0.09812 per share: 3,679 | |
| 21,703 | | |
| 21,703 | |
Series G 1.5% cumulative
mandatorily convertible preferred stock, $0.001 par value, $1,000 per share stated value and liquidation preference; aggregate
liquidation preference (including dividend) $753,628; shares authorized: 1,700; shares issued and outstanding: 753.22; common
shares issuable upon conversion at 303,030.3 common shares per Series G share: 228,372,117 shares, including 123,635 shares
issuable for dividend of $408 at March 31, 2014 | |
| 753,628 | | |
| — | |
Common stock, $0.001
par value; shares authorized: 1,400,000,000; shares issued and outstanding: 201,041,556 and 144,041,556 at March 31, 2014
and December 31, 2013, respectively | |
| 201,041 | | |
| 144,041 | |
Additional paid-in
capital | |
| 128,701,424 | | |
| 125,188,620 | |
Accumulated
deficit | |
| (132,133,876 | ) | |
| (129,542,788 | ) |
| |
| | | |
| | |
Total stockholders’
deficiency | |
| (2,456,080 | ) | |
| (4,188,424 | ) |
| |
| | | |
| | |
Total liabilities and stockholders’
deficiency | |
$ | 441,221 | | |
$ | 51,855 | |
See
accompanying notes to condensed consolidated financial statements (unaudited).
CORTEX
PHARMACEUTICALS, INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
Three
Months Ended
| |
| |
March
31, | |
| |
2014 | | |
2013 | |
Revenues | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
General and administrative, including $1,960,000 and $-0- to
related parties for the three months ended March 31, 2014 and 2013, respectively | |
| 2,348,107 | | |
| 759,289 | |
Research and development | |
| 64,089 | | |
| 83,928 | |
| |
| | | |
| | |
Total operating expenses | |
| 2,412,196 | | |
| 843,217 | |
| |
| | | |
| | |
Loss from operations | |
| (2,412,196 | ) | |
| (843,217 | ) |
| |
| | | |
| | |
Gain on settlements with former management | |
| 1,038,270 | | |
| — | |
Interest expense, including $12,046 and $11,993 to related parties for the three months ended
March 31, 2014 and 2013, respectively | |
| (13,061 | ) | |
| (15,037 | ) |
Foreign currency transaction gain | |
| 6,277 | | |
| 20,868 | |
| |
| | | |
| | |
Net loss | |
| (1,380,710 | ) | |
| (837,386 | ) |
| |
| | | |
| | |
Adjustments related to Series G 1.5% Convertible Preferred Stock: | |
| | | |
| | |
Amortization of deemed dividend on Series G 1.5% Convertible Preferred Stock | |
| (1,209,970 | ) | |
| — | |
Dividend on Series G 1.5% Convertible Preferred Stock | |
| (408 | ) | |
| — | |
| |
| | | |
| | |
Net loss attributable to common stockholders | |
$ | (2,591,088 | ) | |
$ | (837,386 | ) |
| |
| | | |
| | |
Net loss per common share - basic and diluted | |
$ | (0.02 | ) | |
$ | (0.01 | ) |
| |
| | | |
| | |
Weighted average common shares outstanding - basic and diluted | |
| 152,274,889 | | |
| 144,041,556 | |
See
accompanying notes to condensed consolidated financial statements (unaudited).
CORTEX
PHARMACEUTICALS, INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
(Unaudited)
Three
Months Ended March 31, 2014
| |
Series
B | | |
Series
G 1.5% | | |
| | |
| | |
| | |
| | |
| |
| |
Convertible | | |
Convertible | | |
| | |
| | |
| | |
| | |
| |
| |
Preferred
Stock | | |
Preferred
Stock | | |
Common
Stock | | |
Additional | | |
| | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
Par | | |
Paid-in | | |
Accumulated | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Value | | |
Capital | | |
Deficit | | |
Deficiency | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance, December 31, 2013 | |
| 37,500 | | |
$ | 21,703 | | |
| — | | |
$ | — | | |
| 144,041,556 | | |
$ | 144,041 | | |
$ | 125,188,620 | | |
$ | (129,542,788 | ) | |
$ | (4,188,424 | ) |
Sale of Series G 1.5% Convertible Preferred Stock | |
| — | | |
| — | | |
| 753.22 | | |
| 753,220 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 753,220 | |
Costs incurred in connection with sale of Series G 1.5% Convertible Preferred Stock | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (100,076 | ) | |
| — | | |
| (100,076 | ) |
Stock-based compensation expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| 57,000,000 | | |
| 57,000 | | |
| 2,223,000 | | |
| — | | |
| 2,280,000 | |
Fair value of common stock options issued in connection with settlements with former management | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 179,910 | | |
| — | | |
| 179,910 | |
Amortization of deemed dividend on Series G 1.5% Convertible Preferred Stock | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,209,970 | | |
| (1,209,970 | ) | |
| — | |
Dividend on Series G 1.5% Convertible Preferred Stock | |
| — | | |
| — | | |
| — | | |
| 408 | | |
| — | | |
| — | | |
| — | | |
| (408 | ) | |
| — | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,380,710 | ) | |
| (1,380,710 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, March 31, 2014 | |
| 37,500 | | |
$ | 21,703 | | |
| 753.22 | | |
$ | 753,628 | | |
| 201,041,556 | | |
$ | 201,041 | | |
$ | 128,701,424 | | |
$ | (132,133,876 | ) | |
$ | (2,456,080 | ) |
See
accompanying notes to condensed consolidated financial statements (unaudited).
CORTEX
PHARMACEUTICALS, INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
Three
Months Ended
March 31, | |
| |
2014 | | |
2013 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (1,380,710 | ) | |
$ | (837,386 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation expense | |
| 17 | | |
| — | |
Gain on settlements with former management | |
| (1,038,270 | ) | |
| — | |
Stock-based compensation expense included in general and administrative expenses | |
| 2,280,000 | | |
| — | |
Foreign currency transaction gain | |
| (6,277 | ) | |
| (20,868 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Increase in - | |
| | | |
| | |
Prepaid insurance | |
| (124,998 | ) | |
| (81,145 | ) |
Increase (decrease) in - | |
| | | |
| | |
Accounts payable and accrued expenses | |
| 61,613 | | |
| 195,109 | |
Accrued compensation and related expenses | |
| (118,084 | ) | |
| 586,700 | |
Accrued interest payable | |
| 12,950 | | |
| 12,998 | |
| |
| | | |
| | |
Net cash used in operating activities | |
| (313,759 | ) | |
| (144,592 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchases of furniture and equipment | |
| (1,925 | ) | |
| — | |
| |
| | | |
| | |
Net cash used in investing activities | |
| (1,925 | ) | |
| — | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from sale of Series G 1.5% Convertible Preferred Stock | |
| 753,220 | | |
| — | |
Proceeds from issuance of notes payable to Chairman | |
| 75,000 | | |
| — | |
Repayment of notes payable to Chairman | |
| (150,000 | ) | |
| — | |
Cash payments made for costs incurred in connection
with sale of Series G 1.5% Convertible Preferred Stock | |
| (64,956 | ) | |
| — | |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 613,264 | | |
| — | |
| |
| | | |
| | |
Cash and cash equivalents: | |
| | | |
| | |
Net increase (decrease) | |
| 297,580 | | |
| (144,592 | ) |
Balance at beginning of period | |
| 14,352 | | |
| 152,179 | |
Balance at end of period | |
$ | 311,932 | | |
$ | 7,587 | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid for - | |
| | | |
| | |
Interest | |
$ | — | | |
$ | — | |
Income taxes | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Amortization of deemed dividend on Series G 1.5% Convertible
Preferred Stock | |
$ | 1,209,970 | | |
$ | — | |
Dividend on Series G 1.5% Convertible Preferred Stock | |
$ | 408 | | |
$ | — | |
Fair value of common stock options issued in connection
with debt settlements | |
$ | 179,910 | | |
$ | — | |
Fair value of common stock warrants issuable to placement
agents and selected dealers in connection with the sale of Series G 1.5% Convertible Preferred Stock | |
$ | 443,848 | | |
$ | — | |
Deferred financing costs transferred to additional
paid-in capital in connection with sale of Series G 1.5% Convertible Preferred Stock | |
$ | 35,120 | | |
$ | — | |
See
accompanying notes to condensed consolidated financial statements (unaudited).
CORTEX
PHARMACEUTICALS, INC.
AND
SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three
Months Ended March 31, 2014 and 2013
1.
Basis of Presentation
The
condensed consolidated financial statements of Cortex Pharmaceuticals, Inc. (“Cortex”) and its wholly-owned subsidiary,
Pier Pharmaceuticals, Inc. (“Pier”) (collectively referred to herein as the “Company”, unless the context
indicates otherwise), at March 31, 2014 and for the three months ended March 31, 2014 and 2013, are unaudited. In the opinion
of management, all adjustments (including normal recurring adjustments) have been made that are necessary to present fairly the
consolidated financial position of the Company as of March 31, 2014, the results of its consolidated operations for the three
months ended March 31, 2014 and 2013, and its consolidated cash flows for the three months ended March 31, 2014 and 2013. Consolidated
operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full fiscal
year. The condensed consolidated balance sheet at December 31, 2013 has been derived from the Company’s audited consolidated
financial statements at such date.
The
condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”)
have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and other information included in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2013, as filed with the SEC.
2.
Organization and Business Operations
Business
Cortex
was formed in 1987 to engage in the discovery, development and commercialization of innovative pharmaceuticals for the treatment
of neurological and psychiatric disorders. In 2011, prior management conducted a re-evaluation of Cortex’s strategic focus
and determined that clinical development in the area of respiratory disorders, particularly respiratory depression and sleep apnea,
provided the most cost-effective opportunities for potential rapid development and commercialization of Cortex’s compounds.
Accordingly, Cortex narrowed its clinical focus at that time and abandoned other avenues of scientific inquiry. This re-evaluation
provided the impetus for Cortex’s acquisition of Pier in August 2012. New management was appointed in March 2013 and has
continued to implement this revised 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 (including a new license agreement with
the University of Illinois), management believes that the Company is now a leader in the discovery and development of innovative
pharmaceuticals for the treatment of respiratory disorders.
Since
its formation in 1987, Cortex has been engaged in the research and clinical development of a class of compounds referred to as
ampakines. By acting as positive allosteric modulators of AMPA glutamate receptors, ampakines increase the excitatory effects
of the neurotransmitter glutamate. Preclinical research suggested that these ampakines might have therapeutic potential for the
treatment of certain respiratory disorders, as well as cognitive disorders, depression, attention deficit disorder and schizophrenia.
Cortex
entered into a series of license agreements in 1993 and 1998 with the University of California, Irvine (“UCI”) that
granted Cortex proprietary rights to certain chemical compounds that acted as ampakines and their therapeutic uses. These agreements
granted Cortex, 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. Cortex was required, among other terms and conditions, to pay
UCI a license fee, royalties, patent costs and certain additional payments.
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, UCI notified the Company that these license agreements were terminated
due to the Company’s failure to make its obligatory payments. 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
or future drug development programs.
Cortex
also 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, Cortex’s lead
ampakines CX1739 and CX1942, and extend through at least 2028.
On
May 8, 2007, Cortex entered into a license agreement, as subsequently amended, with the University of Alberta granting Cortex
exclusive rights to practice patents held by the University of Alberta claiming the use of ampakines for the treatment of various
respiratory disorders. These patents, along with Cortex’s own patents claiming chemical structures, comprise Cortex’s
principal intellectual property supporting Cortex’s research and clinical development program in the use of ampakines for
the treatment of respiratory disorders. Cortex 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 opiates or certain anesthetics
without offsetting the analgesic effects of the opiates 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, Cortex has conducted a Phase 2A clinical study in which patients with sleep apnea were administered CX1739, Cortex’s
lead clinical compound. Preliminary results suggested that CX1739 might have use for the treatment of central and mixed sleep
apnea, but not obstructive sleep apnea (“OSA”).
In
order to expand Cortex’s respiratory disorders program, the Company 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 the respiratory disorder known as
obstructive sleep apnea and had been engaged in research and clinical development activities since formation.
Through
the merger, the Company 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 obstructive sleep apnea. 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 (“AHI”),
the primary therapeutic end-point, and was observed to be safe and well tolerated. Dronabinol is currently under investigation,
at the University of Illinois and other centers, in a potentially pivotal 120 patient, double-blind, placebo-controlled Phase
2B OSA clinical trial, fully funded by the National Institutes of Health.
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
(“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.
The
License Agreement was terminated effective March 21, 2013 due to the Company’s failure to make a required payment. New management
subsequently opened negotiations with the University of Illinois and as a result, the Company ultimately 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 had been terminated on March 21, 2013.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred
net losses of $1,380,710 for the three months ended March 31, 2014 and $1,201,457 for the fiscal year ended December 31, 2013,
respectively, negative operating cash flows of $313,759 for the three months ended March 31, 2014 and $182,435 for the fiscal
year ended December 31, 2013, respectively, and incurred additional net losses and negative operating cash flows in the remainder
of the 2014 fiscal year. The Company expects to continue to incur net losses and negative operating cash flows for several more
years thereafter. As a result, management and the Company’s auditors believe that there is 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. Beginning in late 2012, the Company’s business activities were reduced to minimal
levels, and the prior Board of Directors of the Company, which was removed by the written consent of stockholders holding a majority
of the outstanding shares on March 22, 2013, had retained bankruptcy counsel to assist the Company in preparations to file for
liquidation under Chapter 7 of the United States Bankruptcy Code. New management, which was appointed during March and April 2013,
has evaluated the status of numerous aspects of the Company’s existing business and obligations, including, without limitation,
debt obligations, financial requirements, intellectual property, licensing agreements, legal and patent matters and regulatory
compliance, and has raised new capital to fund its business activities.
From
June 2013 through March 2014, the Company’s Chairman and Chief Executive Officer advanced short-term loans to the Company
aggregating $150,000 in order to meet its minimum operating needs. 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 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 (with warrants) in an
aggregate principal amount of $369,500 to various accredited investors and an additional $210,000 of such short-term convertible
notes (with warrants) in February 2015. The Company currently expects to terminate this financing effective February 27, 2015.
The
Company will need to continue to raise additional capital to be able to pay its liabilities and fund its business activities going
forward. As a result of the Company’s current financial situation, the Company has limited access to external sources of
debt and equity financing. Accordingly, there can be no assurances that the Company will be able to secure additional financing
in the amounts necessary to fully fund its operating and debt service requirements. If the Company is unable to access sufficient
cash resources, the Company may be forced to discontinue its operations entirely and liquidate.
3. Summary
of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the financial statements of Cortex and its wholly-owned subsidiary,
Pier. Intercompany balances and transactions have been eliminated in consolidation.
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.
Deferred
and Capitalized Financing Costs
Costs
incurred in connection with ongoing financing activities, including legal and other professional fees, cash finders and placement
agent fees, and escrow agent fees, are deferred until the related financing is either completed or abandoned. Costs related to
abandoned financings are charged to operations.
Costs
related to completed debt financings are 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 condensed consolidated statements of operations. Costs related to completed equity financings
are charged directly to additional paid-in capital.
Series
G 1.5% Convertible Preferred Stock
The
Series G 1.5% Convertible Preferred Stock (including accrued dividends) 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.
The
Company accounts for beneficial conversion features in accordance with ASC 470-20, Accounting for Debt with Conversion and Other
Options. 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 is convertible into shares of common stock at a fixed price of $0.0033 per share. At the time
of each of these issuances, the value of the common stock into which the Series G 1.5% Convertible Preferred Stock was convertible
had a fair value greater than the proceeds for such issuances. Fair value was determined by reference to the closing market price
of the Company’s common stock on each of the closing dates. Accordingly, 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 is being
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 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 during the three months ended
March 31, 2014 was $1,209,970.
Dr.
Arnold S. Lippa, Ph.D., the Company’s Chairman, 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 27.9% 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 deemed dividend for the initial closing of the Series G 1.5% Convertible
Preferred Stock was $8,376,719, of which the proportionate share of such deemed dividend attributable to Dr. Lippa’s investment
was $2,780,303.
Equipment
Equipment
is recorded at cost and depreciated on a straight-line basis over the lesser of their estimated useful lives, ranging 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.
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, in conjunction with the preparation
of the Company’s fiscal year-end audited financial statements. An impairment loss is recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition is less than the asset’s carrying amount.
The Company has not deemed any long-lived assets as impaired at March 31, 2014.
Research
Grant Revenues
The
Company recognizes research grant revenues as earned when the related expenses for the grant projects are incurred. Amounts received
under research grants are nonrefundable, regardless of the success of the underlying research, to the extent that such amounts
are expended in accordance with the approved grant project. The Company did not have any research grant revenues during the three
months ended March 31, 2014 or 2013.
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.
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 over the vesting
period.
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 options vest, they are valued
on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current
value on the date of vesting.
All
share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based
on their fair values. The fair value of stock options 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 security 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 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 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
options granted during the three months ended March 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 | |
| 0.015%
to 0.027 | % |
Expected dividend yield | |
| 0 | % |
Expected volatility | |
| 200 | % |
Expected life | |
| 5-10
years | |
The
Company issues new shares to satisfy stock option and warrant exercises. There were no options granted during the three months
ended March 31, 2013. There were no options exercised during the three months ended March 31, 2014 and 2013.
The
Company recognizes the fair value of stock-based compensation in general and administrative costs and in research and development
costs, as appropriate, in the Company’s condensed consolidated statements of operations.
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, which is not expected for at least the next few years.
As
of March 31, 2014, 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.
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
and Development Costs
Research
and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and
other expenses relating to the acquisition, design, development and testing of the Company’s treatments and product candidates.
Research
and development costs are expensed as incurred over the life of the underlying contracts on the straight-line basis, unless the
achievement of milestones, the completion of contracted work, or other information indicates that a different expensing schedule
is more appropriate. Payments made pursuant to research and development contracts are initially recorded as advances on research
and development contract services in the Company’s balance sheet and then charged to research and development costs in the
Company’s statements of operations as those contract services are performed. Expenses incurred under research and development
contracts in excess of amounts advanced are recorded as research and development contract liabilities in the Company’s balance
sheet, with a corresponding charge to research and development costs in the Company’s statements of operations. The Company
reviews the status of its research and development contracts on a quarterly basis.
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 three months ended March 31, 2014 and 2013.
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
March 31, 2014 and 2013, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to
acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
| |
March
31, | |
| |
2014 | | |
2013 | |
Series B convertible preferred stock | |
| 3,679 | | |
| 3,679 | |
Series G 1.5% convertible preferred stock | |
| 228,372,117 | | |
| — | |
Common stock warrants | |
| 4,000,000 | | |
| 5,691,367 | |
Common stock options | |
| 9,466,668 | | |
| 9,860,001 | |
Total | |
| 241,842,464 | | |
| 15,555,047 | |
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.
Recent
Accounting Pronouncements
In
April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08 (ASU
2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends
the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under
ASU 2014-08, only disposals representing a strategic shift in operations or that have a major effect on the Company’s operations
and financial results should be presented as discontinued operations. ASU 2014-08 is effective for annual periods beginning after
December 15, 2014. As the Company is engaged in research and development activities, the Company does not expect the adoption
of this guidance to have any impact on the Company’s financial statement presentation or disclosures.
In
May 2014, 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 U.S. GAAP and replace
it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue
based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective
for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard
either retrospectively or as a cumulative-effect adjustment as of the date of adoption. As the Company does not expect to have
any operating revenues for the foreseeable future, the Company does not expect the adoption of this guidance to have any impact
on the Company’s financial statement presentation or disclosures.
In
June 2014, the FASB issued Accounting Standards Update No. 2014-10 (ASU 2014-10), Development Stage Entities (Topic 915): Elimination
of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation.
ASU 2014-10 eliminated the requirement to present inception-to-date information about income statement line items, cash flows,
and equity transactions, and clarifies how entities should disclose the risks and uncertainties related to their activities. ASU
2014-10 also eliminated an exception provided to development stage entities in Consolidations (ASC Topic 810) for determining
whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The presentation
and disclosure requirements in Topic 915 will no longer be required for interim and annual reporting periods beginning after December
15, 2014, and the revised consolidation standards will take effect in annual periods beginning after December 15, 2015. Early
adoption is permitted. The adoption of ASU 2014-10 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 or disclosures.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
4. Notes
Payable
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 US 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 anticipates
entering into discussions with Samyang with a view toward a comprehensive resolution of the aforementioned matters.
Pursuant
to the terms of this borrowing arrangement, Samyang was granted the right to designate a representative to serve on the Company’s
Board of Directors, pursuant to which Samyang designated Dr. Moogak Hwang, Ph.D. as its representative.
In this regard, the Company elected Dr. Hwang to its Board of Directors on August 3, 2012. Dr. Hwang resigned from the Company’s
Board of Directors effective September 30, 2013.
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 have 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 unexercised warrants expired 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 being amortized as additional interest expense over the 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 March 31, 2014 and December 31, 2013:
| |
March
31, 2014 | | |
December
31, 2013 | |
Principal amount of note payable | |
$ | 399,774 | | |
$ | 399,774 | |
Accrued interest payable | |
| 85,972 | | |
| 73,979 | |
Foreign currency transaction adjustment | |
| 41,225 | | |
| 47,502 | |
| |
$ | 526,971 | | |
$ | 521,255 | |
Notes
Payable to Chairman
On
June 25, 2013, the Arnold Lippa Family Trust, an affiliate of Dr. Arnold S. Lippa, the Company’s Chairman and Chief Executive
Officer, began advancing funds to the Company in order to meet minimum operating needs. At December 31, 2013, Dr. Lippa 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, with the proceeds from the private placement of its Series G 1.5% Convertible Preferred Stock.
5. Project
Advance
In
June 2000, the Company received $247,300 from the Institute for the Study of Aging (the “Institute”) 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 funding 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. Included
in the condensed consolidated balance sheets is principal and accrued interest with respect to this funding agreement in the amount
of $335,101 and $334,096 at March 31, 2014 and December 31, 2013, respectively.
The
Company entered into an agreement with the Institute on September 2, 2014 to settle this obligation by issuing 1,000,000 shares
of the Company’s restricted common stock. The note payable, including accrued interest, had an approximate balance of $337,000
on such date.
6. Settlements
During
the three months ended March 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 three months ended March 31, 2014.
7. Stockholders’
Equity
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, 2013, 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”); and 205,000 shares
were designated as Series A Junior Participating Preferred Stock (non-voting, “Series A Junior Participating Preferred Stock”).
On March 14, 2014, the Company filed a Certificate of Designation, Preferences, Rights and Limitations, (the “Certificate
of Designation”) of its Series G 1.5% Convertible Preferred Stock with the Secretary of State of the State of Delaware to
amend the Company’s certificate of incorporation. The number of shares designated as Series G 1.5% Convertible Preferred
Stock is 1,700 (which shall not be subject to increase without the written consent of a majority of the holders of the Series
G 1.5% Convertible Preferred Stock or as otherwise set forth in the Certificate of Designation). Accordingly, as of March 31,
2014, 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 March 31, 2014 or December
31, 2013.
Series
B Preferred Stock outstanding as of March 31, 2014 and December 31, 2013 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 March
31, 2014 and December 31, 2013, 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 “Private Placement”). The Initial Purchasers in this tranche of the Private
Placement consisted of (i) Dr. Arnold S. Lippa, the Company’s Chairman, 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 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 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
Private Placement were valued pursuant to the Black-Scholes option-pricing model at $443,848.
Aurora
Capital LLC was one of the placement agents. 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 Capital LLC through interests held in its members, and Jeff
E. Margolis is also an officer of Aurora Capital LLC.
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, 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 shall be convertible, beginning 60 days after the last share of Series G 1.5% Convertible
Preferred Stock is issued in the 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 Series G 1.5% Convertible Preferred Stock shall be redeemed by conversion on the two year anniversary
of the date the last share of Series G 1.5% Convertible Preferred Stock is issued in the Private Placement at the Conversion Price.
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 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.
As
of March 31, 2014, the Series G 1.5% Convertible Preferred Stock was convertible into 228,372,117 shares of the Company’s
common stock, including 123,635 shares attributable to the 1.5% dividend on such shares of $408 on that date.
On
April 17, 2014, the Company completed a second (and final) closing of Series G 1.5% Convertible Preferred Stock in the Private
Placement.
Common
Stock and Common Stock Purchase Warrants
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 the 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 Capital LLC, a related party. 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 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.
In
connection with the private placement of the Company’s Series F Convertible Preferred Stock in July 2009, the Company issued
warrants to purchase an aggregate of 6,060,470 shares of its common stock to a single institutional investor. The warrants had
an exercise price of $0.2699 per share and were exercisable on or before January 31, 2013. The Company also issued warrants to
purchase an additional 606,047 shares of the Company’s common stock to the placement agent for that transaction. These warrants
had an exercise price of $0.3656 per share and were subject to the same exercisability term as the warrants issued to the investor.
The warrants issued to the investor and the placement agent were subject to a call provision in favor of the Company. None of
those investor or placement agent warrants were exercised, and consequently, those unexercised warrants to purchase 6,666,517
shares of the Company’s common stock expired in January 2013.
In
October 2011, the Company completed a private placement of $500,000 in securities with Samyang Value Partners Co., Ltd., a wholly-owned
subsidiary of Samyang. The transaction included the issuance of 6,765,466 shares of the Company’s common stock and two-year
warrants to purchase an additional 1,691,367 shares of its common stock. The warrants had an exercise price of $0.1035 per share
and a call right in favor of the Company. None of those warrants were exercised, and consequently, those unexercised warrants
to purchase 1,691,367 shares of the Company’s common stock expired in October 2013. Related to this private placement, the
Company and Samyang entered into a non-binding memorandum of understanding (“MOU”) regarding a potential license agreement
for rights to the ampakine CX1739 for the treatment of neurodegenerative diseases in South Korea. The MOU also provided Samyang
with rights of negotiation to expand its territory into other South East Asian countries, excluding Japan, Taiwan and China, and
to include rights to the high impact ampakine CX1846 for the potential treatment of neurodegenerative diseases. The related license
agreement was subsequently completed in January 2012.
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 unexercised
warrants expired in June 2014.
A
summary of warrant activity for the three months ended March 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 | | |
$ | 0.056 | | |
| | |
Issued | | |
| — | | |
| — | | |
| | |
Exercised | | |
| — | | |
| — | | |
| | |
Expired | | |
| — | | |
| — | | |
| | |
Warrants
outstanding at March 31, 2014 | | |
| 4,000,000 | | |
$ | 0.056 | | |
| 0.24 | |
| | |
| | | |
| | | |
| | |
Warrants
exercisable at December 31, 2013 | | |
| 4,000,000 | | |
$ | 0.056 | | |
| | |
Warrants
exercisable at March 31, 2014 | | |
| 4,000,000 | | |
$ | 0.056 | | |
| 0.24 | |
The
exercise prices of common stock warrants outstanding and exercisable are as follows at March 31, 2014:
Exercise
Price | | |
Warrants
Outstanding
(Shares) | | |
Warrants
Exercisable
(Shares) | | |
Expiration
Date |
$ | 0.056 | | |
| 4,000,000 | | |
| 4,000,000 | | |
June 25, 2014 |
Based
on a fair market value of $0.0352 per share on March 31, 2014, there were no exercisable in-the-money stock warrants as of March
31, 2014.
A
summary of warrant activity for the three months ended March 31, 2013 is presented below.
| |
Number
of Shares | | |
Weighted
Average
Exercise Price | | |
Weighted
Average
Remaining Contractual
Life (in Years) | |
Warrants outstanding at December 31,2012 | |
| 12,357,884 | | |
| 0.182 | | |
| | |
Issued | |
| — | | |
| — | | |
| | |
Exercised | |
| — | | |
| — | | |
| | |
Expired | |
| (6,666,517 | ) | |
| 0.279 | | |
| | |
Warrants outstanding at March 31, 2013 | |
| 5,691,367 | | |
$ | 0.069 | | |
| 1.03 | |
| |
| | | |
| | | |
| | |
Warrants exercisable at December 31, 2012 | |
| 12,357,884 | | |
$ | 0.182 | | |
| | |
Warrants exercisable at March 31, 2013 | |
| 5,691,367 | | |
$ | 0.069 | | |
| 1.03 | |
The
exercise prices of common stock warrants outstanding and exercisable are as follows at March 31, 2013:
Exercise
Price | | |
Warrants
Outstanding
(Shares) | | |
Warrants
Exercisable
(Shares) | | |
Expiration
Date |
$ | 0.056 | | |
| 4,000,000 | | |
| 4,000,000 | | |
June 25, 2014 |
$ | 0.100 | | |
| 1,691,367 | | |
| 1,691,367 | | |
October 20, 2013 |
| | | |
| | | |
| | | |
|
| | | |
| 5,691,367 | | |
| 5,691,367 | | |
|
Stock
Option Plans
On
March 30, 2006, the Company’s Board of Directors approved the 2006 Stock Incentive Plan (the “2006 Plan”), which
subsequently was approved by the Company’s stockholders on May 10, 2006. Upon the approval of the 2006 Plan, no further
options were granted under any prior plans. The 2006 Plan provided for the granting of options and rights to purchase up to an
aggregate of 9,863,799 shares of the Company’s authorized but unissued common stock (subject to adjustment under certain
circumstances, such as stock splits, recapitalizations and reorganization) to qualified employees, officers, directors, consultants
and other service providers.
Under
the 2006 Plan, the Company was able to issue a variety of equity vehicles to provide flexibility in implementing equity awards,
including incentive stock options, nonqualified stock options, restricted stock grants, stock appreciation rights, stock payment
awards, restricted stock units and dividend equivalents. The exercise price of stock options offered under the 2006 Plan must
be at least 100% of the fair market value of the common stock on the date of grant. If the person to whom an incentive stock option
is granted is a 10% stockholder of the Company on the date of grant, the exercise price per share shall not be less than 110%
of the fair market value on the date of grant. Pursuant to the 2006 Plan, options are generally forfeited ninety days from the
date of termination of an optionee’s continuous service if such termination occurs for any reason other than permanent disability
or death.
Subject
to any restrictions under federal or securities laws, the Chief Executive Officer may award stock options to new non-executive
officer employees and consultants, with a market value at the time of hire equivalent to up to 100% of the employee’s annual
salary or the consultant’s anticipated annual consulting fees. The Chief Executive Officer shall have the discretion to
increase or decrease such awards based on market and recruiting factors subject to a limit per person in each case of options
to purchase 50,000 shares. Additionally, on an annual basis, the Chief Executive Officer may grant continuing employees and consultants,
based upon performance and subject to meeting objectives, a stock option for that number of shares up to 40% of the employee’s
annual salary or the consultant’s annual fees, but not to exceed 50,000 shares per person per year. Any option grant exceeding
50,000 shares per person per year requires approval by the Compensation Committee of the Board of Directors or the full Board
of Directors. These options shall be granted with an exercise price equal to the fair market value of the Company’s common
stock on the date of issuance, have a ten-year term, vest annually over a three-year period from the dates of grant and have other
terms consistent with the 2006 Plan.
In
connection with the initial closing of the 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. The Company is no longer making awards under the 2006 Plan.
During
the three months ended March 31, 2014, the Company executed settlement agreements with four former executives that resulted in
the settlement of potential claims totaling $1,336,264. In conjunction with such settlement agreements, the Company issued stock
options to purchase 4,300,000 shares of common stock exercisable at $0.042 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. None of the options outstanding
at March 31, 2014 and December 31, 2013 were issued pursuant to the Company’s stock option plans.
A
summary of stock option activity for the three months ended March 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 | | |
$ | 0.060 | | |
| | |
Granted | | |
| 4,300,000 | | |
| 0.042 | | |
| | |
Expired | | |
| — | | |
| — | | |
| | |
Forfeited | | |
| — | | |
| — | | |
| | |
Options
outstanding at March 31, 2014 | | |
| 9,466,668 | | |
$ | 0.052 | | |
| 7.80 | |
| | |
| | | |
| | | |
| | |
Options
exercisable at December 31, 2013 | | |
| 5,166,668 | | |
$ | 0.060 | | |
| | |
Options
exercisable at March 31, 2014 | | |
| 9,466,668 | | |
$ | 0.052 | | |
| 7.80 | |
As
all stock options outstanding were fully vested at March 31, 2014, there is no compensation expense to be recognized in future
periods with respect to such options.
The
exercise prices of common stock options outstanding and exercisable were as follows at March 31, 2014:
Exercise
Price | | |
Options
Outstanding
(Shares) | | |
Options
Exercisable
(Shares) | | |
Expiration
Date |
$ | 0.040 | | |
| 2,400,000 | | |
| 2,400,000 | | |
March 13, 2019 |
$ | 0.043 | | |
| 1,100,000 | | |
| 1,100,000 | | |
March 14, 2024 |
$ | 0.049 | | |
| 800,000 | | |
| 800,000 | | |
February 28, 2024 |
$ | 0.060 | | |
| 3,083,334 | | |
| 3,083,334 | | |
July 17, 2022 |
$ | 0.060 | | |
| 2,083,334 | | |
| 2,083,334 | | |
August 10, 2022 |
| | | |
| | | |
| | | |
|
| | | |
| 9,466,668 | | |
| 9,466,668 | | |
|
Based
on a fair market value of $0.0352 per share on March 31, 2014, there were no exercisable in-the-money stock options as of March
31, 2014.
A
summary of stock option activity for the three months ended March 31, 2013 is presented below.
| | |
Number
of Shares | | |
Weighted
Average
Exercise Price | | |
Weighted
Average
Remaining Contractual Life
(in Years) | |
Options
outstanding at December 31, 2012 | | |
| 10,754,155 | | |
| 0.557 | | |
| | |
Granted | | |
| — | | |
| — | | |
| | |
Expired | | |
| — | | |
| — | | |
| | |
Forfeited | | |
| (894,154 | ) | |
| 1.141 | | |
| | |
Options
outstanding at March 31, 2013 | | |
| 9,860,001 | | |
$ | 0.505 | | |
| 7.66 | |
| | |
| | | |
| | | |
| | |
Options
exercisable at December 31, 2012 | | |
| 10,754,155 | | |
$ | 0.557 | | |
| | |
Options
exercisable at March 31, 2013 | | |
| 9,860,001 | | |
$ | 0.505 | | |
| 7.66 | |
The
exercise prices of common stock options outstanding and exercisable were as follows at March 31, 2013:
Exercise
Price | | |
Options
Outstanding
(Shares) | | |
Options
Exercisable
(Shares) | | |
Expiration
Date |
$ | 0.060 | | |
| 1,238,333 | | |
| 1,238,333 | | |
August 3, 2022 |
$ | 0.060 | | |
| 3,083,334 | | |
| 3,083,334 | | |
July 17, 2022 |
$ | 0.060 | | |
| 2,083,334 | | |
| 2.083,334 | | |
August 10, 2022 |
$ | 0.130 | | |
| 90,000 | | |
| 90,000 | | |
March 1, 2021 |
$ | 0.160 | | |
| 90,000 | | |
| 90,000 | | |
March 3, 2021 |
$ | 0.200 | | |
| 940,000 | | |
| 940,000 | | |
August 22, 2019 |
$ | 0.290 | | |
| 90,000 | | |
| 90,000 | | |
June 5, 2019 |
$ | 0.540 | | |
| 300,000 | | |
| 300,000 | | |
January 18, 2018 |
$ | 0.860 | | |
| 90,000 | | |
| 90,000 | | |
February 13, 2018 |
$ | 0.970 | | |
| 200,000 | | |
| 200,000 | | |
August 13, 2018 |
$ | 1.120 | | |
| 75,000 | | |
| 75,000 | | |
February 6, 2017 |
$ | 1.300 | | |
| 400,000 | | |
| 400,000 | | |
December 18, 2016 |
$ | 2.350 | | |
| 180,000 | | |
| 180,000 | | |
December 1, 2015 |
$ | 2.680 | | |
| 150,000 | | |
| 150,000 | | |
December 16, 2014 |
$ | 2.760 | | |
| 100,000 | | |
| 100,000 | | |
December 9, 2013 |
$ | 2.950 | | |
| 750,000 | | |
| 750,000 | | |
January 30, 2016 |
| | | |
| | | |
| | | |
|
| | | |
| 9,860,001 | | |
| 9,860,001 | | |
|
For
the three months ended March 31, 2014 and 2013, stock-based compensation costs included in the condensed consolidated statements
of operations consisted of general and administrative expenses of $2,280,000 and $0, respectively, and research and development
expenses of $0 and $0, respectively.
Pier
Contingent Stock Consideration
In
connection with the merger transaction with Pier effective August 10, 2012, Cortex 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 Cortex’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 Cortex
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, Cortex 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 were also out-of-the-money and continued
to be out-of-the-money through December 31, 2013. All of the aforementioned options and warrants became increasingly out-of-the-money
as December 31, 2012 approached (with most options and warrants being out of the money by multiples of the exercise price at such
date), reflecting the fact that the Company’s prospects were very negative. The Company was unable to raise operating capital
subsequent to its acquisition of Pier, had run out of working capital and essentially ceased business operations during the fourth
quarter of 2012, had not filed its September 30, 2012 Form 10-Q Quarterly Report with the U.S. Securities and Exchange Commission
due on November 14, 2012, had accepted the resignations of most of its officers and directors, and had prepared to shut-down and
liquidate. There were no stock options or warrants exercised from August 10, 2012 through March 31, 2014, and all of these stock
options and warrants were out-of-the-money at March 31, 2014. As of March 31, 2014, 2,111,445 contingent shares of common stock
remained issuable under the Pier merger agreement due to forfeitures and expirations 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, given the large spread
between exercise prices of these stock options and warrants as compared to the common stock trading range, the expiration of most
of the lower priced option and warrants within two years, the Company’s distressed financial condition and capital requirements,
and that these stock options and warrants have remained and have become increasingly out-of-the-money through March 31, 2014,
and have continued to expire, as time passes. 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.
Common
Shares Reserved for Issuance
As
of March 31, 2014, the Company had reserved an aggregate of 3,679 shares for issuance upon conversion of the Series B Preferred
Stock; 4,000,000 shares for issuance upon exercise of warrants; 9,466,668 shares for issuance upon exercise of outstanding stock
options; 105,633,002 shares for issuance upon exercise of stock options available for future grant pursuant to the 2014 Plan;
228,372,117 shares for issuance upon conversion of the Series G 1.5% Convertible Preferred Stock; and 2,111,445 shares issuable
as contingent shares pursuant to the Pier merger. The Company expects to satisfy such stock obligations through the issuance of
authorized but unissued shares of common stock.
8. Related
Party Transactions
In
2012, Aurora Capital LLC provided investment banking services to Pier, a company that the Company acquired by merger on August
10, 2012. For those services, on August 10, 2012 Aurora Capital LLC received 2,971,792 shares of the Company’s common stock
in payment of its fee of $194,950. 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 Capital LLC through interests held in its members, and Jeff. E. Margolis
is also an officer of Aurora Capital LLC.
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.
See
Note 7 for a description of other transactions between the Company and Aurora Capital LLC.
See
Notes 4 and 7 for a description of transactions with Samyang, a significant stockholder of the Company and a 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 financial statements with respect to such matters.
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, has asserted certain claims for
consulting compensation against the Company. In the opinion of management, the Company has made adequate provision for any liability
relating to this matter in its condensed consolidated financial statements at March 31, 2014 and December 31, 2013.
Pier
Registration Statement Filing Obligation
In
conjunction with the Pier transaction effective August 10, 2012, the Company agreed to file a registration statement on Form S-1
under the Securities Act of 1933, as amended, with the SEC within ninety days after the closing of the transaction covering the
shares of common stock issued to the former Pier stockholders, as well as the contingent shares, and to take certain other actions
to maintain the effectiveness of such registration statement for a period not exceeding three years. The Company has not filed
this registration statement. The Agreement and Plan of Merger did not provide for any financial penalties in the event that the
Company failed to comply with the registration statement filing requirements.
Lease
Commitment
On
May 14, 2012, the Company executed a three-year lease for approximately 5,000 square feet of office space beginning June 1, 2012
at a monthly rate of $9,204. During December 2013, the Company substantially vacated its operating facility prior to the scheduled
termination of the lease agreement in May 2015. In May 2013, a settlement with the landlord was reached, resulting in a gain of
$1,990 during the three months and six months ended June 30, 2013, and the lease was terminated.
University
of California, Irvine License Agreements
The
Company entered into a series of license agreements in 1993 and 1998 with 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 condensed consolidated financial statements at March 31, 2014 and December 31,
2013.
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, no maintenance payments are currently due and payable to the University of Alberta. In addition, no
other prospective payments are currently due and payable to the University of Alberta.
10. Subsequent
Events
Second
Closing of Series G 1.5% Convertible Preferred Stock Private Placement
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 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 Private Placement. The Purchasers in the second and final tranche of the Private
Placement consisted of new, non-affiliated, accredited investors and non-management investors who had also invested in the first
closing. One of the investors in this second and final closing was an affiliate of an associated person of Aurora Capital LLC.
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 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 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 Private Placement were valued
pursuant to the Black-Scholes option-pricing model at $220,321. Aurora Capital LLC was one of the placement agents.
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 Private Placement are convertible
into a total of 281,363,634 shares of common stock.
The
warrants that the placement agents and selected dealers received in connection with all closings of the 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.
Convertible
Note and Warrant Financing
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.
This was the initial closing of a private placement of up to $1,000,000. Unless otherwise provided for in the Notes, the outstanding
principal balance of each Note and all accrued and unpaid interest is 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
(an aggregate of 6,814,286 shares), 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 shall
be exercisable into a fixed number of shares of common stock of the Company calculated as each Purchaser’s investment amount
divided by $0.035 (an aggregate of 6,814,286 shares for the initial closing). The Warrants do not have any cashless exercise provisions
and are exercisable through September 15, 2015 at a fixed price of $0.035 per share. The shares of common stock issuable upon
conversion of the Notes and 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 Notes and Warrants to various accredited investors. The Company currently expects to terminate this
financing effective February 27, 2015.
Placement
agent fees, brokerage commissions, finder’s fees 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, 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 are exercisable through September 15, 2015 at a fixed price of $0.035 per share. Aurora Capital LLC is
acting as the placement agent for this financing.
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.
Conversion
of Series G 1.5% Convertible Preferred Stock
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.
On
January 19, 2015, 25 shares of Series G 1.5% Convertible Preferred Stock, including 0.320031 dividend shares, were converted into
7,672,737 shares of common stock on a cashless basis.
Exercise
of Placement Agent and Selected Dealer Warrants
Effective
August 25, 2014, a warrant issued on April 17, 2014 in conjunction with the 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.
Effective
September 5, 2014, a warrant issued on April 17, 2014 in conjunction with the 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%) on
a cashless basis, resulting in the net issuance of 1,126,814 shares of common stock.
Effective
September 26, 2014, a warrant issued on April 17, 2014 in conjunction with the 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.
Awards
to Officers and Directors as Compensation
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 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 vest 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%. See Note 7 for information with respect to common stock awards
issued to officers and directors in April 2014 as compensation.
In
connection with the appointment of James Sapirstein and Kathryn MacFarlane as directors of the Company on September 3, 2014, the
Board of Directors awarded an aggregate of 4,000,000 shares of common stock of the Company to the new directors, 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.
These
stock awards to directors in 2014 were made under the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive
Plan.
Debt
Settlements
During
the three months ended June 30, 2014, the Company executed settlement agreements with certain former service providers that resulted
in the settlement of potential claims totaling approximately $591,000 for a cost of approximately $155,000 in cash, plus the issuance
of 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 $37,500 in the aggregate. In addition to other provisions, the settlement
agreements included mutual releases.
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), plus the issuance of a stock option to purchase 500,000 shares of
common stock exercisable at $0.0512 per share for a period of five years, and valued pursuant to the Black-Scholes option-pricing
model at $25,450. In addition to other provisions, the settlement agreement included mutual releases.
The
Company 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.
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 the 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 certain outstanding patent costs (not to exceed $16,000), and (iii) the assignment to the University of Illinois
of certain rights the Company holds in certain patent applications. In exchange for certain milestone and royalty payments, 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.
Settlement
with the Institute for the Study of Aging
On
September 2, 2014, the Company entered into a Release Agreement (the “Release Agreement”) with the Institute for the
Study of Aging (the “Institute”) to settle an outstanding promissory note, dated May 30, 2000, issued by the Company
in favor of the Institute for an initial principal amount of $247,300 (the “Note”), which was made pursuant to an
Agreement to Accept Conditions of Loan Support, also dated May 30, 2000 (the “Loan Support Agreement”). At August
31, 2014, the amount owed under the Note, including accrued interest was approximately $337,000. Pursuant to the terms of the
Release Agreement, the Institute received 1,000,000 restricted 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.
Appointment
of New Directors
On
September 3, 2014, James Sapirstein and Kathryn MacFarlane were appointed as new directors of the Company. The Board of Directors
determined that these two new directors are independent directors. In connection with those appointments and in conformity with
its corporate policy of indemnifying all directors and officers, the Board of Directors also agreed at that time to enter into
indemnification agreements for all directors and officers of the Company, namely, each existing director of the Company, Dr. Arnold
S. Lippa, Jeff E. Margolis, and Robert N. Weingarten, each of whom is also an officer of the Company, and with the two new directors.
Pursuant to the indemnity agreements, the Company will indemnify each director or officer when such individual is a party or threatened
to become a party, by virtue of being a director or officer of the Company, from the costs and expenses, fines and certain other
amounts in connection with certain proceedings, including proceedings in the right of the Company, so long as such director or
officer acted in good faith and reasonably believed that such actions were not in the best interests of the Company.
Appointment
of Chairman of the Company’s Scientific Advisory Board
On
September 18, 2014, Dr. John Greer, Ph.D. was appointed to the position of Chairman of the Company’s Scientific Advisory
Board, which is currently being formed. Dr. Greer is the Director of the Neuroscience and Mental Health Institute at the University
of Alberta. He holds two grants regarding research into neuromuscular control of breathing and is the inventor on the use patents
licensed by the Company with respect to ampakines. Dr. Greer is expected to assist the Company in forming the rest of its Scientific
Advisory Board.
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. This award was made under the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan.
National
Institute on Drug Abuse Grant
On
September 18, 2014, the Company entered into a contract with the National Institute on Drug Abuse, a division of the National
Institutes of Health. The funding under the contract is a Phase 1 award granted under the Small Business Innovation Research Funding
Award Program. The purpose of the project is to determine the most useful injectable route of administration for CX1942, the Company’s
proprietary, soluble ampakine molecule, a potential rescue medication for drug-induced respiratory depression and lethality. The
grant is entitled “Novel Treatment of Drug-Induced Respiratory Depression” and is valued at $148,583, which is to
be paid in increments over the expected six-month duration of the study which commenced in October 2014. The study will measure
the potency, latency to onset and duration of action of CX1942 administered to rats. The Company anticipates that the data obtained
from the study will be used to finalize preclinical studies in preparation for initiating Phase 1 clinical studies. The preclinical
studies are being performed in collaboration with Dr. David Fuller of the University of Florida and Dr. John Greer of the University
of Alberta, Chairman of the Company’s Scientific Advisory Board.
Appointment
of Senior Vice President of Research and Development
Richard
Purcell was appointed as the Company’s Senior Vice President of Research and Development effective October 15, 2014. Mr.
Purcell’s commitment to the Company is for 30 hours per week in order to allow him to comply with his previous professional
commitments. Mr. Purcell provides his services to the Company through his consulting firm, DNA Healthlink, Inc., with which the
Company has contracted for his services.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Cortex
Pharmaceuticals, Inc. (“Cortex”) was formed in 1987 to engage in the discovery, development and commercialization
of innovative pharmaceuticals for the treatment of neurological and psychiatric disorders. In 2011, prior management conducted
a re-evaluation of Cortex’s strategic focus and determined that clinical development in the area of respiratory disorders,
particularly respiratory depression and sleep apnea, provided the most cost-effective opportunities for potential rapid development
and commercialization of Cortex’s compounds. Accordingly, Cortex narrowed its clinical focus at that time and abandoned
other avenues of scientific inquiry. This re-evaluation provided the impetus for Cortex’s acquisition of Pier Pharmaceuticals,
Inc. (“Pier”) in August 2012. Cortex and its wholly-owned subsidiary, Pier, are collectively referred to herein as
the “Company.”
On
March 22, 2013, the Company received a written consent of stockholders holding a majority of the Company’s common stock
(the “Written Consent”) (i) removing Charles J. Casamento, M. Ross Johnson, John F. Benedik and Mark A. Varney from
their positions as directors of the Company, and (ii) appointing each of Dr. Arnold S. Lippa, Ph.D. and Jeff E. Margolis to fill
two of the vacancies created, each to hold such office until the next annual meeting of the stockholders and until their successors
have been duly elected and qualified. The Written Consent did not remove Dr. Moogak Hwang, Ph.D., a representative of Samyang
Optics Co. Ltd., a lender to and significant stockholder of the Company, from the Board of Directors. Dr. Hwang continued to serve
as a director until his resignation from the Board of Directors effective September 30, 2013.
Following
the delivery of the Written Consent, the Board of Directors, acting by unanimous written consent dated March 22, 2013, removed
all officers of the Company and appointed Dr. Arnold S. Lippa, as Chairman of the Board, President and Chief Executive Officer
and Jeff E. Margolis, as Vice President, Treasurer and Secretary. On April 29, 2013, Robert N. Weingarten was appointed as a director,
Vice President and Chief Financial Officer.
New
management was appointed in March 2013 and has continued to implement this revised 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 (including a new license agreement with the University of Illinois), management believes that the Company is now a
leader in the discovery and development of innovative pharmaceuticals for the treatment of respiratory disorders.
Since
its formation in 1987, Cortex has been engaged in the research and clinical development of a class of compounds referred to as
ampakines. By acting as positive allosteric modulators of AMPA glutamate receptors, ampakines increase the excitatory effects
of the neurotransmitter glutamate. Preclinical research suggested that these ampakines might have therapeutic potential for the
treatment of certain respiratory disorders, as well as cognitive disorders, depression, attention deficit disorder and schizophrenia.
Cortex
entered into a series of license agreements in 1993 and 1998 with the University of California, Irvine (“UCI”) that
granted Cortex proprietary rights to certain chemical compounds that acted as ampakines and their therapeutic uses. These agreements
granted Cortex, 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. Cortex was required, among other terms and conditions, to pay
UCI a license fee, royalties, patent costs and certain additional payments.
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, UCI notified the Company that these license agreements were terminated
due to the Company’s failure to make its obligatory payments. 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
or future drug development programs.
The
Company also 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, Cortex entered into a license agreement, as subsequently amended, with the University of Alberta granting Cortex
exclusive rights to practice patents held by the University of Alberta claiming the use of ampakines for the treatment of various
respiratory disorders. These patents, along with Cortex’s own patents claiming chemical structures, comprise Cortex’s
principal intellectual property supporting Cortex’s research and clinical development program in the use of ampakines for
the treatment of respiratory disorders. Cortex 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 opiates or certain anesthetics
without offsetting the analgesic effects of the opiates 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, Cortex has conducted a Phase 2A clinical study in which patients with sleep apnea were administered CX1739, Cortex’s
lead clinical compound. Preliminary results suggested that CX1739 might have use for the treatment of central and mixed sleep
apnea, but not obstructive sleep apnea (“OSA”).
In
order to expand the Company’s respiratory disorders program, the Company 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 the respiratory
disorder known as obstructive sleep apnea and had been engaged in research and clinical development activities since formation.
In
connection with the merger transaction with Pier, Cortex 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 Cortex represented approximately
41% of the 144,041,556 common shares outstanding immediately following the closing of the transaction.
Through
the merger, Cortex 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 obstructive sleep apnea, in which dronabinol produced a statistically significant reduction in the Apnea-Hypopnea
Index (“AHI”), the primary therapeutic end-point, and was observed to be safe and well tolerated. Dronabinol is currently
under investigation, at the University of Illinois and other centers, in a potentially pivotal 120 patient, double-blind, placebo-controlled
Phase 2B OSA clinical trial, fully funded by the National Institutes of Health.
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
(“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.
The
Company accounted for the Pier transaction pursuant to ASC Topic 805, Business Combinations. The Company identified and evaluated
the fair value of the assets acquired. Based on the particular facts and circumstances surrounding the history and status of Pier,
including its business and intellectual property at the time of the merger transaction, the Company determined that the identifiable
intangible assets were comprised solely of contract-based intangible assets, and that there was no measurable goodwill.
The
intangible asset acquired in the Pier transaction consisted of the License Agreement. Unless terminated earlier, the License Agreement
would terminate upon expiration or termination of all patent rights. The License Agreement defined patent rights as all of the
University of Illinois’ rights in the patents and patent applications, and (b) all of the University of Illinois’
rights in all divisions, continuations, continuation-in-part applications, reissues, renewals, re-examinations, foreign counterparts,
substitutions or extensions thereof. Based upon the expiration date of the underlying patents, the License Agreement would be
amortized on a straight-line basis over the remaining life of the underlying patents of 172 months from the date of acquisition.
The
License Agreement was terminated effective March 21, 2013 due to the Company’s failure to make a required payment. The Company
recorded a charge to operations of $3,321,678 for the impairment of the License Agreement effective December 31, 2012.
New
management subsequently opened negotiations with the University of Illinois and as a result, the Company ultimately 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 had been terminated on March 21, 2013.
Loan
from SY Corporation Co., Ltd.
On
June 25, 2012, the Company borrowed 465,000,000 Won (the currency of South Korea, equivalent to approximately $400,000 US 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 anticipates
entering into discussions with Samyang with a view toward a comprehensive resolution of the aforementioned matters.
Significant
Developments Subsequent to March 31, 2014
Second
Closing of Series G 1.5% Convertible Preferred Stock Private Placement
On
April 17, 2014, the Company entered into Securities Purchase Agreements with various accredited investors (together with the Initial
Purchasers, as previously defined, the “Purchasers”), pursuant to which the Company sold an aggregate of 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 Private Placement. The Purchasers in the second and final tranche of the
Private Placement consisted of new, non-affiliated, accredited investors and non-management investors who had also invested in
the first closing. One of the investors in this second and final closing was an affiliate of an associated person of Aurora Capital
LLC. 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 Private Placement received cash fees of $3,465
as compensation and rights to 6,386,120 warrants to acquire 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 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. Aurora Capital LLC was one of
the placement agents.
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 Private Placement are convertible
into a total of 281,363,634 shares of common stock.
The
warrants that the placement agents and selected dealers received in connection with all closings of the 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.
Convertible
Note and Warrant Financing
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.
This was the initial closing of a private placement of up to $1,000,000. Unless otherwise provided for in the Notes, the outstanding
principal balance of each Note and all accrued and unpaid interest is 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
(an aggregate of 6,814,286 shares), 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 shall
be exercisable into a fixed number of shares of common stock of the Company calculated as each Purchaser’s investment amount
divided by $0.035 (an aggregate of 6,814,286 shares for the initial closing). The Warrants do not have any cashless exercise provisions
and are exercisable through September 15, 2015 at a fixed price of $0.035 per share. The shares of common stock issuable upon
conversion of the Notes and 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 Notes and Warrants to various accredited investors. The Company currently expects to terminate this
financing effective February 27, 2015.
Placement
agent fees, brokerage commissions, finder’s fees 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, 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 are exercisable through September 15, 2015 at a fixed price of $0.035 per share. Aurora Capital LLC is
acting as the placement agent for this financing.
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.
Awards
to Officers and Directors as Compensation
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 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 vest 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%. See Note 7 to the Company’s Condensed Consolidated Financial
Statements for the three months ended March 31, 2014 and 2013 for information with respect to common stock awards issued to officers
and directors in April 2014 as compensation.
In
connection with the appointment of James Sapirstein and Kathryn MacFarlane as directors of the Company on September 3, 2014, the
Board of Directors awarded an aggregate of 4,000,000 shares of common stock of the Company to the new directors, 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.
These
stock awards to directors in 2014 were made under the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive
Plan.
Debt
Settlements
During
the three months ended June 30, 2014, the Company executed settlement agreements with certain former service providers that resulted
in the settlement of potential claims totaling approximately $591,000 for a cost of approximately $155,000 in cash, plus the issuance
of 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 $37,500 in the aggregate. In addition to other provisions, the settlement
agreements included mutual releases.
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), plus the issuance of a stock option to purchase 500,000 shares of
common stock exercisable at $0.0512 per share for a period of five years, and valued pursuant to the Black-Scholes option-pricing
model at $25,450. In addition to other provisions, the settlement agreement included mutual releases.
The
Company 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.
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 the 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 certain outstanding patent costs (not to exceed $16,000), and (iii) the assignment to the University of Illinois
of certain rights the Company holds in certain patent applications. In exchange for certain milestone and royalty payments, 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.
Settlement
with the Institute for the Study of Aging
On
September 2, 2014, the Company entered into a Release Agreement (the “Release Agreement”) with the Institute for the
Study of Aging (the “Institute”) to settle an outstanding promissory note, dated May 30, 2000, issued by the Company
in favor of the Institute for an initial principal amount of $247,300 (the “Note”), which was made pursuant to an
Agreement to Accept Conditions of Loan Support, also dated May 30, 2000 (the “Loan Support Agreement”). At August
31, 2014, the amount owed under the Note, including accrued interest was approximately $337,000. Pursuant to the terms of the
Release Agreement, the Institute received 1,000,000 restricted 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.
Appointment
of New Directors
On
September 3, 2014, James Sapirstein and Kathryn MacFarlane were appointed as new directors of the Company. The Board of Directors
determined that these two new directors are independent directors. In connection with those appointments and in conformity with
its corporate policy of indemnifying all directors and officers, the Board of Directors also agreed at that time to enter into
indemnification agreements for all directors and officers of the Company, namely, each existing director of the Company, Dr. Arnold
S. Lippa, Jeff E. Margolis, and Robert N. Weingarten, each of whom is also an officer of the Company, and with the two new directors.
Pursuant to the indemnity agreements, the Company will indemnify each director or officer when such individual is a party or threatened
to become a party, by virtue of being a director or officer of the Company, from the costs and expenses, fines and certain other
amounts in connection with certain proceedings, including proceedings in the right of the Company, so long as such director or
officer acted in good faith and reasonably believed that such actions were not in the best interests of the Company.
Appointment
of Chairman of the Company’s Scientific Advisory Board
On
September 18, 2014, Dr. John Greer, Ph.D. was appointed to the position of Chairman of the Company’s Scientific Advisory
Board, which is currently being formed. Dr. Greer is the Director of the Neuroscience and Mental Health Institute at the University
of Alberta. He holds two grants regarding research into neuromuscular control of breathing and is the inventor on the use patents
licensed by the Company with respect to ampakines. Dr. Greer is expected to assist the Company in forming the rest of its Scientific
Advisory Board.
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. This award was made under the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan.
National
Institute on Drug Abuse Grant
On
September 18, 2014, the Company entered into a contract with the National Institute on Drug Abuse, a division of the National
Institutes of Health. The funding under the contract is a Phase 1 award granted under the Small Business Innovation Research Funding
Award Program. The purpose of the project is to determine the most useful injectable route of administration for CX1942, the Company’s
proprietary, soluble ampakine molecule, a potential rescue medication for drug-induced respiratory depression and lethality. The
grant is entitled “Novel Treatment of Drug-Induced Respiratory Depression” and is valued at $148,583, which is to
be paid in increments over the expected six-month duration of the study which commenced in October 2014. The study will measure
the potency, latency to onset and duration of action of CX1942 administered to rats. The Company anticipates that the data obtained
from the study will be used to finalize preclinical studies in preparation for initiating Phase 1 clinical studies. The preclinical
studies are being performed in collaboration with Dr. David Fuller of the University of Florida and Dr. John Greer of the University
of Alberta, Chairman of the Company’s Scientific Advisory Board.
Appointment
of Senior Vice President of Research and Development
Richard
Purcell was appointed as the Company’s Senior Vice President of Research and Development effective October 15, 2014. Mr.
Purcell’s commitment to the Company is for 30 hours per week in order to allow him to comply with his previous professional
commitments. Mr. Purcell provides his services to the Company through his consulting firm, DNA Healthlink, Inc., with which the
Company has contracted for his services.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred
net losses of $1,380,710 for the three months ended March 31, 2014 and $1,201,457 for the fiscal year ended December 31, 2013,
respectively, negative operating cash flows of $313,759 for the three months ended March 31, 2014 and $182,435 for the fiscal
year ended December 31, 2013, respectively, and incurred additional net losses and negative operating cash flows in the remainder
of the 2014 fiscal year. The Company expects to continue to incur net losses and negative operating cash flows for several more
years thereafter. As a result, management and the Company’s auditors believe that there is 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. Beginning in late 2012, the Company’s business activities were reduced to minimal
levels, and the prior Board of Directors of the Company, which was removed by the written consent of stockholders holding a majority
of the outstanding shares on March 22, 2013, had retained bankruptcy counsel to assist the Company in preparations to file for
liquidation under Chapter 7 of the United States Bankruptcy Code. New management, which was appointed during March and April 2013,
has evaluated the status of numerous aspects of the Company’s existing business and obligations, including, without limitation,
debt obligations, financial requirements, intellectual property, licensing agreements, legal and patent matters and regulatory
compliance, and has raised new capital to fund its business activities.
From
June 2013 through March 2014, the Company’s Chairman and Chief Executive Officer advanced short-term loans to the Company
aggregating $150,000 in order to meet its minimum operating needs. 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 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 (with warrants) in an
aggregate principal amount of $369,500 to various accredited investors and an additional $210,000 of such short-term convertible
notes (with warrants) in February 2015. The Company currently expects to terminate this financing effective February 27, 2015.
The
Company will need to continue to raise additional capital to be able to pay its liabilities and fund its business activities going
forward. 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.
Recent
Accounting Pronouncements
In
April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08 (ASU
2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends
the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under
ASU 2014-08, only disposals representing a strategic shift in operations or that have a major effect on the Company’s operations
and financial results should be presented as discontinued operations. ASU 2014-08 is effective for annual periods beginning after
December 15, 2014. As the Company is engaged in research and development activities, the Company does not expect the adoption
of this guidance to have any impact on the Company’s financial statement presentation or disclosures.
In
May 2014, 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 U.S. GAAP and replace
it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue
based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective
for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard
either retrospectively or as a cumulative-effect adjustment as of the date of adoption. As the Company does not expect to have
any operating revenues for the foreseeable future, the Company does not expect the adoption of this guidance to have any impact
on the Company’s financial statement presentation or disclosures.
In
June 2014, the FASB issued Accounting Standards Update No. 2014-10 (ASU 2014-10), Development Stage Entities (Topic 915): Elimination
of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation.
ASU 2014-10 eliminated the requirement to present inception-to-date information about income statement line items, cash flows,
and equity transactions, and clarifies how entities should disclose the risks and uncertainties related to their activities. ASU
2014-10 also eliminated an exception provided to development stage entities in Consolidations (ASC Topic 810) for determining
whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The presentation
and disclosure requirements in Topic 915 will no longer be required for interim and annual reporting periods beginning after December
15, 2014, and the revised consolidation standards will take effect in annual periods beginning after December 15, 2015. Early
adoption is permitted. The adoption of ASU 2014-10 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 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.
Concentration
of Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents
and short-term investments. The Company limits its exposure to credit risk by investing its cash with high credit quality financial
institutions.
The
Company’s research and development efforts and potential products rely on licenses from research institutions and if the
Company loses access to these technologies or applications, its business could be substantially impaired.
Under
the Company’s agreements with The Regents of the University of California, the Company had exclusive rights to certain ampakine
compounds for all applications for which the University had patent rights, other than endocrine modulation. The license securing
these rights has since been terminated.
Under
a patent license agreement with The Governors of the University of Alberta, the Company has exclusive rights to the use of certain
ampakine compounds to prevent and treat respiratory depression induced by opiate analgesics, barbiturates and anesthetic and sedative
agents.
On
May 8, 2007, the Company entered into a license agreement, as subsequently 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, no maintenance payments are currently due and payable to the University
of Alberta. In addition, no other prospective payments are currently due and payable to the University of Alberta.
Through
the merger with Pier, the Company gained access to the License Agreement that Pier had entered into with the University of Illinois
on October 10, 2007. The Pier License Agreement covered certain patents and patent applications in the United States and other
countries claiming the use of certain compounds referred to as cannabinoids for the treatment of sleep related breathing disorders
(including sleep apnea), of which dronabinol is a specific example of one type of cannabinoid. Dronabinol is a synthetic derivative
of the naturally occurring substance in the cannabis plant, otherwise known as Δ9-THC (Δ9-tetrahydrocannabinol). Dronabinol
is currently approved by the FDA and is sold generically for use in refractory chemotherapy-induced nausea and vomiting, as well
as for anorexia in patients with AIDS. Pier’s business plan was to determine whether dronabinol would significantly improve
subjective and objective clinical measures in patients with obstructive sleep apnea. In addition, Pier intended to evaluate the
feasibility and comparative efficacy of a proprietary formulation of dronabinol. The Pier License Agreement was terminated effective
March 21, 2013 due to the Company’s failure to make a required payment and on June 27, 2014, the Company entered into a
new license agreement with the University of Illinois, the material terms of which were similar to the Pier License Agreement
that had been terminated. If the Company is unable to comply with the terms of the new license agreement, such as required payments
thereunder, the Company risks the new license agreement being terminated.
Critical
Accounting Policies and Estimates
The
Company prepared its condensed consolidated financial statements in accordance with accounting principles generally accepted in
the United States of America. The preparation of these consolidated financial statements requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically
evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various
factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result
of different assumptions or conditions.
The
following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s
condensed consolidated financial statements.
Research
Grant Revenue
The
Company recognizes research grant revenues as earned when the related expenses for the grant projects are incurred. Amounts received
under research grants are nonrefundable, regardless of the success of the underlying research, to the extent that such amounts
are expended in accordance with the approved grant project.
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.
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 charged to operations at the grant date fair value ratably over the vesting period.
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 options vest, they are valued
on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current
value on the date of vesting.
The
fair value of stock options 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 security 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 value of common stock is determined by reference
to the quoted market price of the Company’s common stock.
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 to satisfy stock option exercises.
Research
and Development Costs
Research
and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and
other expenses relating to the acquisition, design, development and testing of the Company’s treatments and product candidates.
Research
and development costs are expensed as incurred over the life of the underlying contracts on the straight-line basis, unless the
achievement of milestones, the completion of contracted work, or other information indicates that a different expensing schedule
is more appropriate. Payments made pursuant to research and development contracts are initially recorded as advances on research
and development contract services in the Company’s balance sheet and then charged to research and development costs in the
Company’s statements of operations as those contract services are performed. Expenses incurred under research and development
contracts in excess of amounts advanced are recorded as research and development contract liabilities in the Company’s balance
sheet, with a corresponding charge to research and development costs in the Company’s statements of operations. The Company
reviews the status of its research and development contracts on a quarterly basis.
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.
Results
of Operations
Three
Months Ended March 31, 2014 and 2013
Revenues.
The Company had no revenues during the three months ended March 31, 2014 and 2013.
General
and Administrative. For the three months ended March 31, 2014, general and administrative expenses were $2,348,107, an increase
of $1,588,818 or approximately 209%, as compared to $759,289 for the three months ended March 31, 2013. The increase in general
and administrative expenses for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, is
a result of share-based compensation of $2,280,000 to officers, directors and consultants as compensation for services rendered
since they joined the Company in March and April 2013. None of these individuals receiving share-based compensation had previously
received any compensation from the Company.
Included
in general and administrative expenses of $759,289 for the three months ended March 31, 2013 were accrued severance costs of $585,000
relating to the termination of certain corporate officers in March 2013 and accrued legal fees of $85,000 to reimburse Aurora
Capital LLC for its legal fees incurred in conjunction with the removal of the Company’s former Board of Directors on March
22, 2013.
For
the three months ended March 31, 2014, stock-based compensation costs included in general and administrative expenses were $2,280,000,
including $1,960,000 to related parties. There were no stock-based compensation costs included in general and administrative expenses
during the three months ended March 31, 2013.
Research
and Development. For the three months ended March 31, 2014, research and development expenses were $64,089, a decrease of
$19,839 or approximately 24%, as compared to $83,928 for the three months ended March 31, 2013. The decrease in research and development
expenses for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, reflects the discontinuance
of licensing costs relating to the licensing agreement with the University of California, Irvine that was terminated on April
15, 2013, partially offset by increased spending on patent legal fees.
There
were no stock-based compensation costs included in research and development expenses during the three months ended March 31, 2014
or 2013.
Gain
on Settlements with Former Management. During the three months ended March 31, 2014, the Company recorded a gain of $1,038,270
as a result of settlement agreements with four former executives. The Company settled potential claims totaling $1,336,264 for
cash payments of $118,084 and the issuance of 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.
Interest
Expense. During the three months ended March 31, 2014, interest expense was $13,061 (including $12,046 to related parties),
a decrease of $1,976, as compared to $15,037 (including $11,993 to related parties) for the three months ended March 31, 2013.
The decrease in interest expense resulted primarily from the discontinuance of interest relating to the licensing agreement with
the University of California, Irvine that was terminated on April 15, 2013.
Foreign
Currency Transaction Gain. Foreign currency transaction gain was $6,277 and $20,868 for the three months ended March 31, 2014
and 2013, respectively, reflecting the $399,774 loan from Samyang in June 2012 being denominated in the South Korean won.
Net
Loss. For the three months ended March 31, 2014, the Company incurred a net loss of $1,380,710, as compared to a net loss
of $837,386 for the three months ended March 31, 2013.
Amortization
of Deemed Dividend on Series G 1.5% Convertible Preferred Stock. For the three months ended March 31, 2014, amortization of
the deemed dividend on the shares of Series G 1.5% Convertible Preferred Stock issued in the March 18, 2014 closing was $1,209,970.
Dividend
on Series G 1.5% Convertible Preferred Stock. For the three months ended March 31, 2014, dividends accrued on the shares of
Series G 1.5% Convertible Preferred Stock issued in the March 18, 2014 closing were $408.
Net
Loss Attributable to Common Stockholders. For the three months ended March 31, 2014, the Company incurred a net loss attributable
to common stockholders of $1,524,216, as compared to a net loss attributable to common stockholders of $837,386 for the three
months ended March 31, 2013.
Liquidity
and Capital Resources – March 31, 2014
The
Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred
net losses of $1,380,710 for the three months ended March 31, 2014 and $1,201,457 for the fiscal year ended December 31, 2013,
respectively, negative operating cash flows of $313,759 for the three months ended March 31, 2014 and $182,435 for the fiscal
year ended December 31, 2013, respectively, and incurred additional net losses and negative operating cash flows in the remainder
of the 2014 fiscal year. The Company expects to continue to incur net losses and negative operating cash flows for several more
years thereafter. As a result, management and the Company’s auditors believe that there is substantial doubt about the Company’s
ability to continue as a going concern.
At
March 31, 2014, the Company had a working capital deficit of $2,532,091, as compared to a working capital deficit of $4,188,424
at December 31, 2013, an increase in working capital of $1,656,333 for the three months ended March 31, 2014. At March 31, 2014,
the Company had cash aggregating $311,932, as compared to $14,352 at December 31, 2013, an increase of $297,580 for the three
months ended March 31, 2014. The increase in working capital and cash during the three months ended March 31, 2014 was the result
primarily of proceeds from the issuance of Series G 1.5% Convertible Preferred Stock and settlement agreements executed with four
former executives.
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. Beginning in late 2012, the Company’s business activities were reduced to minimal
levels, and the prior Board of Directors of the Company, which was removed by the written consent of stockholders holding a majority
of the outstanding shares on March 22, 2013, had retained bankruptcy counsel to assist the Company in preparations to file for
liquidation under Chapter 7 of the United States Bankruptcy Code. New management, which was appointed during March and April 2013,
has evaluated the status of numerous aspects of the Company’s existing business and obligations, including, without limitation,
debt obligations, financial requirements, intellectual property, licensing agreements, legal and patent matters and regulatory
compliance, and has raised new capital to fund its business activities.
From
June 2013 through March 2014, the Company’s Chairman and Chief Executive Officer advanced short-term loans to the Company
aggregating $150,000 in order to meet its minimum operating needs. 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 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 (with warrants) in an
aggregate principal amount of $369,500 to various accredited investors and an additional $210,000 of such short-term convertible
notes (with warrants) in February 2015. The Company currently expects to terminate this financing effective February 27, 2015.
The
Company will need to continue to raise additional capital to be able to pay its liabilities and fund its business activities going
forward. 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.
Operating
Activities. For the three months ended March 31, 2014, operating activities utilized cash of $313,759, as compared to utilizing
cash of $144,592 for the three months ended March 31, 2013, to support the Company’s ongoing operations, including research
and development activities. Included in the $313,759 of cash utilized during the three months ended March 31, 2014 was $118,084
of cash used to fund, in part, settlement agreements with four former executives.
Investing
Activities. For the three months ended March 31, 2014, investing activities utilized cash of $1,925 for the acquisition of
furniture and equipment. There were no investing activities during the three months ended March 31, 2013.
Financing
Activities. For the three months ended March 31, 2014, financing activities generated cash of $613,264 consisting of $753,220
in proceeds from the sale of the Series G 1.5% Convertible Preferred Stock and $75,000 in proceeds from notes payable issued to
the Company’s Chairman, offset by the payment of financing costs of $64,956 relating to the sale of the Series G 1.5% Convertible
Preferred Stock and the repayment of the advances to the Chairman totaling $150,000. There were no financing activities during
the three months ended March 31, 2013.
Principal
Commitments
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, no maintenance payments are currently due and payable to the University of Alberta. In addition, no
other prospective payments are currently due and payable to the University of Alberta.
Off-Balance
Sheet Arrangements
At
March 31, 2014, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet
arrangements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) that are designed to ensure that information required to be disclosed in the reports that the Company files with the
Securities and Exchange Commission (the “SEC”) under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated
to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow for timely decisions
regarding required disclosures.
The Company carried out an evaluation, under
the supervision and with the participation of its management, consisting of its principal executive officer and principal financial
officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act). Based upon that evaluation, the Company’s principal executive officer and principal financial officer
concluded that, as of the end of the period covered in this report, the Company’s disclosure controls and procedures were
not effective to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed,
summarized and reported within the required time periods and is accumulated and communicated to the Company’s management,
consisting of the Company’s principal executive officer and principal financial officer, to allow timely decisions regarding
required disclosure. The Company failed to complete and file various periodic reports in 2012, 2013 and 2014 in a timely manner
because the Company’s accounting and financial staff had resigned by October 26, 2012 and its financial and accounting systems
had been shut-down at December 31, 2012.
New
management, which joined the Company in March and April 2013, has been focusing on developing replacement controls and procedures
that are adequate to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed,
summarized and reported within the required time periods and is accumulated and communicated to the Company’s management,
consisting of the Company’s principal executive officer and principal financial officer, to allow timely decisions regarding
required disclosure. New management has instituted a program to reestablish the Company’s accounting and financial staff
and install new accounting and internal control systems, and has retained accounting personnel, established accounting and internal
control systems, addressed the preparation of delinquent financial statements, and been diligently working to bring delinquent
SEC filings current as promptly as reasonably possible under the circumstances. However, as of the date of the filing of this
Quarterly Report on Form 10-Q, the Company had not yet completed the process to establish adequate internal controls over financial
reporting.
The
Company’s management, consisting of its principal executive officer and principal financial officer, does not expect that
its disclosure controls and procedures or its internal controls will prevent all error or fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits of
controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. In addition,
as conditions change over time, so too may the effectiveness of internal controls. However, management believes that the financial
statements included in this report fairly present, in all material respects, the Company’s financial condition, results
of operations and cash flows for the periods presented.
(b)
Changes in Internal Controls Over Financial Reporting
The
Company’s management, consisting of its principal executive officer and principal financial officer, has determined that
no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f)
of the Securities Exchange Act of 1934) occurred during or subsequent to the end of the period covered in this report that has
materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
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, has asserted certain claims for
consulting compensation against the Company. In the opinion of management, the Company has made adequate provision for any liability
relating to this matter in its financial statements at March 31, 2014.
The
Company is periodically the subject of various pending and threatened legal actions and claims. In the opinion of management of
the Company, adequate provision has been made in the Company’s condensed consolidated financial statements with respect
to such matters.
Additional
information with respect to certain legal matters is provided at “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Significant Developments Subsequent to March 31, 2014 – Debt Settlements.”
ITEM
1A. RISK FACTORS
Not
applicable.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During
the three months ended March 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 three months ended March 31, 2014.
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 “Private Placement”). The Initial Purchasers in this tranche of the Private
Placement consisted of (i) Dr. Arnold S. Lippa, the Company’s Chairman, 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. Aurora Capital LLC was one of the placement agents. The proceeds from the Series G 1.5% Convertible Preferred
Stock financing were used to repay advances to Dr. Lippa, to fund settlements with former management, to pay accounts payable
and accrued liabilities, and to fund research and development and general and administrative expenses.
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 Capital LLC, a related party. 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 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.
Additional
information with respect to the transactions described above is provided in the Notes to the Condensed Consolidated Statements
for the three months ended March 31, 2014 and 2013, which is included elsewhere in this document.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
On
June 25, 2012, the Company borrowed 465,000,000 Won (the currency of South Korea, equivalent to approximately $400,000 US 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 had 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 had 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 anticipates
entering into discussions with Samyang with a view toward a comprehensive resolution of the aforementioned matters.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
ITEM
5. OTHER INFORMATION
Not
applicable.
ITEM
6. EXHIBITS
A
list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which is presented elsewhere
in this document, and is incorporated herein by reference.
SIGNATURES
In
accordance with the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
|
CORTEX
PHARMACEUTICALS, INC. |
|
(Registrant) |
Date:
February 10, 2015 |
By:
|
/s/
ARNOLD S. LIPPA |
|
|
Arnold
S. Lippa |
|
|
President
and Chief Executive Officer |
|
|
|
Date:
February 10, 2015 |
By:
|
/s/
ROBERT N. WEINGARTEN |
|
|
Robert
N. Weingarten |
|
|
Vice
President and Chief Financial Officer |
INDEX
TO EXHIBITS
The
following documents are filed as part of this report:
Exhibit
Number |
|
Description
of Document |
|
|
|
3.1 |
|
Certificate
of Designation, Preferences, Rights and Limitations of Series G 1.5% Convertible Preferred Stock, incorporated by reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March
24, 2014. |
|
|
|
10.1 |
|
Form
of Securities Purchase Agreement, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on March 24, 2014. |
|
|
|
10.2 |
|
Cortex
Pharmaceuticals, Inc. 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan, incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 24, 2014. |
|
|
|
31.1* |
|
Officer’s
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2* |
|
Officer’s
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1* |
|
Officer’s
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2* |
|
Officer’s
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101.INS* |
|
XBRL
Instance Document |
|
|
|
101.SCH* |
|
XBRL
Taxonomy Extension Schema Document |
|
|
|
101.CAL* |
|
XBRL
Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB* |
|
XBRL
Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE* |
|
XBRL
Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF* |
|
XBRL
Taxonomy Extension Definition Linkbase Document |
*
Filed herewith.
EXHIBIT
31.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Arnold S. Lippa, certify that:
1. |
I
have reviewed this Quarterly Report on Form 10-Q of Cortex Pharmaceuticals, Inc.; |
|
|
2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have: |
|
(a) |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
(b) |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
(c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
|
|
|
|
(d) |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
5. |
The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors
(or persons performing the equivalent functions): |
|
(a) |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
|
|
|
(b) |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date:
February 10, 2015 |
By:
|
/s/
ARNOLD S. LIPPA |
|
|
Arnold S. Lippa |
|
|
Chief Executive
Officer |
EXHIBIT
31.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Robert N. Weingarten, certify that:
1. |
I
have reviewed this Quarterly Report on Form 10-Q of Cortex Pharmaceuticals, Inc.; |
|
|
2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have: |
|
(a) |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
(b) |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
(c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
|
|
|
|
(d) |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
5. |
The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors
(or persons performing the equivalent functions): |
|
(a) |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
|
|
|
(b) |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date:
February 10, 2015 |
By:
|
/s/
ROBERT N. WEINGARTEN |
|
|
Robert N. Weingarten |
|
|
Chief Financial
Officer |
EXHIBIT
32.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I,
Arnold S. Lippa, the Chief Executive Officer of Cortex Pharmaceuticals, Inc. (the “Company”), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(i)
The Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2014 (the “Report”) fully
complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
(ii)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
A
signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date:
February 10, 2015 |
By: |
/s/
ARNOLD S. LIPPA |
|
|
Arnold S. Lippa |
|
|
Chief Executive
Officer |
EXHIBIT
32.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I,
Robert N. Weingarten, the Chief Financial Officer of Cortex Pharmaceuticals, Inc. (the “Company”), certify, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(i)
The Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2014 (the “Report”) fully
complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
(ii)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
A
signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date:
February 10, 2015 |
By: |
/s/
ROBERT N. WEINGARTEN |
|
|
Robert N. Weingarten |
|
|
Chief Financial
Officer |
RespireRx Pharmaceuticals (PK) (USOTC:RSPI)
過去 株価チャート
から 6 2024 まで 7 2024
RespireRx Pharmaceuticals (PK) (USOTC:RSPI)
過去 株価チャート
から 7 2023 まで 7 2024