PART
I
Item
1. Business
The
Company’s mission is to develop innovative and revolutionary treatments to combat diseases caused by disruption of neuronal
signaling. We are developing treatment options that address conditions that affect millions of people, but for which there are
few or poor treatment options, including obstructive sleep apnea (“OSA”), attention deficit hyperactivity disorder
(“ADHD”) and recovery from spinal cord injury (“SCI”), as well as certain neurological orphan diseases
such as Fragile X Syndrome. RespireRx is developing a pipeline of new drug products based on our broad patent portfolios for two
drug platforms: ampakines, proprietary compounds that positively modulate AMPA-type glutamate receptors to promote neuronal function
and cannabinoids, including dronabinol (“∆9-THC”).
Ampakines
Since
its formation in 1987, RespireRx Pharmaceuticals Inc. (formerly known as Cortex Pharmaceuticals, Inc.) has been engaged in the
research and clinical development of a class of proprietary compounds known as ampakines, a term used to designate their actions
as positive allosteric modulators of the alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid (“AMPA”) glutamate
receptor. Ampakines are small molecule compounds that enhance the excitatory actions of the neurotransmitter glutamate at the
AMPA receptor complex, which mediates most excitatory transmission in the central nervous system (“CNS”). These drugs
do not have agonistic or antagonistic properties but instead positively modulate the receptor rate constants for transmitter binding,
channel opening, and desensitization. We currently are developing two lead clinical compounds, CX717 and CX1739, and one pre-clinical
compound, CX1942. These compounds belong to a new class of ampakines that do not display the electrophysiological and biochemical
effects that lead to undesirable side effects, namely convulsive activities, previously reported in animal models of earlier generations.
The
Company owns patents and patent applications, or the rights thereto, for certain families of chemical compounds, including ampakines,
which claim the chemical structures, their actions as ampakines and their use in the treatment of various disorders. Patents claiming
a family of chemical structures, including CX1739 and CX1942, as well as their use in the treatment of various disorders extend
through at least 2028. Additional patent applications claiming the use of ampakines in the treatment of certain neurological and
neuropsychiatric disorders, such as Attention Deficit Hyperactivity Disorder (“ADHD”) have been or are expected to
be filed in the near future.
In
2007, we determined that expansion of our strategic development into the areas of central respiratory dysfunction, including drug-induced
respiratory dysfunction, represented cost-effective opportunities for potentially rapid development and commercialization of RespireRx’s
compounds. On May 8, 2007, RespireRx entered into a license agreement, as subsequently amended, with the University of Alberta
granting RespireRx exclusive rights to method of treatment patents held by the University of Alberta claiming the use of ampakines
for the treatment of various respiratory disorders. These patents, along with RespireRx’s own patents claiming chemical
structures, comprise RespireRx’s principal intellectual property supporting RespireRx’s research and clinical development
program in the use of ampakines for the treatment of central and drug-induced respiratory disorders.
On
May 18, 2018, the Company received a letter from counsel claiming to represent TEC Edmonton and The Governors of the University
of Alberta that purported to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 (as subsequently
amended) between the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds
for termination and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting
to be attended by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute.
In February 2019, the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license
agreement and the form of a new license agreement. However, the parties have not signed the draft new license agreement pending
the Company’s payment of the agreed amount of historical unreimbursed patent fees of approximately CAD$23,000 (approximately
US$17,000 as of December 31, 2018). No assurance can be provided that the Company will or will not be able to remit the
historical license fees or that the draft new license agreement will be executed and become effective. If we do not remit the
historical fees and the new license agreement does not become effective, we cannot estimate the possible adverse impact on the
Company’s operations or business prospects.
Through
an extensive translational research effort from the cellular level through Phase 2 clinical trials, the Company has developed
a family of novel, low impact ampakines, including CX717, CX1739 and CX1942 that have clinical application in the treatment of
neurobehavioral disorders, CNS-driven respiratory disorders, spinal cord injury, neurological diseases, and orphan indications.
We have been addressing CNS-driven respiratory disorders that affect millions of people, but for which there are few treatment
options and limited drug therapies, including opioid induced respiratory disorders, such as apnea (transient cessation of breathing)
or hypopnea (transient reduction in breathing). When these symptoms become severe, as in opioid overdose, they are the primary
cause of opioid lethality.
RespireRx
has completed pre-clinical studies indicating that several of its ampakines, including CX717, CX1739 and CX1942, were efficacious
in treating drug induced respiratory depression caused by opioids or certain anesthetics without altering the analgesic effects
of the opioids or the anesthetic effects of the anesthetics. The results of our preclinical research studies have been replicated
in three separate Phase 2A human clinical trials with two ampakines, CX717 and CX1739, confirming the translational mechanism
and target site engagement and demonstrating proof of principle that ampakines act as positive allosteric modulators of AMPA receptors
in humans and can be used in humans for the prevention of opioid induced apnea. In addition, RespireRx has conducted a Phase 2A
clinical study in which patients with sleep apnea were administered CX1739, RespireRx’s lead clinical compound. The results
suggested that CX1739 might have use as a treatment for central sleep apnea (“CSA”) and mixed sleep apnea, but not
OSA.
RespireRx
is committed to advancing the ampakines through the clinical and regulatory path to approval and commercialization. Until recently,
RespireRx has focused on the ampakines’ ability to antagonize opioid induced respiratory depression both as a translational
tool to verify target engagement, as well as an eventual commercial indication. We believe the loss of over 70,000 lives in our
country last year alone demands that new solutions for opioid induced deaths be developed to ensure the public health.
To
this end, the Company has conducted preclinical and clinical research with CX1739, CX717 and CX1942 in the prevention, treatment,
and management of opioid induced apnea, the primary cause of overdose deaths. In particular, we have conducted several Phase 2
clinical trials demonstrating that both CX717 and CX1739 significantly reduced opioid induced respiratory depression (“OIRD”)
without altering analgesia. Since one of the primary risk factors for opioid overdose is CSA, it is significant that a Phase 2A
clinical study with CX1739 produced data suggesting a possible reduction in central sleep apnea.
As
there are
neither drugs nor devices approved to treat CSA, Company
management believes there is the potential for a rapid path to commercialization. Unfortunately, rather than support novel approaches
for opioid treatment, the recent public and governmental discourses regarding the “opioid epidemic” has focused almost
entirely on the distribution of naloxone, an opioid antagonist used for acute emergency situations, so-called “non-abuseable”
opioid formulations, as well as on means of reducing opioid consumption by limiting production of opioids and access to legal
opioid prescriptions. It remains to be seen whether these approaches will have an impact on the situation. Nevertheless, as a
result, we believe that there is an ongoing industry-wide pullback from opioids, as evidenced by a reduction in opioid prescriptions
and a major reduction in manufacturing by two of the largest opioid manufactures in the United States.
These
factors have made it difficult to raise capital or find strategic partners for the development of ampakines for the treatment
of opioid induced respiratory depression and we are assessing whether to continue with this program. In addition, as noted above,
we have been notified by the University of Alberta (“TEC Edmonton”) that they consider our license agreement to be
terminated and we are in discussions with them to determine whether and under what conditions a resolution to the dispute can
be achieved. At the present time, we are suspending the development of this program until we reach an understanding with
the University of Alberta, the political climate is clarified and we are able to either raise funding or enter into a strategic
relationship for this purpose. Nevertheless, the valuable data derived from these translational studies have established antagonism
of OIRD as a biomarker for demonstrating proof of principle and target engagement in support of continued ampakine development
for other indications.
In
addition, the Company is pursuing potentially promising clinical development programs in neuro-behavioral and cognitive disorders,
with translational and clinical research programs focused on the use of ampakines for the treatment of ADHD and, together with
our academic collaborators, for motor impairment resulting from SCI and for Fragile X Autism.
ADHD
is one of the most common neurobehavioral disorders, with 6.1% of American children taking medication for treatment, and ADHD
is estimated to affect 7.8% of U.S. children aged 4 to 17, which is approximately 4.5 million children, according
to the U.S. Centers for Disease Control and Prevention (“CDC”). The principal characteristics of ADHD are inattention,
hyperactivity and impulsivity. ADHD symptoms are known to persist into adulthood. In a study published in
Psychiatry Res in
May 2010,
up to 78% of children affected by this disorder showed at least one of the major symptoms of ADHD when followed
up 10 years later. According to the CDC, approximately 4% of the US adult population has ADHD, which can negatively impair many
aspects of daily life, including home, school, work and interpersonal relationships.
Currently
available treatments for ADHD include amphetamine-type stimulants and non-stimulant agents targeting the monoaminergic receptor
systems in the brain. However, these receptors are not restricted to the brain and are widely found throughout the body. Thus,
while these agents can be effective in ameliorating ADHD symptoms, they also can produce adverse cardiovascular effects, such
as increased heart rate and blood pressure. Existing treatments also affect eating habits and can reduce weight gain and growth
in children and have been associated with suicidal ideation in adolescents and adults. In addition, approved stimulant treatments
are DEA classified as controlled substances and present logistical issues for distribution and protection from diversion. Approved
non-stimulant treatments, such as atomoxetine, can take four to eight weeks to become effective and undesirable side effects have
been observed.
Various
investigators have generated data supporting the concept that alterations in AMPA receptor function might underlie the production
of some of the symptoms of ADHD. In rodent and primate models of cognition, ampakines have been demonstrated to reduce inattention
and impulsivity, two of the cardinal symptoms of ADHD. Furthermore, ampakines do not stimulate spontaneous locomotor activity
in either mice or rats, unlike the stimulants presently used for the treatment of ADHD, nor do they increase the stimulation produced
by amphetamine or cocaine. These preclinical considerations prompted us to conduct a randomized, double-blind, placebo controlled,
two period crossover study to assess the efficacy and safety of CX717 in adults with ADHD.
In
a repeated measures analysis, a statistically significant treatment effect on ADHD Rating Scale (ADHD-RS), the primary outcome
measure, was observed after a three-week administration of CX717, 800 mg BID. Differences between this dose of CX717 and placebo
were seen as early as week one of treatment and continued throughout the remainder of the study. The low dose of CX717, 200 mg
BID, did not differ from placebo. In general, results from both the ADHD-RS hyperactivity and inattentiveness subscales, which
were secondary efficacy variables, paralleled the results of the total score. CX717 was considered safe and well tolerated.
Based
on these clinical results, ampakines such as CX717 might represent a breakthrough opportunity to develop a non-stimulating therapeutic
for ADHD with the rapidity of onset normally seen with stimulants. Subject to raising sufficient financing (of which no assurance
can be provided), we are planning to continue this program with a Phase 2B clinical trial in patients with adult ADHD.
Ampakines
also may have potential utility in the treatment and management of SCI to enhance motor functions and improve the quality of life
for SCI patients. An estimated 17,000 new cases of SCI occur each year in the United States, most a result of automobile accidents.
Currently, there are roughly 282,000 people living with spinal cord injuries, which often produce impaired motor function.
SCI
can profoundly impair neural plasticity leading to significant morbidity and mortality in human accident victims. Plasticity is
a fundamental property of the nervous system that enables continuous alteration of neural pathways and synapses in response to
experience or injury. One frequently studied model of plasticity is long-term facilitation of motor nerve output (“LTF”).
A large body of literature exists regarding the ability of ampakines to stimulate neural plasticity, possibly due to an enhanced
synthesis and secretion of various growth factors.
Recently,
studies of acute intermittent hypoxia (“AIH”) in patients with SCI demonstrate that neural plasticity can be induced
to improve motor function. This LTF is based on physiological mechanisms associated with the ability of spinal circuitry to learn
how to adjust spinal and brainstem synaptic strength following repeated hypoxic bouts. Because AIH induces spinal plasticity,
the potential exists to harness repetitive AIH as a means of inducing functional recovery of motor function following SCI.
RespireRx
has been working with Dr. David Fuller, at the University of Florida with funding from the National Institutes of Health, to evaluate
the use of ampakines for the treatment of compromised motor function in SCI. Using mice that have received spinal hemisections,
CX717 was observed to increase motor nerve activity bilaterally. The effect on the hemisected side was greater than that measured
on the intact side, with the recovery approximating that seen on the intact side prior to administration of ampakine. In addition,
CX717 was observed to produce a dramatic and long-lasting effect on LTF produced by AIH. The doses of ampakines active in SCI
were comparable to those demonstrating antagonism of OIRD, indicating target engagement of the AMPA receptors.
These
animal models of motor nerve function following SCI support proof of concept for a new treatment paradigm using ampakines to improve
motor functions in patients with SCI. With additional funding recently granted by NIH to Dr. Fuller, RespireRx is continuing
its collaborative preclinical research with Dr. Fuller while it is planning a clinical trial program focused on developing ampakines
for the restoration of certain motor functions in patients with SCI. The Company is working with our Clinical Advisory Panel and
with researchers at highly regarded clinical sites to finalize a Phase 2 clinical trial protocol. Subject to raising sufficient
financing (of which no assurance can be provided), we believe that a clinical study could be initiated as early as 2019.
According
to the Autism Society, more than 3.5 million Americans live with an Autism Spectrum Disorder (“ASD”), a complex neurodevelopmental
disorder. Fragile X Syndrome (“FXS”) is the most common identifiable single-gene cause of autism, affecting approximately
1.4 in every 10,000 males and 0.9 in every 10,000 females, according to the CDC. Individuals with FXS and ASD exhibit a range
of abnormal behaviors comprising hyperactivity and attention problems, executive function deficits, hyper-reactivity to stimuli,
anxiety and mood instability. Also, according the Autism Society, the prevalence rate of ASD has risen from 1 in 150 children
in 2000 to 1 in 68 children in 2010, with current estimates indicating a significant rise in ASD diagnosis to 1 in 59 births,
placing a significant emotional and economic burden on families and educational systems. The Autism Society estimates the economic
cost to U.S. citizens of autism services to be between $236 and $262 billion annually.
Since
“autistic disturbances” were first identified in children in 1943, extensive research efforts have attempted to
identify the genetic, molecular, environmental, and clinical causes of ASD, but until recently the underlying etiology of the
disorder remained elusive. Today, there are no medications that can treat ASD or its core symptoms, and only two
anti-psychotic drugs, aripiprazole and risperidone, are approved by the United States Food and Drug Administration
(“FDA”) for the treatment of irritability associated with ASD.
Thanks
to wide ranging translational research efforts, FXS and ASD are currently recognized as disorders of the synapse with alterations
in different forms of synaptic communication and neuronal network connectivity. Focusing on the proteins and subunits of the AMPA
receptor complex, autism researchers at the University of San Diego (“UCSD”) have proposed that AMPA receptor malfunction
and disrupted glutamate signal transmission may play an etiologic role in the behavioral, emotional and neurocognitive phenotypes
that remain the standard for ASD diagnosis. For example, Stargazin, also known as CACNG2 (Ca
2+
channel γ2 subunit),
is one of four closely related proteins recently categorized as transmembrane AMPA receptor regulating proteins (“TARPs”).
Researchers
at the UCSD have been studying genetic mutations in the AMPA receptor complex that lead to cognitive and functional deficiencies
along the autism spectrum. They work with patients and their families to conduct detailed genetic analyses in order to better
understand the underlying mechanisms of autism. In one case, they have been working with a teenage patient who has an autism diagnosis,
with a phenotype that is characterized by subtle Tourette-like behaviors, extreme aggression, and verbal and physical outbursts
with disordered thought. Despite the behaviors, his language is normal. Using next generation sequencing and genome editing technologies,
the researchers identified a specific mutation in stargazin,
a transmembrane AMPA receptor
regulatory protein that alters the configuration and kinetics of the AMPA receptor.
When the aberrant sequence was introduced
into C57bL6 mice using CRISPR (Clustered Regulatory Interspaced Short Palindromic Repeats), the heterozygous allele had a dominant
negative effect on the trafficking of post-synaptic AMPA receptors and produced behaviors consistent with a glutamatergic deficit
and similar to what has been observed in the teenage patient.
With
funding from the National Institutes of Health to UCSD, RespireRx is working with UCSD to explore the use of ampakines for the
amelioration of the cognitive and other deficits associated with AMPA receptor gene mutations. Because CX1739 has an open investigational
new drug (“IND”) application, subject to securing sufficient outside funding (of which no assurance can
be provided), we are considering a Phase 2A clinical trial sometime in 2019.
Cannabinoids
OSA
is a sleep-related breathing disorder that afflicts an estimated 29 million people in the United States according to the American
Academy of Sleep Medicine (“AASM”), and an additional 26 million in Germany and 8 million in the United Kingdom, as
presented at the European Respiratory Society’s (“ERS”) annual Congress in Paris, France in September 2018.
OSA involves a decrease or complete halt in airflow despite an ongoing effort to breathe during sleep. When the muscles relax
during sleep, soft tissue in the back of the throat collapses and obstructs the upper airway. OSA remains significantly under-recognized,
as only 20% of cases in the United States according to the AASM and 20% of cases globally have been properly diagnosed. About
24 percent of adult men and 9 percent of adult women have the breathing symptoms of OSA with or without daytime sleepiness. OSA
significantly impacts the lives of sufferers who do not get enough sleep; their quality of sleep is deteriorated such that daily
function is compromised and limited. OSA is associated with decreased quality of life, significant functional impairment, and
increased risk of road traffic accidents, especially in professions like transportation and shipping.
Research
has established links between OSA and several important co-morbidities, including hypertension, type II diabetes, obesity, stroke,
congestive heart failure, coronary artery disease, cardiac arrhythmias, and even early mortality. The consequences of undiagnosed
and untreated OSA are medically serious and economically costly. According to the AASM, the estimated economic burden of OSA in
the United States is approximately $162 billion annually. We believe that a new drug therapy that is effective in reducing the
medical and economic burden of OSA would have significant advantages for optimal pricing in this costly disease indication.
Continuous
Positive Airway Pressure (“CPAP”) is the most common treatment for OSA. CPAP devices work by blowing pressurized air
into the nose (or mouth and nose), which keeps the pharyngeal airway open. CPAP is not curative, and patients must use the mask
whenever they sleep. Reduction of the apnea/hypopnea index (“AHI”) is the standard objective measure of therapeutic
response in OSA. Apnea is the cessation of breathing for 10 seconds or more and hyponea is a reduction in breathing. AHI is the
sum of apnea and hypopnea events per hour. In the sleep laboratory, CPAP is highly effective at reducing the AHI. However, the
device is cumbersome and difficult for many patients to tolerate. Most studies describe that 25-50% of patients refuse to initiate
or completely discontinue CPAP use within the first several months and that most patients who continue to use the device do so
only intermittently.
Oral
devices may be an option for patients who cannot tolerate CPAP. Several dental devices are available including the Mandibular
Advancement Device (“MAD”) and the Tongue Retaining Device (“TRD”). The MAD is the most widely used dental
device for sleep apnea and is similar in appearance to a sports mouth guard. It forces the lower jaw forward and down slightly
which keeps the airway more open. The TRD is a splint that holds the tongue in place to keep the airway as open as possible. Like
CPAP, oral devices are not curative for patients with OSA. The cost of these devices tends to be high and side effects associated
with them include night time pain, dry lips, tooth discomfort, and excessive salivation.
Patients
with clinically significant OSA who cannot be treated adequately with CPAP or oral devices can elect to undergo surgery. The most
common surgery is uvulopalatopharyngoplasty which involves the removal of excess tissue in the throat to make the airway wider.
Other possible surgeries include tracheostomies, rebuilding of the lower jaw, and nose surgery. Patients who undergo surgery for
the treatment of OSA risk complications, including infection, changes in voice frequency, and impaired sense of smell. Surgery
is often unsuccessful and, at present, no method exists to reliably predict therapeutic outcome from these forms of OSA surgery.
Recently,
another surgical option has become available based on upper airway stimulation. It is a combination of an implantable nerve stimulator
and an external remote controlled by the patient. The hypoglossal nerve is a motor nerve that controls the tongue. The implanted
device stimulates the nerve with every attempted breath, regardless of whether such stimulation is needed for that breath, to
increase muscle tone to prevent the tongue and other soft tissues from collapsing. The surgically implanted device is turned on
at night and off in the morning by the patient with the remote.
The
poor tolerance and long-term adherence to CPAP, as well as the limitations of mechanical devices and surgery, make discovery of
therapeutic alternatives clinically relevant and important. RespireRx’s translational research results demonstrate that
dronabinol, a synthetic cannabinoid, has the potential to become the first drug treatment for this large and underserved
market.
In
order to expand RespireRx’s respiratory disorders program and develop cannabinoids for the treatment of OSA, RespireRx acquired
100% of the issued and outstanding equity securities of Pier Pharmaceuticals, Inc. (“Pier”) effective August 10, 2012
pursuant to an Agreement and Plan of Merger. Pier had been formed in June 2007 (under the name SteadySleep Rx Co.) as a clinical
stage pharmaceutical company to develop a pharmacologic treatment for OSA and had been engaged in research and clinical development
activities.
Through
the merger, RespireRx gained access to an Exclusive License Agreement (as amended, the “Old License Agreement”) that
Pier had entered into with the University of Illinois Chicago (the “UIC”) on October 10, 2007. The Old License
Agreement covered certain patents and patent applications in the United States and other countries claiming the use of certain
compounds referred to as cannabinoids, of which dronabinol is a specific example, for the treatment of sleep-related breathing
disorders (including sleep apnea). Pier’s business plan was to determine whether dronabinol would significantly improve
subjective and objective clinical measures in patients with OSA.
The
Old License Agreement was terminated effective March 21, 2013 and the Company entered into a new license agreement (the “2014
License Agreement”) with the UIC on June 27, 2014, the material terms of which were substantially similar to the Old License
Agreement. The 2014 License Agreement grants the Company, among other provisions, exclusive rights: (i) to practice certain patents
in the United States, Germany and the United Kingdom, as defined in the 2014 License Agreement, that are held by the UIC; (ii)
to identify, develop, make, have made, import, export, lease, sell, have sold or offer for sale any related licensed products;
and (iii) to grant sub-licenses of the rights granted in the 2014 License Agreement, subject to the provisions of the 2014 License
Agreement. The Company is required under the 2014 License Agreement, among other terms and conditions, to pay the UIC a
license fee, royalties, patent costs and certain milestone payments.
Dronabinol
is a synthetic derivative of Δ9-THC, one of the pharmacologically active substances naturally occurring in the cannabis
plant. Dronabinol is a Schedule III, controlled generic drug that has been approved by the FDA for the treatment of AIDS-related
anorexia and chemotherapy-induced nausea and vomiting. Dronabinol is available in the United States as the branded prescription
drug product Marinol® capsules. Marinol®, together with numerous generic formulations, is available in 2.5, 5, and 10
mg capsules, with a maximum labelled dosage of 20 mg/day for the AIDS indication, or 15 mg/m
2
per dose for chemotherapy-induced
nausea and vomiting.
The
Company conducted a 21 day, randomized, double-blind, placebo-controlled, dose escalation Phase 2A clinical study in 22 patients
with OSA, in which dronabinol produced a statistically significant reduction in AHI, the primary therapeutic end-point, and was
observed to be safe and well tolerated, with the frequency of side effects no different from placebo (Prasad
et al, Frontiers
in Psychiatry
, 2013).
With
approximately $5 million in funding from the National Heart, Lung and Blood Institute of National Institutes of Health (“NIH”),
Dr. David Carley of UIC, along with his colleagues at UIC and Northwestern University, recently completed a Phase 2B multi-center,
double-blind, placebo-controlled clinical trial of dronabinol in patients with OSA. Entitled Pharmacotherapy of Apnea with Cannabimimetic
Enhancement (“PACE”), this study replicated the earlier Phase 2A study. The authors reported (Carley
et al
,
Sleep
, 2018) that, in a dose dependent fashion, treatment with 2.5mg and 10mg of dronabinol once a day at night, significantly
reduced, compared to placebo, the AHI during sleep in 56 evaluable patients with moderate to severe OSA who completed the
study. Additionally, treatment with 10mg of dronabinol significantly improved daytime sleepiness as measured by the Epworth Sleepiness
Scale and achieved the greatest overall patient satisfaction. As in the previous study, dronabinol was observed to be safe and
well tolerated, with the frequency of side effects no different from placebo. The Company did not manage or fund this clinical
trial which was funded by the National Heart, Lung and Blood Institute of NIH.
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 allow us or a development partner to submit a 505(b)(2) New Drug Application (“NDA”) to the FDA for
approval of a new dronabinol label, as opposed to the submission and approval of a full 505(b)(1) NDA. The 505(b)(2) NDA was created
by the Hatch-Waxman Amendments to the Federal Food, Drug and Cosmetic Act, in part, to help avoid unnecessary duplication of studies
already performed on a previously approved drug; the section gives the FDA express permission to rely on data not developed by
the NDA applicant. A 505(b)(2) NDA contains full safety and effectiveness reports but allows at least some of the information
required for NDA approval, such as safety and efficacy information on the active ingredient, to come from studies not conducted
by or for the applicant. This can result in a less expensive and faster route to approval, compared with a traditional development
path, such as 505(b)(1), while creating new, differentiated products. This regulatory path offers market protections under Hatch-Waxman
provisions for market exclusivity at the FDA. Other regulatory routes are available to pursue proprietary formulations of dronabinol
that will provide further market protections. In Europe, a regulatory approval route similar to the 505(b)(2) pathway is the hybrid
procedure based on Article 10 of Directive 2001/83/EC.
In
conjunction with its management and consultants, RespireRx has developed a regulatory strategy in which we intend to file a new
NDA under Section 505(b)(2) claiming the efficacy of dronabinol in the treatment of OSA and, in the process, create
a new branded product. We have engaged Camargo Pharmaceutical Services, LLC to act as regulatory consultants and assist with FDA
filings and regulatory strategy.
Unlike
a standard 505(b)(1) NDA, the 505(b)(2) Abbreviated New Drug Application (“ANDA”) process begins with a pre-IND meeting
with the FDA, then moves to formulation development (and nonclinical studies, if necessary) and then to the IND (investigational
new drug) filing. Since we intend to utilize an already approved or equivalent dronabinol product from manufacturers that have
approved Drug Master Files, we believe that the pre-IND meeting will forego discussions of CMC (chemistry, manufacturing and controls),
formulation and safety, as well as Phase 1 and 2 studies. Instead, we believe that the focus will be on the Phase 3 clinical development
program. When a Phase 3 study is required for a 505(b)(2), usually only one study with fewer patients is necessary versus the
two, large scale, confirmatory studies generally required for 505(b)(1). While no assurance can be provided, with an extensive
safety database tracking chronic, long-term use of Marinol® and generics, we believe that FDA should not have major safety
concerns with dronabinol in the treatment of OSA.
We
anticipate requesting a pre-IND meeting with the FDA possibly during the second quarter of 2019, which would functionally
serve as the equivalent of an end-of-Phase 2 meeting. The FDA responses to this meeting will be incorporated into an IND, which
we believe we could be in a position to submit within 60 days of receiving their communication.
RespireRx
has worked with the PACE investigators and staff, as well as with our Clinical Advisory Panel to design a Phase 3 protocol that,
based on the experience and results from the Phase 2A and Phase 2B trials, we believe will provide sufficient data for FDA approval
of a RespireRx dronabinol branded capsule for OSA. Subject to raising sufficient financing (of which no assurance can be provided).
RespireRx intends to submit the Phase 3 protocol to the FDA. The current version of the protocol is designed as a 90-day randomized,
blinded, placebo controlled study of dronabinol in the treatment of OSA. Depending on feedback from the FDA, RespireRx estimates
that the Phase 3 trial would require between 120 and 300 patients at 15 to 20 sites, and take 18 to 24 months to complete, at
a cost of between $10 million and $14 million.
Subject
to raising sufficient financing (of which no assurance can be provided), RespireRx intends to hire Clinilabs Drug Development
Corporation, a full-service CRO, to consult and potentially provide clinical site management, monitoring, data management, and
centralized sleep monitoring services for the Phase 3 OSA trial. Dr. Gary Zammitt, CEO of Clinilabs, serves on the RespireRx Clinical
Advisory Panel, and his management team has provided guidance on study design and CNS drug development that will be relevant for
the Phase 3 program. For example, Clinilabs offers specialized clinical trial services for CNS drug development through an alliance
with Neuroclinics, including clinical trials examining the effects of drugs on driving, cognitive effects of food and (medicinal)
drugs, and sleep and sleep disordered breathing.
On
September 4, 2018, RespireRx entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Under the terms of the Agreement, Noramco agreed to (i) provide all of the active pharmaceutical
ingredient (“API”) estimated to be needed for the clinical development process for both the first- and second-generation
products (each a “Product” and collectively, the “Products”), three validation batches for NDA filing(s)
and adequate supply for the initial inventory stocking for the wholesale and retail channels, subject to certain limitations,
(ii) maintain or file valid drug master files (“DMFs”) with the FDA or any other regulatory authority and provide
the Company with access or a right of reference letter entitling the Company to make continuing reference to the DMFs during the
term of the agreement in connection with any regulatory filings made with the FDA by the Company, (iii) participate on a development
committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting firms engaged by the
Company and participate in all FDA or Drug Enforcement Agency (“DEA”) meetings as appropriate and as related to the
API.
In
consideration for these supplies and services, the Company has agreed (i) to purchase exclusively from Noramco, during the commercialization
phase, all API for its Products (as defined in the Development and Supply Agreement) at a pre-determined price subject to certain
producer price adjustments and (ii) Noramco’s participation in the economic success of the commercialized Product or Products
up to the earlier of the achievement of a maximum dollar amount or the expiration of a period of time.
We
plan to establish strategic relationships with appropriate companies to complete formulation and packaging. RespireRx has identified
several candidates to perform the encapsulation. Some of these already supply finished product to generic pharmaceutical companies
marketing dronabinol for its current non-OSA indications. In addition, as described below, RespireRx has been in discussions with
several companies that have considerable expertise in developing novel formulations for dronabinol and have expressed interest
in helping us develop a proprietary controlled release formulation. No assurance can be provided that encapsulation or formulation
agreements will be consummated on terms acceptable to us; the failure to consummate these agreements would materially adversely
affect the Company.
After
considerable research and discussions with consultants, we believe the most direct route to commercialization is to proceed directly
to a Phase 3 pivotal clinical trial using the currently available dronabinol formulation (2.5, 5 and 10 mg gel caps) and to commercialize
a RespireRx branded dronabinol capsule (“RBDC”) with an NDA. To that end, RespireRx plans to complete the Phase 3
trial and submit a 505(b)(2) application to FDA for approval of a new, branded, once per day dronabinol gel capsule for the treatment
of OSA estimated to occur in 2020. Under the provisions of the Hatch-Waxman Act, the RBDC would have 3-year market exclusivity,
as well as further protection from generic substitution through 2025 due to our patents and an anticipated listing in the
Approved
Drug Products with Therapeutic Equivalence Evaluations
publication (the “Orange
Book”), which identifies drug products approved on the basis of safety and effectiveness by the FDA and related patent and
exclusivity information.
In
addition, management believes there are numerous opportunities for reformulation of dronabinol to produce a proprietary, branded
product for the treatment of OSA. Therefore, simultaneous with the development of the RBDC, RespireRx plans to develop a proprietary
dronabinol formulation to optimize the dose and duration of action for treating OSA. An analysis of the time-related efficacy
results provides potential guidance on development. We have identified several formulation companies with existing dronabinol
formulations, expertise, and licensure to develop a proprietary formulation of dronabinol for RespireRx based on RespireRx’s
pending patents for low-dose and extended release dronabinol, which we expect would enable brand extensions and market protections
through 2036.
Since
RBDC is expected, if approved, to be approved under a 505(b)(2) NDA, it would be considered a new, proprietary, branded dronabinol
product, with a specific label for OSA. It would be non-identical to any other dronabinol product and there would be no generic
equivalents or AB substitutions. There are many examples of branded products that might ordinarily have applied for an ANDA as
a branded generic, but which have successfully utilized this 505(b)(2) NDA approach to grant them new product status and
protect them from generic substitution.
Because
the 505(b)(2) NDA requires clinical data for approval of a new indication, we anticipate that our RBDC would be eligible for market
protection under the Hatch-Waxman Amendment clause for “other significant changes” and we expect would therefore be
eligible for 3-years of market exclusivity. At the end of these 3 years, if a generic company wished to challenge our issued patents,
they would have to file an ANDA with bioequivalence data to our RBDC and, if our patents were listed in the Orange Book, they
would have to simultaneously file a Paragraph 4 certification stating that they are challenging our patent. At that point, we
would receive a 30-months stay of the patent challenge.
We
believe the 5.5 years of market exclusivity expected to result from the Hatch-Waxman Act and the Orange Book listing will provide
adequate time for the development and approval of a novel, proprietary formulation of dronabinol, optimized for all-night treatment
of OSA, with patent protections through 2036. If the new formulation is approved, we plan to rescind the 505(b)(2) NDA for RBDC
and replace the branded product with the new and improved formulation on the market, with the intention of preventing ANDA competition
and protecting market share.
With
guidance based on the product launch experience of Dr. MacFarland, a member of our Board of Directors, and Richard Purcell, our
senior vice-president of research and development, and the managed markets experience of our consultant, Commercialization Consulting,
LLC, we have prepared an approach to marketing and commercialization of both the RBDC and the proprietary dronabinol formulation.
Based upon an extensive analysis conducted by Commercialization Consulting, LLC, we believe that if we were to execute
our strategy, we should not experience a loss of more than approximately 15% of sales due to off-label generic dronabinol sales.
On
February 13, 2019, the Company entered into a non- binding memorandum of understanding (“MOU”) and exclusivity agreement
with Impression Healthcare Limited (ASX: IHL)(“Impression”) for the purpose of negotiating terms by which the parties
would enter in an arrangement, such as a license, joint venture or partner agreement, so as to commercialize dronabinol for the
treatment of OSA in Australia, New Zealand and Southeast Asia. Discussions are in progress.
See
“Risk Factors—
Risks related to our business—
We will need additional capital in the near term and the
future and, if such capital is not available on terms acceptable to us or available to us at all, we may need to scale back our
research and development efforts and may be unable to continue our business operations.”
Competition
The
pharmaceutical industry is characterized by intensive research efforts, rapidly advancing technologies, intense competition and
a strong emphasis on proprietary therapeutics. Our competitors include many companies, research institutes and universities that
are working in a number of pharmaceutical or biotechnology disciplines to develop therapeutic products similar to those we are
currently investigating. Most of these competitors have substantially greater financial, technical, manufacturing, marketing,
distribution and/or other resources than we do. In addition, many of our competitors have experience in performing human clinical
trials of new or improved therapeutic products and obtaining approvals from the FDA and other regulatory agencies. We have no
experience in conducting and managing later-stage clinical testing or in preparing applications necessary to obtain regulatory
approvals. We expect that competition in this field will continue to intensify.
Regulation
The
FDA and other similar agencies in foreign countries have substantial requirements for therapeutic products. Such requirements
often involve lengthy and detailed laboratory, clinical and post-clinical testing procedures and are expensive to complete. It
often takes companies many years to satisfy these requirements, depending on the complexity and novelty of the product. The review
process is also extensive, which may delay the approval process further. Failure to comply with applicable FDA or other requirements
may subject a company to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending
applications, a clinical hold, warning letters, recall or seizure of products, partial or total suspension of production, withdrawal
of the product from the market, injunctions, fines, civil penalties or criminal prosecution.
FDA
approval is required before any new drug or dosage form, including the new use of a previously approved drug, can be marketed
in the United States. Other similar agencies in foreign countries also impose substantial requirements.
The
process of developing drug candidates normally begins with a discovery process of potential candidates that are then initially
tested in
in vitro
and
in vivo
non-human animal (preclinical) studies which include, but are not limited to toxicity
and other safety related studies, pharmacokinetics, pharmacodynamics and ADME (absorption, distribution, metabolism, excretion).
Once sufficient preclinical data are obtained, a company must submit an IND and receive authorization from the FDA in order to
begin clinical trials in the United States. Successful drug candidates then move into human studies that are characterized generally
as Phase 1, Phase 2 and Phase 3. Phase 1 studies seeking safety and other data normally utilize healthy volunteers. Phase 2 studies
utilize one or more prospective patient populations and are designed to establish safety and preliminary measures of efficacy.
Sometimes studies may be referred to as Phase 2A and 2B depending on the size of the patient population. Phase 3 studies are large
trials in the targeted patient population, performed in multiple centers, often for longer periods of time and are designed to
establish statistically significant efficacy as well as safety in the larger population. Most often the FDA and similar regulatory
agencies in other countries require two confirmatory Phase 3 or pivotal studies. Upon completion of both the preclinical and clinical
phases, an NDA (New Drug Application) is filed with the FDA or a similar filing is made to the regulatory authority in other countries.
NDA filings are extensive and include the data from all prior studies. These filings are reviewed by the FDA and, only if approved,
may the company or its partners commence marketing of the new drug in the United States.
There
also are variations of these procedures. For example, companies seeking approval for new indications for an already approved drug
may choose to pursue an abbreviated approval process such as the filing for an NDA under Section 505(b)(2). Another example would
be a Supplementary NDA (“SNDA”). A third example would be an Abbreviated NDA (“ANDA”) claiming bio-equivalence
to an already approved drug and claiming the same indications such as in the case of generic drugs. Other opportunities allow
for accelerated review and approval based upon several factors, including potential fast-track status for serious medical conditions
and unmet medical needs, potential breakthrough therapy designation of the drug for serious conditions where preliminary evidence
shows that the drug may show substantial improvement over available therapy or orphan designation (generally, an orphan indication
in the United States is one with a patient population of less than 200,000).
As
of yet, we have not obtained any approvals to market our products. Further, we cannot assure you that the FDA or other regulatory
agency will grant us approval for any of our products on a timely basis, if at all. Even if regulatory clearances are obtained,
a marketed product is subject to continual review, and later discovery of previously unknown problems may result in restrictions
on marketing or withdrawal of the product from the market.
See
“Risk Factors—
Risks related to our business—
We are at an early stage of development and we may not be
able to successfully develop and commercialize our products and technologies.”
Manufacturing
We
have no experience or capability to either manufacture bulk quantities of the new compounds that we develop, or to produce finished
dosage forms of the compounds, such as tablets or capsules. We rely, and presently intend to continue to rely, on the manufacturing
and quality control expertise of contract manufacturing organizations (see below with respect to dronabinol) or current and prospective
corporate partners. There is no assurance that we will be able to enter into manufacturing arrangements to produce bulk quantities
of our compounds on favorable financial terms. There is, however, substantial availability of both bulk chemical manufacturing
and dosage form manufacturing capability throughout the world that we believe we can readily access.
On
September 4, 2018, RespireRx entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Under the terms of the Agreement, Noramco agreed to (i) provide all of the active pharmaceutical
ingredient (“API”) estimated to be needed for the clinical development process for both the first- and second-generation
products (each a “Product” and collectively, the “Products”), three validation batches for New Drug Application
(“NDA”) filing(s) and adequate supply for the initial inventory stocking for the wholesale and retail channels, subject
to certain limitations, (ii) maintain or file valid drug master files (“DMFs”) with the FDA or any other regulatory
authority and provide the Company with access or a right of reference letter entitling the Company to make continuing reference
to the DMFs during the term of the agreement in connection with any regulatory filings made with the FDA by the Company, (iii)
participate on a development committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting
firms engaged by the Company and participate in all FDA or Drug Enforcement Agency (“DEA”) meetings as appropriate
and as related to the API.
In
consideration for these supplies and services, the Company has agreed to purchase exclusively from Noramco during the commercialization
phase all API for its Products (as defined in the Development and Supply Agreement) at a pre-determined price subject to certain
producer price adjustments and agreed to Noramco’s participation in the economic success of the commercialized Product or
Products up to the earlier of the achievement of a maximum dollar amount or the expiration of a period of time.
See
“Risk Factors—
Risks related to our business—
We are at an early stage of development and we may not be
able to successfully develop and commercialize our products and technologies” for a discussion of certain risks related
to the development and commercialization of our products.
Marketing
We
have no experience in the marketing of pharmaceutical products and do not anticipate having the resources to distribute and broadly
market any products that we may develop. We will therefore continue to seek commercial development arrangements with other pharmaceutical
companies for our proposed products for those indications that require significant sales forces to effectively market. In entering
into such arrangements, we may seek to retain the right to promote or co-promote products for certain of the orphan drug indications
in North America. We believe that there is a significant expertise base for such marketing and sales functions within the pharmaceutical
industry and expect that we could recruit such expertise if we choose to directly market a drug.
See
“Risk Factors—
Risks related to our business—
We are at an early stage of development and we may not be
able to successfully develop and commercialize our products and technologies” for a discussion of certain risks related
to the marketing of our products.
Employees
As
of December 31, 2018 and as of the date of filing of this Annual Report on Form 10-K, the Company employed three people (all officers),
two of whom were full time. The Company also engages certain contractors who provide substantial services to the Company. Effective
September 30, 2018, one employee (officer), resigned as President and Chief Executive Officer, and his responsibilities were assigned
to one of the remaining officers on an interim basis. In February 2017, one employee (officer), the Company’s Chief Financial
Officer resigned, and his responsibilities were subsequently assigned to one of the remaining officers.
Technology
Rights
University
of Illinois License Agreement
In
August 2012, RespireRx acquired Pier Pharmaceuticals, Inc. (“Pier”), which is now its wholly-owned subsidiary.
Through
the merger, RespireRx gained access to an Exclusive License Agreement (as amended, the “Old License Agreement”) that
Pier had entered into with the University of Illinois Chicago (“UIC”) on October 10, 2007. The Old License Agreement
covered certain patents and patent applications in the United States and other countries claiming the use of certain compounds
referred to as cannabinoids, of which dronabinol is a specific example, for the treatment of sleep-related breathing disorders
(including sleep apnea). Pier’s business plan was to determine whether dronabinol would significantly improve subjective
and objective clinical measures in patients with OSA.
The
Old License Agreement was terminated effective March 21, 2013 and the Company entered into a new license agreement (the “2014
License Agreement”) with the UIC on June 27, 2014, the material terms of which were substantially similar to the Old License
Agreement. The 2014 License Agreement grants the Company, among other provisions, exclusive rights: (i) to practice certain patents
in the United States, Germany and the United Kingdom, as defined in the 2014 License Agreement, that are held by the UIC; (ii)
to identify, develop, make, have made, import, export, lease, sell, have sold or offer for sale any related licensed products;
and (iii) to grant sub-licenses of the rights granted in the 2014 License Agreement, subject to the provisions of the 2014 License
Agreement. The Company is required under the 2014 License Agreement, among other terms and conditions, to pay UIC a license fee,
royalties, patent costs and certain milestone payments.
University
of Alberta License Agreement and Research Agreement
By
letter dated May 18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of the
University of Alberta, which purported to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 between
the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for termination
and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting to be attended
by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute. In February 2019,
the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license agreement and the
form of a new license agreement. However, the parties have not signed the draft new license agreement pending the Company’s
payment of the agreed amount of historical unreimbursed patent fees of approximately CAD$23,000 (approximately US$17,000
as of December 31, 2018). No assurance can be provided that the Company will or will not be able to remit the historical
license fees or that the draft new license agreement will be executed and become effective. If we do not remit the historical
fees and the new license agreement does not become effective, we cannot estimate the possible adverse impact on the Company’s
operations or business prospects.
On
May 9, 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. This is the license agreement that has been the subject of purported license termination and
negotiation of a new draft license agreement in the paragraph above.
On
January 12, 2016, the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of
ampakines at a variety of dosage and formulation levels in the potential treatment of Pompe Disease, apnea of prematurity and
spinal cord injury, as well as to conduct certain electrophysiological studies to explore the ampakine mechanism of action for
central respiratory depression. The Company agreed to pay the University of Alberta total consideration of approximately CAD$146,000
(approximately US$108,000), consisting of approximately CAD$85,000 (approximately US$63,000) of personnel funding in cash in four
installments during 2016, to provide approximately CAD$21,000 (approximately US$16,000) in equipment, to pay patent costs of CAD$20,000
(approximately US$15,000), and to underwrite additional budgeted costs of CAD$20,000 (approximately US$15,000). As of December
31, 2017, the Company had recorded amounts payable in respect to this Research Contract of US$16,207 (CAD$21,222) which amount
was paid in US dollars on January 24, 2018. The conversion to US dollars above utilizes an exchange rate of approximately US$0.76
for every CAD$1.00.
The
University of Alberta received matching funds through a grant from the Canadian Institutes of Health Research in support of this
research. The Company retains the rights to research results and any patentable intellectual property generated by the research.
Dr. John Greer, Ph.D., faculty member of the Department of Physiology, Perinatal Research Centre, and Women & Children’s
Health Research Institute at the University of Alberta, collaborated on this research. The studies were completed in 2016. Any
patentable intellectual property developed in the Research Agreement will be covered by the existing license agreement described
above.
Research
and Development Expenses
The
Company invested $688,286 and $1,499,940 in research and development in 2018 and 2017, respectively. Of those amounts,
$495,638 and $1,132,604 were incurred with related parties in 2018 and 2017 respectively. See our consolidated financial
statements for the years ended December 31, 2018 and 2017 included in this Annual Report on Form 10-K.
Item
1A. Risk Factors
In
addition to the other matters set forth in this Annual Report on Form 10-K, our continuing operations and the price of our common
stock are subject to the following risks:
Risks
related to our business
Our
independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
In
its audit opinion issued in connection with our balance sheets as of December 31, 2018 and 2017 and our statements of operations,
stockholders’ equity (deficiency), and cash flows for the years ended December 31, 2018 and 2017, our independent registered
public accounting firm has expressed substantial doubt about our ability to continue as a going concern given our limited working
capital, recurring net losses and negative cash flows from operations. The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments
in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue
in existence. While we have relied principally in the past on external financing to provide liquidity and capital resources for
our operations, we can provide no assurance that cash generated from our operations together with cash received in the future
from external financing, if any, will be sufficient to enable us to continue as a going concern.
We
have a history of net losses; we expect to continue to incur net losses and we may never achieve or maintain profitability.
Since
our formation on February 10, 1987 through the end of our most recent fiscal year ended December 31, 2018, we have generated only
minimal operating revenues. For the fiscal year ended December 31, 2018, our net loss was $2,591,790 and as of December 31, 2018,
we had an accumulated deficit of $164,394,052. For the year ended December 31, 2017, our net loss was $4,291,483 and as of December
31, 2017, we had an accumulated deficit of $161,802,262. We have not generated any revenue from product sales to date, and it
is possible that we will never generate revenues from product sales in the future. Even if we do achieve significant revenues
from product sales, we expect to continue to incur significant net losses over the next several years. As with other biotechnology
companies, it is possible that we will never achieve profitable operations.
We
will need additional capital in the near term and the future and, if such capital is not available on terms acceptable to us or
available to us at all, we may need to scale back our research and development efforts and may be unable to continue our business
operations.
We
require additional cash resources for basic operations and will require substantial additional funds to advance our research
and development programs and to continue our operations, particularly if we decide to independently conduct later-stage clinical
testing and apply for regulatory approval of any of our proposed products, and if we decide to independently undertake the marketing
and promotion of our products. Additionally, we may require additional funds in the event that we decide to pursue strategic acquisitions
of or licenses for other products or businesses. Based on our operating plan as of December 31, 2018, we estimated that our existing
cash resources will not be sufficient to meet our requirements for 2019. We also need additional capital in the near term to fund
on-going operations including basic operations. Additional funds may come from the sale of common equity, preferred equity, convertible
preferred equity or equity-linked securities, debt, including debt convertible into equity, or may result from agreements with
larger pharmaceutical companies that include the license or rights to the technologies and products that we are currently developing,
although there is no assurance that we will secure any such funding or other transaction in a timely manner, or at all.
Our
cash requirements in the future may differ significantly from our current estimates, depending on a number of factors, including:
●
|
Our
ability to raise equity or debt capital, or our ability to obtain in-kind services
|
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the
results of our clinical trials;
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|
the
time and costs involved in obtaining regulatory approvals;
|
●
|
the
costs of setting up and operating our own marketing and sales organization;
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|
the
ability to obtain funding under contractual and licensing agreements;
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the
costs involved in obtaining and enforcing patents or any litigation by third parties regarding intellectual property;
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the
costs involved in meeting our contractual obligations including employment agreements; and
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our
success in entering into collaborative relationships with other parties.
|
To
finance our future activities, we may seek funds through additional rounds of financing, including private or public equity or
debt offerings and collaborative arrangements with corporate partners. We may also seek to exchange or restructure some of our
outstanding securities to provide liquidity, strengthen our balance sheet and provide flexibility. We cannot say with any certainty
that these measures will be successful, or that we will be able to obtain the additional needed funds on reasonable terms, or
at all. The sale of additional equity or convertible debt securities could result in additional and possibly substantial dilution
to our stockholders. If we issued preferred equity or debt securities, these securities could have rights superior to holders
of our common stock, and such instruments entered into in connection with the issuance of securities could contain covenants that
will restrict our operations. We might have to obtain funds or in-kind services through arrangements with collaborative partners
or others that may require us to relinquish rights to our technologies, product candidates or products that we otherwise would
not relinquish. If adequate funds are not available in the future, as required, we could lose our key employees and might have
to further delay, scale back or eliminate one or more of our research and development programs, which would impair our future
prospects. In addition, we may be unable to meet our research spending obligations under our existing licensing agreements and
may be unable to continue our business operations.
Our
product opportunities rely on licenses from research institutions and if we lose access to these technologies or applications,
our business could be substantially impaired.
Through
the merger with Pier, the Company gained access to a 2007 Exclusive License Agreement (as amended, the “Old License”),
that Pier had entered into with the University of Illinois on October 10, 2007. The Old License 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
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
Old License was terminated effective March 21, 2013 due to the Company’s failure to make a required payment and on June
27, 2014, the Company entered into the 2014 License Agreement with the University of Illinois that was similar, but not identical,
to the Old License that had been terminated. If we are unable to comply with the terms of the 2014 License Agreement, such as
required payments thereunder, the 2014 License Agreement might be terminated.
On
May 9, 2007, the Company entered into a license agreement with The Governors of the University of Alberta, as subsequently amended,
granting he Company exclusive rights to practice patents held by the University of Alberta claiming the use of ampakines for the
treatment of various respiratory disorders. By letter dated May 18, 2018, the Company received notice from counsel claiming to
represent TEC Edmonton and The Governors of the University of Alberta, which purports to terminate, effective December 12, 2017,
the license agreement dated May 9, 2007 between the Company and The Governors of the University of Alberta. The Company, through
its counsel, disputed any grounds for termination and notified the representative that it invoked Section 13 of that license agreement,
which mandates a meeting to be attended by individuals with decision-making authority to attempt in good faith to negotiate a
resolution to the dispute. In February 2019, the Company and TEC Edmonton, in February 2019, tentatively agreed to terms acceptable
to all parties to establish a new license agreement and the form of a new license agreement. However, the parties have not signed
the draft new license agreement pending the Company’s payment of the agreed amount of historical unreimbursed patent fees,
of approximately CAD$23,000 (approximately US$17,000 as of December 31, 2018). No assurance can be provided that the Company
will or will not be able to remit the historical license fees or that the draft new license agreement will be executed
and become effective. If we do not remit the historical fees and the new license agreement does not become effective, we cannot
estimate the possible adverse impact on the Company’s operations or business prospects.
W
e
may not be able to successfully develop and commercialize our proposed products and technologies.
The
development of cannabinoid products and ampakine products is subject to the risks of failure commonly experienced in the development
of products based upon innovative technologies and the expense and difficulty of obtaining approvals from regulatory agencies.
Drug discovery and development is time consuming, expensive and unpredictable. On average, only one out of many thousands of chemical
compounds discovered by researchers proves to be both medically effective and safe enough to become an approved medicine. All
of our proposed products are in the preclinical or early to mid-clinical stage of development and will require significant additional
funding for research, development and clinical testing, which may not be available on favorable terms or at all, before we are
able to submit them to any of the regulatory agencies for clearances for commercial use.
The
process from discovery to development to regulatory approval can take several years and drug candidates can fail at any stage
of the process. Late stage clinical trials often fail to replicate results achieved in earlier studies. In a recent study (in
the journal BioStatistics, Volume 20, Issue 2, April 2019, pp 273-286) covering approximately 16 years of clinical trial data
(both company sponsored clinical trials and non-company sponsored trials), the authors showed transitional success rates from
Phase 1 to Phase 2 of 66.4% (failure rate of 33.6%), from Phase 2 to Phase 3 of 58.3% (failure rate of 41.7%) and from Phase 3
to approval of 59.0% (failure rate of 41%). Other studies have shown lower success and higher failure rates. We cannot assure
you that we will be able to complete successfully any of our research and development activities including those described above
under PART I. Item 1. Business-Development Goals.
Even
if we do complete them, we may not be able to market successfully any of the products or be able to obtain the necessary regulatory
approvals or assure that healthcare providers and payors will accept our products. We also face the risk that any or all of our
products will not work as intended or that they will be unsafe, or that, even if they do work and are safe, that our products
will be uneconomical to manufacture and market on a large scale. Due to the extended testing and regulatory review process required
before we can obtain marketing clearance, we do not expect to be able to commercialize any therapeutic drug for several years,
either directly or through our corporate partners or licensees.
We
may not be able to enter into the strategic alliances necessary to fully develop and commercialize our products and technologies,
and we will be dependent on our strategic partners if we do.
We
are seeking pharmaceutical company and other strategic partners to participate with us in the development of major indications
for the cannabinoids and ampakine compounds. These agreements would potentially provide us with additional funds or in-kind services
in exchange for exclusive or non-exclusive license or other rights to the technologies and products that we are currently developing.
Competition between biopharmaceutical companies for these types of arrangements is intense. We cannot give any assurance that
our discussions with candidate companies will result in an agreement or agreements in a timely manner, or at all. Additionally,
we cannot assure you that any resulting agreement will generate sufficient revenues to offset our operating expenses and longer-term
funding requirements.
If
our third-party manufacturers’ facilities do not follow current good manufacturing practices, our product development and
commercialization efforts may be harmed.
There
are a limited number of manufacturers that operate under the FDA’s and European Union’s good manufacturing practices
regulations and are capable of manufacturing products like those we are developing. Third-party manufacturers may encounter difficulties
in achieving quality control and quality assurance and may experience shortages of qualified personnel. A failure of third-party
manufacturers to follow current good manufacturing practices or other regulatory requirements and to document their adherence
to such practices may lead to significant delays in the availability of products for commercial use or clinical study, the termination
of, or hold on, a clinical study, or may delay or prevent filing or approval of marketing applications for our products. In addition,
we could be subject to sanctions, including fines, injunctions and civil penalties. Changing manufacturers may require additional
clinical trials and the revalidation of the manufacturing process and procedures in accordance with FDA mandated current good
manufacturing practices and would require FDA approval. This revalidation may be costly and time consuming. If we are unable to
arrange for third-party manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete
development or marketing of our products.
Our
ability to use our net operating loss carry forwards will be subject to limitations upon a change in ownership, which could reduce
our ability to use those loss carry forwards following any change in Company ownership.
Generally,
a change of more than 50% in the ownership of a Company’s stock, by value, over a three-year period constitutes an ownership
change for U.S. federal income tax purposes. An ownership change may limit our ability to use our net operating loss carry forwards
attributable to the period prior to such change. We have sold or otherwise issued shares of our common stock in various transactions
sufficient to constitute an ownership change, including the issuance of the Series G 1.5% Convertible Preferred Stock (as defined
below), the issuance of qualified and non-qualified stock options and the issuance of convertible notes and warrants, some of
which have been converted or exercised, as well as the issuance of additional shares of our Common Stock and warrants. As a result,
if we earn net taxable income in the future, our ability to use our pre-change net operating loss carry forwards to offset U.S.
federal taxable income will be subject to limitations, which would restrict our ability to reduce future tax liability. Future
shifts in our ownership, including transactions in which we may engage, may cause additional ownership changes, which could have
the effect of imposing additional limitations on our ability to use our pre-change net operating loss carry forwards.
Risks
related to our industry
If
we fail to secure adequate intellectual property protection, it could significantly harm our financial results and ability to
compete.
Our
success will depend, in part, on our ability to obtain and maintain patent protection for our products and processes in the United
States and elsewhere. We have filed and intend to continue to file patent applications as we need them. However, additional patents
that may issue from any of these applications may not be sufficiently broad to protect our technology. Also, any patents issued
to us or licensed by us may be designed around or challenged by others, and if such design or challenge is effective, it may diminish
our rights and negatively affect our financial results.
If
we are unable to obtain and maintain sufficient protection of our proprietary rights in our products or processes prior to or
after obtaining regulatory clearances, our competitors may be able to obtain regulatory clearance and market similar or competing
products by demonstrating at a minimum the equivalency of their products to our products. If they are successful at demonstrating
at least the equivalency between the products, our competitors would not have to conduct the same lengthy clinical tests that
we have or will have conducted.
We
also rely on trade secrets and confidential information that we protect by entering into confidentiality agreements with other
parties. Those confidentiality agreements could be breached, and our remedies may be insufficient to protect the confidential
information. Further, our competitors may independently learn our trade secrets or develop similar or superior technologies. To
the extent that our consultants, key employees or others apply technological information independently developed by them or by
others to our projects, disputes may arise regarding the proprietary rights to such information or developments. We cannot assure
you that such disputes will be resolved in our favor.
We
may be subject to potential product liability claims. One or more successful claims brought against us could materially affect
our business and financial condition.
The
clinical testing, manufacturing and marketing of our products may expose us to product liability claims. We have never been subject
to a product liability claim, and we require each patient in our clinical trials to sign an informed consent agreement that describes
the risks related to the trials, but we cannot assure you that the coverage limits of our insurance policies will be adequate
or that one or more successful claims brought against us would not have a material adverse effect on our business, financial condition
and result of operations. Further, if one of our cannabinoid or ampakine compounds is approved by the FDA for marketing, we cannot
assure you that adequate product liability insurance will be available, or if available, that it will be available at a reasonable
cost. Any adverse outcome resulting from a product liability claim could have a material adverse effect on our business, financial
condition and results of operations.
We
face intense competition, and our competitors may develop products that are superior to those we are developing.
Our
business is characterized by intensive research efforts. Our competitors include many companies, research institutes and universities
that are working in a number of pharmaceutical or biotechnology disciplines to develop therapeutic products similar to those we
are currently investigating. Most of these competitors have substantially greater financial, technical, manufacturing, marketing,
distribution and/or other resources than we do. In addition, many of our competitors have experience in performing human clinical
trials of new or improved therapeutic products and obtaining approvals from the FDA and other regulatory agencies. We have limited
experience in conducting and managing later-stage clinical testing or in preparing applications necessary to obtain regulatory
approvals. Although we have engaged regulatory consultants and contract research organizations to assist us in such endeavors,
it is possible that our competitors may succeed in developing products, or may obtain FDA approvals for their products faster
than we can and/or such competitors may develop products that are safer or more effective than those that we are developing. We
expect that competition in this field will continue to intensify.
We
may be unable to recruit and retain our senior management and other key technical personnel on whom we are dependent.
We
are highly dependent upon senior management and key technical personnel and currently do not carry any insurance policies on such
persons. In particular, we are highly dependent on Arnold S. Lippa, Ph.D., our Interim Chief Executive Officer, Interim President,
Chief Scientific Officer and Executive Chairman, James Sapirstein, our Executive Vice Chairman, Jeff E. Margolis, our Senior Vice
President, Chief Financial Officer, Treasurer and Secretary, and Richard Purcell, our Senior Vice President of Research and development.
Competition for qualified employees among pharmaceutical and biotechnology companies is intense. The loss of any of our senior
management or other key employees, or our inability to attract, retain and motivate the additional or replacement highly-skilled
employees and consultants that our business requires, could substantially hurt our business prospects.
The
regulatory approval process is expensive, time consuming, uncertain and may prevent us from obtaining required approvals for the
commercialization of some of our products.
The
FDA and other similar agencies in foreign countries have substantial requirements for therapeutic products. Such requirements
often involve lengthy and detailed laboratory, clinical and post-clinical testing procedures and are expensive to complete. It
often takes companies many years to satisfy these requirements, depending on the complexity and novelty of the product. The review
process is also extensive, which may delay the approval process even more.
As
of yet, we have not obtained any approvals to market our products. Further, we cannot assure you that the FDA or other regulatory
agency will grant us approval for any of our products on a timely basis, if at all. Even if regulatory clearances are obtained,
a marketed product is subject to continual review, and later discovery of previously unknown problems may result in restrictions
on marketing or withdrawal of the product from the market.
Risks
related to capital structure
Our
stock price may be volatile and our common stock could decline in value.
The
market price of securities of life sciences companies in general has been very unpredictable. The range of sales prices of our
common stock for the fiscal years ended December 31, 2018 and 2017, as quoted on the OTC QB, was $0.40 to $2.90 and $0.80 to $4.20,
respectively. The following factors, in addition to factors that affect that market generally, could significantly affect our
business, and the market price of our common stock could decline:
●
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competitors
announcing technological innovations or new commercial products;
|
●
|
competitors’
publicity regarding actual or potential products under development;
|
●
|
regulatory
developments in the United States and foreign countries;
|
●
|
legal
developments regarding cannabinoids and cannabis products in the United States and foreign countries
|
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developments
concerning proprietary rights, including patent litigation;
|
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public
concern over the safety of therapeutic products; and
|
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changes
in healthcare reimbursement policies and healthcare regulations.
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Our
common stock is thinly traded and you may be unable to sell some or all of your shares at the price you would like, or at all,
and sales of large blocks of shares may depress the price of our common stock.
Our
common stock has historically been sporadically or “thinly-traded,” meaning that the number of persons interested
in purchasing shares of our common stock at prevailing prices at any given time may be relatively small or nonexistent. As a consequence,
there may be periods of several days or more when trading activity in shares of our common stock is minimal or non-existent, as
compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales
without an adverse effect on share price. This could lead to wide fluctuations in our share price. You may be unable to sell your
common stock at or above your purchase price, which may result in substantial losses to you. Also, as a consequence of this lack
of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price
of shares of our common stock in either direction. The price of shares of our common stock could, for example, decline precipitously
in the event a large number of shares of our common shares are sold on the market without commensurate demand, as compared to
a seasoned issuer which could better absorb those sales without adverse impact on its share price.
There
is a large number of shares of the Company’s common stock that may be issued or sold, and if such shares are issued or sold,
the market price of our common stock may decline.
As
of December 31, 2018, we had 3,872,076 shares of our common stock outstanding.
If
all warrants and options outstanding as of December 31, 2018 are exercised prior to their expiration, up to 6,128,223 additional
shares of our common stock could become freely tradable. The issuance of such shares would dilute the interests of the current
stockholders and sales of substantial amounts of common stock in the public market could adversely affect the prevailing market
price of our common stock and could also make it more difficult for us to raise funds through future offerings of common stock.
As
of December 31, 2018, there were remaining outstanding convertible notes totaling $239,666 inclusive of accrued interest. Of that
amount, $187,233 was convertible into 16,319 shares of common stock and the remainder into an indeterminate number of shares of
common stock as such notes may convert, at the option of each note holder, acting separately and independently of the other note
holders, into the next exempt private securities offering of equity securities. If we issue additional equity or equity-based
securities, the number of shares of our common stock outstanding could increase substantially, which could adversely affect the
prevailing market price of our common stock and could also make it more difficult for us to raise funds through future offerings
of common stock.
Our
charter document may prevent or delay an attempt by our stockholders to replace or remove management.
Certain
provisions of our restated certificate of incorporation, as amended, could make it more difficult for a third party to acquire
control of our business, even if such change in control would be beneficial to our stockholders. Our restated certificate of incorporation,
as amended, allows the Board of Directors of the Company to issue, as of December 31, 2018, up to 5,000,000 shares of preferred
stock, with characteristics to be determined by the board, without stockholder approval. The ability of our Board of Directors
to issue additional preferred stock may have the effect of delaying or preventing an attempt by our stockholders to replace or
remove existing directors and management.
If
our common stock is determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common
stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.
In
addition, our common stock may be subject to the so-called “penny stock” rules. The United States Securities and Exchange
Commission (“SEC”) has adopted regulations that define a “penny stock” to be any equity security that
has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities
exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice
requirements on broker-dealers, subject to certain exceptions. If our common stock is determined to be a “penny stock,”
a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or
dispose of our common stock on the secondary market.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
As
of December 31, 2018, the Company did not own any real property or maintain any leases with respect to real property. The Company
periodically contracts for services provided at the facilities owned by third parties and may, from time-to-time, have employees
who work in these facilities.
Item
3. Legal Proceedings
By
letter dated February 5, 2016, the Company received a demand from a law firm representing a professional services vendor of the
Company alleging an amount due and owing for unpaid services rendered. On January 18, 2017, following an arbitration proceeding,
an arbitrator awarded the vendor the full amount sought in arbitration of $146,082. Additionally, the arbitrator granted the vendor
attorneys’ fees and costs of $47,937. All such amounts have been accrued at December 31, 2018 and December 31, 2017, including
accrued interest at 4.5% annually from February 26, 2018, the date of the judgment, through December 31, 2018, totaling $7,470.
We
are periodically subject to various pending and threatened legal actions and claims. See Note 9 to our consolidated financial
statements for the years ended December 31, 2018 and 2017—Commitments and Contingencies—
Pending or Threatened Legal
Actions and Claims
for details regarding these matters.
Item
4. Mine Safety Disclosures
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our
common stock is quoted on the OTC QB, under the symbol “RSPI”. The following table presents quarterly information
on the high and low closing prices of the common stock furnished by the OTC QB for the fiscal years ended December 31, 2018 and
2017. The quotations on the OTC QB reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
As
of December 31, 2018, there were 107 stockholders of record of our common stock, and approximately 1,200 beneficial owners. The
high and low sales prices for our common stock on December 28, 2018, as quoted on the OTC QB market, were $0.65 and $0.65, respectively,
the last date of the fiscal year on which the common stock traded (390 shares of common stock). No shares of common stock traded
on December 31, 2018, therefore the OTC QB market reflected a high and low stock price on that date of $0.65.
We
have never paid cash dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. The
payment of dividends, if any, will be determined by the Board in light of conditions then existing, including our financial condition
and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant
by the Board.
During
the fiscal year ended December 31, 2018, we did not repurchase any of our securities.
Item
6. Selected Financial Data
Not
applicable to smaller reporting companies.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis should be read in conjunction with the audited financial statements and notes related thereto
appearing elsewhere in this document.
Overview
The
mission of RespireRx Pharmaceuticals Inc. (“RespireRx” or the “Company” or “we” or “our”)
is to develop innovative and revolutionary treatments to combat diseases caused by disruption of neuronal signaling. We are developing
treatment options that address conditions that affect millions of people, but for which there are few or poor treatment options,
including obstructive sleep apnea (“OSA”), attention deficit hyperactivity disorder (“ADHD”) and recovery
from spinal cord injury (“SCI”), as well as certain neurological orphan diseases such as Fragile X Syndrome. RespireRx
is developing a pipeline of new drug products based on our broad patent portfolios for two drug platforms: ampakines, proprietary
compounds that positively modulate AMPA-type glutamate receptors to promote neuronal function and cannabinoids, including dronabinol
(“∆9-THC”).
Ampakines
Since
its formation in 1987, RespireRx Pharmaceuticals Inc. (formerly known as Cortex Pharmaceuticals, Inc.) has been engaged in the
research and clinical development of a class of proprietary compounds known as ampakines, a term used to designate their actions
as positive allosteric modulators of the alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid (“AMPA”) glutamate
receptor. Ampakines are small molecule compounds that enhance the excitatory actions of the neurotransmitter glutamate at the
AMPA receptor complex, which mediates most excitatory transmission in the central nervous system (“CNS”). These drugs
do not have agonistic or antagonistic properties but instead modulate the receptor rate constants for transmitter binding, channel
opening, and desensitization. We currently are developing two lead clinical compounds, CX717 and CX1739, and one pre-clinical
compound, CX1942. These compounds belong to a new class of ampakines that do not display the electrophysiological and biochemical
effects that lead to undesirable side effects, namely convulsive activities, previously reported in animal models of earlier generations.
The
Company owns patents and patent applications, or the rights thereto, for certain families of chemical compounds, including ampakines,
which claim the chemical structures, their actions as ampakines and their use in the treatment of various disorders. Patents claiming
a family of chemical structures, including CX1739 and CX1942, as well as their use in the treatment of various disorders extend
through at least 2028. Additional patent applications claiming the use of ampakines in the treatment of certain neurological and
neuropsychiatric disorders, such as Attention Deficit Hyperactivity Disorder (“ADHD”) have been or are expected to
be filed in the near future.
In
2007, we determined that expansion of our strategic development into the areas of central respiratory dysfunction, including drug-induced
respiratory dysfunction represented cost-effective opportunities for potentially rapid development and commercialization of RespireRx’s
compounds. On May 9, 2007, RespireRx entered into a license agreement, as subsequently amended, with the University of Alberta
granting RespireRx exclusive rights to method of treatment patents held by the University of Alberta claiming the use of ampakines
for the treatment of various respiratory disorders. These patents, along with RespireRx’s own patents claiming chemical
structures, comprise RespireRx’s principal intellectual property supporting RespireRx’s research and clinical development
program in the use of ampakines for the treatment of central and drug-induced respiratory disorders.
On
May 18, 2018, the Company received a letter from counsel claiming to represent TEC Edmonton and The Governors of the University
of Alberta, which purported to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 (as subsequently
amended) between the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds
for termination and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting
to be attended by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute.
In February 2019, the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license
agreement and the form of a new license agreement. However, the parties have not signed the draft new license agreement pending
the Company’s payment of the agreed amount of historical unreimbursed patent fees of approximately CAD$23,000 (approximately
US$17,000 as of December 31, 2018). No assurance can be provided that the Company will or will not be able to remit the
historical license fees or that the draft new license agreement will be executed and become effective. If we do not remit the
historical fees and the new license agreement does not become effective, we cannot estimate the possible adverse impact on the
Company’s operations or business prospects.
Through
an extensive translational research effort from the cellular level through Phase 2 clinical trials, the Company has developed
a family of novel, low impact ampakines, including CX717, CX1739 and CX1942 that have clinical application in the treatment of
neurobehavioral disorders, CNS-driven respiratory disorders, spinal cord injury, neurological diseases, and orphan indications.
We have been addressing CNS-driven respiratory disorders that affect millions of people, but for which there are few treatment
options and limited drug therapies, including opioid induced respiratory disorders, such as apnea (transient cessation of breathing)
or hypopnea (transient reduction in breathing). When these symptoms become severe, as in opioid overdose, they are the primary
cause of opioid lethality.
RespireRx
has completed pre-clinical studies indicating that several of its ampakines, including CX717, CX1739 and CX1942, were efficacious
in treating drug induced respiratory depression caused by opioids or certain anesthetics without altering the analgesic effects
of the opioids or the anesthetic effects of the anesthetics. The results of our preclinical research studies have been replicated
in three separate Phase 2A human clinical trials with two ampakines, CX717 and CX1739, confirming the translational mechanism
and target site engagement and demonstrating proof of principle that ampakines act as positive allosteric modulators of AMPA receptors
in humans and can be used in humans for the prevention of opioid induced apnea. In addition, RespireRx has conducted a Phase 2A
clinical study in which patients with sleep apnea were administered CX1739, RespireRx’s lead clinical compound. The results
suggested that CX1739 might have use as a treatment for central sleep apnea (“CSA”) and mixed sleep apnea, but not
OSA.
RespireRx
is committed to advancing the ampakines through the clinical and regulatory path to approval and commercialization. Until recently,
RespireRx has focused on the ampakines’ ability to antagonize opioid induced respiratory depression both as a translational
tool to verify target engagement, as well as an eventual commercial indication. We believe the loss of over 70,000 lives in our
country last year alone demands that new solutions for opioid induced deaths be developed to ensure the public health.
To
this end, the Company has conducted preclinical and clinical research with CX1739, CX717 and CX1942 in the prevention, treatment,
and management of opioid induced apnea, the primary cause of overdose deaths. In particular, we have conducted several Phase 2
clinical trials demonstrating that both CX717 and CX1739 significantly reduced opioid induced respiratory depression (“OIRD”)
without altering analgesia. Since one of the primary risk factors for opioid overdose is CSA, it is significant that a Phase 2A
clinical study with CX1739 produced data suggesting a possible reduction in central sleep apnea.
As
there are
neither drugs nor devices approved to treat CSA, Company
management believes there is the potential for a rapid path to commercialization. Unfortunately, rather than support novel approaches
for opioid treatment, the recent public and governmental discourses regarding the “opioid epidemic” has focused almost
entirely on the distribution of naloxone, an opioid antagonist used for acute emergency situations, so-called “non-abuseable”
opioid formulations, as well as on means of reducing opioid consumption by limiting production of opioids and access to legal
opioid prescriptions. It remains to be seen whether these approaches will have an impact on the situation. Nevertheless, as a
result, we believe that there is an ongoing industry-wide pullback from opioids, as evidenced by a reduction in opioid prescriptions
and a major reduction in manufacturing by two of the largest opioid manufactures in the United States.
These
factors have made it difficult to raise capital or find strategic partners for the development of ampakines for the treatment
of opioid induced respiratory depression and we are assessing whether to continue with this program. In addition, as noted above,
we have been notified by the University of Alberta (“TEC Edmonton”) that they consider our license agreement to be
terminated and we are in discussions with them to determine whether and under what conditions a resolution to the dispute can
be achieved. At the present time, we are suspending the development of this program until we reach an understanding with the University
of Alberta, the political climate is clarified and we are able to either raise funding or enter into a strategic relationship
for this purpose. Nevertheless, the valuable data derived from these translational studies have established antagonism of OIRD
as a biomarker for demonstrating proof of principle and target engagement in support of continued ampakine development for other
indications.
In
addition, the Company is pursuing potentially promising clinical development programs in neuro-behavioral and cognitive disorders,
with translational and clinical research programs focused on the use of ampakines for the treatment of ADHD and, together with
our academic collaborators, motor impairment resulting from SCI and for Fragile X Autism.
ADHD
is one of the most common neurobehavioral disorders, with 6.1% of American children taking medication for treatment, and ADHD
is estimated to affect 7.8% of U.S. children aged 4 to 17, which is approximately 4.5 million children, according
to the U.S. Centers for Disease Control and Prevention (“CDC”). The principal characteristics of ADHD are inattention,
hyperactivity and impulsivity. ADHD symptoms are known to persist into adulthood. In a study published in
Psychiatry Res in
May 2010,
up to 78% of children affected by this disorder showed at least one of the major symptoms of ADHD when followed
up 10 years later. According to the CDC, approximately 4% of the US adult population has ADHD, which can negatively impair many
aspects of daily life, including home, school, work and interpersonal relationships.
Currently
available treatments for ADHD include amphetamine-type stimulants and non-stimulant agents targeting the monoaminergic receptor
systems in the brain. However, these receptors are not restricted to the brain and are widely found throughout the body. Thus,
while these agents can be effective in ameliorating ADHD symptoms, they also can produce adverse cardiovascular effects, such
as increased heart rate and blood pressure. Existing treatments also affect eating habits and can reduce weight gain and growth
in children and have been associated with suicidal ideation in adolescents and adults. In addition, approved stimulant treatments
are DEA classified as controlled substances and present logistical issues for distribution and protection from diversion. Approved
non-stimulant treatments, such as atomoxetine, can take four to eight weeks to become effective and undesirable side effects have
been observed.
Various
investigators have generated data supporting the concept that alterations in AMPA receptor function might underlie the production
of some of the symptoms of ADHD. In rodent and primate models of cognition, ampakines have been demonstrated to reduce inattention
and impulsivity, two of the cardinal symptoms of ADHD. Furthermore, ampakines do not stimulate spontaneous locomotor activity
in either mice or rats, unlike the stimulants presently used for the treatment of ADHD, nor do they increase the stimulation produced
by amphetamine or cocaine. These preclinical considerations prompted us to conduct a randomized, double-blind, placebo controlled,
two period crossover study to assess the efficacy and safety of CX717 in adults with ADHD.
In
a repeated measures analysis, a statistically significant treatment effect on ADHD Rating Scale (ADHD-RS), the primary outcome
measure, was observed after a three-week administration of CX717, 800 mg BID. Differences between this dose of CX717 and placebo
were seen as early as week one of treatment and continued throughout the remainder of the study. The low dose of CX717, 200 mg
BID, did not differ from placebo. In general, results from both the ADHD-RS hyperactivity and inattentiveness subscales, which
were secondary efficacy variables, paralleled the results of the total score. CX717 was considered safe and well tolerated.
Based
on these clinical results, ampakines such as CX717 might represent a breakthrough opportunity to develop a non-stimulating therapeutic
for ADHD with the rapidity of onset normally seen with stimulants. Subject to raising sufficient financing (of which no assurance
can be provided), we are planning to continue this program with a Phase 2B clinical trial in patients with adult ADHD.
Ampakines
also may have potential utility in the treatment and management of SCI to enhance motor functions and improve the quality of life
for SCI patients. An estimated 17,000 new cases of SCI occur each year in the United States, most a result of automobile accidents.
Currently, there are roughly 282,000 people living with spinal cord injuries, which often produce impaired motor function.
SCI
can profoundly impair neural plasticity leading to significant morbidity and mortality in human accident victims. Plasticity is
a fundamental property of the nervous system that enables continuous alteration of neural pathways and synapses in response to
experience or injury. One frequently studied model of plasticity is long-term facilitation of motor nerve output (“LTF”).
A large body of literature exists regarding the ability of ampakines to stimulate neural plasticity, possibly due to an enhanced
synthesis and secretion of various growth factors.
Recently,
studies of acute intermittent hypoxia (“AIH”) in patients with SCI demonstrate that neural plasticity can be induced
to improve motor function. This LTF is based on physiological mechanisms associated with the ability of spinal circuitry to learn
how to adjust spinal and brainstem synaptic strength following repeated hypoxic bouts. Because AIH induces spinal plasticity,
the potential exists to harness repetitive AIH as a means of inducing functional recovery of motor function following SCI.
RespireRx
has been working with Dr. David Fuller, at the University of Florida with funding from the National Institutes of Health, to evaluate
the use of ampakines for the treatment of compromised motor function in SCI. Using mice that have received spinal hemisections,
CX717 was observed to increase motor nerve activity bilaterally. The effect on the hemisected side was greater than that measured
on the intact side, with the recovery approximating that seen on the intact side prior to administration of ampakine. In addition,
CX717 was observed to produce a dramatic and long-lasting effect on LTF produced by AIH. The doses of ampakines active in SCI
were comparable to those demonstrating antagonism of OIRD, indicating target engagement of the AMPA receptors.
These
animal models of motor nerve function following SCI support proof of concept for a new treatment paradigm using ampakines to improve
motor functions in patients with SCI. With additional funding recently granted by NIH to Dr. Fuller, RespireRx is continuing
its collaborative preclinical research with Dr. Fuller while it is planning a clinical trial program focused on developing ampakines
for the restoration of certain motor functions in patients with SCI. The Company is working with our Clinical Advisory Panel and
with researchers at highly regarded clinical sites to finalize a Phase 2 clinical trial protocol. Subject to raising sufficient
financing (of which no assurance can be provided), we believe that a clinical study could be initiated as early as 2019.
According
to the Autism Society, more than 3.5 million Americans live with an Autism Spectrum Disorder (“ASD”), a complex neurodevelopmental
disorder. Fragile X Syndrome (“FXS”) is the most common identifiable single-gene cause of autism, affecting approximately
1.4 in every 10,000 males and 0.9 in every 10,000 females, according to the CDC. Individuals with FXS and ASD exhibit a range
of abnormal behaviors comprising hyperactivity and attention problems, executive function deficits, hyper-reactivity to stimuli,
anxiety and mood instability. Also, according the Autism Society, the prevalence rate of ASD has risen from 1 in 150 children
in 2000 to 1 in 68 children in 2010, with current estimates indicating a significant rise in ASD diagnosis to 1 in 59 births,
placing a significant emotional and economic burden on families and educational systems. The Autism Society estimates the economic
cost to U.S. citizens of autism services to be between $236 and $262 billion annually.
Since
“autistic disturbances” were first identified in children in 1943, extensive research efforts have attempted to identify
the genetic, molecular, environmental, and clinical causes of ASD, but until recently the underlying etiology of the disorder
remained elusive. Today, there are no medications that can treat ASD or its core symptoms, and only two anti-psychotic drugs,
aripiprazole and risperidone, are approved by the United States Food and Drug Administration (“FDA”)
for the treatment of irritability associated with ASD.
Thanks
to wide ranging translational research efforts, FXS and ASD are currently recognized as disorders of the synapse with alterations
in different forms of synaptic communication and neuronal network connectivity. Focusing on the proteins and subunits of the AMPA
receptor complex, autism researchers at the University of San Diego (“UCSD”) have proposed that AMPA receptor malfunction
and disrupted glutamate signal transmission may play an etiologic role in the behavioral, emotional and neurocognitive phenotypes
that remain the standard for ASD diagnosis. For example, Stargazin, also known as CACNG2 (Ca
2+
channel γ2 subunit),
is one of four closely related proteins recently categorized as transmembrane AMPA receptor regulating proteins (“TARPs”).
Researchers
at the UCSD have been studying genetic mutations in the AMPA receptor complex that lead to cognitive and functional deficiencies
along the autism spectrum. They work with patients and their families to conduct detailed genetic analyses in order to better
understand the underlying mechanisms of autism. In one case, they have been working with a teenage patient who has an autism diagnosis,
with a phenotype that is characterized by subtle Tourette-like behaviors, extreme aggression, and verbal and physical outbursts
with disordered thought. Despite the behaviors, his language is normal. Using next generation sequencing and genome editing technologies,
the researchers identified a specific mutation in stargazin,
a transmembrane AMPA receptor
regulatory protein that alters the configuration and kinetics of the AMPA receptor.
When the aberrant sequence was introduced
into C57bL6 mice using CRISPR (Clustered Regulatory Interspaced Short Palindromic Repeats), the heterozygous allele had a dominant
negative effect on the trafficking of post-synaptic AMPA receptors and produced behaviors consistent with a glutamatergic deficit
and similar to what has been observed in the teenage patient.
With
funding from the National Institutes of Health to UCSD, RespireRx is working with UCSD to explore the use of ampakines for the
amelioration of the cognitive and other deficits associated with AMPA receptor gene mutations. Because CX1739 has an open IND,
subject to securing sufficient outside funding (of which no assurance can be provided), we are considering a Phase 2A clinical
trial sometime in 2019.
Cannabinoids
OSA
is a sleep-related breathing disorder that afflicts an estimated 29 million people in the United States according to the American
Academy of Sleep Medicine (“AASM”), and an additional 26 million in Germany and 8 million in the United Kingdom, as
presented at the European Respiratory Society’s (“ERS”) annual Congress in Paris, France in September 2018.
OSA involves a decrease or complete halt in airflow despite an ongoing effort to breathe during sleep. When the muscles relax
during sleep, soft tissue in the back of the throat collapses and obstructs the upper airway. OSA remains significantly under-recognized,
as only 20% of cases in the United States according to the AASM and 20% of cases globally have been properly diagnosed. About
24 percent of adult men and 9 percent of adult women have the breathing symptoms of OSA with or without daytime sleepiness. OSA
significantly impacts the lives of sufferers who do not get enough sleep; their quality of sleep is deteriorated such that daily
function is compromised and limited. OSA is associated with decreased quality of life, significant functional impairment, and
increased risk of road traffic accidents, especially in professions like transportation and shipping.
Research
has established links between OSA and several important co-morbidities, including hypertension, type II diabetes, obesity, stroke,
congestive heart failure, coronary artery disease, cardiac arrhythmias, and even early mortality. The consequences of undiagnosed
and untreated OSA are medically serious and economically costly. According to the AASM, the estimated economic burden of OSA in
the United States is approximately $162 billion annually. We believe that a new drug therapy that is effective in reducing the
medical and economic burden of OSA would have significant advantages for optimal pricing in this costly disease indication.
Continuous
Positive Airway Pressure (“CPAP”) is the most common treatment for OSA. CPAP devices work by blowing pressurized air
into the nose (or mouth and nose), which keeps the pharyngeal airway open. CPAP is not curative, and patients must use the mask
whenever they sleep. Reduction of the apnea/hypopnea index (“AHI”) is the standard objective measure of therapeutic
response in OSA. Apnea is the cessation of breathing for 10 seconds or more and hyponea is a reduction in breathing. AHI is the
sum of apnea and hypopnea events per hour. In the sleep laboratory, CPAP is highly effective at reducing the AHI. However, the
device is cumbersome and difficult for many patients to tolerate. Most studies describe that 25-50% of patients refuse to initiate
or completely discontinue CPAP use within the first several months and that most patients who continue to use the device do so
only intermittently.
Oral
devices may be an option for patients who cannot tolerate CPAP. Several dental devices are available including the Mandibular
Advancement Device (“MAD”) and the Tongue Retaining Device (“TRD”). The MAD is the most widely used dental
device for sleep apnea and is similar in appearance to a sports mouth guard. It forces the lower jaw forward and down slightly
which keeps the airway more open. The TRD is a splint that holds the tongue in place to keep the airway as open as possible. Like
CPAP, oral devices are not curative for patients with OSA. The cost of these devices tends to be high and side effects associated
with them include night time pain, dry lips, tooth discomfort, and excessive salivation.
Patients
with clinically significant OSA who cannot be treated adequately with CPAP or oral devices can elect to undergo surgery. The most
common surgery is uvulopalatopharyngoplasty which involves the removal of excess tissue in the throat to make the airway wider.
Other possible surgeries include tracheostomies, rebuilding of the lower jaw, and nose surgery. Patients who undergo surgery for
the treatment of OSA risk complications, including infection, changes in voice frequency, and impaired sense of smell. Surgery
is often unsuccessful and, at present, no method exists to reliably predict therapeutic outcome from these forms of OSA surgery.
Recently,
another surgical option has become available based on upper airway stimulation. It is a combination of an implantable nerve stimulator
and an external remote controlled by the patient. The hypoglossal nerve is a motor nerve that controls the tongue. The implanted
device stimulates the nerve with every attempted breath, regardless of whether such stimulation is needed for that breath, to
increase muscle tone to prevent the tongue and other soft tissues from collapsing. The surgically implanted device is turned on
at night and off in the morning by the patient with the remote.
The
poor tolerance and long-term adherence to CPAP, as well as the limitations of mechanical devices and surgery, make discovery of
therapeutic alternatives clinically relevant and important. RespireRx’s translational research results demonstrate that
dronabinol, a synthetic cannabinoid, has the potential to become the first drug treatment for this large and underserved
market.
In
order to expand RespireRx’s respiratory disorders program and develop cannabinoids for the treatment of OSA, RespireRx acquired
100% of the issued and outstanding equity securities of Pier Pharmaceuticals, Inc. (“Pier”) effective August 10, 2012
pursuant to an Agreement and Plan of Merger. Pier had been formed in June 2007 (under the name SteadySleep Rx Co.) as a clinical
stage pharmaceutical company to develop a pharmacologic treatment for OSA and had been engaged in research and clinical development
activities.
Through
the merger, RespireRx gained access to an Exclusive License Agreement (as amended, the “Old License Agreement”) that
Pier had entered into with the University of Illinois Chicago (the “UIC”) on October 10, 2007. The Old License
Agreement covered certain patents and patent applications in the United States and other countries claiming the use of certain
compounds referred to as cannabinoids, of which dronabinol is a specific example, for the treatment of sleep-related breathing
disorders (including sleep apnea). Pier’s business plan was to determine whether dronabinol would significantly improve
subjective and objective clinical measures in patients with OSA.
The
Old License Agreement was terminated effective March 21, 2013 and the Company entered into a new license agreement (the “2014
License Agreement”) with the UIC on June 27, 2014, the material terms of which were substantially similar to the Old License
Agreement. The 2014 License Agreement grants the Company, among other provisions, exclusive rights: (i) to practice certain patents
in the United States, Germany and the United Kingdom, as defined in the 2014 License Agreement, that are held by the UIC; (ii)
to identify, develop, make, have made, import, export, lease, sell, have sold or offer for sale any related licensed products;
and (iii) to grant sub-licenses of the rights granted in the 2014 License Agreement, subject to the provisions of the 2014 License
Agreement. The Company is required under the 2014 License Agreement, among other terms and conditions, to pay the UIC a
license fee, royalties, patent costs and certain milestone payments.
Dronabinol
is a synthetic derivative of Δ9-THC, one of the pharmacologically active substances naturally occurring in the cannabis
plant. Dronabinol is a Schedule III, controlled generic drug that has been approved by the FDA for the treatment of AIDS-related
anorexia and chemotherapy-induced nausea and vomiting. Dronabinol is available in the United States as the branded prescription
drug product Marinol® capsules. Marinol®, together with numerous generic formulations, is available in 2.5, 5, and 10
mg capsules, with a maximum labelled dosage of 20 mg/day for the AIDS indication, or 15 mg/m
2
per dose for chemotherapy-induced
nausea and vomiting.
The
Company conducted a 21 day, randomized, double-blind, placebo-controlled, dose escalation Phase 2A clinical study in 22 patients
with OSA, in which dronabinol produced a statistically significant reduction in AHI, the primary therapeutic end-point, and was
observed to be safe and well tolerated, with the frequency of side effects no different from placebo (Prasad
et al, Frontiers
in Psychiatry
, 2013).
With
approximately $5 million in funding from the National Heart, Lung and Blood Institute of National Institutes of Health (“NIH”),
Dr. David Carley of UIC, along with his colleagues at UIC and Northwestern University, recently completed a Phase 2B multi-center,
double-blind, placebo-controlled clinical trial of dronabinol in patients with OSA. Entitled Pharmacotherapy of Apnea with Cannabimimetic
Enhancement (“PACE”), this study replicated the earlier Phase 2A study. The authors reported (Carley
et al
,
Sleep
, 2018) that, in a dose dependent fashion, treatment with 2.5mg and 10mg of dronabinol once a day at night, significantly
reduced, compared to placebo, the AHI during sleep in 56 evaluable patients with moderate to severe OSA who completed the
study. Additionally, treatment with 10mg of dronabinol significantly improved daytime sleepiness as measured by the Epworth Sleepiness
Scale and achieved the greatest overall patient satisfaction. As in the previous study, dronabinol was observed to be safe and
well tolerated, with the frequency of side effects no different from placebo. The Company did not manage or fund this clinical
trial which was funded by the National Heart, Lung and Blood Institute of NIH.
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 allow us or a development partner to submit a 505(b)(2) New Drug Application (“NDA”) to the FDA for
approval of a new dronabinol label, as opposed to the submission and approval of a full 505(b)(1) NDA. The 505(b)(2) NDA was created
by the Hatch-Waxman Amendments to the Federal Food, Drug and Cosmetic Act, in part, to help avoid unnecessary duplication of studies
already performed on a previously approved drug; the section gives the FDA express permission to rely on data not developed by
the NDA applicant. A 505(b)(2) NDA contains full safety and effectiveness reports but allows at least some of the information
required for NDA approval, such as safety and efficacy information on the active ingredient, to come from studies not conducted
by or for the applicant. This can result in a less expensive and faster route to approval, compared with a traditional development
path, such as 505(b)(1), while creating new, differentiated products. This regulatory path offers market protections under Hatch-Waxman
provisions for market exclusivity at the FDA. Other regulatory routes are available to pursue proprietary formulations of dronabinol
that will provide further market protections. In Europe, a regulatory approval route similar to the 505(b)(2) pathway is the hybrid
procedure based on Article 10 of Directive 2001/83/EC.
In
conjunction with its management and consultants, RespireRx has developed a regulatory strategy in which we intend to file a new
NDA under Section 505(b)(2) claiming the efficacy of dronabinol in the treatment of OSA and, in the process, create
a new branded product. We have engaged Camargo Pharmaceutical Services, LLC to act as regulatory consultants and assist with FDA
filings and regulatory strategy.
Unlike
a standard 505(b)(1) NDA, the 505(b)(2) Abbreviated New Drug Application (“ANDA”) process begins with a pre-IND meeting
with the FDA, then moves to formulation development (and nonclinical studies, if necessary) and then to the IND (investigational
new drug) filing. Since we intend to utilize an already approved or equivalent dronabinol product from manufacturers that have
approved Drug Master Files, we believe that the pre-IND meeting will forego discussions of CMC (chemistry, manufacturing and controls),
formulation and safety, as well as Phase 1 and 2 studies. Instead, we believe that the focus will be on the Phase 3 clinical development
program. When a Phase 3 study is required for a 505(b)(2), usually only one study with fewer patients is necessary versus the
two, large scale, confirmatory studies generally required for 505(b)(1). While no assurance can be provided, with an extensive
safety database tracking chronic, long-term use of Marinol® and generics, we believe that FDA should not have major safety
concerns with dronabinol in the treatment of OSA.
We
anticipate requesting a pre-IND meeting with the FDA possibly during the second quarter of 2019, which would functionally
serve as the equivalent of an end-of-Phase 2 meeting. The FDA responses to this meeting will be incorporated into an IND, which
we believe we could be in a position to submit within 60 days of receiving their communication.
RespireRx
has worked with the PACE investigators and staff, as well as with our Clinical Advisory Panel to design a Phase 3 protocol that,
based on the experience and results from the Phase 2A and Phase 2B trials, we believe will provide sufficient data for FDA approval
of a RespireRx dronabinol branded capsule for OSA. Subject to raising sufficient financing (of which no assurance can be provided).
RespireRx intends to submit the Phase 3 protocol to the FDA. The current version of the protocol is designed as a 90-day randomized,
blinded, placebo controlled study of dronabinol in the treatment of OSA. Depending on feedback from the FDA, RespireRx estimates
that the Phase 3 trial would require between 120 and 300 patients at 15 to 20 sites, and take 18 to 24 months to complete, at
a cost of between $10 million and $14 million.
Subject
to raising sufficient financing (of which no assurance can be provided), RespireRx intends to hire Clinilabs Drug Development
Corporation, a full-service CRO, to consult and potentially provide clinical site management, monitoring, data management, and
centralized sleep monitoring services for the Phase 3 OSA trial. Dr. Gary Zammitt, CEO of Clinilabs, serves on the RespireRx Clinical
Advisory Panel, and his management team has provided guidance on study design and CNS drug development that will be relevant for
the Phase 3 program. For example, Clinilabs offers specialized clinical trial services for CNS drug development through an alliance
with Neuroclinics, including clinical trials examining the effects of drugs on driving, cognitive effects of food and (medicinal)
drugs, and sleep and sleep disordered breathing.
On
September 4, 2018, RespireRx entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Under the terms of the Agreement, Noramco agreed to (i) provide all of the active pharmaceutical
ingredient (“API”) estimated to be needed for the clinical development process for both the first- and second-generation
products (each a “Product” and collectively, the “Products”), three validation batches for NDA filing(s)
and adequate supply for the initial inventory stocking for the wholesale and retail channels, subject to certain limitations,
(ii) maintain or file valid drug master files (“DMFs”) with the FDA or any other regulatory authority and provide
the Company with access or a right of reference letter entitling the Company to make continuing reference to the DMFs during the
term of the agreement in connection with any regulatory filings made with the FDA by the Company, (iii) participate on a development
committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting firms engaged by the
Company and participate in all FDA or Drug Enforcement Agency (“DEA”) meetings as appropriate and as related to the
API.
In
consideration for these supplies and services, the Company has agreed (i) to purchase exclusively from Noramco, during the commercialization
phase, all API for its Products (as defined in the Development and Supply Agreement) at a pre-determined price subject to certain
producer price adjustments and (ii) Noramco’s participation in the economic success of the commercialized Product or Products
up to the earlier of the achievement of a maximum dollar amount or the expiration of a period of time.
We
plan to establish strategic relationships with appropriate companies to complete formulation and packaging. RespireRx has identified
several candidates to perform the encapsulation. Some of these already supply finished product to generic pharmaceutical companies
marketing dronabinol for its current non-OSA indications. In addition, as described below, RespireRx has been in discussions with
several companies that have considerable expertise in developing novel formulations for dronabinol and have expressed interest
in helping us develop a proprietary controlled release formulation. No assurance can be provided that encapsulation or formulation
agreements will be consummated on terms acceptable to us; the failure to consummate these agreements would materially adversely
affect the Company.
After
considerable research and discussions with consultants, we believe the most direct route to commercialization is to proceed directly
to a Phase 3 pivotal clinical trial using the currently available dronabinol formulation (2.5, 5 and 10 mg gel caps) and to commercialize
a RespireRx branded dronabinol capsule (“RBDC”) with an NDA. To that end, RespireRx plans to complete the Phase 3
trial and submit a 505(b)(2) application to FDA for approval of a new, branded, once per day dronabinol gel capsule for the treatment
of OSA estimated to occur in 2020. Under the provisions of the Hatch-Waxman Act, the RBDC would have 3-year market exclusivity,
as well as further protection from generic substitution through 2025 due to our patents and an anticipated listing in the
Approved
Drug Products with Therapeutic Equivalence Evaluations
publication (the “Orange
Book”), which identifies drug products approved on the basis of safety and effectiveness by the FDA and related patent and
exclusivity information.
In
addition, management believes there are numerous opportunities for reformulation of dronabinol to produce a proprietary, branded
product for the treatment of OSA. Therefore, simultaneous with the development of the RBDC, RespireRx plans to develop a proprietary
dronabinol formulation to optimize the dose and duration of action for treating OSA. An analysis of the time-related efficacy
results provides potential guidance on development. We have identified several formulation companies with existing dronabinol
formulations, expertise, and licensure to develop a proprietary formulation of dronabinol for RespireRx based on RespireRx’s
pending patents for low-dose and extended release dronabinol, which we expect would enable brand extensions and market protections
through 2036.
Since
RBDC is expected, if approved, to be approved under a 505(b)(2) NDA, it would be considered a new, proprietary, branded dronabinol
product, with a specific label for OSA. It would be non-identical to any other dronabinol product and there would be no generic
equivalents or AB substitutions. There are many examples of branded products that might ordinarily have applied for an ANDA as
a branded generic, but which have successfully utilized this 505(b)(2) NDA approach to grant them new product status and
protect them from generic substitution.
Because
the 505(b)(2) NDA requires clinical data for approval of a new indication, we anticipate that our RBDC would be eligible for market
protection under the Hatch-Waxman Amendment clause for “other significant changes” and we expect would therefore be
eligible for 3-years of market exclusivity. At the end of these 3 years, if a generic company wished to challenge our issued patents,
they would have to file an ANDA with bioequivalence data to our RBDC and, if our patents were listed in the Orange Book, they
would have to simultaneously file a Paragraph 4 certification stating that they are challenging our patent. At that point, we
would receive a 30-months stay of the patent challenge.
We
believe the 5.5 years of market exclusivity expected to result from the Hatch-Waxman Act and the Orange Book listing will provide
adequate time for the development and approval of a novel, proprietary formulation of dronabinol, optimized for all-night treatment
of OSA, with patent protections through 2036. If the new formulation is approved, we plan to rescind the 505(b)(2) NDA for RBDC
and replace the branded product with the new and improved formulation on the market, with the intention of preventing ANDA competition
and protecting market share.
With
guidance based on the product launch experience of Dr. MacFarland, a member of our Board of Directors, and Richard Purcell, our
senior vice-president of research and development, and the managed markets experience of our consultant, Commercialization Consulting,
LLC, we have prepared an approach to marketing and commercialization of both the RBDC and the proprietary dronabinol formulation.
Based upon an extensive analysis conducted by Commercialization Consulting, LLC we believe that if we were to execute our strategy,
we should not experience a loss of more than approximately 15% of sales due to off-label generic dronabinol sales.
Recent
Developments
Resignation
of James S. Manuso, President and Chief Executive Officer, Vice Chairman and Member of the Board of Directors and Appointment
of Arnold S. Lippa as lnterim President and Interim Chief Executive Officer
The
resignation of Dr. James S. Manuso as the Company’s President and Chief Executive Officer, Vice Chairman and Member of the
Board of Directors became effective on September 30, 2018, the end of the term of his employment agreement. Dr. Manuso did not
resign because of any disagreement with the Company relating to the Company’s operations, policies or practices.
On
October 12, 2018, Arnold S. Lippa, Ph.D. was named Interim President and Interim Chief Executive Officer. Dr. Lippa continues
to serve as the Company’s Chief Scientific Officer and Chairman of the Board of Directors.
University
of Alberta (TEC Edmonton)
On
May 9, 2007, the Company entered into a license agreement with The Governors of the University of Alberta, as subsequently amended,
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. On May 18, 2018, the Company received a letter from counsel claiming to represent
TEC Edmonton and The Governors of the University of Alberta, which purported to terminate, effective December 12, 2017,
the license agreement dated May 9, 2007 (as subsequently amended) between the Company and The Governors of the University of Alberta.
The Company, through its counsel, disputed any grounds for termination and notified the representative that it invoked Section
13 of that license agreement, which mandates a meeting to be attended by individuals with decision-making authority to attempt
in good faith to negotiate a resolution to the dispute. In February 2019, the Company and TEC Edmonton tentatively agreed to terms
acceptable to all parties to establish a new license agreement and the form of a new license agreement. However, the parties have
not signed the draft new license agreement pending the Company’s payment of the agreed amount of historical unreimbursed
patent fees of approximately CAD$23,000 (approximately US$17,000 as of December 31, 2018). No assurance can be provided
that the Company will or will not be able to remit the historical license fees or that the draft new license agreement
will be executed and become effective. If we do not remit the historical fees and the new license agreement does not become effective,
we cannot estimate the possible adverse impact on the Company’s operations or business prospects.
Dronabinol
Development and Supply Agreement
On
September 4, 2018, RespireRx entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Under the terms of the Agreement, Noramco agreed to (i) provide all of the active pharmaceutical
ingredient (“API”) estimated to be needed for the clinical development process for both the first- and second-generation
products (each a “Product” and collectively, the “Products”), three validation batches for NDA filing(s)
and adequate supply for the initial inventory stocking for the wholesale and retail channels, subject to certain limitations,
(ii) maintain or file valid drug master files (“DMFs”) with the FDA or any other regulatory authority and provide
the Company with access or a right of reference letter entitling the Company to make continuing reference to the DMFs during the
term of the agreement in connection with any regulatory filings made with the FDA by the Company, (iii) participate on a development
committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting firms engaged by the
Company and participate in all FDA or Drug Enforcement Agency (“DEA”) meetings as appropriate and as related to the
API.
In
consideration for these supplies and services, the Company has agreed to purchase exclusively from Noramco during the commercialization
phase all API for its Products (as defined in the Development and Supply Agreement) at a pre-determined price subject to certain
producer price adjustments and agreed to Noramco’s participation in the economic success of the commercialized Product or
Products up to the earlier of the achievement of a maximum dollar amount or the expiration of a period of time.
2018
Unit Offering
On
September 12, 2018, the Company consummated an initial closing on an offering (“2018 Unit Offering”) of Units comprised
of one share of the Company’s common stock and one common stock purchase warrant. The 2018 Unit Offering was for up to $1.5
million and had a final termination date of October 15, 2018. The initial closing was for $250,750 of which $200,750 was the gross
cash proceeds. The additional $50,000 was represented by the conversion or exchange into the 2018 Unit Offering of the principal
amount of the Arnold S. Lippa, Demand Promissory Note described below. With the exchange of Dr. Lippa’s Demand Promissory
Note into the 2018 Unit Offering, 47,620 warrants exercisable at $150% of the unit price ($1.575) per share of common stock and
expiring on April 30, 2023 were issued with a value of $49,975 which amount was considered a loss on the extinguishment of that
officer note and which amount was credited to additional paid-in capital. Units were sold for $1.05 per unit and the warrants
issued in connection with the units are exercisable through April 30, 2023 at a fixed price of 150% of the unit purchase price.
The warrants contain a cashless exercise provision and certain blocker provisions preventing exercise if the investor would beneficially
own more than 4.99% of the Company’s outstanding shares of common stock as a result of such exercise. The warrants are also
subject to redemption by the Company at $0.001 per share upon ten (10) days written notice if the Company’s common stock
closes at $3.00 or more for any five (5) consecutive trading days. In total, 238,814 shares of the Company’s common stock
and 238,814 common stock purchase warrants were purchased. Other than Arnold S. Lippa, the investors in the offering were not
affiliates of the Company. Investors also received an unlimited number of piggy-back registration rights in respect to the shares
of common stock and the shares of common stock underlying the common stock purchase warrants, unless such common stock is eligible
to be sold with volume limits under an exemption from registration under any rule or regulation of the SEC that permits the holder
to sell securities of the Company to the public without registration and without volume limits (assuming the holder is not an
affiliate).
The
shares of common stock and common stock purchase warrants were offered and sold without registration under the Securities Act
of 1933, as amended (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities
Act as provided in Rule 506(b) of Regulation D promulgated thereunder. None of the shares of common stock issued as part of the
units, the common stock purchase warrants, the Common Stock issuable upon exercise of the common stock purchase warrants or any
warrants issued to a qualified referral source (of which there were none in the initial closing) have been registered under the
Securities Act or any other applicable securities laws, and unless so registered, may not be offered or sold in the United States
except pursuant to an exemption from the registration requirements of the Securities Act.
Prior
to the initial closing of the 2018 Unit Offering, the Company issued to Arnold S. Lippa, Ph.D, the Company’s Interim President,
Interim Chief Executive Officer, Executive Chairman and Chief Scientific Officer and James S. Manuso, Ph.D., the Company’s
then Vice Chairman and then Chief Executive Officer, $100,000 aggregate principal amount ($50,000 each) of demand promissory notes
bearing interest at 10% (the “Demand Promissory Notes”). The Demand Promissory Note issued to Dr. Lippa, exclusive
of any interest accrued, was exchanged or converted into the 2018 Unit Offering simultaneously with its initial closing. The principal
amount of, but not the interest on, the Demand Promissory Note was taken into consideration when determining if the Company had
achieved the minimum amount necessary to effect the initial closing of the 2018 Unit Offering. With the exchange of Dr. Lippa’s
Demand Promissory Note into the 2018 Unit Offering, 47,620 warrants exercisable at $150% of the unit price ($1.575) per share
of common stock and expiring on April 30, 2023 were issued with a value of $49,975 which amount was considered a loss on the extinguishment
of that officer note and which amount was credited to additional paid-in capital. The Demand Promissory Note issued to Dr. Manuso
was not exchanged or converted in connection with the 2018 Unit Offering.
In
addition, as set forth in the Purchase Agreements, each Purchaser had an unlimited number of exchange rights, which were options
and not obligations, to exchange such Purchaser’s entire investment, as defined, (but not less than the entire investment)
into one or more subsequent equity financings (consisting solely of convertible preferred stock or common stock or units containing
preferred stock or common stock and warrants exercisable only into preferred stock or common stock) that would be considered as
“permanent equity” under United States Generally Accepted Accounting Principles and the rules and regulations of the
United States Securities and Exchange Commission, and therefore classified within stockholders’ equity, and excluding any
form of debt or convertible debt or preferred stock redeemable at the discretion of the holder (each such financing a “Subsequent
Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion of any number of Subsequent
Equity Financings that aggregate at least $15 million of gross proceeds, or (ii) December 30, 2018. The exchange rights expired
on December 30, 2018.
The
2018 Unit Offering was terminated on October 15, 2018 without any additional closings.
Impression
Healthcare Limited
On
February 13, 2019, the Company entered into a non- binding memorandum of understanding (“MOU”) and exclusivity agreement
with Impression Healthcare Limited (ASX: IHL,“Impression”) for the purpose of negotiating terms by which the parties
would enter in an arrangement, such as a license, joint venture or partnership agreement, so as to commercialize dronabinol for
the treatment of OSA in Australia, New Zealand and Southeast Asia. Discussions are in progress.
Recent
Accounting Pronouncements
For a description
of recent accounting pronouncements, see Note 3 to the Company’s consolidated financial statements for the fiscal years
ended December 31, 2018 and 2017.
Concentration
of Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents.
The Company limits its exposure to credit risk by investing its cash with high credit quality financial institutions.
The
Company’s research and development efforts and potential products rely on licenses from research institutions and if the
Company loses access to these technologies or applications, its business could be substantially impaired.
Under
a patent license agreement in respect to which, the Company is engaged in a dispute resolution process with TEC Edmonton on behalf
of The Governors of the University of Alberta, the Company maintains that it has exclusive rights to the use of certain ampakine
compounds to prevent and treat respiratory depression induced by opioid analgesics, barbiturates and anesthetic and sedative agents.
On
May 9, 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 with respect to the subject matter of this disputed license, no maintenance
payments are currently due and payable to the University of Alberta. The University of Alberta claims a prospective payment
of approximately $3,600 is currently due and payable.
By
letter dated May 18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of the
University of Alberta, which purports to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 between
the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for termination
and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting to be attended
by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute. In February 2019,
the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license agreement and the
form of a new license agreement. However, the parties have not signed the draft new license agreement pending the Company’s
payment of the agreed amount of historical unreimbursed patent fees, of approximately CAD$23,000 (approximately US$17,000
as of December 31, 2018). No assurance can be provided that the Company will or will not be able to remit the historical
license fees or that the draft new license agreement will be executed and become effective. If we do not remit the historical
fees and the new license agreement does not become effective, we cannot estimate the possible adverse impact on the Company’s
operations or business prospects.
Through
the merger with Pier, the Company gained access to the Old License Agreement that Pier had entered into with the University of
Illinois on October 10, 2007. The Old License Agreement covered certain patents and patent applications in the United States and
other countries claiming the use of certain compounds referred to as cannabinoids for the treatment of sleep related breathing
disorders (including sleep apnea), of which dronabinol is a specific example of one type of cannabinoid. Dronabinol is a synthetic
derivative of the naturally occurring substance in the cannabis plant, otherwise known as Δ9-THC (Δ9-tetrahydrocannabinol).
Dronabinol is currently approved by the FDA and is sold generically for use in refractory chemotherapy-induced nausea and vomiting,
as well as for anorexia in patients with AIDS. Pier’s business plan was to determine whether dronabinol would significantly
improve subjective and objective clinical measures in patients with OSA. The Old License Agreement was terminated effective March
21, 2013 due to the Company’s failure to make a required payment and on June 27, 2014, the Company entered into the 2014
License Agreement with the University of Illinois, the material terms of which were similar to the Old License Agreement that
had been terminated and also included the assignment of rights to the University of Illinois, to certain patent applications filed
by RespireRx. If the Company is unable to comply with the terms of the 2014 License Agreement, such as an inability to make the
payments required thereunder, the Company would be at risk of the 2014 License Agreement being terminated.
As
of December 31, 2018, the Company received an extension of time to make a $100,000 payment that would have due on such date. An
additional extension was granted until February 28, 2019 (See Subsequent Events) on which date the Company made the required payment.
Critical
Accounting Policies and Estimates
The
Company prepared its 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
consolidated financial statements.
Stock-Based
Compensation and Awards
The
Company periodically issues common stock and stock options to officers, directors and consultants for services rendered. Such
issuances vest and expire according to terms established at the issuance date of each grant.
The
Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for
equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s consolidated financial statements over the vesting period of the awards. The Company accounts for
stock-based payments to 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 sometimes subject to time-based vesting, are measured at the grant date fair value and charged to operations
ratably over the vesting period.
Stock
options granted to members of the Company’s outside consultants and other vendors are valued on the grant date. At each
reporting period, the common stock options are re-valued and the Company recognizes this expense over the period in
which the services are provided.
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 stock option or warrant,
whichever can be more clearly determined. Management uses the Black-Scholes option-pricing model to determine the fair value of
the stock options and warrants issued by the Company. The Company recognizes this expense over the period in which the services
are provided.
The
Company recognizes the fair value of stock-based compensation in general and administrative costs and in research and development
costs, as appropriate, in the Company’s consolidated statements of operations. The Company issues new shares of common stock
to satisfy stock option exercises.
Note
Exchange Agreements
See
Note 4 to our consolidated financial statements for information on our “Note Exchange Agreements” during the years
ended December 31, 2018 and 2017.
Research
and Development Costs
Research
and development costs consist primarily of fees paid to consultants and outside service providers and organizations (including
research institutes at universities) and other expenses relating to the acquisition, design, development and testing of the Company’s
treatments and product candidates.
Research
and development costs incurred by the Company under research grants are expensed as incurred over the life of the underlying contracts,
unless the terms of the contract indicate that a different expensing schedule is more appropriate.
The
Company reviews the status of its research and development contracts on a quarterly basis.
License
Agreements
Obligations
incurred with respect to mandatory payments provided for in license agreements are recognized ratably over the appropriate period,
as specified in the underlying license agreement, and are recorded as liabilities in the Company’s consolidated balance
sheet, with a corresponding charge to research and development costs in the Company’s consolidated statement of operations.
Obligations incurred with respect to milestone payments provided for in license agreements are recognized when it is probable
that such milestone will be reached and are recorded as liabilities in the Company’s consolidated balance sheet, with a
corresponding charge to research and development costs in the Company’s consolidated statement of operations. Payments of
such liabilities are made in the ordinary course of business.
Patent
Costs
Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on
the Company’s research efforts and any related patent applications, all patent costs, including patent-related legal and
filing fees, are expensed as incurred and, in accordance with SEC accounting rules, are charged to general and administrative
expenses.
Results
of Operations
The
Company’s consolidated statements of operations as discussed herein are presented below.
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,488,238
|
|
|
|
2,747,471
|
|
Research and development
|
|
|
688,286
|
|
|
|
1,499,940
|
|
Total operating expenses
|
|
|
2,176,524
|
|
|
|
4,247,411
|
|
Loss from operations
|
|
|
(2,176,524
|
)
|
|
|
(4,247,411
|
)
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt and other liabilities in exchange for equity
|
|
|
(166,382
|
)
|
|
|
-
|
|
Interest expense
|
|
|
(136,243
|
)
|
|
|
(102,225
|
)
|
Foreign currency transaction (loss) gain
|
|
|
(112,641
|
)
|
|
|
58,153
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,591,790
|
)
|
|
$
|
(4,291,483
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.77
|
)
|
|
$
|
(1.77
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
3,351,105
|
|
|
|
2,418,271
|
|
Years
Ended December 31, 2018 and 2017
Revenues
.
During the year ended December 31, 2018 and 2017, the Company had no revenues.
General and Administrative
.
For the year ended December 31, 2018, general and administrative expenses were $1,488,238, a decrease of $1,259,233, as compared
to $2,747,471 for the year ended December 31, 2017.
Stock-based
compensation costs and fees included in general and administrative expenses were $14,248 for the December 31, 2018,
as compared to $1,164,537 for the year ended December 31, 2017, reflecting a decrease of $1,150,289. The decrease
is the result of the fact that no stock-based compensation was granted to general and administrative employees of the Company
during the year ended December 31, 2018. Salaries and employee benefits included in general and administrative expenses were
$685,884 for the year ended December 31, 2018 as compared to $696,445 for the year ended December 31, 2017, a decrease of $10,561.
The decrease is the net effect of an increase in base salary of one executive officer in July 2017, reflecting a partial year
in 2017, but a full year in 2018, offset by the elimination of the salary and employee benefits of the former Chief Executive
Officer and President as of September 30, 2018. Legal fees for general corporate purposes were $278,373 for the year ended December
31, 2018 as compared to $290,290 for the year ended December 31, 2017, a decrease of $11,917. Legal fees for patents and other
patent expenses included in general and administrative expenses were $199,363 for the year ended December 31, 2018, a decrease
of 32,272 as compared to $231,635. The decreases in both general legal fees and legal fees associated with patents and other patent
costs is a result of a reduction in utilization of professional resources as part of the Company’s cost control efforts.
The
remaining decrease in general and administrative expenses is due to a number of smaller decreases, partially offset by increases
in a number of other expense categories.
Research
and Development
. For the year ended December 31, 2018, research and development expenses were $688,286, a decrease
of $811,654, as compared to $1,499,940 for the year ended December 31, 2017, primarily due to a decrease in share-based
compensation expenses of $747,741, a reduction in research contracts of $136,779, partially offset by an increase in consulting
fees of $63,702 and other expenses.
Loss
on Extinguishment of Debt and other Liabilities in Exchange for Equity
. Loss on extinguishment of debt or other liabilities
during the year ended December 31, 2018 was $166,382. There was no such loss for the year ended December 31, 2017.
Interest
Expense
. During the year ended December 31, 2018, interest expense was $136,243 (including $42,821 to related parties
of which $17,682 is to a single vendor that is also a related party representing interest on invoices subject to delayed payment),
an increase of $34,018, as compared to $102,225 (including $15,519 to related parties) for the year ended December
31, 2017. The increase in interest expense resulted primarily from interest on two new promissory notes issued to officers totaling
$100,000 of principal amount in 2018, one of which converted or exchanged into the 2018 Unit Offering, net of the reduction in
interest associated with the exchange of four convertible notes to non-affiliates and the addition of interest with respect to
the Salamandra legal settlement as well as from a single vendor associated with the delay of cash remittances to that vendor.
Foreign
Currency Transaction Loss or Gain
. The foreign currency transaction loss was $112,641 for the year ended December 31, 2018,
as compared to a foreign currency transaction gain of $58,153 for the year ended December 31, 2017. The foreign currency transaction
loss or gain relates to the $399,774 loan from SY Corporation Co., Ltd., formerly known as Samyang Optics Co. Ltd., made in June
2012, which is denominated in the South Korean Won.
Net
Loss
. For the year ended December 31, 2018, the Company incurred a net loss of $2,591,790, as compared to a net loss of $4,291,484
for the year ended December 31, 2017.
Liquidity
and Capital Resources – December 31, 2018
The
Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses
of $2,591,790 for the fiscal year ended December 31, 2018 and $4,291,483 for the fiscal year ended December 31, 2017, and negative
operating cash flows of $427,368 and $697,009 for the fiscal years ended December 31, 2018 and 2017 respectively. The Company
had a stockholders’ deficiency of $5,733,255 at December 31, 2018, and expects to continue to incur net losses and negative
operating cash flows for at least the next few years. As a result, management has concluded that there is substantial doubt about
the Company’s ability to continue as a going concern. In addition, the Company’s independent registered public accounting
firm, in its report on the Company’s consolidated financial statements for the year ended December 31, 2018, has expressed
substantial doubt about the Company’s ability to continue as a going concern (see “Going Concern” below).
At
December 31, 2018, the Company had a working capital deficit of $5,736,369, as compared to a working capital deficit of $4,373,443
at December 31, 2017, reflecting an increase in the working capital deficit of $1,362,926 for the fiscal year ended December 31,
2018. The increase in the working capital deficit during the fiscal year ended December 31, 2018 is comprised of an increase in
total current liabilities of $1,307,291, and a decrease in current assets of $55,635. The increase in total current liabilities
consists of a net increase in accounts payable and accrued expenses of $381,107, an increase in accrued compensation and related
expenses of $825,134 (in December 2017, the Company was able to reduce a substantial amount of accrued compensation and related
expenses and issued options related thereto), a decrease in convertible notes payable of $134,890, an increase in the note payable
to SY Corporation of $160,614, an increase in notes payable to officers of $75,139 and an increase in other short-term notes payable
of $277.
At
December 31, 2018, the Company had cash aggregating $33,284 as compared to $84,902 at December 31, 2017, reflecting a decrease
in cash of $51,618 during the fiscal year ended December 31, 2018.
At
December 31, 2018, the Company had $125,000 principal amount of the original 10% convertible notes payable outstanding (plus accrued
interest of $62,233), which matured and become due and payable in full on September 15, 2016. Certain of the note holders have
notified the Company that the convertible notes are in default. As of the date of such notification, the interest rate on such
defaulted convertible notes was increased to 12%. The Company is continuing efforts to extend and/or satisfy these convertible
notes payable through the issuance of the Company’s securities, although there can be no assurances that the Company will
be successful in this regard.
In
December, 2018, the Company issued new 10% convertible notes, due on February 28, 2019 with a face amount of $80,000. Common stock
purchase warrants were issued in connection with the issuance of such notes. The Company valued the warrants and recorded an original
issue discount associated with the new 10% convertible notes which was then amortized, in part, resulting is amount of unamortized
original issue discount of $27,969 as of December 31, 2018.
Operating
Activities
. For the fiscal year ended December 31, 2018, operating activities utilized cash of $427,368 as compared
to utilizing cash of $427,368 for the fiscal year ended December 31, 2017, to support the Company’s ongoing operations
and research and development activities.
Financing
Activities
. For the fiscal year ended December 31, 2018, financing activities consisted of three financings and the payment
of vendor liabilities with restricted stock. The Company received $100,000 from the proceeds of two notes issued to executive officers.
The 2018 Unit Offering generated cash of $195,750 in net proceeds which was a closing of $250,750, of which $50,000 resulted from
an exchange of the principal amount of one officer note and $5,000 represented costs associated with the offering. In addition,
the New 10% Convertible Note Financing generated cash of $80,000 in December 2018. For the year ended December 31, 2017, financing
activities generated cash of $689,871 comprised of $754,500 from the sale of units comprised of common stock and warrants, which
was partially offset by principal paid on short-term notes of $64,629.
On
April 9, 2018, Dr. Arnold S. Lippa and Dr. James S. Manuso, the Company’s Chief Scientific Officer and Chairman of the Board
of Directors and the Company’s then Chief Executive Officer and then Vice Chairman of the Board of Directors, advanced $50,000
each, for a total of $100,000, to the Company for working capital purposes. Each note was payable on demand after June 30, 2018.
Each note was subject to a mandatory exchange provision that provided that the principal amount of the note would be mandatorily
exchanged into a board approved offering of the Company’s securities, if such offering held its first closing on or before
June 30, 2018 and the amount of proceeds from such first closing was at least $150,000, not including the principal amounts of
the notes that would be exchanged, or $250,000 including the principal amounts of such notes. Upon such exchange, the notes would
be deemed repaid and terminated. Any accrued but unpaid interest outstanding at the time of such exchange will be (i) repaid to
the note holder or (ii) invested in the offering, at the note holder’s election. A first closing did not occur on or before
June 30, 2018. Dr. Arnold S. Lippa agreed to exchange his note into the board approved offering that had its initial closing on
September 12, 2018 (See Note 9). Accrued interest on Dr. Lippa’s note did not exchange. Dr. Manuso’s note has
not been exchanged and remains outstanding as of December 31, 2018.
On
September 12, 2018, the Company consummated an initial closing on an offering (“2018 Unit Offering”) of Units comprised
of one share of the Company’s common stock and one common stock purchase warrant. The 2018 Unit Offering was for up to $1.5
million and had a final termination date of October 15, 2018. The initial closing was for $250,750 of which $200,750 was the gross
cash proceeds. The additional $50,000 was represented by the conversion or exchange into the 2018 Unit Offering of the principal
amount of the Arnold S. Lippa Demand Promissory Note described below. Units were sold for $1.05 per unit and the warrants issued
in connection with the units are exercisable through April 30, 2023 at a fixed price of 150% of the unit purchase price. The warrants
contain a cashless exercise provision and certain blocker provisions preventing exercise if the investor would beneficially own
more than 4.99% of the Company’s outstanding shares of common stock as a result of such exercise. The warrants are also
subject to redemption by the Company at $0.001 per share upon ten (10) days written notice if the Company’s common stock
closes at $3.00 or more for any five (5) consecutive trading days. In total, 238,814 shares of the Company’s common stock
and 238,814 common stock purchase warrants were purchased. Other than Arnold S. Lippa, the investors in the offering were not
affiliates of the Company. Investors also received an unlimited number of piggy-back registration rights in respect to the shares
of common stock and the shares of common stock underlying the common stock purchase warrants, unless such common stock is eligible
to be sold with volume limits under an exemption from registration under any rule or regulation of the SEC that permits the holder
to sell securities of the Company to the public without registration and without volume limits (assuming the holder is not an
affiliate).
The
shares of common stock and common stock purchase warrants were offered and sold without registration under the Securities Act
of 1933, as amended (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities
Act as provided in Rule 506(b) of Regulation D promulgated thereunder. None of the shares of common stock issued as part of the
units, the common stock purchase warrants, the Common Stock issuable upon exercise of the common stock purchase warrants or any
warrants issued to a qualified referral source (of which there were none in the initial closing) have been registered under the
Securities Act or any other applicable securities laws, and unless so registered, may not be offered or sold in the United States
except pursuant to an exemption from the registration requirements of the Securities Act.
Prior
to the initial closing of the 2018 Unit Offering, the Company issued to Arnold S. Lippa, Ph.D, the Company’s Interim President,
Interim Chief Executive Officer, Executive Chairman and Chief Scientific Officer and James S. Manuso, Ph.D., the Company’s
then Vice Chairman and then Chief Executive Officer, respectively, $100,000 aggregate principal amount ($50,000 each) of demand
promissory notes bearing interest at 10% (the “Demand Promissory Notes”). The Demand Promissory Note issued to Dr.
Lippa, exclusive of any interest accrued, was exchanged into the 2018 Unit Offering simultaneously with its initial closing. With
the exchange of Dr. Lippa’s Demand Promissory Note into the 2018 Unit Offering, 47,620 warrants exercisable at $150% of
the unit price ($1.575) per share of common stock and expiring on April 30, 2023 were issued with a value of $49,975 which amount
was considered a loss on the extinguishment of that officer note and which amount was credited to additional paid-in capital.
The principal amount of, but not the interest on, the Demand Promissory Note was taken into consideration when determining if
the Company had achieved the minimum amount necessary to effect the initial closing of the 2018 Unit Offering. The Demand Promissory
Note issued to Dr. Manuso was not exchanged or converted in connection with the closing of the 2018 Unit Offering.
In
addition, as set forth in the Purchase Agreements, each Purchaser had an unlimited number of exchange rights, which were options
and not obligations, to exchange such Purchaser’s entire investment as defined (but not less than the entire investment)
into one or more subsequent equity financings (consisting solely of convertible preferred stock or common stock or units containing
preferred stock or common stock and warrants exercisable only into preferred stock or common stock) that would be considered as
“permanent equity” under United States Generally Accepted Accounting Principles and the rules and regulations of the
United States Securities and Exchange Commission, and therefore classified within stockholders’ equity, and excluding any
form of debt or convertible debt or preferred stock redeemable at the discretion of the holder (each such financing a “Subsequent
Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion of any number of Subsequent
Equity Financings that aggregate at least $15 million of gross proceeds, or (ii) December 30, 2018. For clarity, a Purchaser’s
entire investment was the entire amount invested (“Investment Amount”) (for purposes of the multiple described below)
and all of the Common Stock and Warrants purchased (for purposes of the exchange) pursuant to the Purchase Agreement of such Purchaser,
however, if the Warrants had been exercised in part or in whole on a cashless basis, then the Investment Amount (for purposes
of the multiple described below) would have been the Investment Amount (for purposes of the multiple described below) and all
of the Common Stock initially purchased pursuant to the Purchase Agreement of such Purchaser plus any shares of Common Stock issued
pursuant to a cashless exercise and any Warrants remaining after such cashless exercise (for purposes of the exchange), or, if
the Warrants had been exercised for cash, then the entire investment would have been the Investment Amount plus the amount of
cash paid upon cash exercise (for purposes of the multiple described below) and all of the Common Stock initially purchased pursuant
to the Purchase Agreement of such Purchaser plus any shares of Common Stock issued pursuant to the cash exercise and any Warrants
remaining after such cash exercise (for purposes of the exchange). The dollar amount used to determine the amount invested or
exchanged into the subsequent financing would have been 1.2 times the amount of the original investment. Under certain circumstances,
the ratio might have been 1.4 instead of 1.2. There were no additional closings of the 2018 Unit Offering. The exchange rights
expired on December 30, 2018.
On
November 21, 2018, the Company issued common stock in payment of $198,550 of liabilities to one vendor the Company granted non-qualified
stock options with a value of $15,000 in payment of a liability to another vendor.
On
December 6, 2018, December 7, 2018 and December 31, 2018, the company received an aggregate of $80,000 from the proceeds of the
sale to three unaffiliated investors of 10% convertible promissory notes due, inclusive of accrued interest, on February 28, 2019
and associated common stock purchase warrants. The warrants are exercisable at $1.50 per share of common stock and expire on December
30, 2023. The warrants have cashless exercise, call, blocker and other provisions similar to those described above for the warrants
in the 2018 Unit Offering.
Going
Concern
The
Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses
of $2,591,790 for the fiscal year ended December 31, 2018 and $4,291,483 for the fiscal year ended December 31, 2017, and negative
operating cash flows of $427,368 and $697,009 for the fiscal years ended December 31, 2018 and 2017, respectively. The
Company had a stockholders’ deficiency of $5,733,255 at December 31, 2018 and expects to continue to incur net losses and
negative operating cash flows for at least the next few years. As a result, management has concluded that there is substantial
doubt about the Company’s ability to continue as a going concern, and the Company’s independent registered public
accounting firm, in its report on the Company’s consolidated financial statements for the year ended December 31, 2018,
expressed substantial doubt about the Company’s ability to continue as a going concern.
The
Company is currently, and has for some time, been in significant financial distress. It has limited cash resources and current
assets and has no ongoing source of sustainable revenue. Management is continuing to address various aspects of the Company’s
operations and obligations, including, without limitation, debt obligations, financing requirements, intellectual property, licensing
agreements, legal and patent matters and regulatory compliance, and has continued to raise new debt and equity capital to fund
the Company’s business activities from both related and unrelated parties.
The
Company is continuing its efforts to raise additional capital in order to be able to pay its liabilities and fund its business
activities on a going forward basis, including the pursuit of the Company’s planned research and development activities.
The Company regularly evaluates various measures to satisfy the Company’s liquidity needs, including development and other
agreements with collaborative partners and, when necessary, seeking to exchange or restructure the Company’s outstanding
securities. The Company is evaluating certain changes to its operations and structure to facilitating raising capital from sources
that may be interested in financing only discrete aspects of the Company’s development programs. Such changes could include
a significant reorganization, which may include the formation of one or more subsidiaries into which one or more programs may
be contributed. As a result of the Company’s current financial situation, the Company has limited access to external sources
of debt and equity financing. Accordingly, there can be no assurances that the Company will be able to secure additional financing
in the amounts necessary to fully fund its operating and debt service requirements. If the Company is unable to access sufficient
cash resources, the Company may be forced to discontinue its operations entirely and liquidate.
Principal
Commitments
Employment
Agreements
On August 18, 2015, the Company entered into an employment agreement with Dr. James S. Manuso, Ph.D., to be
its new President and Chief Executive Officer. Dr. Manuso resigned as President and Chief Executive Officer effective September
30, 2018 and therefore Dr. Manuso’s employment agreement was not automatically extended as described below. Pursuant to the
agreement, which was for an initial term through September 30, 2018 (and which would have been deemed to be automatically extended,
upon the same terms and conditions, for successive periods of one year, except that Dr. Manuso resigned effective September 30,
2018), Dr. Manuso received an annual base salary of $375,000. Dr. Manuso was, through September 30, 2018, also eligible to earn
a performance-based annual bonus award of up to 50% of his base salary, based upon the achievement of annual performance goals
established by the Board of Directors in consultation with the executive prior to the start of such fiscal year, or any amount
at the discretion of the Board of Directors. No such bonuses were earned or granted during the fiscal years ended December 31,
2018 and December 31, 2017. Additionally, Dr. Manuso was granted stock options to acquire 261,789 shares of common stock of the
Company and was eligible to receive additional awards under the Company’s Plans in the discretion of the Board of Directors.
No such awards were granted to Dr. Manuso during the fiscal year ended December 31, 2018. During the fiscal year ended December
31, 2017, Dr. Manuso was granted, from the Company’s 2015 Stock and Stock Option Plan (the “2015 Plan”), non-qualified
stock options to acquire 125,000 shares of common stock. Dr. Manuso was also entitled to receive, until such time as the Company
established a group health plan for its employees, $1,200 per month, on a tax-equalized basis, as additional compensation to cover
the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as additional compensation for a term life insurance
policy and disability insurance policy. Such amounts were accrued during fiscal year ended December 31, 2018 for the nine-month
periods ended September 30, 2018, the effective date of Dr. Manuso’s termination and for the twelve months during fiscal
year ended December 31, 2017. Dr. Manuso was also entitled to be reimbursed for business expenses. The Company has accrued all
submitted and approved business expenses as of September 30, 2018, the effective date of Dr. Manuso’s termination and December
30, 2017. Additional information with respect to the stock options granted to Dr. Manuso is provided at Note 6 to the Company’s
consolidated financial statements for the fiscal year ended December 31, 2018 and 2017. Cash compensation inclusive of employee
benefits accrued pursuant to this agreement totaled $310,950 during fiscal year ended December 31, 2018 for each of the nine months
ended September 30, 2018, and $414,600 for the fiscal year ended December 31, 2017, respectively. Such amounts were included in
accrued compensation and related expenses in the Company’s consolidated balance sheet at December 31, 2018 and 2017, respectively,
and in general and administrative expenses in the Company’s consolidated statement of operations for the fiscal years ended
December 31, 2018 and 2017, as appropriate. On December 9, 2017, Dr. Manuso forgave $878,360 of accrued compensation and related
expenses which was the amount owed by the Company as of September 30, 2017, as described in more detail below. On the same date,
Dr. Manuso received options to purchase 608,704 shares of common stock, as described in more detail below. Dr. Manuso did not receive
any additional compensation for serving as Vice Chairman or a member of on the Board of Directors. Amounts accruing after September
30, 2017 have not been paid to Dr. Manuso. Effective on September 30, 2018, Dr. Manuso also resigned as Vice Chairman and as a
member of the Board of Directors.
On
August 18, 2015, concurrently with the hiring of Dr. James S. Manuso as the Company’s then new President and Chief Executive
Officer, Dr. Arnold S. Lippa resigned as the Company’s President and Chief Executive Officer. On October 12, 2018, Dr. Lippa
was named Interim President and Interim Chief Executive Officer (see Note 9 to the Company’s consolidated financial statements
for the fiscal years ended December 31, 2018 and 2017) to replace Dr. Manuso who resigned effective September 30, 2018. Dr. Lippa
continues to serve as the Company’s Executive Chairman and as a member of the Board of Directors. Also on August 18, 2015,
Dr. Lippa was named Chief Scientific Officer of the Company, and the Company entered into an employment agreement with Dr. Lippa
in that capacity. Pursuant to the agreement, which was for an initial term through September 30, 2018 (and which automatically
extended on September 30, 2018 and will automatically extend annually, upon the same terms and conditions, for successive periods
of one year, unless either party provides written notice of its intention not to extend the term of the agreement at least 90
days prior to the applicable renewal date), Dr. Lippa received an annual base salary of $300,000. Dr. Lippa is also eligible to
earn a performance-based annual bonus award of up to 50% of his base salary, based upon the achievement of annual performance
goals established by the Board of Directors in consultation with the executive prior to the start of such fiscal year, or any
amount at the discretion of the Board of Directors. Additionally, Dr. Lippa was granted stock options to acquire 30,769 shares
of common stock of the Company and is eligible to receive additional awards under the Company’s Plans at the discretion
of the Board of Directors. Dr. Lippa did not receive any option to purchase shares of common stock during fiscal year ended December
31, 2018. Dr. Lippa received from the 2015 Plan, non-qualified stock options to purchase 50,000 shares of common stock on January
17, 2017 and non-qualified stock options to purchase an additional 50,000 shares of common stock on June 30, 2017. Dr. Lippa is
also entitled to receive, until such time as the Company establishes a group health plan for its employees, $1,200 per month,
on a tax-equalized basis, as additional compensation to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized
basis, as reimbursement for a term life insurance policy and disability insurance policy. Dr. Lippa is also entitled to be reimbursed
for business expenses. Additional information with respect to the stock options granted to Dr. Lippa is provided at Note 6 to
the Company’s consolidated financial statements for the fiscal years ended December 31, 2018 and 2017. Cash compensation
inclusive of employee benefits accrued pursuant to this agreement totaled $339,600 for each of the fiscal years ended December
31, 2017 and 2018, respectively, which amounts are included in accrued compensation and related expenses in the Company’s
consolidated balance sheet at December 31, 2017 and 2018, and in research and development expenses in the Company’s consolidated
statement of operations for the fiscal years ended December 31, 2018 and 2017. Dr. Lippa does not receive any additional compensation
for serving as Executive Chairman and on the Board of Directors. On December 9, 2017, Dr. Lippa forgave $807,497 of accrued compensation
and related expenses which was the amount owed by the Company as of September 30, 2017. On the same date, Dr. Lippa received options
to purchase 559,595 shares of common stock, as described in more detail below.
On
August 18, 2015, the Company also entered into an employment agreement with Jeff E. Margolis, in his role at that time as Vice
President, Secretary and Treasurer. Pursuant to the agreement, which was for an initial term through September 30, 2016 (and which
automatically extended on September 30, 2016 and will automatically extend annually, upon the same terms and conditions for successive
periods of one year, unless either party provides written notice of its intention not to extend the term of the agreement at least
90 days prior to the applicable renewal date), Mr. Margolis received, at that time, an annual base salary of $195,000, and was
eligible to receive performance-based annual bonus awards ranging from $65,000 to $125,000, based upon the achievement of annual
performance goals established by the Board of Directors in consultation with the executive prior to the start of such fiscal year,
or any amount at the discretion of the Board of Directors. Additionally, Mr. Margolis was granted stock options to acquire 30,769
shares of common stock of the Company and is eligible to receive additional awards under the Company’s Plans at the discretion
of the Board of Directors. Mr. Margolis received from the 2015 Plan, non-qualified stock option to acquire 50,000 shares of common
stock on each of January 17, 2017 and June 30, 2017. Mr. Margolis is also entitled to receive, until such time as the Company
establishes a group health plan for its employees, $1,200 per month, on a tax-equalized basis, as additional compensation to cover
the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as reimbursement for a term life insurance policy
and disability insurance policy. Mr. Margolis is also entitled to be reimbursed for business expenses. Additional information
with respect to the stock options granted to Mr. Margolis is provided at Note 6 to the Company’s consolidated financial
statements for fiscal years ended December 31, 2018 and 2017. Mr. Margolis’ employment agreement was amended effective July
1, 2017. The employment agreement amendment called for payment in three installments in cash of the $60,000 bonus granted on June
30, 2015. A minimum of $15,000 was to be payable in cash as follows: (a) $15,000 payable in cash upon the next closing (after
July 1, 2017) of any financing in excess of $100,000 (b) $15,000 payable by the end of the following month assuming cumulative
closings (beginning with the closing that triggered (a)) in excess of $200,000 and (c) $30,000 payable in cash upon the next closing
of any financing in excess of an additional $250,000. The conditions of (a), (b) and (c) above were met as of December 31, 2017,
however Mr. Margolis waived the Company’s obligation to make any payments of the cash bonus until the Board of Directors
of the Company determines that sufficient capital has been raised by the Company or is otherwise available to fund the Company’s
operations on an ongoing basis. Recurring cash compensation accrued pursuant to this amended agreement totaled $321,600 for the
fiscal year ended December 31, 2018 and totalled $269,100 pro-rated between the pre-amendment and post-amendment terms of Mr.
Margolis’ employment contract for fiscal year ended December 31, 2017 which amounts are included in accrued compensation
and related expenses in the Company’s consolidated balance sheet December 31, 2017 and, 2018, and in general and administrative
expenses in the Company’s consolidated statement of operations.
The
employment agreements between the Company and each of Dr. Manuso, Dr. Lippa, and Mr. Margolis (prior to the 2017 amendment), respectively,
provided that the payment obligations associated with the first year base salary were to accrue, but no payments were to be made,
until at least $2,000,000 of net proceeds from any offering or financing of debt or equity, or a combination thereof, was received
by the Company, at which time scheduled payments were to commence. Dr. Lippa, and Mr. Margolis (who are each also directors of
the Company), (and prior to his resignation, Dr. James S. Manuso) have each agreed, effective as of August 11, 2016, to continue
to defer the payment of such amounts indefinitely, until such time as the Board of Directors of the Company determines that sufficient
capital has been raised by the Company or is otherwise available to fund the Company’s operations on an ongoing basis.
On
December 9, 2017, the Company accepted offers from Dr. Arnold S. Lippa, Dr. James S. Manuso, Jeff E. Margolis, James E. Sapirstein,
Kathryn MacFarlane and Robert N. Weingarten (former Chief Financial Officer) pursuant to which such individuals would forgive
accrued compensation and related accrued expenses as of September 30, 2017 in the following amounts: $807,497, $878,360, $560,876,
$55,000, $55,000, and $200,350, respectively, for a total of $2,557,083. On the same date, the Company granted to the same individuals,
or designees of such individuals from the 2015 Plan, non-qualified stock options, exercisable for 10 years with an exercise price
of $1.45 per share of common stock, among other terms and features as follows: 559,595, 608,704, 388,687, 38114, 38,114, and 138,842,
respectively, for options exercisable into a total of 1,772,055 shares of common stock with a total value of $2,475,561.
On
April 5, 2018, the Company accepted an offer from Robert N. Weingarten, (former Chief Financial Officer), pursuant to which Mr.
Weingarten would forgive accrued compensation and related accrued expenses as of that date in the amount of $200,350. On the same
date, the Company granted Mr. Weingarten, from the 2015 Plan, non-qualified stock options exercisable for 10 years with an exercise
price of $1.12 per share of common stock, among other terms and features and with a total value of $200,404.
University
of Alberta License Agreement
On
May 9, 2007, the Company entered into a license agreement, as amended, with the University of Alberta granting the Company exclusive
rights to practice patents held by the University of Alberta claiming the use of ampakines for the treatment of various respiratory
disorders. The Company agreed to pay the University of Alberta a licensing fee and a patent issuance fee, which were paid, and
prospective payments consisting of a royalty on net sales, sublicense fee payments, maintenance payments and milestone payments.
The prospective maintenance payments commence on the enrollment of the first patient into the first Phase 2B clinical trial and
increase upon the successful completion of the Phase 2B clinical trial. As the Company does not at this time anticipate scheduling
a Phase 2B clinical trial in the near term, no maintenance payments to the University of Alberta are currently due and payable,
nor are any maintenance payments expected to be due in the near future in connection with the license agreement.
By
letter dated May 18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of the
University of Alberta, which purports to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 between
the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for termination
and notified the representative that it invoked Section 13 of that license agreement, which mandates a meeting to be attended
by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute. In February 2019,
the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to establish a new license agreement and the
form of a new license agreement. However, the parties have not signed the draft new license agreement pending the Company’s
payment of the agreed amount of historical unreimbursed patent fees, of approximately CAD$23,000 (approximately US$17,000
as of December 31, 2018). No assurance can be provided that the Company will or will not be able to remit the historical
license fees or that the draft new license agreement will be executed and become effective. If we do not remit the historical
fees and the new license agreement does not become effective, we cannot estimate the possible adverse impact on the Company’s
operations or business prospects.
University
of Illinois 2014 Exclusive License Agreement
On
June 27, 2014, the Company entered into an Exclusive License Agreement (the “2014 License Agreement”) with the University
of Illinois, the material terms of which were similar to a License Agreement between the parties that had been previously terminated
on March 21, 2013. The 2014 License Agreement became effective on September 18, 2014, upon the completion of certain conditions
set forth in the 2014 License Agreement, including: (i) the payment by the Company of a $25,000 licensing fee, (ii) the payment
by the Company of outstanding patent costs aggregating $15,840, and (iii) the assignment to the University of Illinois of rights
the Company held in certain patent applications, all of which conditions were fulfilled.
The
2014 License Agreement granted the Company (i) exclusive rights to several issued and pending patents in numerous jurisdictions
and (ii) the non-exclusive right to certain technical information that is generated by the University of Illinois in connection
with certain clinical trials as specified in the 2014 License Agreement, all of which relate to the use of cannabinoids for the
treatment of sleep related breathing disorders. The Company is developing dronabinol (Δ9-tetrahydrocannabinol), a cannabinoid,
for the treatment of OSA, the most common form of sleep apnea.
The
2014 License Agreement provides for various commercialization and reporting requirements commencing on June 30, 2015. In addition,
the 2014 License Agreement provides for various royalty payments, including a royalty on net sales of 4%, payment on sub-licensee
revenues of 12.5%, and a minimum annual royalty beginning in 2015 of $100,000, which is due and payable on December 31 of each
year beginning on December 31, 2015. The minimum annual royalty obligation of $100,000 due on December 31, 2018, was extended
to February 28, 2019 when such payment obligation was paid by the Company. The minimum annual royalty obligation was paid as scheduled
in December 2017. One-time milestone payments may become due based upon the achievement of certain development milestones. $350,000
will be due within five days after the dosing of the first patient is a Phase III human clinical trial anywhere in the world.
$500,000 will be due within five days after the first NDA filing with FDA or a foreign equivalent. $1,000,000 will be due within
twelve months of the first commercial sale. One-time royalty payments may also become due and payable. Annual royalty payments
may also become due. In the year after the first application for market approval is submitted to the FDA or a foreign equivalent
and until approval is obtained, the minimum annual royalty will increase to $150,000. In the year after the first market approval
is obtained from the FDA or a foreign equivalent and until the first sale of a product, the minimum annual royalty will increase
to $200,000. In the year after the first commercial sale of a product, the minimum annual royalty will increase to $250,000. During
the fiscal years ended December 31, 2018 and 2017, the Company recorded a charge to operations of $100,000 with respect to its
minimum annual royalty obligation, which is included in research and development expenses in the Company’s consolidated
statements of operations for the fiscal years ended December 31, 2018 and 2017.
Noramco
Inc. - Dronabinol Development and Supply Agreement
On
September 4, 2018, RespireRx entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Under the terms of the Agreement, Noramco agreed to (i) provide all of the active pharmaceutical
ingredient (“API”) estimated to be needed for the clinical development process for both the first- and second-generation
products (each a “Product” and collectively, the “Products”), three validation batches for New Drug Application
(“NDA”) filing(s) and adequate supply for the initial inventory stocking for the wholesale and retail channels, subject
to certain limitations, (ii) maintain or file valid drug master files (“DMFs”) with the FDA or any other regulatory
authority and provide the Company with access or a right of reference letter entitling the Company to make continuing reference
to the DMFs during the term of the agreement in connection with any regulatory filings made with the FDA by the Company, (iii)
participate on a development committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting
firms engaged by the Company and participate in all FDA or Drug Enforcement Agency (“DEA”) meetings as appropriate
and as related to the API.
In
consideration for these supplies and services, the Company has agreed to purchase exclusively from Noramco during the commercialization
phase all API for its Products as defined in the Development and Supply Agreement at a pre-determined price subject to certain
producer price adjustments and agreed to Noramco’s participation in the economic success of the commercialized Product or
Products up to the earlier of the achievement of a maximum dollar amount or the expiration of a period of time.
National
Institute of Drug Abuse Agreement
As
a result of agreements entered into on October 19, 2015 and January 19, 2016, the Medications Development Program of the National
Institute of Drug Abuse (“NIDA”) funded and conducted research on the Company’s ampakine compounds CX717 and
CX1739 to determine their potential usefulness for the treatment of cocaine and methamphetamine addiction and abuse. The Company
retains all intellectual property resulting from this research, as well as proprietary and commercialization rights to these compounds.
In
general, the ampakines did not produce behavioral effects in rats and mice that are commonly associated with administration of
stimulants such as cocaine or amphetamines. Instead, the ampakines reduced the stimulation produced by both of these drugs. In
addition, the ampakines were not recognized as cocaine- or amphetamine-like when administered to rats that had been trained to
recognize whether they had been administered these drugs. The absence of stimulant properties on the part of the ampakines may
confirm their value as potential non-stimulant treatments for ADHD.
Transactions
with Biovail Laboratories International SRL
In
March 2010, the Company entered into an asset purchase agreement with Biovail Laboratories International SRL (“Biovail”).
Pursuant to the asset purchase agreement, Biovail acquired the Company’s interests in CX717, CX1763, CX1942 and the injectable
dosage form of CX1739, as well as certain of its other ampakine compounds and related intellectual property for use in the field
of respiratory depression or vaso-occlusive crises associated with sickle cell disease. The agreement provided the Company with
the right to receive milestone payments in an aggregate amount of up to $15,000,000 plus the reimbursement of certain related
expenses, conditioned upon the occurrence of particular events relating to the clinical development of certain assets that Biovail
acquired. None of these events occurred.
As
part of the transaction, Biovail licensed back to the Company certain exclusive and irrevocable rights to some acquired ampakine
compounds, other than CX717, an injectable dosage form of CX1739, CX1763 and CX1942, for use outside of the field of respiratory
depression or vaso-occlusive crises associated with sickle cell disease. Accordingly, following the transaction with Biovail,
the Company retained its rights to develop and commercialize the non-acquired ampakine compounds as a potential treatment for
neurological diseases and psychiatric disorders. Additionally, the Company retained its rights to develop and commercialize the
ampakine compounds as a potential treatment for sleep apnea disorders, including an oral dosage form of ampakine CX1739.
In
September 2010, Biovail’s parent corporation, Biovail Corporation, combined with Valeant Pharmaceuticals International in
a merger transaction and the combined company was renamed “Valeant Pharmaceuticals International, Inc.” (“Valeant”).
Following the merger, Valeant and Biovail conducted a strategic and financial review of their product pipeline and, as a result,
in November 2010, Biovail announced its intent to exit from the respiratory depression project acquired from the Company in March
2010.
Following
that announcement, the Company entered into discussions with Biovail regarding the future of the respiratory depression project.
In March 2011, the Company entered into a new agreement with Biovail to reacquire the ampakine compounds, patents and rights that
Biovail had acquired from the Company in March 2010. The new agreement provided for potential future payments of up to $15,150,000
by the Company based upon the achievement of certain developments, including new drug application submissions and approval milestones
pertaining to an intravenous dosage form of the ampakine compounds for respiratory depression. Biovail is also eligible to receive
additional payments of up to $15,000,000 from the Company based upon the Company’s net sales of an intravenous dosage form
of the compounds for respiratory depression.
At
any time following the completion of Phase 1 clinical studies and prior to the end of Phase 2A clinical studies, Biovail retains
an option to co-develop and co-market intravenous dosage forms of an ampakine compound as a treatment for respiratory depression
and vaso-occlusive crises associated with sickle cell disease. In such an event, the Company would be reimbursed for certain development
expenses to date and Biovail would share in all such future development costs with the Company. If Biovail makes the co-marketing
election, the Company would owe no further milestone payments to Biovail and the Company would be eligible to receive a royalty
on net sales of the compound by Biovail or its affiliates and licensees.
Duke
University Clinical Trial Agreement
On
January 27, 2015, the Company entered into a Clinical Study and Research Agreement with Duke University (as amended, the “Duke
Agreement”) to develop and conduct a protocol for a program of clinical study and research which was amended on October
30, 2015 and further amended on July 28, 2016, which agreement, as amended, resulted in a total amount payable under the Agreement
to $678,327. During the fiscal years ended December 31, 2018 and 2017, the Company charged $0 to research and development expenses
with respect to work conducted pursuant to the Duke Agreement. The clinical trial completed in October 2016 and the Company announced
the study results on December 15, 2016. Amounts still owing under this agreement are in the Company’s balance sheets at
December 31, 2018 and 2017.
Sharp
Clinical Services, Inc. Agreement
The
Company has various agreements with Sharp Clinical Services, Inc. to provide packaging, labeling, distribution and analytical
services.
Covance
Laboratories Inc. Agreement
On
October 26, 2016, the Company entered into a twelve-month agreement with Covance Laboratories Inc. to provide compound testing
and storage services with respect to CX1739, CX1866 and CX1929 at a total budgeted cost of $35,958. This agreement was renewed
in October 2018.
Summary
of Principal Cash Obligations and Commitments
The following table sets forth the Company’s principal cash obligations and commitments for the next
five fiscal years as of December 31, 2018, aggregating $995,900.
|
|
|
|
|
Payments Due By Year
|
|
|
|
|
Total
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2021
|
|
|
|
2022
|
|
|
|
2023
|
|
License agreements
|
|
$
|
500,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Employment agreements (1)
|
|
|
495,900
|
|
|
|
495,900
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
995,900
|
|
|
$
|
595,900
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
(1)
The payment of such amounts has been deferred indefinitely, as described above at “Employment Agreements”. 2019 obligations
include nine months of employment agreement obligations for Dr. Lippa and Mr. Margolis as their employment contracts renewed on
September 30, 2018.
Off-Balance
Sheet Arrangements
At
December 31, 2018, the Company did not have any transactions, obligations or relationships that could be considered off-balance
sheet arrangements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Not
applicable for smaller reporting companies.
Item
8. Financial Statements and Supplementary Data
Our
financial statements and other information required by this item are set forth herein in a separate section beginning with the
Index to Consolidated Financial Statements on page F-1.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not
applicable.
Item
9A. Controls and Procedures
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 Annual Report on Form 10-K,
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. Current management, two of whom joined the Company in March 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 to allow timely decisions regarding required disclosure. Current 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 worked diligently to bring current delinquent SEC filings as promptly as reasonably possible under the
circumstances. The Company is current in its SEC periodic reporting obligations, but as of the date of the filing of this Annual
Report on Form 10-K, the Company had not yet completed the process to establish adequate internal controls over financial reporting.
In February 2017, the Company’s Chief Financial Officer resigned and one of the existing officers was appointed Interim
Chief Financial Officer and subsequently, Chief Financial Officer. The Company has not completed its search for a permanent replacement.
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 Annual Report on Form 10-K fairly present, in all material respects, the Company’s financial
condition, results of operations and cash flows for the periods presented.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to ensure that material
information regarding our operations is made available to management and the board of directors to provide them reasonable assurance
that the published financial statements are fairly presented. There are limitations inherent in any internal control, such as
the possibility of human error and the circumvention or overriding of controls. As a result, even effective internal controls
can provide only reasonable assurance with respect to financial statement preparation. As conditions change over time so too may
the effectiveness of internal controls.
Our
management, consisting of our Interim Chief Executive Officer and our Chief Financial Officer, has evaluated our internal
control over financial reporting as of December 31, 2018 based on the 2013 Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on this assessment,
and taking into account the operating structure of the Company as it has existed from October 2012 through December 2018,
as well as the various factors discussed herein, our management has concluded that material weaknesses in the Company’s
internal control over financial reporting existed as of December 31, 2018, as a result of which our internal control over
financial reporting was not effective at December 31, 2018.
Prior
management, which had essentially ceased business operations and was preparing to shut down the Company and cause it to file for
liquidation under Chapter 7 of the United States Bankruptcy Code, was replaced on March 22, 2013 in conjunction with the change
in control of the Board of Directors on such date. Since that date, new management has instituted a program to reestablish the
Company’s accounting and financial staff functions, as well as to install new accounting and internal control systems.
Within
the constraints of the Company’s limited financial resources, new management has retained accounting personnel, established
accounting and internal control systems, addressed the preparation of delinquent SEC financial filings, and filed all delinquent
SEC filings. As of the date of the filing of this Annual Report on Form 10-K, the Company has not yet completed this process of
reestablishing adequate internal controls over financial reporting.
This
Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s
independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s
report in this Annual Report on Form 10-K.
Changes
in Internal Control 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 fourth quarter of the year ended December 31, 2018
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting. The Company’s management has made this determination as of December 31, 2018 and 2017.
Item
9B. Other Information
Arnold
S. Lippa, the Company’s Interim Chief Executive Officer, Interim President and Chief Scientific Officer has extended credit
to the Company on April 15, 2019 for operating expenses by making a payment of $25,000 to the Company’s auditors which amount
has been accounted for by the Company as an advance by Dr. Lippa payable on demand. The balance of the amount payable to the auditors
has been paid directly by the Company.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2018 and 2017
1.
Organization and Basis of Presentation
Organization
RespireRx
Pharmaceuticals Inc. (“RespireRx”) was formed in 1987 under the name Cortex Pharmaceuticals, Inc. to engage in the
discovery, development and commercialization of innovative pharmaceuticals for the treatment of neurological and psychiatric disorders.
On December 16, 2015, RespireRx filed a Certificate of Amendment to its Second Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware to amend its Second Restated Certificate of Incorporation to change its name from
Cortex Pharmaceuticals, Inc. to RespireRx Pharmaceuticals Inc. While developing potential applications for respiratory disorders,
RespireRx has retained and expanded its ampakine intellectual property and data with respect to neurological and psychiatric disorders
and is considering developing certain potential products in this platform, pending additional financing and/or strategic relationships.
In
August 2012, RespireRx acquired Pier Pharmaceuticals, Inc. (“Pier”), which is now its wholly-owned subsidiary.
Basis
of Presentation
The
consolidated financial statements are of RespireRx and its wholly-owned subsidiary, Pier (collectively referred to herein as the
“Company” or “we” or “our” unless the context indicates otherwise) as of December 31, 2018
and for each of the years ended December 31, 2018 and 2017.
2.
Business
The
mission of the Company is to develop innovative and revolutionary treatments to combat diseases caused by disruption of neuronal
signaling. We are developing treatment options that address conditions that affect millions of people, but for which there are
few or poor treatment options, including obstructive sleep apnea (“OSA”), attention deficit hyperactivity disorder
(“ADHD”) and recovery from spinal cord injury (“SCI”), as well as certain neurological orphan diseases
such as Fragile X Syndrome. RespireRx is developing a pipeline of new drug products based on our broad patent portfolios for two
drug platforms: cannabinoids, including dronabinol (“∆9-THC”), and the ampakines, proprietary compounds that
positively modulate AMPA-type glutamate receptors to promote neuronal function.
RespireRx
is developing a number of potential products. From the cannabinoid platform, two Phase 2 clinical trials have been completed demonstrating
the ability of dronabinol to significantly reduce the symptoms of OSA, which management believes is potentially a multi-billion-dollar
market. Subject to raising sufficient financing, we believe that we have put most of the necessary pieces into place to rapidly
initiate a Phase 3 clinical trial program. By way of definition, when a new drug is allowed by the United States Food and Drug
Administration (“FDA”) to be tested in humans, Phase 1 clinical trials are conducted in healthy people to determine
safety and pharmacokinetics. If successful, Phase 2 clinical trials are conducted in patients to determine safety and preliminary
efficacy. Phase 3 trials, large scale studies to determine efficacy and safety, are the final step prior to seeking FDA approval
to market a drug.
From
our ampakine platform, our lead clinical compounds, CX717 and CX1739, have successfully completed multiple Phase 1 safety trials.
Both compounds have also completed Phase 2 efficacy trials demonstrating target engagement, by antagonizing the ability of opioids
to induce respiratory depression. CX717 has completed a Phase 2 trial demonstrating the ability to significantly reduce the symptoms
of adult ADHD. In an early Phase 2 study, CX1739 improved breathing in patients with central sleep apnea. Preclinical studies
have highlighted the potential ability of these ampakines to improve motor function in animals with spinal injury. Subject to
raising sufficient financing (of which no assurance can be provided), we believe that we will be able to rapidly initiate a human
Phase 2 study with CX1739 and/or CX717 in patients with spinal cord injury and a human Phase 2B study in patients with ADHD with
either CX717 or CX1739.
RespireRx
is considering an internal restructuring plan that contemplates spinning out the cannabinoid platform into what would initially
be a wholly-owned subsidiary that the Company currently intends would ultimately have its own management team and board of directors.
This spin-out company would be tasked with raising financing in order to develop and commercialize the dronabinol platform for
the treatment of OSA.
As
previously disclosed on June 19, 2018, James S. Manuso, Ph.D., the Company’s former President and Chief Executive Officer,
resigned as an officer and as Vice Chairman and a member of the Company’s Board of Directors, effective as of the end of
the term of his employment agreement, September 30, 2018. On October 12, 2018, Arnold S. Lippa, Ph.D. was named Interim President
and Interim Chief Executive Officer. Dr. Lippa continues to serve as the Company’s Chief Scientific Officer and Chairman
of the Board of Directors.
Going
Concern
The
Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses
of $2,591,790 and $4,291,483 for the fiscal years ended December 31, 2018 and 2017, respectively, and negative operating cash
flows of $427,368 and $697,009 for the fiscal years ended December 31, 2018 and 2017, respectively. The Company also had
a stockholders’ deficiency of $5,733,255 at December 31, 2018 and expects to continue to incur net losses and negative
operating cash flows for at least the next few years. As a result, management has concluded that there is substantial doubt about
the Company’s ability to continue as a going concern, and the Company’s independent registered public accounting firm,
in its report on the Company’s consolidated financial statements for the year ended December 31, 2018, expressed substantial
doubt about the Company’s ability to continue as a going concern.
The
Company is currently, and has for some time, been in significant financial distress. It has extremely limited cash resources and
current assets and has no ongoing source of sustainable revenue. Management is continuing to address various aspects of the Company’s
operations and obligations, including, without limitation, debt obligations, financing requirements, intellectual property, licensing
agreements, legal and patent matters and regulatory compliance, and has taken steps to continue to raise new debt and equity capital
to fund the Company’s business activities from both related and unrelated parties.
The
Company is continuing its efforts to raise additional capital in order to be able to pay its liabilities and fund its business
activities on a going forward basis, including the pursuit of the Company’s planned research and development activities.
The Company regularly evaluates various measures to satisfy the Company’s liquidity needs, including development and other
agreements with collaborative partners and, when necessary, seeking to exchange or restructure the Company’s outstanding
securities. The Company is evaluating certain changes to its operations and structure to facilitate raising capital from sources
that may be interested in financing only discrete aspects of the Company’s development programs. Such changes could include
a significant reorganization, which may include the formation of one or more subsidiaries into which one or more programs may
be contributed. As a result of the Company’s current financial situation, the Company has limited access to external sources
of debt and equity financing. Accordingly, there can be no assurances that the Company will be able to secure additional financing
in the amounts necessary to fully fund its operating and debt service requirements. If the Company is unable to access sufficient
cash resources, the Company may be forced to discontinue its operations entirely and liquidate.
3.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements are prepared in accordance with United States generally accepted accounting principles
(“GAAP”) and include the financial statements of RespireRx and its wholly-owned subsidiary, Pier. Intercompany balances
and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates
include, among other things, accounting for potential liabilities, and the assumptions used in valuing stock-based compensation
issued for services. Actual amounts may differ from those estimates.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents.
The Company limits its exposure to credit risk by investing its cash with high quality financial institutions. The Company’s
cash balances may periodically exceed federally insured limits. The Company has not experienced a loss in such accounts to date.
Cash
Equivalents
The
Company considers all highly liquid short-term investments with maturities of less than three months when acquired to be cash
equivalents.
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value of financial instruments established a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value into three levels and requires that assets and liabilities carried
at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers into and
out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying amounts of financial instruments (consisting of cash, cash equivalents, advances on research grants and accounts payable
and accrued expenses) are considered by the Company to be representative of the respective fair values of these instruments due
to the short-term nature of those instruments. With respect to the note payable to SY Corporation and the convertible notes payable,
management does not believe that the credit markets have materially changed for these types of borrowings since the original borrowing
date. The Company considers the carrying amounts of the notes payable to officers, inclusive of accrued interest, to be representative
of the respective fair values of such instruments due to the short-term nature of those instruments and their terms.
Deferred
Financing Costs
Costs
incurred in connection with ongoing debt and equity financings, including legal fees, are deferred until the related financing
is either completed or abandoned.
Costs
related to abandoned debt or equity financings are charged to operations in the period of abandonment. Costs related to completed
debt financings are presented as a direct deduction from the carrying amount of the related debt liability (see “Capitalized
Financing Costs” below). Costs related to completed equity financings are charged directly to additional paid-in capital.
Capitalized
Financing Costs
The
Company presents debt issuance costs related to debt liability in its consolidated balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with the presentation for debt discounts.
Convertible
Notes Payable
Convertible
notes are evaluated to determine if they should be recorded at amortized cost. To the extent that there are associated warrants
or a beneficial conversion feature, the convertible notes and warrants are evaluated to determine if there are embedded
derivatives to be identified, bifurcated and valued at fair value in connection with and at the time of such financing.
Note Exchanges
In
cases where debt or other liabilities are exchanged for equity, the Company compares the carrying value of debt, inclusive of
accrued interest, if applicable, being exchanged, to the fair value of the equity issued and records any loss
or gain as a result of such exchange. See Note 4.
Extinguishment
of Debt
The
Company accounts for the extinguishment of debt in accordance with GAAP by comparing the carrying value of the debt to the fair
value of consideration paid or assets given up and recognizing a loss or gain in the consolidated statement of operations in the
amount of the difference in the period in which such transaction occurs.
Equipment
Equipment
is recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which range from three to five
years. All equipment was fully depreciated as of December 31, 2018.
Prepaid Insurance
P
repaid
insurance represents the premium paid in March 2017 for directors’ and officers’ insurance tail coverage, which is
being amortized on a straight-line basis over the policy period of six years. The amount amortizable in the ensuing twelve-month
period is recorded as prepaid insurance in the Company’s consolidated balance sheet at each reporting date, with
the remaining amount recorded as long-term prepaid insurance.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets, including long-term prepaid insurance, for impairment whenever events or changes in circumstances
indicate that the total amount of an asset may not be recoverable, but at least annually. An impairment loss is recognized when
estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than the asset’s
carrying amount. The Company has not deemed any long-lived assets as impaired at December 31, 2018.
Stock-Based
Awards
The
Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Board members, consultants
and other vendors for services rendered. Such issuances vest and expire according to terms established at the issuance date of
each grant.
The
Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for
equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s consolidated financial statements over the vesting period of the awards.
Stock
grants, which are sometimes subject to time-based vesting, are measured at the grant date fair value and charged to operations
ratably over the vesting period.
Stock options granted to members of the Company’s outside consultants and other vendors are valued on
the grant date. As the stock options vest, the Company recognizes this expense over the period in which the services are provided.
The
fair value of stock options granted as stock-based compensation is determined utilizing the Black-Scholes option-pricing model,
and is affected by several variables, the most significant of which are the life of the equity award, the exercise price of the
stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common
stock over the term of the equity award. Estimated volatility is based on the historical volatility of the Company’s common
stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The fair market value
of common stock is determined by reference to the quoted market price of the Company’s common stock.
Stock
options and warrants issued to non-employees as compensation for services to be provided to the Company or in settlement of debt
are accounted for based upon the fair value of the services provided or the estimated fair value of the stock option or warrant,
whichever can be more clearly determined. Management uses the Black-Scholes option-pricing model to determine the fair value of
the stock options and warrants issued by the Company. The Company recognizes this expense over the period in which the services
are provided.
During
fiscal year ended December 31, 2018, there were stock grants totaling 283,643 shares of common stock to designees
of one vendor with a value on the date of the grant of $198,550 which amount paid $198,550 of account payable to that vendor.
There was no gain or loss on such stock grant.
For
stock options requiring an assessment of value during the fiscal years ended December 31, 2018 and 2017,
the fair value of each stock option award was estimated using the Black-Scholes option-pricing model using the following assumptions:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.64-2.89
|
%
|
|
|
1.89%
to 2.2
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
186.07-222.64
|
%
|
|
|
132.87%
to 184.92
|
%
|
Expected
life at date of issuance
|
|
|
5
years
|
|
|
|
4.55-5
years
|
|
The expected life is estimated to be equal
to the term of the common stock options issued in 2018. For certain common stock options issued in 2017, the simple method was
used to estimate the expected life.
The
Company recognizes the fair value of stock-based awards in general and administrative costs and in research and development
costs, as appropriate, in the Company’s consolidated statements of operations. The Company issues new shares of common stock
to satisfy stock option and warrant exercises. There were no stock options exercised during the fiscal years ended December
31, 2018. and 2017.
There
were no warrants issued as compensation or for services during the fiscal year ended December 31, 2018 requiring such assessment.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes.
Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities.
The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of
its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination
was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.
Pursuant
to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss and credit carryforwards may be limited
if a cumulative change in ownership of more than 50% occurs within any three-year period since the last ownership change. The
Company may have had a change in control under these Sections. However, the Company does not anticipate performing a complete
analysis of the limitation on the annual use of the net operating loss and tax credit carryforwards until the time that it anticipates
it will be able to utilize these tax attributes.
As
of December 31, 2018, the Company did not have any unrecognized tax benefits related to various federal and state income tax matters
and does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The
Company is subject to U.S. federal income taxes and income taxes of various state tax jurisdictions. As the Company’s net
operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions
in which the Company currently operates or has operated in the past.
The
Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.
The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority
as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits
of the position are recognized. As of December 31, 2018, the Company had not recorded any liability for uncertain tax positions.
In subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income
tax expense.
Foreign
Currency Transactions
The
note payable to SY Corporation, which is denominated in a foreign currency (the South Korean Won), is translated into the Company’s
functional currency (the United States Dollar) at the exchange rate on the balance sheet date. The foreign currency exchange gain
or loss resulting from translation is recognized in the related consolidated statements of operations.
Research
and Development
Research
and development costs include compensation paid to management directing the Company’s research and development activities,
and fees paid to consultants and outside service providers and organizations (including research institutes at universities),
and other expenses relating to the acquisition, design, development and clinical testing of the Company’s treatments and
product candidates.
The
Company reviews the status of its research and development contracts on a quarterly basis.
On
May 6, 2016, the Company made an advance payment to Duke University with respect to the Phase 2A clinical trial of CX1739. At
December 31, 2018 and 2017, an asset balance of $48,912 remained from the advance payment.
License
Agreements
Obligations
incurred with respect to mandatory payments provided for in license agreements are recognized ratably over the appropriate period,
as specified in the underlying license agreement, and are recorded as liabilities in the Company’s consolidated balance
sheet, with a corresponding charge to research and development costs in the Company’s consolidated statement of operations.
Obligations incurred with respect to milestone payments provided for in license agreements are recognized when it is probable
that such milestone will be reached and are recorded as liabilities in the Company’s consolidated balance sheet, with a
corresponding charge to research and development costs in the Company’s consolidated statement of operations. Payments of
such liabilities are made in the ordinary course of business.
Patent
Costs
Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on
the Company’s research efforts and any related patent applications, all patent costs, including patent-related legal and
filing fees, are expensed as incurred and are charged to general and administrative expenses.
Earnings
per Share
The
Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as
the income (loss) attributable to common stockholders divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants
and options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common
shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.
Net
income (loss) attributable to common stockholders consists of net income or loss, as adjusted for actual and deemed preferred
stock dividends declared, amortized or accumulated.
Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the respective periods. Basic and diluted loss per common share is the same for all periods presented because all warrants and
stock options outstanding are anti-dilutive.
At
December 31, 2018 and 2017, the Company excluded the outstanding securities summarized below, which entitle the holders
thereof to acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Series B convertible preferred stock
|
|
|
11
|
|
|
|
11
|
|
Convertible notes payable
|
|
|
16,319
|
|
|
|
32,941
|
|
Common stock warrants
|
|
|
1,783,229
|
|
|
|
1,464,415
|
|
Common stock options
|
|
|
4,344,994
|
|
|
|
3,996,167
|
|
Total
|
|
|
6,144,553
|
|
|
|
5,493,534
|
|
Reclassifications
Certain
comparative figures in 2017 have been reclassified to conform to the current year’s presentation. These reclassifications
were immaterial, both individually and in the aggregate.
Recent
Accounting Pronouncements
In
June 2018, the FASB issued Accounting Standards Update No. 2018-07 (ASU 2018-07), Compensation-Stock Compensation (Topic 718)—Improvements
to Nonemployee Share-Based Payment Accounting. ASU 2018-07 are amendments to Topic 718 that become effective for public entities
like the Company for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. This update
applies to nonemployee share-based awards within the scope of Topic 718. Consistent with the accounting requirement for employee
share-based payment awards, nonemployee share-based payment awards are measured at grant-date fair value of the equity instruments
that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions
necessary to earn the right to benefit from the instruments have been satisfied. Equity-classified nonemployee share- based payment
awards are measured at the grant date. The definition of the term grant date has been amended to generally state the date at which
a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share- based payment award. An entity
considers the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions.
This is consistent with the treatment for employee-based awards. Generally, the classification of equity- classified nonemployee
share-based payment awards will continue to be subject to the requirements of Topic 718 unless modified after the good has been
delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have
been satisfied, and the nonemployee is no longer providing goods or services. This eliminates the requirement to reassess classification
of such awards upon vesting. This standard will change the valuation of applicable awards granted in subsequent periods.
In
August 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2017-12
—Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard is intended
to improve and simplify accounting rules around hedge accounting. The new standard refines and expands hedge accounting for both
financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented,
both on the face of the financial statements and in the footnotes, for investors and analysts. The new standard takes effect for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, for public companies and for fiscal
years beginning after December 15, 2019 (and interim periods for fiscal years beginning after December 15, 2020), for private
companies. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard. The adoption
of ASU 2017-12 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11 (ASU 2017-11), Earnings Per Share (Topic 260): Distinguishing
Liabilities from Equity (Topic 480): Derivatives and Hedging (Topic 815). The relevant section for the Company is Topic 815 where
it pertains to accounting for certain financial instruments with down round features. Until the issuance of this ASU, financial
instruments with down round features required fair value measurement and subsequent changes in fair value were recognized in earnings.
As a result of the ASU, financial instruments with down round features are no longer treated as a derivative liability measured
at fair value. Instead, when the down round feature is triggered, the effect is treated as a dividend and as a reduction of income
available to common shareholders in basic earnings per share. For public entities, the ASU is effective for fiscal years beginning
after December 15, 2018. Early adoption is permitted including adoption in an interim period. The adoption of ASU 2017-11 is not
expected to have any impact on the Company’s financial statement presentation or disclosures.
4.
Notes Payable
Convertible
Notes Payable
During December 2018,
convertible notes (“2018 Convertible Notes”) bearing interest at 10% per year and maturing on February 28, 2019 and
warrants were sold to investors with an aggregate face amount of $80,000. Investors also received 80,000 common stock purchase
warrants. The warrants were valued using the Black Scholes option pricing model calculated on the date of each grant and had an
aggregate value of $68,025. Total value received by the investors was $148,025, the sum of the face value of the convertible note
and the value of the warrant. Therefore, the Company recorded an initial original issue discount of $36,347 and an initial value
of the note of $43,653 using the relative fair value method. $8,379 of the original issue discount was amortized to interest
expense through December 31, 2018. An additional $401 of interest expense was recorded based upon the 10% annual rate. The 2018
Convertible Notes matured on February 28, 2019 and were not paid and remain outstanding and continue to accrue interest. Although
the 2018 Convertible Notes are in default, the Company has not received any notices of default from any of the note holders.
The 2018 Convertible Notes have no reset rights or other protections based on subsequent equity transactions, equity-linked transactions
or other events other than the right, but not the obligation for each investor to convert or exchange his or her 2018 Convertible
Note, but not the warrant, into the next equity or equity-linked offering (not convertible into any debt offering),
which offering has not occurred as of December 31, 2018 or as of the date of the issuance of these financial statements. Therefore,
the number of shares of common stock (or preferred stock) into which the 2018 Convertible Notes may convert is not determinable
and the Company has not accounted for any beneficial conversion feature. The warrants to purchase 80,000 shares of common
stock issued in connection with the sale of the 2018 Convertible Notes are exercisable at a fixed price of $1.50 per share of
common stock, provide no right to receive a cash payment, and included no reset rights or other protections based on subsequent
equity transactions, equity-linked transactions or other events. The Company determined that there were no embedded derivatives
to be identified, bifurcated and valued in connection with this financing.
The
2018 Convertible Notes consist of the following at December 31, 2018 and December 31, 2017:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Principal amount of notes payable
|
|
$
|
80,000
|
|
|
$
|
-
|
|
Original issue discount net of amortization of $8,379
|
|
|
(27,968
|
)
|
|
|
-
|
|
Add accrued interest payable
|
|
|
401
|
|
|
|
-
|
|
|
|
$
|
52,433
|
|
|
$
|
-
|
|
The
convertible notes sold to investors in 2014 and 2015 (“Original Convertible Notes), which aggregated a total of $579,500,
had a fixed interest rate of 10% per annum and those that remain outstanding are convertible into common stock at a fixed price
of $11.3750 per share. The Original Convertible Notes have no reset rights or other protections based on subsequent equity transactions,
equity-linked transactions or other events. The warrants to purchase 50,945 shares of common stock issued in connection with the
sale of the convertible notes were exercisable at a fixed price of $11.3750 per share. All such warrants have either been exchanged
as part of April and May 2016 note and warrant exchange agreements or expired on September 15, 2016.
The
maturity date of the Original Convertible Notes was extended to September 15, 2016 and included the issuance of 27,936 additional
warrants to purchase common stock, exercisable at $11.375 per share of common stock, which expired on September 15, 2016.
The
Original Convertible Notes (including those for which default notices have been received) consist of the following at December
31, 2018 and December 31, 2017:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Principal amount of notes payable
|
|
$
|
125,000
|
|
|
$
|
276,000
|
|
Add accrued interest payable
|
|
|
62,233
|
|
|
|
98,646
|
|
|
|
$
|
187,233
|
|
|
$
|
374,646
|
|
Between
October 3, 2016 and October 25, 2016, the Company received several notices of default from holders of Original Convertible Notes.
The effect of such notices of default was to increase the annual interest rate from 10% to 12% with respect to the Original Convertible
Notes to which such notices applied. On February 28, 2018, two of such Original Convertible Notes were exchanged for common stock
of the Company and were extinguished. The Company measured the fair value of the shares of common stock issued to the holder in
respect to the extinguishment of the two convertible notes as compared to the aggregate of principal and interest on such notes
and recorded a loss of $66,782 which is the amount of the excess fair value paid as compared to the aggregate principal and interest
extinguished. The total amount of principal and accrued interest that was due and payable was $43,552. The Original Convertible
Notes were exchanged for 58,071 shares of the Company’s common stock. The effective exchange rate was $0.75 per share of
the Company’s common stock. The closing price of the Company’s common stock on February 28, 2018, was $1.90 as reported
by the OTC Markets.
On
February 28, 2018, the Board of Directors authorized the offering of a similar exchange arrangement at the same effective exchange
rate of $0.75 per share of the Company’s common stock to all remaining holders of Original Convertible Notes (some of which
Original Convertible Notes were the subject of notices of default and therefore accruing annual interest at 12%).
On
May 31, 2018, the Company entered into exchange agreements with four holders of Original Convertible Notes who agreed to exchange
their Original Convertible Notes for the Company’s common stock at an exchange rate of $0.75 per share. The note holders,
in the aggregate, agreed to exchange $169,715 of principal and accrued interest for 226,287 shares of the Company’s common
stock. The closing price of the Company’s common stock on May 31, 2018 was $0.92 per share. As a result of the exchange,
$169,715 of convertible notes, inclusive of accrued interest, were cancelled and $208,185 of common stock was issued,
resulting in a loss on extinguishment of debt of $38,470.
As
of December 31, 2018, principal and accrued interest on the one remaining outstanding Original Convertible Note subject
to a default notice totaled $38,292, of which $13,292 was accrued interest. As of December 31, 2017, principal and accrued interest
on convertible notes subject to default notices totaled $91,028 of which $25,028 was accrued interest.
As
of December 31, 2018, the remaining total outstanding Original Convertible Notes, inclusive of accrued interest, were convertible
into 16,460 shares of the Company’s common stock, including 5,471 shares attributable to accrued interest of $62,233 payable
as of such date. As of December 31, 2017, the outstanding Original Convertible Notes were convertible into 32,941 shares of the
Company’s common stock, including 8,677 shares attributable to accrued interest of $98,646 payable as of such date. Such
Original Convertible Notes will continue to accrue interest until exchanged, paid or otherwise discharged. There can be no assurance
that any of the additional holders of the remaining Original Convertible Notes will exchange their notes.
Note
Payable to SY Corporation Co., Ltd.
On
June 25, 2012, the Company borrowed 465,000,000 Won (the currency of South Korea, equivalent to approximately $400,000 United
States Dollars) from and executed a secured note payable to SY Corporation Co., Ltd., formerly known as Samyang Optics Co. Ltd.
(“SY Corporation”), an approximately 20% common stockholder of the Company at that time. SY Corporation was a significant
stockholder and a related party at the time of the transaction, but has not been a significant stockholder or related party of
the Company subsequent to December 31, 2014. The note accrues simple interest at the rate of 12% per annum and had a maturity
date of June 25, 2013. The Company has not made any payments on the promissory note. At June 30, 2013 and subsequently, the promissory
note was outstanding and in default, although SY Corporation has not issued a notice of default or a demand for repayment. The
Company believes that SY Corporation is in default of its obligations under its January 2012 license agreement, as amended, with
the Company, but the Company has not yet issued a notice of default. The Company is continuing efforts towards a comprehensive
resolution of the aforementioned matters involving SY Corporation.
The
promissory note is secured by collateral that represents a lien on certain patents owned by the Company, including composition
of matter patents for certain of the Company’s high impact ampakine compounds and the low impact ampakine compounds CX2007
and CX2076, and other related compounds. The security interest does not extend to the Company’s patents for its ampakine
compounds CX1739 and CX1942, or to the patent for the use of ampakine compounds for the treatment of respiratory depression.
Note
payable to SY Corporation consists of the following at December 31, 2018 and 2017:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Principal amount of note payable
|
|
$
|
399,774
|
|
|
$
|
399,774
|
|
Accrued interest payable
|
|
|
315,307
|
|
|
|
267,335
|
|
Foreign currency transaction adjustment
|
|
|
29,360
|
|
|
|
(83,282
|
)
|
|
|
$
|
744,441
|
|
|
$
|
583,827
|
|
Interest
expense with respect to this promissory note was $47,973 for years ended December 31, 2018 and 2017, respectively.
Advances
and Notes Payable to Officers
On
January 29, 2016, Dr. Arnold S. Lippa, the Company’s Interim President, Interim Chief Executive Officer, Chief Scientific
Officer and Chairman of the Board of Directors, advanced $52,600 to the Company for working capital purposes under a demand promissory
note with interest at 10% per annum. On September 23, 2016, Dr. Lippa advanced $25,000 to the Company for working capital purposes
under a second demand promissory note with interest at 10% per annum. The notes are secured by the assets of the Company. Additionally,
on April 9, 2018, Dr. Lippa advanced another $50,000 to the Company as discussed in more detail below. In connection with the
loans, Dr. Lippa was issued fully vested warrants to purchase 15,464 shares of the Company’s common stock, 10,309 of which
have an exercise price of $5.1025 per share and 5,155 of which have an exercise price of $4.85 which were the closing prices of
the Company’s common stock on the respective dates of grant. The warrants expire on January 29, 2019 and September 23, 2019
respectively and may be exercised on a cashless basis.
On
February 2, 2016, Dr. James S. Manuso, the Company’s then Chief Executive Officer and Vice Chairman of the Board of Directors,
advanced $52,600 to the Company for working capital purposes under a demand promissory note with interest at 10% per annum. On
September 22, 2016, Dr. Manuso, advanced $25,000 to the Company for working capital purposes under a demand promissory note with
interest at 10% per annum. The notes are secured by the assets of the Company. Additionally, on April 9, 2018, Dr. Manuso advanced
another $50,000 to the Company as discussed in more detail below. In connection with the loans, Dr. Manuso was issued fully vested
warrants to purchase 13,092 shares of the Company’s common stock, 8,092 of which have an exercise price of $6.50 per share
and 5,000 of which have an exercise price of $5.00, which were the closing market prices of the Company’s common stock on
the respective dates of grant. The warrants expire on February 2, 2019 and September 22, 2019, respectively, and may be exercised
on a cashless basis.
On April 9, 2018, Dr.
Arnold S. Lippa, the Company’s Interim President, Interim Chief Executive Officer, Chief Scientific Officer and Chairman
of the Board of Directors and Dr. James S. Manuso, the Company’s then Chief Executive Officer and Vice Chairman of the Board
of Directors, advanced $50,000 each, for a total of $100,000, to the Company for working capital purposes. Each note is payable
on demand after June 30, 2018. Each note was subject to a mandatory exchange provision that provided that the principal amount
of the note would be mandatorily exchanged into a board approved offering of the Company’s securities, if such offering
held its first closing on or before June 30, 2018 and the amount of proceeds from such first closing was at least $150,000, not
including the principal amounts of the notes that would be exchanged, or $250,000 including the principal amounts of such notes.
Upon such exchange, the notes would be deemed repaid and terminated. Any accrued but unpaid interest outstanding at the time of
such exchange will be (i) repaid to the note holder or (ii) invested in the offering, at the note holder’s election. A first
closing did not occur on or before June 30, 2018. Dr. Arnold S. Lippa agreed to exchange his note into the board approved offering
that had its initial closing on September 12, 2018. Accrued interest on Dr. Lippa’s note was not exchanged.
As of December 31, 2018, Dr. James S. Manuso had not exchanged his note.
For
the fiscal years ended December 31, 2018 and 2017, $11,268 and $7,760 was charged to interest expense with respect to Dr. Lippa’s
notes, respectively.
For
the fiscal years ended December 31, 2018 and 2017, $12,769 and $7,760 was charged to interest expense with respect to Dr. James
S. Manuso’s notes, respectively.
As
of September 30, 2018, Dr. James S. Manuso resigned his executive officer positions and as a member of the Board of Directors
of the Company. Of the $12,769 of interest expense noted above, $3,564 was incurred while Dr. Manuso was no longer an officer.
Other
Short-Term Notes Payable
Other
short-term notes payable at December 31, 2018 and December 31, 2017 consisted of premium financing agreements with respect to
various insurance policies. At December 31, 2018, a premium financing agreement was payable in the initial amount of $63,750,
with interest at 8.930% per annum, in ten monthly installments of $6,639, and another premium financing arrangement was payable
in the initial amount of $9,322 payable in equal quarterly installments. At December 31, 2018 and 2017, the aggregate amount of
the short-term notes payable was $8,907 and $8,630 respectively.
5.
Settlement and Payment Agreements
On April 5, 2018, the
Company issued 185,388 common stock purchase options to Robert N. Weingarten, the Company’s former Chief Financial Officer
and 125,000 common stock purchase options to Pharmaland Executive Consulting Services LLC (“Pharmaland”) exercisable
until April 5, 2023 at $1.12 per share of common stock, which was the closing price of the common stock as quoted on the OTC QB
on that date. All of these common stock purchase options vested immediately. Each of the common stock purchase options were valued
on the issuance date based upon a Black-Scholes valuation method at $1.081. Mr. Weingarten simultaneously with the issuance of
the common stock purchase options, agreed to forgive $200,350 of accrued compensation owed to him. The value of the options granted
to Mr. Weingarten was $200,404. The resulting loss on extinguishment of the accrued liability was $54. The common stock purchase
options issued to Pharmaland was in partial payment of accounts payable owed. The common stock purchase options issued to Pharmaland
had a value of $135,125 and the accounts payable extinguished was $124,025. The loss on extinguishment of this accounts
payable was $11,100.
On
November 21, 2018, the Company issued 283,643 shares of common stock with a value of $198,550 to designees of one of its intellectual
property law firms as partial settlement of accounts payable due to the law firm. There was no gain or loss on the settlement
of this accounts payable.
On November 21, 2018,
the Company granted a non-qualified stock option (“NQSO”) to purchase 21,677 shares of common stock to a vendor
to settle $15,000 of accounts payable due to that vendor. The NQSO vested immediately with respect to 14,452 shares of
common stock and on November 30, 2018 with respect to an additional 7,225 shares of common stock. As of December 31, 2018,
the NQSO has vested with respect to all shares. The NQSO has a term of 5 years and have an exercise
price of $0.70 per share, which was the closing price on the trading day of the grant date. The NQSO was valued using the Black-Scholes
option pricing model resulting value was $0.692 per NQSO. There was no gain or loss on the extinguishment of the accounts payable.
On
December 9, 2017, the Company accepted offers from certain executive officers, a former executive officer, the independent members
of the Board of Directors and two consultants (“Offerees”) pursuant to which such Offerees offered to forgive all,
or in one case, a portion of their accrued compensation and compensation related amounts owed to them and vendor accounts payable
as of September 30, 2017. Also, on December 9, 2017, the Company granted NQSOs to the Offerees. The NQSOs immediately vested,
have a term of 10 years and have an exercise price of $1.45 per share, which was the closing price on the last trading day before
the grant date (Friday, December 8, 2017). The NQSOs were valued using the Black-Scholes option pricing model. The resulting
value was $1.396 per NQSO.
The
table below summarizes the result of the forgiveness and NQSO grant transactions on December 9, 2017:
|
|
Dollar amount
forgiven
|
|
|
Number of
NQSOs
granted
|
|
|
Value of
NQSOs
granted
|
|
|
Gain
|
|
Executive Officers, former executive officer, independent members of the Board of Directors
|
|
$
|
2,557,083
|
|
|
|
1,772,056
|
|
|
$
|
2,475,561
|
|
|
$
|
81,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants
|
|
$
|
111,635
|
|
|
|
77,362
|
|
|
$
|
108,076
|
|
|
$
|
3,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,668,718
|
|
|
|
1,849,418
|
|
|
$
|
2,583,637
|
|
|
$
|
85,081
|
|
The
Company continues to explore ways to reduce its obligations and indebtedness, and might in the future enter into additional settlement
and payment agreements.
6.
Stockholders’ Deficiency
Preferred
Stock
The
Company has authorized a total of 5,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2018 and
2017, 1,250,000 shares were designated as 9% Cumulative Convertible Preferred Stock (non-voting, “9% Preferred Stock”);
37,500 shares were designated as Series B Convertible Preferred Stock (non-voting, “Series B Preferred Stock”); 205,000
shares were designated as Series A Junior Participating Preferred Stock (non-voting, “Series A Junior Participating Preferred
Stock”); and 1,700 shares were designated as Series G 1.5% Convertible Preferred Stock. Accordingly, as of December 31,
2018, 3,505,800 shares of preferred stock were undesignated and may be issued with such rights and powers as the Board of Directors
may designate.
There
were no shares of 9% Preferred Stock or Series A Junior Participating Preferred Stock or Series G 1.5% Convertible Preferred Stock
outstanding as of December 31, 2018 and 2017.
Series
B Preferred Stock outstanding as of December 31, 2018 and 2017 consisted of 37,500 shares issued in a May 1991 private placement.
Each share of Series B Preferred Stock is convertible into approximately 0.00030 shares of common stock at an effective conversion
price of $2,208.375 per share of common stock, which is subject to adjustment under certain circumstances. As of December 31,
2018 and 2017, the shares of Series B Preferred Stock outstanding are convertible into 11 shares of common stock. The Company
may redeem the Series B Preferred Stock for $25,001, equivalent to $0.6667 per share, an amount equal to its liquidation preference,
at any time upon 30 days prior notice.
Common
Stock
There
are 3,872,076 shares of the Company’s Common Stock outstanding as of December 31, 2018. After reserving for conversions
of convertible debt as well as common stock purchase options and warrants exercises, there are 50,486,154 shares of the Company’s
Common Stock available for future issuances.
2018
Unit Offering
On
September 12, 2018, the Company consummated an initial closing on an offering (“2018 Unit Offering”) of Units comprised
of one share of the Company’s common stock and one common stock purchase warrant. The 2018 Unit Offering was for
up to $1.5 million and had a final termination date of October 15, 2018. The initial closing was for $250,750 of
which $200,750 was the gross cash proceeds. The additional $50,000 was represented by the conversion into the 2018
Unit Offering of the principal amount of the Arnold S. Lippa, Demand Promissory Note described below. With the exchange of Dr.
Lippa’s Demand Promissory Note into the 2018 Unit Offering, 47,620 warrants exercisable at 150% of the unit price ($1.575)
per share of common stock and expiring on April 30, 2023 were issued with a value of $49,975 which amount was considered a loss
on the extinguishment of that officer note and which amount was credited to additional paid-in capital. Units were sold for $1.05
per unit and the warrants issued in connection with the units are exercisable through April 30, 2023 at a fixed price of 150%
of the unit purchase price. The warrants contain a cashless exercise provision and certain blocker provisions preventing exercise
if the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a result of
such exercise. The warrants are also subject to redemption by the Company at $0.001 per share upon ten (10) days written notice
if the Company’s common stock closes at $3.00 or more for any five (5) consecutive trading days. In total, 238,814 shares
of the Company’s common stock and 238,814 common stock purchase warrants were purchased. Other than Arnold S. Lippa, the
investors in the offering were not affiliates of the Company. Investors also received an unlimited number of piggy-back registration
rights in respect to the shares of common stock and the shares of common stock underlying the common stock purchase warrants,
unless such common stock is eligible to be sold with volume limits under an exemption from registration under any rule or regulation
of the SEC that permits the holder to sell securities of the Company to the public without registration and without volume limits
(assuming the holder is not an affiliate).
The
shares of common stock and common stock purchase warrants were offered and sold without registration under the Securities Act
of 1933, as amended (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities
Act as provided in Rule 506(b) of Regulation D promulgated thereunder. None of the shares of common stock issued as part of the
units, the common stock purchase warrants, the Common Stock issuable upon exercise of the common stock purchase warrants or any
warrants issued to a qualified referral source (of which there were none in the initial closing) have been registered under the
Securities Act or any other applicable securities laws, and unless so registered, may not be offered or sold in the United States
except pursuant to an exemption from the registration requirements of the Securities Act.
In
addition, as set forth in the Purchase Agreements, each Purchaser had an unlimited number of exchange rights, which were
options and not obligations, to exchange such Purchaser’s entire investment as defined (but not less than the entire
investment) into one or more subsequent equity financings (consisting solely of convertible preferred stock or common stock or
units containing preferred stock or common stock and warrants exercisable only into preferred stock or common stock) that would
be considered as “permanent equity” under United States Generally Accepted Accounting Principles and the rules and
regulations of the United States Securities and Exchange Commission, and therefore classified within stockholders’ equity,
and excluding any form of debt or convertible debt or preferred stock redeemable at the discretion of the holder (each such financing
a “Subsequent Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion
of any number of Subsequent Equity Financings that aggregate at least $15 million of gross proceeds, or (ii) December 30, 2018.
For clarity, a Purchaser’s entire investment was the entire amount invested (“Investment Amount”) (for
purposes of the multiple described below) and all of the Common Stock and Warrants purchased (for purposes of the exchange) pursuant
to the Purchase Agreement of such Purchaser, however, if the Warrants had been exercised in part or in whole on a cashless
basis, then the Investment Amount (for purposes of the multiple described below) would have been the Investment Amount
(for purposes of the multiple described below) and all of the Common Stock initially purchased pursuant to the Purchase Agreement
of such Purchaser plus any shares of Common Stock issued pursuant to a cashless exercise and any Warrants remaining after such
cashless exercise (for purposes of the exchange), or, if the Warrants had been exercised for cash, then the entire investment
would have been the Investment Amount plus the amount of cash paid upon cash exercise (for purposes of the multiple described
below) and all of the Common Stock initially purchased pursuant to the Purchase Agreement of such Purchaser plus any shares of
Common Stock issued pursuant to the cash exercise and any Warrants remaining after such cash exercise (for purposes of the exchange).
The exchange rights expired on December 31, 2018.
1
st
2017 Unit Offering
On
March 10, 2017 and March 28, 2017, the Company sold units to investors for aggregate gross proceeds of $350,000, with each unit
consisting of one share of the Company’s common stock and one common stock purchase warrant to purchase one share of the
Company’s common stock (the “1
st
2017 Unit Offering”). Units were sold for $2.50 per unit and the
warrants issued in connection with the units were exercisable through December 31, 2021 at a fixed price $2.75 per share of the
Company’s common stock. The warrants contained a cashless exercise provision and certain blocker provisions preventing exercise
if the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common stock as a result of
such exercise. The warrants were also subject to redemption by the Company at $0.001 per share upon ten (10) days written notice
if the Company’s common stock closed at 200% or more of the unit purchase price for any five (5) consecutive trading days.
Investors were not affiliates of the Company. The investors received an unlimited number of piggy-back registration rights. Investors
also received an unlimited number of exchange rights, which were options and not obligations, to exchange such investor’s
entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting solely of
convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable only
into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing”). These exchange rights were effective until the earlier of: (i) the completion of any number of subsequent
financings aggregating at least $15 million gross proceeds to the Company, or (ii) December 30, 2017. The dollar amount used to
determine the amount invested or exchanged into the subsequent financing would be 1.2 times the amount of the original investment.
Under certain circumstances, the ratio might have been 1.4 instead of 1.2. The Company evaluated whether the warrants or the exchange
rights met criteria to be accounted for as a derivative in accordance with Accounting Standard Codification Topic (ASC) 815 and
determined that the derivative criteria were not met. Therefore, the Company determined no bifurcation and separate valuation
was necessary and that the warrants and exchange right should be accounted for with the host instrument. The closing market prices
of the Company’s common stock on March 10, 2017 and March 28, 2017 were $4.05 and $3.80 respectively. In connection with
this transaction, Aurora Capital LLC (“Aurora”) served as a placement agent and earned $20,000 fees and 8,000 placement
agent common stock warrants associated with the closing of 1
st
2017 Unit Offering. The fees were unpaid as of December
31, 2018 and have been accrued in accounts payable and accrued expenses and charged against Additional paid-in capital as
of December 31, 2017 and December 31, 2018. The placement agent common stock warrants were valued at $27,648 and were accounted
for in Additional paid-in capital as of December 31, 2017 and remain valued at that amount as of December 31, 2018.
On
July 26, 2017, the Company’s Board approved an offering of securities conducted via private placement (the “2
nd
2017 Unit Offering” described below) that, because of the terms of the 2
nd
2017 Unit Offering as compared
to the terms of the 1
st
2017 Unit Offering, resulted in an exchange of all of the units from the 1
st
2017
Unit Offering into equity securities of the Company in the 2
nd
2017 Unit Offering by all of the investors in the 1
st
2017 Unit Offering.
2
nd
2017 Unit Offering
On August 29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29,
2017, December 13, 2017, December 21, 2017, December 22, 2017 and December 29, 2017 the Company sold units in the 2
nd
2017 Unit Offering to investors for aggregate gross proceeds of $404,500, with each unit consisting of one share of the Company’s
common stock and one common stock purchase warrant to purchase one share of the Company’s common stock. Units were sold for
$1.00 per unit and the warrants issued in connection with the units are exercisable through September 29, 2022 at a fixed price
$1.10 per share of the Company’s common stock. The warrants contain a cashless exercise provision and certain blocker provisions
preventing exercise if the investor would beneficially own more than 4.99% of the Company’s outstanding shares of common
stock as a result of such exercise. The warrants are also subject to redemption by the Company at $0.001 per share upon ten (10)
days written notice if the Company’s common stock closes at 250% or more of the unit purchase price for any five (5) consecutive
trading days. The investors were not affiliates of the Company. Investors received an unlimited number of piggy-back registration
rights. Investors also received an unlimited number of exchange rights, which were options and not obligations, to exchange such
investor’s entire investment (and not less than the entire investment) into one or more subsequent equity financings (consisting
solely of convertible preferred stock or common stock or units containing preferred stock or common stock and warrants exercisable
only into preferred stock or common stock) that would be considered as “permanent equity” under United States Generally
Accepted Accounting Principles and the rules and regulations of the United States Securities and Exchange Commission, and therefore
classified as stockholders’ equity, and excluding any form of debt or convertible debt (each such financing a “Subsequent
Equity Financing” as in the 1
st
2017 Unit Offering). These exchange rights were effective until the earlier of:
(i) the completion of any number of subsequent financings aggregating at least $15 million gross proceeds to the Company, or (ii)
December 30, 2017 and have therefore expired. The dollar amount used to determine the amount invested or exchanged into the subsequent
financing would have been 1.2 times the amount of the original investment. Under certain circumstances, the ratio might have been
1.4 instead of 1.2. The exchange right did not permit the investors to exchange into a debt offering or into redeemable preferred
stock, therefore the 2
nd
2017 Unit Offering resulted in the issuance of permanent equity. All exchange rights have expired
as of December 30, 2017. The Company evaluated whether the warrants or the exchange rights met criteria to be accounted for as
a derivative in accordance with Accounting Standard Codification Topic (ASC) 815 and determined that the derivative criteria were
not met. Therefore, the Company determined no bifurcation and separate valuation was necessary and that the warrants and exchange
right should be accounted for with the host instrument. The closing market prices of the Company’s common stock on August
29, 2017, September 27, 2017, September 28, 2017, October 5, 2017, October 25, 2017, November 29, 2017, December 13, 2017, December
21, 2017, December 22, 2017 and December 29, 2017 were $1.00, $1.40, $1.40, $1.50, $0.80, $1.05, $1.45, $1.51, $1.45 and $1.14,
respectively. There was no placement agent and therefore no fees associated with the 2
nd
2017 Unit Offering.
The
terms of the 2
nd
2017 Unit Offering resulted in an exchange of all of the units from each of the last unit offering
in 2016 and the 1
st
2017 Unit Offering into equity securities of the 2
nd
2017 Unit Offering. The 1
st
2017 Unit Offering and the 2
nd
2017 Unit Offering were both originally accounted for as equity.
Common
Stock Warrants
Although not considered
stock-based compensation, the Company issued a warrant to purchase 47,620 shares of common stock at an exercise price of $1.50
per share and expiring on December 30, 2023 as part of an officer note exchange into the 2018 Unit Offering. The warrants were
valued at $49,925 as of September 12, 2018, the date of issuance and were accounted for in Additional paid-in capital as of December
31, 2018 During the fiscal year ended December 31, 2017, the Company issued warrants to purchase 8,000 shares of the Company’s
common stock at an exercise price of $2.75 per share and expiring on December 31, 2021 to Aurora Capital LLC, an affiliate of
the Company, for placement agent services. The warrants were valued at $27,648 and were accounted for in Additional paid-in capital
as of March 31, 2017, the date of issuance, and remain valued at that amount as of December 31, 2017 and December 31, 2018.
A
summary of warrant activity for the year ended December 31, 2018 is presented below.
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants outstanding at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
3.73
|
|
Issued
|
|
|
318,814
|
|
|
|
1.55618
|
|
|
|
4.50
|
|
Warrants outstanding at December 31, 2018
|
|
|
1,783,229
|
|
|
$
|
2.20393
|
|
|
|
3.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2,68146
|
|
|
|
3.73
|
|
Warrants exercisable at December 31, 2018
|
|
|
1,783,229
|
|
|
$
|
2.20393
|
|
|
|
3.06
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2018:
Exercise Price
|
|
|
Warrants Outstanding
(Shares)
|
|
|
Warrants Exercisable
(Shares)
|
|
|
Expiration Date
|
$
|
1.0000
|
|
|
|
916,217
|
|
|
|
916,217
|
|
|
September 20, 2022
|
$
|
1.2870
|
|
|
|
41,002
|
|
|
|
41,002
|
|
|
April 17, 2019
|
$
|
1.5000
|
|
|
|
80,000
|
|
|
|
80,000
|
|
|
December 30, 2023
|
$
|
1.5620
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December 31, 2021
|
$
|
1.5750
|
|
|
|
238,814
|
|
|
|
238,814
|
|
|
April 30, 2023
|
$
|
2.7500
|
|
|
|
8,000
|
|
|
|
8000
|
|
|
September 20, 2022
|
$
|
4.8500
|
|
|
|
5,155
|
|
|
|
5,155
|
|
|
September 23, 2019
|
$
|
4.8750
|
|
|
|
108,594
|
|
|
|
108,594
|
|
|
September 30, 2020
|
$
|
5.0000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
September 22, 2019
|
$
|
5.1025
|
|
|
|
10,309
|
|
|
|
10,309
|
|
|
January 29, 2019
|
$
|
6.5000
|
|
|
|
8,092
|
|
|
|
8,092
|
|
|
February 4, 2019
|
$
|
6.8348
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September 30, 2020
|
$
|
7.9300
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February 28, 2021
|
|
|
|
|
|
1,783,229
|
|
|
|
1,783,229
|
|
|
|
Based
on a fair market value of $0.65 per share on December 31, 2018, there were no exercisable in-the money common stock warrants as
of December 31, 2018.
A
summary of warrant activity for the year ended December 31, 2017 is presented below.
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants outstanding at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
Issued
|
|
|
1,194,500
|
|
|
|
|
|
|
|
|
|
Reduction through transactions in conjunction with - Unit Exchange Agreements
|
|
|
(270,283
|
)
|
|
|
|
|
|
|
|
|
Warrants outstanding at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at December 31, 2016
|
|
|
540,198
|
|
|
$
|
4.84842
|
|
|
|
3.93
|
|
Warrants exercisable at December 31, 2017
|
|
|
1,464,415
|
|
|
$
|
2.68146
|
|
|
|
4.88
|
|
The
exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2017:
Exercise Price
|
|
|
Warrants Outstanding
(Shares)
|
|
|
Warrants Exercisable
(Shares)
|
|
|
Expiration Date
|
$
|
1.0000
|
|
|
|
916,217
|
|
|
|
916,217
|
|
|
September 20, 2022
|
$
|
1.2870
|
|
|
|
41,002
|
|
|
|
41,002
|
|
|
April 17, 2019
|
$
|
1.5620
|
|
|
|
130,284
|
|
|
|
130,284
|
|
|
December 31, 2021
|
$
|
2.7500
|
|
|
|
8,000
|
|
|
|
8000
|
|
|
September 20, 2022
|
$
|
4.8500
|
|
|
|
5,155
|
|
|
|
5,155
|
|
|
September 23, 2019
|
$
|
4.8750
|
|
|
|
108,594
|
|
|
|
108,594
|
|
|
September 30, 2020
|
$
|
5.0000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
September 22, 2019
|
$
|
5.1025
|
|
|
|
10,309
|
|
|
|
10,309
|
|
|
January 29, 2019
|
$
|
6.5000
|
|
|
|
8,092
|
|
|
|
8,092
|
|
|
February 4, 2019
|
$
|
6.8348
|
|
|
|
145,758
|
|
|
|
145,758
|
|
|
September 30, 2020
|
$
|
7.9300
|
|
|
|
86,004
|
|
|
|
86,004
|
|
|
February 28, 2021
|
|
|
|
|
|
1,464,415
|
|
|
|
1,464,415
|
|
|
|
Based
on a fair market value of $1.14 per share on December 31, 2017, the intrinsic value of exercisable in-the-money common stock warrants
was $128,270 as of December 31, 2017.
Stock
Options
On
March 18, 2014, the stockholders of the Company holding a majority of the votes to be cast on the issue approved the adoption
of the Company’s 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan (the “2014 Plan”), which had
been previously adopted by the Board of Directors of the Company, subject to stockholder approval. The Plan permits the grant
of options and restricted stock with respect to up to 325,025 shares of common stock, in addition to stock appreciation rights
and phantom stock, to directors, officers, employees, consultants and other service providers of the Company.
On
June 30, 2015, the Board of Directors adopted the 2015 Stock and Stock Option Plan (the “2015 Plan”). The 2015 Plan
initially provided for, among other things, the issuance of either or any combination of restricted shares of common stock and
non-qualified stock options to purchase up to 461,538 shares of the Company’s common stock for periods up to ten years to
management, members of the Board of Directors, consultants and advisors. The Company has not and does not intend to present the
2015 Plan to stockholders for approval. On August 18, 2015, the Board of Directors increased the number of shares that may be
issued under the 2015 Plan to 769,231 shares of the Company’s common stock. On March 31, 2016, the Board of Directors further
increased the number of shares that may be issued under the 2015 Plan to 1,538,461 shares of the Company’s common stock.
On January 17, 2017, the Board of Directors further increased the number of shares that may be issued under the 2015 Plan to 3,038,461
shares of the Company’s common stock. On December 9, 2017, the Board of Directors further increased the number of shares
that may be issued under the 2015 Plan to 6,985,260 shares of the Company’s common stock. On December 28, 2018, the Board
of Directors further increased the number of shares that may be issued under the 2015 Plan to 8,985,260 shares of the Company’s
common stock.
During fiscal year
ended December 31, 2018, there were three grants of options to purchase an aggregate of 348,827 shares of the Company’s
common stock to a vendor. The value of these options on the grant date was approximately equal to the amount payable to the vendor
that was to be paid with the options. The cumulative loss on extinguishment of three liabilities totaling $353,623 was $11,154.
The remaining amount payable to the vendor is due in cash.
Information
with respect to the Black-Scholes variables used in connection with the evaluation of the fair value of stock-based compensation
costs and fees is provided at Note 3.
A
summary of stock option activity for the year ended December 31, 2018 is presented below.
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options outstanding at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
6.30
|
|
Granted
|
|
|
348,827
|
|
|
|
1.1002
|
|
|
|
4.29
|
|
Options outstanding at December 31, 2018
|
|
|
4,344,994
|
|
|
$
|
3.5414
|
|
|
|
5.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
6.30
|
|
Options exercisable at December 31, 2018
|
|
|
4,344,994
|
|
|
$
|
3,5414
|
|
|
|
5.90
|
|
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2018:
Exercise Price
|
|
|
Options Outstanding (Shares)
|
|
|
Options Exercisable (Shares)
|
|
|
Expiration Date
|
$
|
0.7000
|
|
|
|
21,677
|
|
|
|
21,677
|
|
|
November 21, 2023
|
$
|
1.1200
|
|
|
|
310,388
|
|
|
|
310,388
|
|
|
April 5, 2023
|
$
|
1.2500
|
|
|
|
16,762
|
|
|
|
16,762
|
|
|
December 7, 2022
|
$
|
1.3500
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
July 28, 2022
|
$
|
1.4500
|
|
|
|
1,849,418
|
|
|
|
1,849,418
|
|
|
December 9, 2027
|
$
|
1.4500
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
December 9, 2027
|
$
|
2.0000
|
|
|
|
285,000
|
|
|
|
285,000
|
|
|
June 30, 2022
|
$
|
2.0000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
July 26, 2022
|
$
|
3.9000
|
|
|
|
395,000
|
|
|
|
395,000
|
|
|
January 17, 2022
|
$
|
4.5000
|
|
|
|
7,222
|
|
|
|
7,222
|
|
|
September 2, 2021
|
$
|
5.6875
|
|
|
|
89,686
|
|
|
|
89,686
|
|
|
June 30, 2020
|
$
|
5.7500
|
|
|
|
2,608
|
|
|
|
2,608
|
|
|
September 12, 2021
|
$
|
6.4025
|
|
|
|
27,692
|
|
|
|
27,692
|
|
|
August 18, 2020
|
$
|
6.4025
|
|
|
|
129,231
|
|
|
|
129,231
|
|
|
August 18, 2022
|
$
|
6.4025
|
|
|
|
261,789
|
|
|
|
261,789
|
|
|
August 18, 2025
|
$
|
6.8250
|
|
|
|
8,791
|
|
|
|
8,791
|
|
|
December 11, 2020
|
$
|
7.3775
|
|
|
|
523,077
|
|
|
|
523,077
|
|
|
March 31, 2021
|
$
|
8.1250
|
|
|
|
169,231
|
|
|
|
169,231
|
|
|
June 30, 2022
|
$
|
13.0000
|
|
|
|
7,385
|
|
|
|
7,385
|
|
|
March 13, 2019
|
$
|
13.0000
|
|
|
|
3,846
|
|
|
|
3,846
|
|
|
April 14, 2019
|
$
|
13.9750
|
|
|
|
3,385
|
|
|
|
3,385
|
|
|
March 14, 2024
|
$
|
15.4700
|
|
|
|
7,755
|
|
|
|
7,755
|
|
|
April 8, 2020
|
$
|
15.9250
|
|
|
|
2,462
|
|
|
|
2,462
|
|
|
February 28, 2024
|
$
|
16.0500
|
|
|
|
46,154
|
|
|
|
46,154
|
|
|
July 17, 2019
|
$
|
16.6400
|
|
|
|
1,538
|
|
|
|
1,538
|
|
|
January 29, 2020
|
$
|
19.5000
|
|
|
|
9,487
|
|
|
|
9,487
|
|
|
July 17, 2022
|
$
|
19.5000
|
|
|
|
6,410
|
|
|
|
6,410
|
|
|
August 10, 2022
|
|
|
|
|
|
4,344,994
|
|
|
|
4,344,994
|
|
|
|
There
was no deferred compensation expense for the outstanding and unvested stock options at December 31, 2018.
Based
on a fair market value of $0.65 per share on December 31, 2018, there were no exercisable in-the-money common stock options as
of December 31, 2018.
A
summary of stock option activity for the year ended December 31, 2017 is presented below.
|
|
Number of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options outstanding at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6515
|
|
|
|
5.31
|
|
Granted
|
|
|
2,688,418
|
|
|
|
1.8721
|
|
|
|
8.38
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
7.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2016
|
|
|
1,307,749
|
|
|
$
|
7.6515
|
|
|
|
5.31
|
|
Options exercisable at December 31, 2017
|
|
|
3,996,167
|
|
|
$
|
3.7634
|
|
|
|
7.38
|
|
There
was no deferred compensation expense for the outstanding and unvested stock options at December 31, 2017.
The
exercise prices of common stock options outstanding and exercisable were as follows at December 31, 2017:
Exercise Price
|
|
|
Options
Outstanding
(Shares)
|
|
|
Options
Exercisable
(Shares)
|
|
|
Expiration Date
|
$
|
1.3500
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
July 28, 2022
|
$
|
1.4500
|
|
|
|
1,849,418
|
|
|
|
1,849,418
|
|
|
December 9, 2027
|
$
|
1.4500
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
December 9, 2027
|
$
|
2.0000
|
|
|
|
285,000
|
|
|
|
285,000
|
|
|
June 30, 2022
|
$
|
2.0000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
July 26, 2022
|
$
|
3.9000
|
|
|
|
395,000
|
|
|
|
395,000
|
|
|
January 17, 2022
|
$
|
4.5000
|
|
|
|
7,222
|
|
|
|
7,222
|
|
|
September 2, 2021
|
$
|
5.6875
|
|
|
|
89,686
|
|
|
|
89,686
|
|
|
June 30, 2020
|
$
|
5.7500
|
|
|
|
2,608
|
|
|
|
2,608
|
|
|
September 12, 2021
|
$
|
6.4025
|
|
|
|
27,692
|
|
|
|
27,692
|
|
|
August 18, 2020
|
$
|
6.4025
|
|
|
|
129,231
|
|
|
|
129,231
|
|
|
August 18, 2022
|
$
|
6.4025
|
|
|
|
261,789
|
|
|
|
261,789
|
|
|
August 18, 2025
|
$
|
6.8250
|
|
|
|
8,791
|
|
|
|
8,791
|
|
|
December 11, 2020
|
$
|
7.3775
|
|
|
|
523,077
|
|
|
|
523,077
|
|
|
March 31, 2021
|
$
|
8.1250
|
|
|
|
169,231
|
|
|
|
169,231
|
|
|
June 30, 2022
|
$
|
13.0000
|
|
|
|
7,385
|
|
|
|
7,385
|
|
|
March 13, 2019
|
$
|
13.0000
|
|
|
|
3,846
|
|
|
|
3,846
|
|
|
April 14, 2019
|
$
|
13.9750
|
|
|
|
3,385
|
|
|
|
3,385
|
|
|
March 14, 2024
|
$
|
15.4700
|
|
|
|
7,755
|
|
|
|
7,755
|
|
|
April 8, 2020
|
$
|
15.9250
|
|
|
|
2,462
|
|
|
|
2,462
|
|
|
February 28, 2024
|
$
|
16.0500
|
|
|
|
46,154
|
|
|
|
46,154
|
|
|
July 17, 2019
|
$
|
16.6400
|
|
|
|
1,538
|
|
|
|
1,538
|
|
|
January 29, 2020
|
$
|
19.5000
|
|
|
|
9,487
|
|
|
|
9,487
|
|
|
July 17, 2022
|
$
|
19.5000
|
|
|
|
6,410
|
|
|
|
6,410
|
|
|
August 10, 2022
|
|
|
|
|
|
3,996,167
|
|
|
|
3,996,167
|
|
|
|
Based
on a fair market value of $1.14 per share on December 31, 2017, there were no exercisable in-the-money common stock options as
of December 31, 2017.
For the years ended
December 31, 2018 and 2017, stock-based compensation costs and fees included in the consolidated statements of operations
consisted of general and administrative expenses of $14,248 and $1,164,537 respectively, and research and development
expenses of $15,000 and $762,741, respectively.
Pier
Contingent Stock Consideration
In
connection with the merger transaction with Pier effective August 10, 2012, RespireRx issued 179,747 newly issued shares of its
common stock with an aggregate fair value of $3,271,402 ($18.2000 per share), based upon the closing price of RespireRx’s
common stock on August 10, 2012. The shares of common stock were distributed to stockholders, convertible note holders, warrant
holders, option holders, and certain employees and vendors of Pier in satisfaction of their interests and claims. The common stock
issued by RespireRx represented approximately 41% of the 443,205 common shares outstanding immediately following the closing of
the transaction.
Pursuant
to the terms of the transaction, RespireRx agreed to issue additional contingent consideration, consisting of up to 56,351 shares
of common stock, to Pier’s former security holders and certain other creditors and service providers (the “Pier Stock
Recipients”) that received RespireRx’s common stock as part of the Pier transaction if certain of RespireRx’s
stock options and warrants outstanding immediately prior to the closing of the merger were subsequently exercised. In the event
that such contingent shares were issued, the ownership percentage of the Pier Stock Recipients, following their receipt of such
additional shares, could not exceed their ownership percentage as of the initial transaction date.
The
stock options and warrants outstanding at June 30, 2012 were all out-of-the-money on August 10, 2012. During late July and early
August 2012, shortly before completion of the merger, the Company issued options to officers and directors at that time to purchase
a total of 22,651 shares of common stock exercisable for ten years at $19.5000 per share. By October 1, 2012, these options, as
well as the options and warrants outstanding at June 30, 2012, were also out-of-the-money and continued to be out-of-the-money
through December 31, 2018.
There
were no stock options or warrants exercised subsequent to August 10, 2012 that triggered additional contingent consideration,
and the only remaining stock options outstanding that could still trigger the additional contingent consideration remained out-of-the-money
through December 31, 2018. As of December 31, 2018, due to the expirations and forfeitures of RespireRx stock options
and warrants occurring since August 10, 2012, 6,497 contingent shares of common stock remained potentially issuable under the
Pier merger agreement.
The
Company concluded that the issuance of any of the contingent shares to the Pier Stock Recipients was remote, as a result of the
large spread between the exercise prices of these stock options and warrants as compared to the common stock trading range, the
subsequent expiration or forfeiture of most of the options and warrants, the Company’s distressed financial condition and
capital requirements, and that these stock options and warrants have remained significantly out-of-the-money through December
31, 2018. Accordingly, the Company considered the fair value of the contingent consideration to be immaterial and therefore
did not ascribe any value to such contingent consideration. If any such shares are ultimately issued to the former Pier stockholders,
the Company will recognize the fair value of such shares as a charge to operations at that time.
Reserved
and Unreserved Shares of Common Stock
On
January 17, 2017, the Board of Directors of the Company approved the adoption of an amendment of the Amended and Restated RespireRx
Pharmaceuticals, Inc. 2015 Stock and Stock Option Plan (as amended, the “2015 Plan”). That amendment increases the
shares issuable under the plan by 1,500,000, from 1,538,461 to 3,038,461. On December 9, 2017, the Board of Directors further
amended the 2015 Plan to increase the number of shares that may be issued under the 2015 Plan to 6,985,260 shares of the Company’s
common stock. On December 28, 2018, the Borad of Directors further amended the 2015 Plan to increase the number of shares that
may be issued under the 2015 Plan to 8,985,260 shares of the Company’s common stock.
Other
than the change in the number of shares available under the 2015 Plan, no other changes were made to the 2015 Plan by these amendments.
At
December 31, 2018, the Company had 65,000,000 shares of common stock authorized and 3,872,076 shares of common stock issued and
outstanding. Furthermore, as of December 31, 2018, the Company had reserved an aggregate of 11 shares for issuance upon conversion
of the Series B Preferred Stock; 1,783,229 shares for issuance upon exercise of warrants; 4,344,996 shares for issuance upon exercise
of outstanding stock options; 63,236 shares to cover equity grants available for future issuance pursuant to the Company’s
2014 Equity, Equity-linked and Equity Derivative Incentive Plan; 4,427,341 shares to cover equity grants available
for future issuance pursuant to the 2015 Plan; 16,460 shares for issuance upon conversion of the Convertible Notes; and 6,497
shares issuable as contingent shares pursuant to the Pier merger. Accordingly, as of December 31, 2018, the Company had an aggregate
of 10,641,770 shares of common stock reserved for issuance and 50,486,154 shares of common stock unreserved and available for
future issuance. The Company expects to satisfy its future common stock commitments through the issuance of authorized but unissued
shares of common stock.
7.
Income Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
as of December 31, 2018 and 2017 are summarized below.
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Capitalized research and development costs
|
|
$
|
183,000
|
|
|
$
|
183,000
|
|
Research and development credits
|
|
|
3,017,000
|
|
|
|
3,017,000
|
|
Stock-based compensation
|
|
|
3,787,000
|
|
|
|
3,628,000
|
|
Stock options issued in connection with the payment of debt
|
|
|
202,000
|
|
|
|
199,000
|
|
Net operating loss carryforwards
|
|
|
20,424,000
|
|
|
|
25,569,000
|
|
Accrued compensation
|
|
|
367,000
|
|
|
|
135,000
|
|
Accrued interest due to related party
|
|
|
103,000
|
|
|
|
83,000
|
|
Other, net
|
|
|
8,000
|
|
|
|
10,000
|
|
Total deferred tax assets
|
|
|
28,091,000
|
|
|
|
32,824,000
|
|
Valuation allowance
|
|
|
(28,091,000
|
)
|
|
|
(32,824,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
In
assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon
the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December
31, 2018 and 2017, management was unable to determine that it was more likely than not that the Company’s deferred tax assets
will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates.
No
federal tax provision has been provided for the years ended December 31, 2018 and 2017 due to the losses incurred during such
periods. Reconciled below is the difference between the income tax rate computed by applying the U.S. federal statutory rate and
the effective tax rate for the years ended December 31, 2018 and 2017.
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
U. S. federal statutory tax rate
|
|
|
(21.0
|
)%
|
|
|
(35.0
|
)%
|
Forgiveness of indebtedness
|
|
|
-
|
%
|
|
|
(0.9
|
)%
|
Change in valuation allowance
|
|
|
(14.4
|
)%
|
|
|
(2.4
|
)%
|
Adjustment to deferred tax asset
|
|
|
35.4
|
%
|
|
|
38.8
|
%
|
Other
|
|
|
-
|
%
|
|
|
(0.5
|
)%
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
As of December 31, 2018,
the Company had federal and state tax net operating loss carryforwards of approximately $100,188,000 and $56,743,000,
respectively. The state tax net operating loss carryforward consists of $30,521,000 for California purposes and $26,222,000
for New Jersey purposes. The difference between the federal and state tax loss carryforwards was primarily attributable to
the capitalization of research and development expenses for California franchise tax purposes. The federal net operating loss
carryforwards will expire at various dates from 2019 through 2038. State net operating losses expire at various dates
from 2019 through 2028 for California and through 2038 for New Jersey. The Company also had federal and California research
and development tax credit carryforwards that totaled approximately $1,872,000 and $1,146,000, respectively, at December 31, 2018.
The federal research and development tax credit carryforwards will expire at various dates from 2019 through 2032.
The California research and development tax credit carryforward does not expire and will carryforward indefinitely until utilized.
While
the Company has not performed a formal analysis of the availability of its net operating loss carryforwards under Internal Revenue
Code Sections 382 and 383, management expects that the Company’s ability to use its net operating loss carryforwards will
be limited in future periods.
The Company did not file its federal or state tax returns for
the year ended December 31, 2017 and has not yet filed such returns for the year ended December 31, 2018. The Company does not
expect there to be any material non-filing penalties. The Company intends to file such returns as soon as practical.
8.
Related Party Transactions
Dr.
Arnold S. Lippa and Jeff E. Margolis, officers and directors of the Company since March 22, 2013, have indirect ownership interests
and managing memberships in Aurora Capital LLC (“Aurora”) through interests held in its members, and Jeff. E. Margolis
is also an officer of Aurora. Aurora is a boutique investment banking firm specializing in the life sciences sector that is also
a full-service brokerage firm.
On
March 31, 2013, the Company accrued $85,000 as reimbursement for legal fees incurred by Aurora in conjunction with the removal
of the Company’s prior Board of Directors on March 22, 2013, which amount has been included in accounts payable and accrued
expenses at December 31, 2018 and 2017.
On
June 30, 2015, the Board of Directors of the Company awarded, but did not pay, cash bonuses totaling $215,000, including an aggregate
of $195,000 to certain of the Company’s executive officers and an aggregate of $20,000 to the independent members of the
Company’s Board of Directors. The cash bonuses awarded to executive officers were as follows: Dr. Arnold S. Lippa - $75,000;
Jeff E. Margolis - $60,000; and Robert N. Weingarten (resigned as an officer and director of the Company in February 2017 but
remains a consultant to the Company) - $60,000. The cash bonuses awarded to the two independent members of the Company’s
Board of Directors were as follows: James E. Sapirstein - $10,000; and Kathryn MacFarlane - $10,000. The cash bonuses were awarded
as partial compensation for services rendered by such persons from January 1, 2015 through June 30, 2015.
On
June 30, 2015, the Board of Directors also established cash compensation arrangements for certain of the
Company’s executive officers at the following monthly rates: Dr. Arnold S. Lippa - $12,500; Jeff E. Margolis - $10,000;
and Robert N. Weingarten (resigned as an officer and director of the Company in February 2017 but remains a consultant to the
Company) - $10,000. In addition, the Company established quarterly cash board fees for the two independent members of
the Company’s Board of Directors as follows: James E. Sapirstein - $5,000; and Kathryn MacFarlane - $5,000.
This compensation was payable in arrears and commenced on July 1, 2015. On August 18, 2015, the cash compensation
arrangements for these executive officers were further revised as described below in Note 9. Effective November 1,
2018, the Company increased the quarterly cash board fees for each of the two independent members of the Company’s
Board of Directors to $15,000 per quarter. These new compensation arrangements were in effect as of December 31,
2018.
Both
the cash bonuses and the cash monthly compensation were accrued and will not be paid in cash until such time as the Board of Directors
of the Company determines that sufficient capital has been raised by the Company or is otherwise available to fund the Company’s
operations on an ongoing basis. Such amounts of accrued compensation through September 30, 2017 were forgiven on December 9, 2017
when, on the same date certain amounts were granted as options, as further described below, and therefore such amounts are no
longer included in accrued compensation and related expenses as of December 31, 2018 or 2017.
Effective
August 18, 2015, Company entered into employment agreements with Dr. Arnold S. Lippa, Robert N. Weingarten and Jeff E. Margolis,
which superseded the compensation arrangements previously established for those officers on June 30, 2015, excluding the cash
bonuses referred to above.
On
February 17, 2017, Robert N. Weingarten resigned as a director and as the Company’s Vice President and Chief Financial Officer,
but remains a consultant to the Company.
Jeff
E. Margolis’ employment agreement was amended effective July 1, 2017. The employment agreement amendment called for payment
in three installments in cash of the $60,000 bonus granted on June 30, 2015. A minimum of $15,000 was to be payable in cash as
follows: (a) $15,000 payable in cash upon the next closing (after July 1, 2017) of any financing in excess of $100,000 (b) $15,000
payable by the end of the following month assuming cumulative closings (beginning with the closing that triggered (a)) in excess
of $200,000 and (c) $30,000 payable in cash upon the next closing of any financing in excess of an additional $250,000. The conditions
of (a), (b) and (c) above were met as of December 31, 2017 and 2018, however Mr. Margolis has waived the Company’s
obligation to make any payments of the cash bonus until the Board of Directors of the Company determines that sufficient capital
has been raised by the Company or is otherwise available to fund the Company’s operations on an ongoing basis. Obligations
through September 30, 2017 were forgiven by Mr. Margolis as described below.
On
March 28, 2017, Aurora earned $20,000 of cash fees and 8,000 placement agent common stock warrants associated with the closing
of 1
st
2017 Unit Offering. The cash fees were unpaid as of December 31, 2018 and have been included in accounts
payable and accrued expenses and charged against Additional paid-in capital as of December 31, 2018 and 2017. The placement
agent common stock warrants were valued at $27,648 and were accounted for in “Additional paid-in capital” as of December
31, 2018 and 2017.
On
December 9, 2017, the Company accepted offers from Dr. Arnold S. Lippa, Dr. James S. Manuso, Jeff E. Margolis, James E. Sapirstein,
Kathryn MacFarlane and Robert N. Weingarten (former Chief Financial Officer) pursuant to which such individuals would forgive
accrued compensation and related accrued expenses as of September 30, 2017 in the following amounts: $807,497; $878,360; $560,876;
$55,000; $55,000 and $200,350 respectively for a total of $2,557,083. On the same date, the Company granted to the same individuals,
or designees of such individuals from the 2015 Plan, non-qualified stock options, exercisable for 10 years with an exercise price
of $1.45 per share of common stock, among other terms and features as follows: 559,595; 608,704; 388,687; 38114; 38,114 and 138,842
respectively, for options exercisable into a total of 1,772,055 shares of common stock with a total value of $2,475,561.
Dr.
James S. Manuso resigned as the Company’s President and Chief Executive Officer as well as Vice Chairman and member of the
Board of Directors effective as of September 30, 2018. Having been the principal executive officer of the Company during the
fiscal year ended December 31, 2018, Dr. Manuso is considered a named executive officer for the current year. Dr. Manuso remains
an affiliate due to his equity ownership and option grants.
As
a result of his resignation in February 2017, Mr. Weingarten is no longer considered a related party of the Company.
A
description of advances and notes payable to officers is provided at Note 4.
9
.
Commitments and Contingencies
Pending
or Threatened Legal Action and Claims
By
letter dated May 18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of
the University of Alberta, which purports to terminate, effective December 12, 2017, the license agreement dated May 9, 2007
between the Company and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds
for termination and notified the representative that it invoked Section 13 of that license agreement, which mandates a
meeting to be attended by individuals with decision-making authority to attempt in good faith to negotiate a resolution to
the dispute. In February 2019, the Company and TEC Edmonton tentatively agreed to terms acceptable to all parties to
establish a new license agreement and the form of a new license agreement. However, the parties have not signed the draft new
license agreement pending the Company’s payment of the agreed amount of historical unreimbursed patent fees of
approximately CAD$23,000 (approximately US$17,000 as of December 31, 2018). No assurance can be provided that the Company
will or will not be able to remit the historical license fees or that the draft new license agreement will be executed and
become effective. If we do not remit the historical fees and the new license agreement does not become effective, we cannot
estimate the possible adverse impact on the Company’s operations or business prospects.
By
e-mail dated July 21, 2016, the Company received a demand from an investment banking consulting firm that represented the Company
in 2012 in conjunction with the Pier transaction alleging that $225,000 is due and payable for investment banking services
rendered. Such amount has been included in accrued expenses at December 31, 2018 and 2017.
By
letter dated February 5, 2016, the Company received a demand from a law firm representing a professional services vendor of the
Company alleging an amount due and payable for services rendered. On January 18, 2017, following an arbitration proceeding,
an arbitrator awarded the vendor the full amount sought in arbitration of $146,082. Additionally, the arbitrator granted the vendor
attorneys’ fees and costs of $47,937. All such amounts have been included in accrued expenses at December
31, 2018 and 2017, including accrued interest at 4.5% annually from February 26, 2018, the date of the judgment, through December
31, 2018, totaling $7,470.
The
Company is periodically the subject of various pending and threatened legal actions and claims. In the opinion of management of
the Company, adequate provision has been made in the Company’s consolidated financial statements as of December 31,
2018 and 2017 with respect to such matters, including, specifically, the matters noted above. The Company intends to vigorously
defend itself if any of the matters described above results in the filing of a lawsuit or formal claim.
Significant
Agreements and Contracts
Consulting
Agreement
Richard
Purcell, the Company’s Senior Vice President of Research and Development since October 15, 2014, provides his services to
the Company on a month-to-month basis through his consulting firm, DNA Healthlink, Inc., through which the Company has contracted
for his services, for a monthly cash fee of $12,500. Additional information with respect to shares of common stock that have been
issued to Mr. Purcell is provided at Note 6. Cash compensation expense pursuant to this agreement totaled $150,000 for
the fiscal years ended December 31, 2018 and 2017, which is included in research and development expenses in the
Company’s consolidated statements of operations for such periods.
Employment
Agreements
On
August 18, 2015, the Company entered into an employment agreement with Dr. James S. Manuso, Ph.D., to be its new President
and Chief Executive Officer. Dr. Manuso resigned as President and Chief Executive Officer effective September 30, 2018 and
therefore Dr. Manuso’s employment agreement was not automatically extended as described below. Pursuant to the
agreement, which was for an initial term through September 30, 2018 (and which would have been deemed to be automatically
extended, upon the same terms and conditions, for successive periods of one year, unless either party provided written notice
of its intention not to extend the term of the agreement at least 90 days prior to the applicable renewal date, except that
Dr. Manuso resigned effective September 30, 2018), Dr. Manuso received an annual base salary of $375,000. Dr. Manuso was,
through September 30, 2018, also eligible to earn a performance-based annual bonus award of up to 50% of his base salary,
based upon the achievement of annual performance goals established by the Board of Directors in consultation with the
executive prior to the start of such fiscal year, or any amount at the discretion of the Board of Directors. No such bonuses
were earned or granted during the fiscal years ended December 31, 2018 and 2017. Additionally, Dr.
Manuso was granted stock options to acquire 261,789 shares of common stock of the Company and was eligible to receive
additional awards under the Company’s Plans in the discretion of the Board of Directors. No such additional awards
were granted to Dr. Manuso during the fiscal year ended December 31, 2018. During the fiscal year ended December 31,
2017, Dr. Manuso was granted, from the Company’s 2015 Stock and Stock Option Plan (the “2015 Plan”),
non-qualified stock options to acquire 125,000 shares of common stock. Dr. Manuso was also entitled to receive, until
such time as the Company established a group health plan for its employees, $1,200 per month, on a tax-equalized basis, as
additional compensation to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as
additional compensation for a term life insurance policy and disability insurance policy. Such amounts were accrued for the fiscal
years ended December 31, 2018 and 2017. Dr. Manuso was also entitled to be reimbursed for business expenses. The
Company has accrued all submitted and approved business expenses as of December 31, 2018 and 2017. Additional
information with respect to the stock options granted to Dr. Manuso is provided at Note 6. Cash compensation accrued pursuant
to this agreement totaled $310,950 for the fiscal year ended December 31, 2018 (nine months accrued through
the date of termination on September 30, 2018), and $414,600 for the fiscal year ended December 31, 2017,
respectively and Such amounts were included in accrued compensation and related expenses in the Company’s consolidated
balance sheet at December 31, 2018 and 2017, respectively, and in general and administrative expenses in the
Company’s consolidated statement of operations for the fiscal years ended December 31, 2018 and 2017, as
appropriate. On December 9, 2017, Dr. Manuso forgave $878,360 of accrued compensation and related expenses which was the
amount owed by the Company as of September 30, 2017, as described in more detail below. On the same date, Dr. Manuso received
options to purchase 608,704 shares of common stock, as described in more detail below. Dr. Manuso did not receive any
additional compensation for serving as Vice Chairman or a member of on the Board of Directors. Amounts accruing after
September 30, 2017 have not been paid to Dr. Manuso. Effective on September 30, 2018, Dr. Manuso resigned as Vice Chairman
and as a member of the Board of Directors.
On October 12, 2018, Dr. Lippa was
named Interim President and Interim Chief Executive Officer to replace Dr. Manuso who resigned effective September 30, 2018. Dr.
Lippa continues to serve as the Company’s Executive Chairman and as a member of the Board of Directors. Also, on
August 18, 2015, Dr. Lippa was named Chief Scientific Officer of the Company, and the Company entered into an employment agreement
with Dr. Lippa in that capacity. Pursuant to the agreement, which is for an initial term through September 30, 2018 (and which
automatically extended on September 30, 2018 and will automatically extend annually, upon the same terms and conditions, for successive
periods of one year, unless either party provides written notice of its intention not to extend the term of the agreement at least
90 days prior to the applicable renewal date), Dr. Lippa received an annual base salary of $300,000. Dr. Lippa is also eligible
to earn a performance-based annual bonus award of up to 50% of his base salary, based upon the achievement of annual performance
goals established by the Board of Directors in consultation with the executive prior to the start of such fiscal year, or any
amount at the discretion of the Board of Directors. Additionally, Dr. Lippa was granted stock options to acquire 30,769 shares
of common stock of the Company and is eligible to receive additional awards under the Company’s Plans at the discretion
of the Board of Directors. Dr. Lippa is also entitled to receive, until such time as the Company establishes a group health plan
for its employees, $1,200 per month, on a tax-equalized basis, as additional compensation to cover the cost of health coverage
and up to $1,000 per month, on a tax-equalized basis, as reimbursement for a term life insurance policy and disability insurance
policy. Dr. Lippa is also entitled to be reimbursed for business expenses. Additional information with respect to the stock options
granted to Dr. Lippa is provided at Note 6. Cash compensation accrued pursuant to this agreement totaled $339,600 for the
fiscal years ended December 31, 2018 and 2017, respectively which amounts are included in accrued compensation and related
expenses in the Company’s consolidated balance sheet at December 31, 2018 and 2017, and in research and development
expenses in the Company’s consolidated statement of operations. Cash compensation accrued to Dr. Lippa for bonuses and under
a prior superseded arrangement, while still serving as the Company’s President and Chief Executive Officer, totaled $94,758
and was part of the amount forgiven on December 9, 2017 and therefore is no longer included in accrued compensation and related
expenses as of December 31, 2018 and 2017. Dr. Lippa does not receive any additional compensation for serving as Executive
Chairman and on the Board of Directors. On December 9, 2017, Dr. Lippa forgave $807,497 of accrued compensation and related expenses
which was the amount owed by the Company as of September 30, 2017. On the same date, Dr. Lippa received options to purchase 559,595
shares of common stock, as described in more detail below.
On
August 18, 2015, the Company also entered into an employment agreement with Jeff E. Margolis, in his continuing role as Vice President,
Secretary and Treasurer. Pursuant to the agreement, which was for an initial term through September 30, 2016 (and which automatically
extended on September 30, 2016 and will automatically extend annually upon the same terms and conditions, for successive periods
of one year, unless either party provides written notice of its intention not to extend the term of the agreement at least 90
days prior to the applicable renewal date), Mr. Margolis received an annual base salary of $195,000, and is also eligible to receive
performance-based annual bonus awards ranging from $65,000 to $125,000, based upon the achievement of annual performance goals
established by the Board of Directors in consultation with the executive prior to the start of such fiscal year, or any amount
at the discretion of the Board of Directors. Additionally, Mr. Margolis was granted stock options to acquire 30,769 shares of
common stock of the Company and is eligible to receive additional awards under the Company’s Plans at the discretion of
the Board of Directors. Mr. Margolis is also entitled to receive, until such time as the Company establishes a group health plan
for its employees, $1,200 per month, on a tax-equalized basis, as additional compensation to cover the cost of health coverage
and up to $1,000 per month, on a tax-equalized basis, as reimbursement for a term life insurance policy and disability insurance
policy. Mr. Margolis is also entitled to be reimbursed for business expenses. Additional information with respect to the stock
options granted to Mr. Margolis is provided at Note 6. Mr. Margolis’ employment agreement was amended effective July
1, 2017. The employment agreement amendment called for payment in three installments in cash of the $60,000 bonus granted on June
30, 2015. A minimum of $15,000 was to be payable in cash as follows: (a) $15,000 payable in cash upon the next closing (after
July 1, 2017) of any financing in excess of $100,000 (b) $15,000 payable by the end of the following month assuming cumulative
closings (beginning with the closing that triggered (a)) in excess of $200,000 and (c) $30,000 payable in cash upon the next closing
of any financing in excess of an additional $250,000. The conditions of (a), (b) and (c) above were met as of December 31, 2017
and 2018, however Mr. Margolis has waived the Company’s obligation to make any payments of the cash bonus until the
Board of Directors of the Company determines that sufficient capital has been raised by the Company or is otherwise available
to fund the Company’s operations on an ongoing basis. Recurring cash compensation accrued pursuant to this amended agreement
totaled $321,600 for the fiscal year ended December 31, 2018 and totaled $269,100 pro-rated between the pre-amendment
and post-amendment terms of Mr. Margolis’ employment contract for fiscal year ended December 31, 2017, respectively,
which amounts are included in accrued compensation and related expenses in the Company’s consolidated balance sheet at December
31, 2018 and 2017, respectively, and in general and administrative expenses in the Company’s consolidated statement
of operations.
The
employment agreements between the Company and each of Dr. Manuso, Dr. Lippa, and Mr. Margolis (prior to the 2017 amendment), respectively,
provided that the payment obligations associated with the first year base salary were to accrue, but no payments were to be made,
until at least $2,000,000 of net proceeds from any offering or financing of debt or equity, or a combination thereof, was received
by the Company, at which time scheduled payments were to commence. Dr. Lippa, and Mr. Margolis (who are each also directors of
the Company), (and prior to his resignation, Dr. James S. Manuso) have each agreed, effective as of August 11, 2016, to continue
to defer the payment of such amounts indefinitely, until such time as the Board of Directors of the Company determines that sufficient
capital has been raised by the Company or is otherwise available to fund the Company’s operations on an ongoing basis.
On
December 9, 2017, the Company accepted offers from Dr. Arnold S. Lippa, Dr. James S. Manuso, Jeff E. Margolis, James E. Sapirstein,
Kathryn MacFarlane and Robert N. Weingarten (former Chief Financial Officer) pursuant to which such individuals would forgive
accrued compensation and related accrued expenses as of September 30, 2017 in the following amounts: $807,497, $878,360, $560,876,
$55,000, $55,000, and $200,350, respectively, for a total of $2,557,083. On the same date, the Company granted to the same individuals,
or designees of such individuals from the 2015 Plan, non-qualified stock options, exercisable for 10 years with an exercise price
of $1.45 per share of common stock, among other terms and features as follows: 559,595, 608,704, 388,687, 38114, 38,114, and 138,842,
respectively, for options exercisable into a total of 1,772,055 shares of common stock with a total value of $2,475,561.
On April 5, 2018,
the Company accepted an offer from Robert N. Weingarten, (former Chief Financial Officer), pursuant to which Mr. Weingarten
would forgive accrued compensation and related accrued expenses as of that date in the amount of $200,350. On the same date,
the Company granted Mr. Weingarten, from the 2015 Plan, non-qualified stock options exercisable for 10 years with an exercise
price of $1.12 per share of common stock, among other terms and features and with a total value of $200,404. The difference
between the value of liability extinguished and the value of the common stock options is recorded in Loss on extinguishment
of debt and other liabilities in exchange for equity in the accompanying statement of operations. The difference between the
value of the liability and the value of the common stock options is recorded as a loss on extinguishment of debt and other
liabilities in the accompanying in the statement of operations.
University
of Alberta License Agreement
On
May 9, 2007, the Company entered into a license agreement, as amended, with the University of Alberta granting the Company
exclusive rights to practice patents held by the University of Alberta claiming the use of ampakines for the treatment of
various respiratory disorders. The Company agreed to pay the University of Alberta a licensing fee and a patent issuance fee,
which were paid, and prospective payments consisting of a royalty on net sales, sublicense fee payments, maintenance payments
and milestone payments. The prospective maintenance payments commence on the enrollment of the first patient into the first
Phase 2B clinical trial and increase upon the successful completion of the Phase 2B clinical trial. As the Company does not
at this time anticipate scheduling a Phase 2B clinical trial in the near term, no maintenance payments to the University of
Alberta are currently due and payable, nor are any maintenance payments expected to be due in the near future in connection
with the license agreement. On May 18, 2018, the Company received a letter from counsel claiming to represent TEC Edmonton
and The Governors of the University of Alberta, which purports to terminate, effective December 12, 2017, the license
agreement dated May 9, 2007 (as subsequently amended) between the Company and The Governors of the University of Alberta. The
Company, through its counsel, disputed any grounds for termination and notified the representative that it invoked Section 13
of that license agreement, which mandates a meeting to be attended by individuals with decision-making authority to attempt
in good faith to negotiate a resolution to the dispute. In February 2019, the Company and TEC Edmonton tentatively agreed
to terms acceptable to all parties to establish a new license agreement and the form of a new license agreement. However, the
parties have not signed the draft new license agreement pending the Company’s payment of the agreed amount of
historical unreimbursed patent fees, of approximately CAD$23,000 (approximately US$17,000 as of December 31, 2018). No
assurance can be provided that the Company will or will not be able to remit the historical license fees or that the draft
new license agreement will be executed and become effective. If we do not remit the historical fees and the new license
agreement does not become effective, we cannot estimate the possible adverse impact on the Company’s operations or
business prospects.
University
of Illinois 2014 Exclusive License Agreement
On
June 27, 2014, the Company entered into an Exclusive License Agreement (the “2014 License Agreement”) with the University
of Illinois, the material terms of which were similar to a License Agreement between the parties that had been previously terminated
on March 21, 2013. The 2014 License Agreement became effective on September 18, 2014, upon the completion of certain conditions
set forth in the 2014 License Agreement, including: (i) the payment by the Company of a $25,000 licensing fee, (ii) the payment
by the Company of outstanding patent costs aggregating $15,840, and (iii) the assignment to the University of Illinois of rights
the Company held in certain patent applications, all of which conditions were fulfilled.
The
2014 License Agreement granted the Company (i) exclusive rights to several issued and pending patents in numerous jurisdictions
and (ii) the non-exclusive right to certain technical information that is generated by the University of Illinois in connection
with certain clinical trials as specified in the 2014 License Agreement, all of which relate to the use of cannabinoids for the
treatment of sleep related breathing disorders. The Company is developing dronabinol (Δ9-tetrahydrocannabinol), a cannabinoid,
for the treatment of OSA, the most common form of sleep apnea.
The
2014 License Agreement provides for various commercialization and reporting requirements commencing on June 30, 2015. In addition,
the 2014 License Agreement provides for various royalty payments, including a royalty on net sales of 4%, payment on sub-licensee
revenues of 12.5%, and a minimum annual royalty beginning in 2015 of $100,000, which is due and payable on December 31 of each
year beginning on December 31, 2015. The minimum annual royalty obligation of $100,000 due on December 31, 2018, was extended
to February 28, 2019, when such payment obligation was paid by the Company. The minimum annual royalty obligation was paid as scheduled
in December 2017. One-time milestone payments may become due based upon the achievement of certain development milestones. $350,000
will be due within five days after the dosing of the first patient is a Phase III human clinical trial anywhere in the world.
$500,000 will be due within five days after the first NDA filing with FDA or a foreign equivalent. $1,000,000 will be due within
twelve months of the first commercial sale. One-time royalty payments may also become due and payable. Annual royalty payments
may also become due. In the year after the first application for market approval is submitted to the FDA or a foreign equivalent
and until approval is obtained, the minimum annual royalty will increase to $150,000. In the year after the first market approval
is obtained from the FDA or a foreign equivalent and until the first sale of a product, the minimum annual royalty will increase
to $200,000. In the year after the first commercial sale of a product, the minimum annual royalty will increase to $250,000. During
the fiscal years ended December 31, 2018 and 2017, the Company recorded a charge to operations of $100,000 with respect to its
minimum annual royalty obligation, which is included in research and development expenses in the Company’s consolidated
statements of operations for the fiscal years ended December 31, 2018 and 2017.
During
the fiscal years ended December 31, 2018 and 2017, the Company recorded charges to operations of $100,000,
respectively, with respect to its 2018 and 2017 minimum annual royalty obligation, which is included in research and development
expenses in the Company’s consolidated statement of operations for the fiscal years ended December 31, 2018 and 2017.
Research
Contract with the University of Alberta
On
January 12, 2016, the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of
ampakines at a variety of dosage and formulation levels in the potential treatment of Pompe Disease, apnea of prematurity and
spinal cord injury, as well as to conduct certain electrophysiological studies to explore the ampakine mechanism of action for
central respiratory depression. The Company agreed to pay the University of Alberta total consideration of approximately CAD$146,000
(approximately US$111,000), consisting of approximately CAD$85,000 (approximately US$65,000) of personnel funding in cash in four
installments during 2016, to provide approximately CAD$21,000 (approximately US$16,000) in equipment, to pay patent costs of CAD$20,000
(approximately US$15,000), and to underwrite additional budgeted costs of CAD$20,000 (approximately US$15,000). The final
amount payable in respect to this Research Contract of US$16,207 (CAD$21,222) was paid in US dollars in January 2018 and
completed the payments under the contract. The conversion to US dollars above utilizes an exchange rate of approximately US$0.76
for every CAD$1.00.
The
University of Alberta received matching funds through a grant from the Canadian Institutes of Health Research in support of this
research. The Company retained the rights to research results and any patentable intellectual property generated by the research.
Dr. John Greer, faculty member of the Department of Physiology, Perinatal Research Centre and Women & Children’s Health
Research Institute at the University of Alberta collaborated on this research. The studies were completed in 2016.
See
“University of Alberta License Agreement” above for more information on the related license agreement.
Noramco
Inc. - Dronabinol Development and Supply Agreement
On
September 4, 2018, RespireRx entered into a dronabinol Development and Supply Agreement with Noramco Inc., one of the world’s
major dronabinol manufacturers. Under the terms of the Agreement, Noramco agreed to (i) provide all of the active pharmaceutical
ingredient (“API”) estimated to be needed for the clinical development process for both the first- and second-generation
products (each a “Product” and collectively, the “Products”), three validation batches for New Drug Application
(“NDA”) filing(s) and adequate supply for the initial inventory stocking for the wholesale and retail channels, subject
to certain limitations, (ii) maintain or file valid drug master files (“DMFs”) with the FDA or any other regulatory
authority and provide the Company with access or a right of reference letter entitling the Company to make continuing reference
to the DMFs during the term of the agreement in connection with any regulatory filings made with the FDA by the Company, (iii)
participate on a development committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting
firms engaged by the Company and participate in all FDA or Drug Enforcement Agency (“DEA”) meetings as appropriate
and as related to the API.
In
consideration for these supplies and services, the Company has agreed to purchase exclusively from Noramco during the commercialization
phase all API for its Products as defined in the Development and Supply Agreement at a pre-determined price subject to certain
producer price adjustments and agreed to Noramco’s participation in the economic success of the commercialized Product or
Products up to the earlier of the achievement of a maximum dollar amount or the expiration of a period of time.
National
Institute of Drug Abuse Agreement
As
a result of agreements entered into on October 19, 2015 and January 19, 2016, the Medications Development Program of the National
Institute of Drug Abuse (“NIDA”) funded and conducted research on the Company’s ampakine compounds CX717 and
CX1739 to determine their potential usefulness for the treatment of cocaine and methamphetamine addiction and abuse. The Company
retains all intellectual property resulting from this research, as well as proprietary and commercialization rights to these compounds.
In
general, the ampakines did not produce behavioral effects in rats and mice that are commonly associated with administration of
stimulants such as cocaine or amphetamines. Instead, the ampakines reduced the stimulation produced by both of these drugs. In
addition, the ampakines were not recognized as cocaine- or amphetamine-like when administered to rats that had been trained to
recognize whether they had been administered these drugs. The absence of stimulant properties on the part of the ampakines may
confirm their value as potential non-stimulant treatments for ADHD.
Transactions
with Biovail Laboratories International SRL
In
March 2010, the Company entered into an asset purchase agreement with Biovail Laboratories International SRL (“Biovail”).
Pursuant to the asset purchase agreement, Biovail acquired the Company’s interests in CX717, CX1763, CX1942 and the injectable
dosage form of CX1739, as well as certain of its other ampakine compounds and related intellectual property for use in the field
of respiratory depression or vaso-occlusive crises associated with sickle cell disease. The agreement provided the Company with
the right to receive milestone payments in an aggregate amount of up to $15,000,000 plus the reimbursement of certain related
expenses, conditioned upon the occurrence of particular events relating to the clinical development of certain assets that Biovail
acquired. None of these events occurred.
As
part of the transaction, Biovail licensed back to the Company certain exclusive and irrevocable rights to some acquired ampakine
compounds, other than CX717, an injectable dosage form of CX1739, CX1763 and CX1942, for use outside of the field of respiratory
depression or vaso-occlusive crises associated with sickle cell disease. Accordingly, following the transaction with Biovail,
the Company retained its rights to develop and commercialize the non-acquired ampakine compounds as a potential treatment for
neurological diseases and psychiatric disorders. Additionally, the Company retained its rights to develop and commercialize the
ampakine compounds as a potential treatment for sleep apnea disorders, including an oral dosage form of ampakine CX1739.
In
September 2010, Biovail’s parent corporation, Biovail Corporation, combined with Valeant Pharmaceuticals International in
a merger transaction and the combined company was renamed “Valeant Pharmaceuticals International, Inc.” (“Valeant”).
Following the merger, Valeant and Biovail conducted a strategic and financial review of their product pipeline and, as a result,
in November 2010, Biovail announced its intent to exit from the respiratory depression project acquired from the Company in March
2010.
Following
that announcement, the Company entered into discussions with Biovail regarding the future of the respiratory depression project.
In March 2011, the Company entered into a new agreement with Biovail to reacquire the ampakine compounds, patents and rights that
Biovail had acquired from the Company in March 2010. The new agreement provided for potential future payments of up to $15,150,000
by the Company based upon the achievement of certain developments, including new drug application submissions and approval milestones
pertaining to an intravenous dosage form of the ampakine compounds for respiratory depression. Biovail is also eligible to receive
additional payments of up to $15,000,000 from the Company based upon the Company’s net sales of an intravenous dosage form
of the compounds for respiratory depression.
At
any time following the completion of Phase 1 clinical studies and prior to the end of Phase 2A clinical studies, Biovail retains
an option to co-develop and co-market intravenous dosage forms of an ampakine compound as a treatment for respiratory depression
and vaso-occlusive crises associated with sickle cell disease. In such an event, the Company would be reimbursed for certain development
expenses to date and Biovail would share in all such future development costs with the Company. If Biovail makes the co-marketing
election, the Company would owe no further milestone payments to Biovail and the Company would be eligible to receive a royalty
on net sales of the compound by Biovail or its affiliates and licensees.
Duke
University Clinical Trial Agreement
On
January 27, 2015, the Company entered into a Clinical Study and Research Agreement with Duke University (as amended, the “Duke
Agreement”) to develop and conduct a protocol for a program of clinical study and research which was amended on October
30, 2015 and further amended on July 28, 2016, which agreement, as amended, resulted in a total amount payable under the Agreement
to $678,327. During the fiscal years ended December 31, 2018 and 2017, the Company charged $0 to research and development
expenses with respect to work conducted pursuant to the Duke Agreement. The clinical trial completed in October 2016 and the Company
announced the study results on December 15, 2016. Amounts still owing under this agreement are in the Company’s balance
sheets at December 31, 2018 and 2017
Sharp
Clinical Services, Inc. Agreement
The
Company has various agreements with Sharp Clinical Services, Inc. to provide packaging, labeling, distribution and analytical
services.
Covance
Laboratories Inc. Agreement
On
October 26, 2016, the Company entered into a twelve-month agreement with Covance Laboratories Inc. to provide compound
testing and storage services with respect to CX1739, CX1866 and CX1929 at a total budgeted cost of $35,958. This agreement was
renewed in October 2018.
Summary
of Principal Cash Obligations and Commitments
The
following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of
December 31, 2018, aggregating $995,900. Employment agreement amounts included in the 2019 column represent amounts contractually
due at from January 1, 2019 through September 30, 2019 when such contracts expire unless extended pursuant to the terms
of the contracts.
|
|
|
|
|
Payments Due By Year
|
|
|
|
Total
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
License agreements
|
|
$
|
500,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Employment agreements (1)
|
|
|
495,900
|
|
|
|
495,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
995,900
|
|
|
$
|
595,900
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
(1) The payment of such amounts has been deferred indefinitely, as described above at “Employment Agreements”.
10.
Subsequent Events
On
January 2, 2019, February 27, 2019, March 6, 2019 and March 14, 2019, the Company issued to five investors, none of whom were
affiliates of the Company, 10% convertible notes (“2019 Convertible Notes”), due on April 30, 2019 with a face amount
of $110,000. These 2019 Convertible Notes have terms (other than expiration date) similar to those of the 2018 Convertible Notes
described in Note 4 above. In addition, 110,000 common stock purchase warrants were issued in connection with the issuance of
such notes. Among
other provisions, the warrants are exercisable at $1.50 share until December 30, 2023.
The
due date of the $100,000 annual amount payable to the University of Illinois that was originally due on December 31, 2018
pursuant to the 2014 License Agreement, was extended until February 28, 2019, on which date the Company remitted the amount
due.
Arnold
S. Lippa, the Company’s Interim Chief Executive Officer, Interim President and Chief Scientific Officer has extended credit
to the Company on April 15, 2019 for operating expenses by making a payment of $25,000 to the Company’s auditors which amount
has been accounted for by the Company as an advance by Dr. Lippa payable on demand. The balance of the amount payable to the auditors
has been paid directly by the Company.
RespireRx
Pharmaceuticals Inc.
Annual
Report on Form 10-K
Year
Ended December 31, 2018