RespireRx Pharmaceuticals Inc. - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-16467
RESPIRERX PHARMACEUTICALS INC.
(Exact name of registrant as specified in its charter)
| Delaware | 33-0303583 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) |
126 Valley Road, Suite C
Glen Rock, New Jersey 07452
(Address of principal executive offices)
(201) 444-4947
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of November 10, 2021, the Company had , shares of common stock, $0.001 par value, issued and outstanding.
RESPIRERX PHARMACEUTICALS INC.
AND SUBSIDIARY
TABLE OF CONTENTS
| 2 |
In this Quarterly Report on Form 10-Q, the terms “RespireRx,” the “Company,” “we,” “us” and “our” refer to RespireRx Pharmaceuticals Inc. a Delaware corporation, and, unless the context indicates otherwise, its consolidated subsidiaries.
INTRODUCTORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q of RespireRx Pharmaceuticals Inc. (“RespireRx” and together with RespireRx’s wholly owned subsidiary, Pier Pharmaceuticals, Inc. (“Pier”), the “Company, “we,” or “our,” unless the context indicates otherwise) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Company intends that such forward-looking statements be subject to the safe harbor created thereby. These might include statements regarding the Company’s future plans, targets, estimates, assumptions, financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about research and development efforts, including, but not limited to, preclinical and clinical research design, execution, timing, costs and results, future product demand, supply, manufacturing, costs, marketing and pricing factors.
In some cases, forward-looking statements may be identified by words including “assumes,” “could,” “ongoing,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” “anticipates,” “believes,” “intends,” “estimates,” “expects,” “plans,” “contemplates,” “targets,” “continues,” “budgets,” “may,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words, and such statements may include, but are not limited to, statements regarding (i) future research plans, expenditures and results, (ii) potential collaborative arrangements, (iii) the potential utility of the Company’s products candidates, (iv) reorganization plans, and (v) the need for, and availability of, additional financing. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this report.
These factors include but are not limited to, regulatory policies or changes thereto, available cash, research and development results, issuance of patents, competition from other similar businesses, interest of third parties in collaborations with us, and market and general economic factors, and other risk factors disclosed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on April 15, 2020 (the “2020 Form 10-K”) as well as any subsequent reports filed from time to time with the SEC.
You should read these risk factors and the other cautionary statements made in the Company’s filings as being applicable to all related forward-looking statements wherever they appear in this report. We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. You should read this report completely. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
We caution investors not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described in the 2020 Form 10-K and in this report, as well as others that we may consider immaterial or do not anticipate at this time. These forward-looking statements are based on assumptions regarding the Company’s business and technology, which involve judgments with respect to, among other things, future scientific, economic, regulatory and competitive conditions, collaborations with third parties, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company’s control. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. Our expectations reflected in our forward-looking statements can be affected by inaccurate assumptions that we might make or by known or unknown risks and uncertainties, including those described in the 2020 Form 10-K and in this report. These risks and uncertainties are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time.
For more information about the risks and uncertainties the Company faces, see “Item 1A. Risk Factors” in our 2020 Form 10-K, and subsequent reports and registration statements filed from time to time with the SEC. Forward-looking statements speak only as of the date they are made. The Company does not undertake and specifically declines any obligation to update any forward-looking statements or to publicly announce the results of any revisions to any statements to reflect new information or future events or developments. We advise investors to consult any further disclosures we may make on related subjects in our annual reports on Form 10-K, as well as subsequent reports file from time to time with the SEC.
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RESPIRERX PHARMACEUTICALS INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 556 | $ | 825 | ||||
| Deferred financing costs | 167,976 | 52,609 | ||||||
| Prepaid expenses | 61,449 | 31,653 | ||||||
| Total current assets | 229,981 | 85,087 | ||||||
| Total assets | $ | 229,981 | $ | 85,087 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses, including amounts owed to related parties | $ | 5,058,227 | $ | 4,923,947 | ||||
| Accrued compensation and related expenses | 2,408,759 | 1,540,809 | ||||||
| Convertible notes payable, including accrued interest of $121,493 and $85,693 at September 30, 2021 and December 31, 2020, respectively, which includes accrued interest to related parties (Note 4) | 559,790 | 414,860 | ||||||
| Note payable to SY Corporation, including accrued interest of $447,266 and $411,385 at September 30, 2021 and December 31, 2020, respectively (payment obligation currently in default – Note 4) | 830,202 | 864,551 | ||||||
| Notes payable to officer, including accrued interest (Note 4) | 229,390 | 213,067 | ||||||
| Notes payable to former officer, including accrued interest (Note 4) | 200,519 | 186,565 | ||||||
| Other short-term notes payable | 35,982 | 4,608 | ||||||
| Total current liabilities | 9,322,869 | 8,148,407 | ||||||
| Long-term liabilities | ||||||||
| Long-term accounts payable associated with payment settlement agreements (Note 5) | 332,000 | - | ||||||
| Total long-term liabilities | 332,000 | - | ||||||
| Total liabilities | 9,654,869 | - | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ deficiency: (Note 6) | ||||||||
| Series B convertible preferred stock, $par value; $0.6667 per share liquidation preference; aggregate liquidation preference $25,001; shares authorized, issued and outstanding: ; common share issuable upon conversion at 0.000030 common shares per Series B share: 1 | 21,703 | 21,703 | ||||||
| Common stock, $ par value; shares authorized: ; shares issued and outstanding: at September 30, 2021 and at December 31, 2020, respectively (Note 2 and Note 6) | 90,397 | 71,271 | ||||||
| Additional paid-in capital | 163,644,453 | 162,654,002 | ||||||
| Accumulated deficit | (173,181,441 | ) | (170,810,296 | ) | ||||
| Total stockholders’ deficiency | (9,424,888 | ) | (8,063,320 | ) | ||||
| Total liabilities and stockholders’ deficiency | $ | 229,981 | $ | 85,087 | ||||
See accompanying notes to condensed consolidated financial statements (unaudited).
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RESPIRERX PHARMACEUTICALS INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three-Months Ended | Nine-Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative, including related parties | $ | 423,558 | $ | 1,140,204 | $ | 1,495,103 | $ | 1,969,223 | ||||||||
| Research and development, including related parties | 157,751 | 171,776 | 550,343 | 480,242 | ||||||||||||
| Total operating expenses | 581,309 | 1,311,980 | 2,045,446 | 2,449,465 | ||||||||||||
| Loss from operations | (581,309 | ) | (1,311,980 | ) | (2,045,446 | ) | (2,449,465 | ) | ||||||||
| Gain on warrant exchange | 1,099 | |||||||||||||||
| Gain/(Loss) on extinguishment or settlement of debt and other liabilities | 62,548 | (65,906 | ) | 62,548 | (389,902 | ) | ||||||||||
| Interest expense, including related parties | (228,253 | ) | (78,678 | ) | (459,566 | ) | (409,994 | ) | ||||||||
| Foreign currency transaction gain (loss) | 38,332 | (22,791 | ) | 70,220 | 7,151 | |||||||||||
| Net loss | $ | (708,682 | ) | $ | (1,479,355 | ) | $ | (2,371,145 | ) | $ | (3,242,210 | ) | ||||
| Deemed dividend associated with most favored nation provisions of convertible notes | $ | (378,042 | ) | $ | $ | (378,042 | ) | $ | ||||||||
| Net loss attributable to common stockholders | $ | (1,086,724 | ) | $ | 1,479,355 | $ | (2,749,187 | ) | $ | |||||||
| Net loss per common share - basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.02 | ) | ||||
| Weighted average common shares outstanding - basic and diluted | 90,396,596 | 22,435,203 | 83,757,619 | 13,179,304 | ||||||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
| 5 |
RESPIRERX PHARMACEUTICALS INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
(Unaudited)
Nine-months and Three-months Ended September 30, 2021
| Series B | ||||||||||||||||||||||||||||
| Convertible | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Par | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||
| Shares | Amount | Shares | Value | Capital | Deficit | Deficiency | ||||||||||||||||||||||
| Balance, December 31, 2020 | 37,500 | $ | 21,703 | 71,271,095 | $ | 71,271 | $ | 162,654,002 | $ | (170,810,296 | ) | $ | (8,063,320 | ) | ||||||||||||||
| Sale of common stock | 3,600,000 | 3,600 | 113,699 | 117,299 | ||||||||||||||||||||||||
| Costs of stock issuance | - | - | (52,609 | ) | (52,609 | ) | ||||||||||||||||||||||
| Issuance of note commitment shares and beneficial conversion feature | - | 2,000,000 | 2,000 | 95,500 | 97,500 | |||||||||||||||||||||||
| Issuance of common stock upon conversion of convertible notes | - | 12,625,557 | 12,626 | 239,885 | 252,511 | |||||||||||||||||||||||
| Stock -based compensation | - | - | 44,250 | 44,250 | ||||||||||||||||||||||||
| Adjustment due to reverse stock split | - | (56 | ) | |||||||||||||||||||||||||
| Net loss | - | - | (850,249 | ) | (850,249 | ) | ||||||||||||||||||||||
| Balance, March 31, 2021 | 37,500 | $ | 21,703 | 89,496,596 | $ | 89,497 | $ | 163,094,727 | $ | (171,660,545 | ) | $ | (8,454,618 | ) | ||||||||||||||
| Issuance of common stock upon cashless warrant exercise | 900,000 | 900 | (900 | ) | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 7,500 | 7,500 | ||||||||||||||||||||||||
| Gain on warrant exchanges | - | - | - | (1,099 | ) | (1,099 | ) | |||||||||||||||||||||
| Note discounts | - | - | 443,550 | 443,550 | ||||||||||||||||||||||||
| Net loss | - | - | (812,214 | ) | (812,214 | ) | ||||||||||||||||||||||
| Balance,June 30, 2021 | 37,500 | $ | 21,703 | 90,396,596 | $ | 90,397 | $ | 163,543,778 | $ | (172,472,759 | ) | $ | (8,816,881 | ) | ||||||||||||||
| Issuance of note with beneficial conversion features, other note discounts and warrant | - | - | - | - | 98,175 | - | 98,175 | |||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 2,500 | - | 2,500 | |||||||||||||||||||||
| Net loss | - | - | (708,682 | ) | (708,682 | ) | ||||||||||||||||||||||
| Balance, September 30, 2021 | 37,500 | $ | 21,703 | 90,396,596 | $ | 90,397 | $ | 163,644,453 | $ | (173,181,441 | ) | $ | (9,424,888 | ) | ||||||||||||||
Nine-months and Three-months Ended September 30, 2020
| Series
B Convertible Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Par | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||
| Shares | Amount | Shares | Value | Capital | Deficit | Deficiency | ||||||||||||||||||||||
| Balance, December 31, 2019 | 37,500 | $ | 21,703 | 417,507 | $ | 418 | $ | 159,042,145 | $ | (166,509,085 | ) | $ | (7,444,819 | ) | ||||||||||||||
| Issuances of common stock | 2,951,878 | 2,952 | 937,166 | 940,118 | ||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2020 | - | - | (946,718 | ) | (946,718 | ) | ||||||||||||||||||||||
| Balance at March 31, 2020 | 37,500 | $ | 21,703 | 3,369,385 | $ | 3,370 | $ | 159,979,311 | $ | (167,455,803 | $ | (7,451,419 | ) | |||||||||||||||
| Issuances of common stock | 18,861,353 | 18,861 | 311,947 | 330,808 | ||||||||||||||||||||||||
| Note discounts | - | - | - | 90,000 | 90,000 | |||||||||||||||||||||||
| Net loss | - | - | (816,137 | ) | (816,137 | ) | ||||||||||||||||||||||
| Balance, June 30, 2020 | 37,500 | $ | 21,703 | 22,230,738 | $ | 22,231 | $ | 160,381,258 | $ | (168,271,940 | ) | $ | (7,846,748 | ) | ||||||||||||||
| Issuances of common stock (after issuance and full conversion of Series H Preferred Stock) | 25,377,426 | 25,377 | 1,664,307 | 1,689,684 | ||||||||||||||||||||||||
| Note payable conversions | 1,355,080 | 1,355 | 9,379 | 10,734 | ||||||||||||||||||||||||
| Option grants | - | - | 337,500 | 337,500 | ||||||||||||||||||||||||
| Warrant exercises | 8,820,956 | 8,821 | (8,821 | ) | ||||||||||||||||||||||||
| Net loss | - | - | (1,479,355 | ) | (1,479,355 | ) | ||||||||||||||||||||||
| Balance, September 30, 2020 | 37,500 | $ | 21,703 | 57,784,200 | $ | 57,784 | $ | 162,383,623 | $ | (169,751,295 | ) | $ | (7,288,185 | ) | ||||||||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
| 6 |
RESPIRERX PHARMACEUTICALS INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine-months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (2,371,145 | ) | $ | (3,242,210 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of original issue discount | 40,795 | 21,332 | ||||||
| Amortization of capitalized note costs and debt discounts | 300,510 | 280,183 | ||||||
| Stock-based compensation included in - | ||||||||
| General and administrative expenses | 28,000 | 315,000 | ||||||
| Research and development expenses | 26,250 | 22,500 | ||||||
| Gain on warrant exchange | (1,099 | ) | ||||||
| Loss on extinguishment of debt | 389,902 | |||||||
| Foreign currency transaction (gain) loss | (70,220 | ) | (7,151 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) decrease in - | ||||||||
| Prepaid expenses | (29,796 | ) | (27,385 | ) | ||||
| Deferred financing cost | (167,976 | ) | ||||||
| Increase (decrease) in - | ||||||||
| Accounts payable and accrued expenses | 470,280 | 1,062,163 | ||||||
| Accrued compensation and related expenses | 867,950 | 700,540 | ||||||
| Accrued interest payable | 105,829 | 134,402 | ||||||
| Net cash used in operating activities | (800,622 | ) | (350,724 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from convertible note borrowings | 754,500 | 274,750 | ||||||
| Capitalized note costs and original issue discount | (109,950 | ) | ||||||
| Proceeds from common stock issuance | 117,299 | |||||||
| Proceeds from issuance of note payable to officer | 59,500 | |||||||
| Officer advance | 7,130 | |||||||
| Repayment of short-term notes payable | (35,078 | ) | ||||||
| Borrowings on short-term notes payable, net of repayments | 66,452 | |||||||
| Net cash provided by financing activities | 800,353 | 334,250 | ||||||
| Cash and cash equivalents: | ||||||||
| Net increase/(decrease) | (269 | ) | (16,474 | ) | ||||
| Balance at beginning of period | 825 | 16,690 | ||||||
| Balance at end of period | $ | 556 | $ | 216 | ||||
(Continued)
| 7 |
RESPIRERX PHARMACEUTICALS INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Nine-months
Ended | ||||||||
| 2021 | 2020 | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for - | ||||||||
| Interest | $ | 6,653 | $ | 1,498 | ||||
| Income taxes | $ | $ | ||||||
| Non-cash financing activities: | ||||||||
Deferred offering costs applied against equity proceeds | $ | 52,609 | $ | |||||
| Conversion of accounts payable to long-term liabilities | $ | 332,000 | $ | |||||
| Commitment shares issued with debt financing | $ | 58,500 | $ | |||||
| Shares issued with conversion of debt | $ | 235,885 | $ | |||||
| Debt discounts established for convertible debt | $ | 580,725 | $ | 90,000 | ||||
| Issuance of common stock for accrued compensation and benefits | $ | $ | 306,000 | |||||
| Increase in principal amount of convertible note | $ | 5,000 | $ | |||||
| Issuance of warrants as deemed dividend associated with most-favored nation provisions of convertible notes | $ | 378,042 | $ | |||||
| Debt and accrued interest converted to common stock | $ | 4,000 | $ | 950,241 | ||||
| Cashless warrant exercises | $ | 900 | $ | 15,638 | ||||
See accompanying notes to condensed consolidated financial statements (unaudited).
| 8 |
RESPIRERX PHARMACEUTICALS INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 (as amended, the “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. In August 2012, RespireRx acquired Pier Pharmaceuticals, Inc. (“Pier”), which is now a wholly owned subsidiary. Pier was a clinical stage biopharmaceutical company developing a pharmacologic treatment for obstructive sleep apnea (“OSA”) and had been engaged in research and clinical development activities which activities are now in RespireRx.
Basis of Presentation
The condensed consolidated financial statements are of RespireRx and its wholly-owned subsidiary, Pier (collectively referred to herein as the “Company,” “we” or “our,” unless the context indicates otherwise). The condensed consolidated financial statements of the Company at September 30, 2021 and for the three-months and nine-months ended September 30, 2021 and 2020, are unaudited. In the opinion of management, all adjustments (including normal recurring adjustments) have been made that are necessary to present fairly the condensed consolidated financial position of the Company, the condensed results of operations, condensed changes in stockholders’ deficiency and condensed changes in cash flows as of and for the periods ended September 30, 2021and 2020. Condensed consolidated operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full fiscal year. The consolidated balance sheet at December 31, 2020 has been derived from the Company’s audited consolidated financial statements at such date. For comparative purposes, certain 2021 and 2020 amounts, including, but not limited to, share and per share amounts, par value and additional paid-in capital have been adjusted to a post-reverse stock split basis which occurred on January 5, 2021.
The condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and other information included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC on April 15, 2021 (“2020 Form 10-K”).
2. Business
The mission of the Company is to develop innovative and revolutionary treatments to combat disorders caused by disruption of neuronal signaling. We are developing treatment options that address conditions that affect millions of people, but for which there are limited or poor treatment options, including obstructive sleep apnea (“OSA”), attention deficit hyperactivity disorder (“ADHD”), epilepsy, chronic pain, including inflammatory and neuropathic pain, recovery from spinal cord injury (“SCI”), as well as other areas of interest based on results of preclinical and clinical studies to date.
RespireRx is developing a pipeline of new drug products based on our broad patent portfolios across two distinct drug platforms:
| (i) | our pharmaceutical cannabinoids platform (which we refer to as ResolutionRx) is developing compounds that target the body’s endocannabinoid system, and in particular, the re-purposing of dronabinol, an endocannabinoid CB1 and CB2 receptor agonist, for the treatment of OSA. Dronabinol is already approved by the FDA for other indications. | |
| (ii) | our neuromodulators platform (which we refer to as EndeavourRx) is made up of two programs: (a) our AMPAkines program, which is developing proprietary compounds that are positive allosteric modulators (“PAMs”) of AMPA-type glutamate receptors to promote neuronal function and (b) our GABAkines program, which is developing proprietary compounds that are PAMs of GABAA receptors, and which was established pursuant to our entry into a patent license agreement (the “UWMRF Patent License Agreement”) with the University of Wisconsin-Milwaukee Research Foundation, Inc., an affiliate of the University of Wisconsin-Milwaukee (“UWMRF”). |
Financing our Platforms
Our major challenge has been to raise substantial equity or equity-linked financing to support research and development plans for our pharmaceutical cannabinoid and neuromodulator platforms, while minimizing the dilutive effect to pre-existing stockholders. At present, we believe that we are hindered primarily by our public corporate structure, our common stock not being listed on a national exchange, and low market capitalization as a result of our low stock price. Our shares are quoted on the OTCQB, the OTC Market’s venture market.
For this reason, the Company has implemented an internal restructuring plan through which our two drug platforms have been reorganized into separate business units and may in the future be organized into subsidiaries of RespireRx. We believe that by creating one or more subsidiaries to further the aims of ResolutionRx and EndeavourRx, it may be possible, through separate finance channels, to optimize the asset values of each. We are also planning to commence, assuming the SEC qualifies the offering, a securities offering pursuant to Regulation A under the Securities Act. See Note 9. Subsequent Events – Filing of Form 1-A for further information.
| 9 |
Going Concern
The Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses of $708,682 and $2,371,145 for the three-months and nine-months ended September 30, 2021, respectively, and $4,301,211 for the fiscal year ended December 31, 2020, as well as negative operating cash flows of $800,622 for the nine-months ended September 30, 2021 and $513,001 for the fiscal year ended December 31, 2020. The Company also had a stockholders’ deficiency of $9,424,888 at September 30, 2021 and expects to continue to incur net losses and negative operating cash flows for the foreseeable future. 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, 2020, 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 assurance that the Company will be able to secure additional financing in the amounts necessary to fully fund its operating and debt service requirements. If the Company is unable to access sufficient cash resources, the Company may be forced to discontinue its operations entirely and liquidate.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements are prepared in accordance with 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.
Reverse Stock Split on January 5, 2021
On January 5, 2021, the Company effected a ten to one reverse-stock split of its common stock. Every ten shares of the “old” common stock was exchanged for one “new” share of common stock rounded down to the nearest whole share with any fractional shares of common stock paid to the stockholder in cash. Option and warrant issuances prior to January 5, 2021 have also been proportionately adjusted by dividing the number of shares into which such options and warrants may exercise by ten and multiplying the exercise price by ten. The effect of the reverse-stock split has been reflected retroactively in the Company’s consolidated financial statements as of December 31, 2020 and any interim periods in 2020. Certain amount with respect to 2019 that appear in these condensed consolidated financial statements have also been reflected on a post reverse-stock split basis.
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Concentration 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.
Value of Financial Instruments
The authoritative guidance with respect to value of financial instruments established a value hierarchy that prioritizes the inputs to valuation techniques used to measure value into three levels and requires that assets and liabilities carried at 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 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 value hierarchy within which each value measurement falls in its entirety, based on the lowest level input that is significant to the 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, and accounts payable and accrued expenses) are considered by the Company to be representative of the respective values of these instruments due to the short-term nature of those instruments. With respect to the note payable to SY Corporation Co., Ltd. (“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 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 and accounting 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 equity financings are netted against the proceeds.
Debt Issuance Costs
The Company presents debt issuance costs related to debt obligations in its consolidated balance sheet as a direct deduction from the carrying amount of that debt obligation, consistent with the presentation for debt discounts.
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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, commitment shares of common stock or a beneficial conversion feature, the convertible notes and equity or equity-linked securities are evaluated to determine if there are embedded derivatives to be identified, bifurcated and valued in connection with and at the time of such financing.
Extinguishment of Debt and Settlement of Liabilities
The Company accounts for the extinguishment of debt and settlement of liabilities by comparing the carrying value of the debt or liability to the value of consideration paid or assets given up and recognizing a loss or gain in the condensed consolidated statement of operations in the amount of the difference in the period in which such transaction occurs. See Note 4 for additional information.
Prepaid Insurance
Prepaid insurance represents the premiums paid in March 2021 for directors and officers insurance and other insurance in April 2021. The amounts of prepaid insurance amortizable in the ensuing twelve-month period are recorded as prepaid insurance in the Company’s consolidated balance sheet at each reporting date and then amortized to the Company’s consolidated statement of operations for each reporting period.
The Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Board members, consultants and vendors for services rendered. Such issuances vest and expire according to terms established at the issuance date of each grant.
The Company accounts for stock-based payments to officers, directors, outside consultants and vendors by measuring the cost of services provided 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 and stock options, 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.
The value of stock options granted as stock-based payments is determined utilizing the Black-Scholes option-pricing model, and is affected by several variables, the most significant of which are the life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common stock over the term of the equity award. Estimated volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The fair market value of common stock is determined by reference to the quoted market price of the Company’s common stock.
Stock and stock option grants and warrants issued to non-employees as compensation for services to be provided to the Company is 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.
Stock and stock option grants and warrants issued to non-employees for services already rendered represent settlement of debt or liabilities and are accounted for by valuing both the amount of the amount of debt or liabilities settled and the value of the stock, stock option or warrant grants and recording a gain or loss as appropriate.
Stock and stock option grants and warrants issued to officers, directors, employees and affiliates in settlement of accrued compensation or other amounts payable are recorded at the amount of the liability settled. Therefore, there are no gains or losses recorded with respect to such settlements.
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There were stock or stock option grants during the nine-months ended September 30, 2021.
The Company recognizes the amortized value of stock-based payments in general and administrative costs and in research and development costs, as appropriate, in the Company’s condensed consolidated statements of operations. The Company issues new shares of common stock to satisfy stock option and warrant exercises. There were stock options exercised during the nine-months ended September 30, 2021 and 2020, respectively.
There were warrants to purchase shares of common stock issued as compensation or for services during the nine-months ended September 30, 2021 and during the nine-months ended September 30, 2020. Warrants, if issued for services, are typically issued to placement agents or brokers for fund raising services. In addition warrants to purchase shares of common stock were issued to lenders during the nine-months ended September 30, 2021 with respect to or in association with the issuance of convertible notes to such lenders. Warrant are not issued from any of the Company’s stock and option plans, from which options issued to non-employees for services are typically issued.
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 September 30, 2021, 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 September 30, 2021, the Company had not recorded any liability for uncertain tax positions. In subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income tax expense.
Foreign Currency Transactions
The note payable to SY Corporation, which is denominated in a foreign currency (the South Korean Won), is translated into the Company’s functional currency (the United States Dollar) at the exchange rate on the balance sheet date. The foreign currency exchange gain or loss resulting from translation is recognized in the related condensed consolidated statements of operations.
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Research and Development
Research and development costs include compensation paid to management directing the Company’s research and development activities, including but not limited to compensation paid to our Chief Scientific Officer who is also our Executive Chairman, 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.
License Agreements
Obligations incurred with respect to mandatory payments provided for in license agreements are recognized ratably over the appropriate term, as specified in the underlying license agreement, and are recorded as liabilities in the Company’s condensed consolidated balance sheet, with a corresponding charge to research and development costs in the Company’s condensed consolidated statement of operations. Obligations incurred with respect to milestone payments provided for in license agreements are recognized when it is probable that such milestone will be reached and are recorded as liabilities in the Company’s condensed consolidated balance sheet, with a corresponding charge to research and development expenses in the Company’s condensed consolidated statement of operations.
Patent Costs
Due to the significant uncertainty associated with the successful development of one or more commercially viable products based on the Company’s research efforts and any related patent applications, all patent costs, including patent-related legal and filing fees, are expensed as incurred and recorded as general and administrative expenses.
The Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) attributable to common stockholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants and options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Net loss attributable to common stockholders consists of net loss, as adjusted for actual and deemed preferred stock dividends declared, amortized or accumulated.
Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted loss per common share is the same for all periods presented because all warrants and stock options outstanding are anti-dilutive.
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Series B convertible preferred stock | 1 | 1 | ||||||
| Convertible notes payable | 40,542,856 | 4,723,986 | ||||||
| Common stock warrants | 59,505,140 | 28,809,358 | ||||||
| Common stock options | 7,111,924 | 7,166,094 | ||||||
| Total | 107,159,921 | 40,699,439 | ||||||
Reclassifications
Certain comparative figures in 2020 have been reclassified to conform to the current quarter’s presentation. These reclassifications were immaterial, both individually and in the aggregate.
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Recent Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The subtitle is Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This Accounting Standard Update (“ASU”) addresses complex financial instruments that have characteristics of both debt and equity. The application of this ASU would reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models would result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The Company has historically issued complex financial instruments and has considered whether embedded conversion features have existed within those contracts or whether derivatives would appropriately be bifurcated. To date, no such bifurcation has been necessary. However, it is possible that this ASU may have a substantial impact on the Company’s financial statements. Management is evaluating the potential impact. This ASU becomes effective for fiscal years beginning after December 15, 2023.
In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Topic 321, Topic 323, Equity Method and Joint Ventures, and Topic 815, Derivatives and Hedging which represents an amendment clarifying the interaction between accounting standards related to equity securities, equity method investments and certain derivatives. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those years. Management has evaluated the guidance and determined that the implementation of such guidance does not have a material impact on our condensed consolidated financial statements.
4. Notes Payable
Convertible Notes Payable
On April 1, 2021, May 3, 2021, May 10, 2021, June 30, 2021 and August 31, 2021, the Company closed on financings, pursuant to which, five convertible notes were issued to four separate investors, due in each case, one year from the effective date (which for the each closing was March 31, 2021, April 30, 2021, May 10, 2021, June 29, 2021 and August 31, 2021, respectively), with maturity amounts of $112,500, $150,000, $150,000, $115,000 and $115,000, respectively. In addition, the noteholders received as consideration, warrants to purchase 2,400,000, 3,200,000, 3,200,000, 2,453,333 and 5,750,000 shares of common stock, respectively, each exercisable for a period of five years at an exercise price of $0.02 per share. The August 31, 2021 issuance triggered the most-favored nation provisions of four notes already outstanding, resulting in the issuance of 15,121,667 additional warrants on September 7, 2021. As a result of the note issuances, the Company received net proceeds of $96,750, $123,400, $123,400, $100,000 and $103,500 respectively, for an aggregate of $547,050. The difference between the maturity amounts and the net proceeds were due to original issue discounts, in four cases, investor legal fees and in two cases, broker fees. The five notes are convertible at a fixed price of $0.02 per share and bear interest at 10% per year which interest is guaranteed regardless of prepayment. The Company has the right to prepay the notes during the first six months subject to prepayment premiums that range from 0% to 15% (100% to 115% of the maturity amount plus accrued interest and any default interest and similar costs).
The Company periodically issues convertible notes with similar characteristics. As described in the table below, as of September 30, 2021, there were nine such notes outstanding (including the convertible notes described in the paragraph above), two of which were satisfied in full by conversion of both principal and interest and one of which was satisfied in part, principal only, during that period. These notes all have or had a fixed conversion price of $0.02 per share of common stock, subject to adjustment in certain circumstances. All notes but one had an annual interest rate of 10% which was guaranteed in full. One note had an annual interest rate of 8%. The convertible notes had an original issue discount (“OID”), debt issuance costs (“DIC”) that were capitalized by the Company, a warrant (“WT”) or commitment shares (“CS”) and in three cases a beneficial conversion feature (“BCF”). The OID, CN, WTs, CSs and BCF allocated values are amortized over the life of the notes to interest expense. All notes mature or matured nine to fifteen months from their issuance date. All notes were prepayable by the Company during the first six months, subject to prepayment premiums that range from 100% to 115% of the maturity amount plus accrued interest. If not earlier paid, the notes were convertible by the holder into the Company’s common stock. Two of the notes were paid before maturity.
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The table below summarizes the convertible notes with similar characteristics outstanding as of September 30, 2021 and the repayments by conversion during the nine-months ended September 30, 2021:
| Inception Date | Maturity date | Original Principal Amount | Interest rate | Original aggregate DIC, OID, Wts, CS and BCF | Cumulative amortization of DIC, OID, Wts, CS and BCF | Accrued coupon interest | Repayment
by conversion | Balance
sheet carrying amount at September 30, 2021 inclusive of accrued interest | ||||||||||||||||||||||
| July 2, 2020 | April 2, 2021 | $ | 137,500 | 10.00 | % | $ | (44,423 | ) | $ | 44,423 | $ | 6,875 | $ | (144,375 | ) | $ | ||||||||||||||
| July 28, 2020 | July 28, 2021 | 45,000 | 8.00 | % | (5,000 | ) | 2,743 | (25,000 | ) | 17,743 | ||||||||||||||||||||
| July 30, 2020 | October 30, 2021 | 75,000 | 10.00 | % | (27,778 | ) | 27,778 | 4,136 | (79,136 | ) | ||||||||||||||||||||
| February 17, 2021 | November 17, 2021 | 112,000 | 10.00 | % | (112,000 | ) | 91,608 | 9,161 | 100,769 | |||||||||||||||||||||
| April 1, 2021 | March 31, 2022 | 112,500 | 10.00 | % | (112,500 | ) | 56,404 | 5,640 | 62,044 | |||||||||||||||||||||
| May 3, 2021 | April 30, 2022 | 150,000 | 10.00 | % | (150,000 | ) | 62,877 | 6,288 | 69,165 | |||||||||||||||||||||
| May 10, 2021 | May 10, 2022 | 150,000 | 10.00 | % | (150,000 | ) | 58,767 | 5,877 | 64,644 | |||||||||||||||||||||
| June 30, 2021 | June 29, 2022 | 115,000 | 10.00 | % | (115,000 | ) | 29,301 | 2,930 | 32,231 | |||||||||||||||||||||
| August 31, 2021 | August 31, 2022 | 115,000 | 10.00 | % | (109,675 | ) | 9,015 | 945 | 15,285 | |||||||||||||||||||||
| Total | $ | 1,012,000 | $ | (826,376 | ) | $ | 380,173 | $ | 44,595 | $ | (248,511 | ) | $ | 361,881 | ||||||||||||||||
In addition to what appears in the table above, there is outstanding accrued interest of $2,747 from a prior floating rate convertible note that has not been paid in cash or by conversion as of September 30, 2021.
On July 27, 2021, the maturity date of the note scheduled to mature on July 28, 2021, was extended to December 1, 2021 and the original and remaining principal amount of the note was increased by $5,000 from $40,000 to $45,000 and from $15,000 to $20,000 respectively, with interest on the incremental increase in principal amount accruing from the note inception date. Since the Company did not receive any cash proceeds from the increase in the principal amount of the note, the increase was recorded as a debt discount to be amortized to interest expense through the maturity date.
In addition to the convertible notes with similar characteristics described above, on December 31, 2018 and January 2, 2019, the Company issued convertible notes to a single investor totaling $35,000 of maturity amount with accrued interest of $10,399 as of September 30, 2021. The number of shares of common stock (or preferred stock) into which these notes may convert is not determinable. The warrants to purchase 19,000 shares of common stock issued in connection with the sale of these notes and other convertible notes issued December 2018 and March 2019 are exercisable at a fixed price of $15.00 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 and expire on December 30, 2023.
Other convertible notes were also sold to investors in 2014 and 2015 (“Original Convertible Notes”), which aggregated a total of $579,500, and had a fixed interest rate of 10% per annum. 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 shares of common stock issued in connection with the sale of the Original Convertible Notes have either been exchanged as part of note and warrant exchange agreements executed in April and May of 2016 or expired on September 15, 2016.
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The remaining outstanding Original Convertible Notes (including those for which default notices have been received) consist of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Principal amount of notes payable | $ | 75,000 | $ | 75,000 | ||||
| Accrued interest payable | 74,763 | 64,357 | ||||||
| $ | 149,256 | $ | 139,357 | |||||
As of September 30, 2021, principal and accrued interest on the Original Convertible Note that is subject to a default notice accrues annual interest at 12% instead of 10%, totaled $52,337, of which $27,337 was accrued interest. As of December 31, 2020, principal and accrued interest on Original Convertible Notes subject to default notices totaled $48,700 of which $23,700 was accrued interest.
As of September 30, 2021 all of the outstanding Original Convertible Notes, inclusive of accrued interest, were convertible into an aggregate of 1,317 shares of the Company’s common stock. 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 Original Convertible 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 as of that date) from and executed a secured note payable to SY Corporation Co., Ltd., (“SY Corporation”). The note accrues simple interest at the rate of 12% per annum and had a maturity date of June 25, 2013. The Company has not made any payments on the promissory note. At June 30, 2013 and subsequently, the promissory note was outstanding and in default, although SY Corporation has not issued a notice of default or a demand for repayment. Management believes that SY Corporation is in default of its obligations under its January 2012 license agreement, as amended, with the Company, but the Company has not yet issued a notice of default. The Company has in the past made several efforts towards a comprehensive resolution of the aforementioned matters involving SY Corporation. During the nine-months ended September 30, 2021, there were no further communications between the Company and SY Corporation.
The promissory note is secured by collateral that represents a lien on certain patents owned by the Company, dating back to January, August and September 2007, 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 that the Company is no longer developing and where patent rights date back to January, August and September 2007. The security interest does not extend to the Company’s patents for its low impact ampakine compounds, such as CX717, CX1739 and CX1942 or certain related method of use patents.
The note payable to SY Corporation consists of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Principal amount of note payable | $ | 399,774 | $ | 399,774 | ||||
| Accrued interest payable | 447,266 | 411,384 | ||||||
| Foreign currency transaction adjustment | (16,838 | ) | 53,393 | |||||
| $ | 830,202 | $ | 864,551 | |||||
Interest expense with respect to this promissory note was $35,881 and $36,013 for the nine-months ended September 30, 2021 and 2020, respectively, and $12,092 for the three-months ended September 30, 2021 and 2020.
Notes Payable to Officers and Former Officers
The following amounts were charged to interest expense with respect to notes payable to Dr. Arnold S. Lippa: $3,096 and $2,848 for the three-months ended September 30, 2021 and 2020, respectively, and $ 9,193 and $8,481 for the nine-months ended September 30, 2021 and 2020, respectively.
The following amounts were charged to interest expense with respect to notes payable to Dr. James S. Manuso: $4,702 and $4,274 for the three-months ended September 30, 2021 and 2020, respectively, and $13,954 and $12,714 for the nine-months ended September 30, 2021 and 2020, respectively.
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Other Short-Term Notes Payable
Other short-term notes payable at September 30, 2021 and December 31, 2020 consisted of premium financing agreements with respect to various insurance policies. At September 30, 2021, a premium financing agreement was payable in the initial amount of $81,672 (after payment of a deposit of $20,347), with interest at 11% per annum, in eight monthly installments of $10,635. In addition, there is $9,238 of short-term financing of office and clinical trials insurance premiums. At September 30, 2021 and December 31, 2020, the aggregate amount of the short-term notes payable was $35,982 and $4,608 respectively.
5. Settlement and Payment Agreements
On February 21, 2020, Sharp Clinical Services, Inc. (“Sharp”), a vendor of the Company, filed a complaint against the Company in the Superior Court of New Jersey Law Division, Bergen County related to a December 16, 2019 demand for payment of past due invoices inclusive of late fees totaling $103,890 of which $3,631 related to late fees, seeking $100,259 plus 1.5% interest per month on outstanding unpaid invoices. On May 29, 2020, a default was entered against the Company, and on September 4, 2020, a final judgment by default was entered against the Company in the amount of $104,217. On March 3, 2021, we executed a settlement agreement with Sharp (the “Sharp Settlement Agreement”), and on March 9, 2021, Sharp requested of the Bergen (NJ) County Sheriff, the return of the Writ of Execution which resulted in a release of the lien in favor of Sharp. The Sharp Settlement Agreement calls for a payment schedule of ten $10,000 payments due on April 1, 2021 and every other month thereafter, and permitted early settlement at $75,000 if the Company had paid Sharp that lower total by August 1, 2021, but the Company did not pay Sharp that lower amount by that date. The Company has recorded a liability to Sharp of $63,859 as of September 30, 2021 after payments totaling $30,000 pursuant to the Sharp Settlement Agreement.
By letter dated February 5, 2016, the Company received a demand from a law firm representing Salamandra, LLC (“Salamandra”) alleging an amount due and owing for unpaid services rendered. On January 18, 2017, following an arbitration proceeding, an arbitrator awarded Salamandra the full amount sought in arbitration of $146,082. Additionally, the arbitrator granted Salamandra attorneys’ fees and costs of $47,937. All such amounts have been accrued as of September 30, 2021 and December 31, 2020, including accrued interest at 4.5% annually from February 26, 2018, the date of the judgment, through September 30, 2021, totaling $29,897. The Company had previously entered into a settlement agreement with Salamandra that is no longer in effect. The Company has approached Salamandra seeking to negotiate a new settlement agreement. A lien with respect to the amounts owed is in effect.
On February 23, 2021, our bank received two New Jersey Superior Court Levies totaling $320,911 related to amounts owed to Sharp and Salamandra which amounts were not in dispute. The bank debited our accounts and restricted access to those accounts pursuant to the liens placed on the accounts. Our accounts were debited for $1,559 on February 23, 2021, which represented all of the cash in our accounts on that date.
On April 29, 2021, the Company entered into a payment and settlement agreement with the University of California Innovation and Entrepreneurship, pursuant to which it agreed to a payment schedule that is reflected in accounts payable and accrued expenses in the Company’s condensed consolidated financial statements. The total amount due is $234,657. The agreed payment schedule is for the Company to pay $10,000 on each of July 1, 2021, September 1, 2021, November 1, 2021, January 1, 2022 and March 31, 2022. If the Company pays an aggregate of $175,000 on or before March 31, 2022, the amounts will be considered paid in full with no further amounts due. If an aggregate of $175,000 has not been paid by March 31, 2022, the remaining unpaid amount up to an aggregate of the original amount of $234,657 would be due and payable. The payments due on July 1, 2021 and September 1, 2021 were timely paid.
On September 14, 2021, the Company and DNA Healthlink, Inc. (“DNA Healthlink”) entered into a settlement agreement (the “ DNA Healthlink Settlement Agreement”) regarding $410,000 in unpaid accounts payable owed by the Company to DNA Healthlink (the “DNA Healthlink Settlement Amount”) for services provided by DNA Healthlink to the Company pursuant to an agreement by and between the Company and DNA Healthlink dated October 15, 2014. Under the terms of the DNA Healthlink Settlement Agreement, the Company is obligated to pay to DNA Healthlink the full DNA Healthlink Settlement Amount as follows: twelve monthly payments of $8,000each commencing on November 15, 2021, followed by twelve monthly payments of $10,000 each commencing on November 15, 2022, followed by twelve monthly payments of $15,000 each commencing on November 15, 2023, followed by one final payment of $14,000 on November 15, 2024. If, prior to March 14, 2023, the Company receives one or more upfront license fee payments or any other similar fee or fees from one or more strategic partners that aggregate at least fifteen million dollars ($15,000,000.00) (“Upfront Fees”), then the full DNA Healthlink Settlement Amount, less any amounts previously paid, will be accelerated and become due and payable in full within ninety (90) days of receipt of any Upfront Fees. As a result of the DNA Healthlink Settlement Agreement, the Company recorded a gain with respect to vendor settlements of $62,548.
An annual obligation payable to the University of Illinois of $100,000 that was originally due on December 31, 2020 pursuant to the 2014 License Agreement was extended to April 19, 2021 and was paid in full on April 1, 2021.
By email 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 September 30, 2021 and December 31, 2020. See Note 1 for additional information on the Pier transaction.
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 September 30, 2021 and December 31, 2020 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.
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6. Stockholders’ Deficiency
Preferred Stock
RespireRx has authorized a total of shares of preferred stock, par value $ per share. As of September 30, 2021 and December 31, 2020, shares were designated as Series B Convertible Preferred Stock (non-voting, “Series B Preferred Stock”).
Series B Preferred Stock outstanding as of September 30, 2021 and 2020 consisted of shares issued in a May 1991 private placement. The shares of Series B Preferred Stock are convertible into share of common stock. RespireRx may redeem the Series B Preferred Stock for $25,001 at any time upon 30 days prior notice.
Although other series of preferred stock have been designated, no other shares of preferred stock are outstanding. As of September 30, 2021 and December 31, 2020, shares of preferred stock were undesignated and may be issued with such rights and powers as the Board of Directors may designate.
Common Stock
RespireRx has authorized (2 billion) shares of common stock, par value $per share. There are shares of the Company’s common stock outstanding as of September 30, 2021. After reserving for conversions of convertible debt and convertible preferred stock, as well as exercises of common stock purchase options (granted and available for grant within the 2014 and 2015 stock and stock option plans) and warrants and the issuance of Pier contingent shares and before accounting for incremental contract excess reserves, there were shares of the Company’s common stock available for future issuances as of September 30, 2021. After accounting for incremental excess reserves contractually required by the various convertible notes and certain warrants, there were 1,702,729,267 shares of common stock available for future issuances as of September 30, 2021. On May 27, 2021, a holder of a warrant exercised the warrant in part, exercising into 900,000 shares of common stock on a cashless basis, what would have exercised into 1,665,958 shares of common stock on a cash basis. The Company did not receive any cash proceeds from the exercise. No other warrants were exercised during the nine-months ended September 30, 2021. No options were exercised during the nine-months ended September 30, 2021. No warrants or options were exercised after September 30, 2021. See Note 9 for a description of a partial warrant exercise and a conversion of a portion of the principal amount of one convertible note, both occurring on November 8, 2021.
Common Stock Warrants
A summary of warrant activity for the nine-months ended September 30, 2021 is presented below.
| Number
of Shares | Weighted Average Exercise Price | Weighted
Average Remaining Contractual Life (in Years) | ||||||||||
| Warrants outstanding at December 31, 2020 | 28,809,352 | $ | 0.1528 | |||||||||
| Issued | 33,432,841 | 0.0200 | ||||||||||
| Expired | (8,595 | ) | ||||||||||
| Cancelled upon exchange | (1,062,500 | ) | 0.0700 | |||||||||
| Exercised - cashless | (1,665,958 | ) | 0.0200 | |||||||||
| Warrants outstanding at September 30, 2021 | 59,505,140 | $ | 0.0721 | |||||||||
| Warrants exercisable at September 30, 2020 | 28,809,358 | $ | 0.1474 | |||||||||
| Warrants exercisable at September 30, 2021 | 59,505,140 | $ | 0.0721 | |||||||||
The exercise prices of common stock warrants outstanding and exercisable are as follows at September 30, 2021:
| Exercise Price | Warrants Outstanding and Exercisable (Shares) | Expiration
Date | ||||||
| $ | 0.016 | 2,212,500 | ||||||
| $ | 0.020 | 31,386,315 | - | |||||
| $ | 0.039 | 208,227 | ||||||
| $ | 0.047 | 172,341 | ||||||
| $ | 0.070 | 25,377,426 | ||||||
| $ | - | 148,331 | - | |||||
| 59,505,140 | ||||||||
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Based on a value of $0.0230 per share on September 30, 2021, there were 33,598,815 exercisable in-the-money common stock warrants as of September 30, 2021.
A summary of warrant activity for the nine months ended September 30, 2020 is presented below.
| Number
of Shares | Weighted Average Exercise Price | Weighted
Average Remaining Contractual Life (in Years) | ||||||||||
| Warrants outstanding at December 31, 2019 | 219,104 | $ | 18.7109 | |||||||||
| Issued including issuances as a result of anti-dilution protections | 39,585,039 | - | ||||||||||
| Expired | (25,435 | ) | (59.9808 | ) | - | |||||||
| Exercised | (10,969,350 | ) | (0.0161 | ) | - | |||||||
| Warrants outstanding and exercisable at September 30, 2020 | 28,809,358 | $ | 0.1474 | |||||||||
The exercise prices of common stock warrants outstanding and exercisable at September 30, 2020 ranged from $0.0161 to $79.30 and these warrants were exercisable into an aggregate of 28,809,358 shares, which warrants have expired or will expire as applicable, between February 28, 2021 and October 22, 2024.
The exercise prices of common stock warrants outstanding and exercisable at September 30, 2020 ranged from $0.016 to $79.30 and these warrants were exercisable into an aggregate of 28,809,358 shares, which warrants have expired or will expire, as applicable, between February 28, 2021 and October 22, 2024.
Based on a value of $0.054 per share on September 30, 2020, there were 28,652,426 exercisable in-the-money common stock warrants as of that date.
Stock Options
On March 18, 2014, the stockholders of RespireRx holding a majority of the votes to be cast on the issue approved the adoption of RespireRx’s 2014 Equity, Equity-Linked and Equity Derivative Incentive Plan (the “2014 Plan”), which had been previously adopted by the Board of Directors, subject to stockholder approval. The Plan permits the grant of options and restricted 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 (as amended, the “2015 Plan”). As of September 30, 2021, there are shares available in the 2015 Plan. On July 29, 2021, the Company amended the 2015 Plan to increase the number of shares by an additional to shares. The Company has not and does not intend to present the 2015 Plan to stockholders for approval.
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.
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in Years) | ||||||||||
| Options outstanding at December 31, 2020 | 7,165,215 | $ | 1.96 | |||||||||
| Expired | (53,291 | ) | 73.78 | - | ||||||||
| Options outstanding at September 30, 2021 | 7,111,924 | $ | 1.43 | |||||||||
| Options exercisable at September 30, 2021 | 7,111,924 | $ | 1.43 | |||||||||
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| Exercise Price | Options Outstanding (Shares) | Options Exercisable (Shares) | Expiration Date | |||||||||
| $ | 0.0540 | 1,700,000 | 1,700,000 | |||||||||
| $ | 0.072 | 5,050,000 | 5,050,000 | |||||||||
| $ | -$ | 361,924 | 361,924 | - | ||||||||
| 7,111,924 | 7,111,924 | |||||||||||
There was no deferred compensation expense for the outstanding and unvested stock options at September 30, 2021.
Based on a fair value of $0.023 per share on September 30, 2021, there were no exercisable in-the-money common stock options as of that date.
Reserved and Unreserved Shares of Common Stock
As of September 30, 2021, there are shares of common stock authorized, of which are issued and outstanding. As of September 30, 2021, there are outstanding options to purchase shares of common stock and and shares available for issuance under the 2014 Plan and 2015 Plan, respectively. There are 649 Pier contingent shares of common stock that may be issued under certain circumstances. As of September 30, 2021, there are shares issuable upon conversion of convertible notes. As of June 30, 2021, there are 59,505,150 shares that may be issued upon exercise of outstanding warrants. As of September 30, 2021, the Series B Preferred Stock may convert into 1 share of common stock. Therefore, the Company is reserving shares of common stock for future issuances with respect to conversions and exercises as well as for the Pier contingent shares. In addition, certain convertible notes and related warrants impose an additional contractual reserve requirement, above the number of shares into which such convertible notes and related warrants may convert or exercise respectively. Although the Company does not anticipate having to issue such shares, such incremental additional contractual reserves total shares of common stock.
7. Related Party Transactions
Dr. Arnold S. Lippa and Jeff E. Margolis, officers and directors of RespireRx since March 22, 2013, have indirect ownership and managing membership interests in Aurora Capital LLC (“Aurora”) through interests held in its members, and Jeff E. Margolis is also an officer of Aurora. Aurora was a boutique investment banking firm specializing in the life sciences sector that ceased its securities related activities in April 2021. On May 5, 2021, Aurora filed to withdraw its membership with FINRA and its registration with the SEC which withdrawal became effective in July 2021. Although Aurora has not provided services to RespireRx during the nine-months ended September 30, 2021 or the fiscal year ended December 31, 2020, Aurora had previously provided services to the Company and there remains $96,000 owed to Aurora by RespireRx which amount is included in accounts payable and accrued expenses as of September 30, 2021.
A description of advances and notes payable to officers is provided at Note 4.
8. Commitments and Contingencies
Pending or Threatened Legal Action and Claims
The Company is periodically the subject of various pending and threatened legal actions and claims. In the opinion of management of the Company, adequate provision has been made in the Company’s condensed consolidated financial statements as of September 30, 2021 and 2020 with respect to such matters. See Note 5 for additional items and details.
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Significant Agreements and Contracts
The Company entered into a consulting contract with David Dickason effective September 15, 2020 pursuant to which Mr. Dickason was appointed and serves as the Company’s Senior Vice President of Pre-Clinical Product Development on an at-will basis at the rate of $250 per hour. The Company recorded but did not pay cash compensation expense pursuant to this agreement of $for the nine-months ended September 30, 2021.
See Note 5 for details of other agreements and contracts.
Employment Agreements
Timothy L. Jones, Arnold S. Lippa and Jeff E. Margolis have similar employment agreements. Mr. Jones was appointed as RespireRx’s President and Chief Executive Officer on May 6, 2020. Dr. Lippa is RespireRx’s Chief Scientific Officer and Executive Chairman and Mr. Margolis is the Company’s Senior Vice President, Chief Financial Officer, Treasurer and Secretary. Dr. Lippa’s and Mr. Margolis’ employment agreements became effective on August 18, 2015. All three agreements are subject to automatic annual extensions on September 30th of each year beginning with the initial termination date if not earlier terminated, subject to notice in accordance with the terms of the agreements. Mr. Jones’ initial termination date is September 30, 2023 and Dr. Lippa’s and Mr. Margolis’ agreements are in their automatic extension periods.
The table below summarized the current cash commitments to each individual through the next September 30th renewal date and in the case of Mr. Jones, through September 30, 2023.
| Contract year ending | Contract year ending | |||||||||||||||||||||||||||||||
| September 30, 2022 | September 30, 2023 | |||||||||||||||||||||||||||||||
| Twelve months | Twelve months | |||||||||||||||||||||||||||||||
| Base | Guaranteed | Base | Guaranteed | |||||||||||||||||||||||||||||
| Salary | Benefits | Bonus | Total | Salary | Benefits | Bonus | Total | |||||||||||||||||||||||||
| Timothy L. Jones | $ | 265,500 | $ | 39,600 | $ | 300,000 | $ | 605,100 | $ | 300,000 | $ | 39,600 | $ | 300,000 | $ | 639,600 | ||||||||||||||||
| Arnold S. Lippa | 300,000 | 39,600 | 339,600 | |||||||||||||||||||||||||||||
| Jeff E. Margolis | 300,000 | 21,600 | 321,600 | |||||||||||||||||||||||||||||
| $ | 865,500 | $ | 100,800 | $ | 300,000 | $ | 1,266,300 | $ | 300,000 | $ | 39,600 | $ | 300,000 | $ | 639,600 | |||||||||||||||||
Under certain circumstances base salaries may be contractually increased or the executives may become eligible for additional benefits and base salaries may be increased at the discretion of the Board of Directors. All executives are eligible for stock and stock option and similar grants at the discretion of the Board or Directors.
The payment of certain amounts reflected in the table above have been voluntarily deferred indefinitely and payments against accrued compensation may be made based upon the Company’s ability to make such payments.
The second amendment to the employment agreement of Timothy Jones, the Company’s President and Chief Executive Officer (the “Employment Agreement”) became effective on September 27, 2021 (“Amendment No. 2”). Mr. Jones is also a director of the Company.
Amendment No. 2 reduces Mr. Jones’ annual Base Salary from $300,000 to $231,000 from October 1, 2021 through March 31, 2022 and restores the annual Base Salary to $300,000 on April 1, 2022. Each month commencing on October 1, 2021 and ending on the last day of the month and on a monthly accumulating basis thereafter until March 31, 2022, during which the Company raises at least $200,000 up to an aggregate amount equal to or greater than $1,200,000, the Base Salary must be paid in cash at the rate of $19,250 per month. In addition, the $150,000 guaranteed bonus that would have been due on September 30, 2021 was adjusted to $0 in accordance with the terms of Amendment No. 2.
After March 31, 2022, until such time as at least $2,500,000 has been raised, Mr. Jones’ salary may be accrued and remain unpaid, at the discretion of the Board. In the event that a payment due in accordance with the Amendment No. 2 payment schedule, is not timely paid, and is not cured by payment during the subsequent month inclusive of such subsequent month’s payment due, Mr. Jones’s Base Salary will revert back to $300,000 per year, the payment schedule becomes null and void and the adjustment to a $0 Guaranteed Bonus will also be deemed null and void and a payment of $150,000 will become due and payable as of the same date that the Base Salary is adjusted to $300,000.
If $10,000,000 is raised by April 30, 2022, Mr. Jones’ annual Base Salary will be adjusted to $375,000. Furthermore, if the Board determines that a sufficient amount of funds have been raised or is otherwise available to fund the Company’s operations on an ongoing basis, some or all of the accrued and unpaid Base Salary or Guaranteed Bonus as described in Amendment No. 2 may be paid in cash.
UWMRF Patent License Agreement
On August 1, 2020, the (“Effective Date”), the Company and UWMRF executed the UWMRF Patent License Agreement pursuant to which, the Company has an exclusive license to commercialize GABAkine products based on UWMRF’s rights in certain patents and patent applications, and a non-exclusive license to commercialize products based on UWMRF’s rights in certain technology that is not the subject of the patents or patent applications. UWMRF maintains the right to use, and, upon the approval of the Company, to license, these patent and technology rights for any non-commercial purpose, including research and education. The UWMRF Patent License Agreement expires upon the later of the expiration of the Company’s payment obligations to UWMRF or the expiration of the last remaining licensed patent granted thereunder, subject to early termination upon the occurrence of certain events. The License Agreement also contains a standard indemnification provision in favor of UWMRF and confidentiality provisions obligating both parties.
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Under the UWMRF Patent License Agreement, in consideration for the licenses granted, the Company will pay to UWMRF the following: (i) patent filing and prosecution costs incurred by UWMRF prior to the effective date, paid in yearly installments over three years from the Effective Date; (ii) annual maintenance fees, beginning on the second anniversary of the Effective Date, which annual maintenance fees terminate upon the Company’s payment of royalties pursuant to clause (iv) below; (iii) milestone payments, paid upon the occurrence of certain dosing events of patients during clinical trials and certain approvals by the FDA; and (iv) royalties on net sales of products developed with the licenses, subject to minimum annual payments and to royalty rate adjustments based on whether separate royalty payments by the Company yield an aggregate rate beyond a stated threshold. The Company has also granted UWMRF certain stock appreciation rights with respect to the Company’s neuromodulator programs, subject to certain limitations, and will pay to UWMRF certain percentages of revenues generated from sublicenses of the licenses provided under the UWMRF Patent License Agreement by the Company to third parties.
University of Wisconsin-Milwaukee Outreach Services Agreement
On July 12, 2021, the Company and the Board of Regents of the University of Wisconsin System on behalf of the University of Wisconsin-Milwaukee (“UWM”) entered into an Outreach Services Agreement pursuant to which UWM agreed to provide, among other molecules, multiple milligram to gram quantities of KRM-II-81 (GABAkine) and the Company agreed to pay UWM an annual sum of $75,000 payable in three installments of $25,000 each beginning October 12, 2021, which amount was timely paid, and on a quarterly basis thereafter. The agreement terminates on June 30, 2022 unless extended upon consent of both parties.
University of Illinois 2014 Exclusive License Agreement
The Company and the University of Illinois entered into the Exclusive License Agreement (the “2014 License Agreement”) effective September 18, 2014, pursuant to which the Company obtained (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 that commenced 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, 2020, was extended to April 19, 2021 and was paid in full on April 1, 2021. One-time milestone payments may become due based upon the achievement of certain development milestones. $75,000 will be due within 5 days of any one of the following, (a) dosing of the first patient with a dronabinol product in a Phase 2 human clinical study anywhere in the world that is not sponsored by the University of Illinois, (b) dosing of the first patient in a Phase 2 human clinical study anywhere in the world with a low dose dronabinol (defined as less than or equal to 1 mg), or (c) dosing of the first patient in a Phase 1 human clinical study anywhere in the world with a proprietary reformulation of dronabinol. $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.
The Company recorded charges to operations of $25,000 during the three-months ended September 30, 2021 and 2020, respectively, and $75,000 during the nine-months ended September 30, 2021 and 2020, respectively, with respect to its minimum annual royalty obligation, which is included in research and development expenses in the Company’s condensed consolidated statement of operations for the three-months and nine-months ended September 30, 2021 and 2020. As discussed above, the Company did not pay the amount due on December 31, 2020 for which the Company was granted an extension until April 19, 2021 and which was paid in full on April 1, 2021.
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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, which Noramco subsequently assigned to its subsidiary, Purisys LLC (the “Purisys Agreement”). Under the terms of the Purisys Agreement, Purisys has 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. We now refer to the second-generation product as our proprietary formulation or proprietary product and have de-emphasized the first-generation product.
In consideration for these supplies and services, the Company has agreed to purchase exclusively from Purisys 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 index adjustments and agreed to Purisys’ 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.
There was no activity during the three-months ended and nine-months ended September 30, 2021 or 2020 with respect to the Purisys Agreement.
Transactions with Bausch Health Companies Inc. (formerly known as Biovail Laboratories International SRL)
Beginning in March 2010, the Company entered into a series of asset purchase and license agreements with Biovail Laboratories International SRL which later merged with Valeant Pharmaceuticals International, Inc. which was later renamed Bausch Health Companies Inc. (“Bausch”).
In March 2011, the Company entered into a new agreement with Bausch to reacquire the ampakine compounds, patents and rights that Bausch 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, a therapeutic area not currently pursued by the Company. Bausch 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, Bausch 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 Bausch would share in all such future development costs with the Company. If Bausch makes the co-marketing election, the Company would owe no further milestone payments to Bausch and the Company would be eligible to receive a royalty on net sales of the compound by Bausch or its affiliates and licensees.
There was no activity during the three-months ended and nine-months ended September 30, 2021 or 2020 that affect the Bausch agreement.
Summary of Principal Cash Obligations and Commitments
The following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of September 30, 2021, aggregating $2,166,177. License agreement amounts included in the 2021 column represents amounts contractually due from October 1, 2021 through December 31, 2021 (three months) and in each of the subsequent years, represents the full year. Employment agreement amounts included in the 2021 column represent amounts contractually due from October 1, 2021 through September 30, 2022 (twelve months) and September 30, 2023 in the case of the employment agreement of Timothy Jones, when such contracts expire unless extended pursuant to the terms of the contracts.
| Payments Due By Year | ||||||||||||||||||||||||
| Total | 2021 | 2022 | 2023 | 2024 | 2025 | |||||||||||||||||||
| License agreements | $ | 520,277 | $ | 25,000 | $ | 120,092 | $ | 140,185 | $ | 110,000 | $ | 115,000 | ||||||||||||
| Research and development contracts | 50,000 | - | 50,000 | - | - | - | ||||||||||||||||||
| Employment agreements (1) | 1,605,900 | 232,950 | 1,118,250 | 254,700 | ||||||||||||||||||||
| Total | $ | 2,166,177 | $ | 257,950 | $ | 1,288,342 | $ | 394,885 | $ | 110,000 | $ | 115,000 | ||||||||||||
| (1) | The payment of certain of such amounts has been deferred indefinitely, as described above in “Employment Agreements”. |
9. Subsequent Events
Amendment to Mr. Jones’ Employment Agreement
See Note 8. Commitments and Contingencies – Significant Agreements and Contracts – Employment Agreements for a description of Amendment No. 2 of Mr. Jones’ employment agreement.
Filing of Form 1-A
On October 12, 2021, the Company filed amendment number one to its Form 1-A which had previously been filed on August 9, 2021 with the SEC with respect to a contemplated Tier 2 offering under Regulation A. The Form 1-A and preliminary offering circular contained therein is subject to further amendment. No securities may be offered prior to qualification of the offering by the Securities and Exchange Commission or in any jurisdiction in which such offer, solicitation or sale of securities would be unlawful before registration or qualification under the laws of such jurisdiction.
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Convertible Note and Related Transactions
On October 7, 2021, the Company and Dariusz Nasiek and Sara Nasiek JTTEN (the “Nasieks”) entered into a Securities Purchase Agreement (the “Nasiek SPA”) pursuant to which the Nasieks provided a sum of $103,500 (the “Nasiek Consideration”) to the Company in return for a convertible promissory note (the “Nasiek Note”) with a face amount of $115,000 (which difference in value as compared to the Nasiek Consideration is due to an original issue discount of $11,500), and a common stock purchase warrant (the “Nasiek Warrant”) exercisable for five years at an exercise price of $0.02 per share on a cash or cashless basis, to purchase up to 5,750,000 shares of the Company’s common stock, par value $0.001. In addition, and to induce the Nasieks to enter into the Nasiek SPA, the Company and the Nasieks entered into a Piggy-Back Registration Rights Agreement (the “Nasiek Registration Rights Agreement”) under which the Company has agreed to provide certain piggy-back registration rights under the Securities Act of 1933, as amended with respect to the common stock issuable pursuant to the Nasiek SPA.
The Note obligates the Company to pay by October 7, 2022 (the “Nasiek Maturity Date”) a principal amount of $115,000 together with interest at a rate equal to 10% per annum. The first twelve months of interest, equal to $11,500, is guaranteed and earned in full as of the effective date. Any amount of principal or interest that is not paid by the Nasiek Maturity Date would bear interest at the rate of 24% from the Nasiek Maturity Date to the date it is paid.
The Nasieks have the right, in their discretion, at any time, to convert any outstanding and unpaid amount of the Nasiek Note into shares of common stock, provided that the conversion would not result in the Nasieks beneficially owning more than 4.99% of the Company’s then outstanding common stock. The Nasieks may convert at a per share conversion price equal to $0.02, subject to equitable adjustments for stock splits, stock dividends, combinations, recapitalizations, extraordinary distributions and similar events. Upon any conversion, all rights with respect to the portion of the Nasiek Note being so converted will terminate, except for the right to receive common stock or other securities, cash or other assets as provided for in the Nasiek Note.
The Company may, in the absence of an event of default, and with prior written notice to the Nasieks, prepay the outstanding principal amount under the Nasiek Note during the initial 180 day period after the effective date by making a payment to the Nasieks of an amount in cash equal to 115% of the outstanding principal, interest, default interest and other amounts owed. Under certain circumstances, including the occurrence of an event of default, a sale, merger or other business combination where the Company is not the survivor, or the conveyance or disposition of all or substantially all of the assets of the Company, the Company may be required to prepay in cash an amount equal to 125% of the outstanding principal, interest, default interest and other amounts owed. The Company’s wholly owned subsidiary, Pier Pharmaceuticals, Inc., provided an unlimited guarantee of the Company’s obligations under the Nasiek Note.
The Nasiek Note requires that the Company reserve the greater of (i) shares of Common Stock or (ii) one and a half times the number of shares into which the Nasiek Note may convert. The Nasiek Warrant requires that the Company reserve three times the number of shares into which the Nasiek Warrant is at any time exercisable.
The Nasiek SPA includes, among other things: (1) the grant of an option to the Nasieks to incorporate into the Nasiek Note any terms applicable to a subsequent issuance of a convertible note or security by the Company that are more beneficial to an investor than the terms of the Nasiek SPA and Nasiek Note are to the Nasieks; and (2) certain registration rights by reference to the Nasiek Registration Rights Agreement, and the right to have any shares of common stock issued in connection with the conversion of the Nasiek Note or exercise of the Nasiek Warrant included in any Regulation A offering statement that the Company files with the Securities and Exchange Commission.
Partial Conversion of Convertible Note
On November 8, 2021, the Company received a notice of conversion with respect to a convertible note with a maturity date of November 17, 2021, pursuant to which the holder converted $80,000 of the $112,000 principal amount of the note into shares of common stock which were issued by the Company. There remains $32,000 of principal amount plus accrued interest on that convertible note.
Cashless Warrant Exercise
On November 8, 2021, the Company received a partial cashless exercise notice with respect to a portion of a warrant which portion of such warrant would have been exercisable into 1,534,042 shares of common stock if exercised for cash. Pursuant to the cashless exercise, the Company issued shares of common stock and cancelled a portion of the warrant with respect to 1,534,042 shares of common stock. The Company did not receive any proceeds from the cashless exercise.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements (unaudited) and notes related thereto appearing elsewhere in this document, as well as the audited consolidated financial statements, notes related thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K.
Overview
The mission of the Company is to develop innovative and revolutionary treatments to combat disorders caused by disruption of neuronal signaling. We are developing treatment options that address conditions that affect millions of people, but for which there are limited or poor treatment options, including obstructive sleep apnea (OSA), attention deficit hyperactivity disorder (“ADHD”), epilepsy, chronic pain, including inflammatory and neuropathic pain, recovery from spinal cord injury (“SCI”), as well as other areas of interest based on results of preclinical and clinical studies to date.
RespireRx is developing a pipeline of new drug products based on our broad patent portfolios across two distinct drug platforms:
| (i) | our pharmaceutical cannabinoids platform (which we refer to as ResolutionRx) is developing compounds that target the body’s endocannabinoid system, and in particular, the re-purposing of dronabinol, an endocannabinoid CB1 and CB2 receptor agonist, for the treatment of OSA. Dronabinol is already approved by the FDA for other indications. | |
| (ii) | our neuromodulators platform (which we refer to as EndeavourRx) is made up of two programs: (a) our AMPAkines program, which is developing proprietary compounds that are positive allosteric modulators (“PAMs”) of AMPA-type glutamate receptors to promote neuronal function and (b) our GABAkines program, which is developing proprietary compounds that are PAMs of GABAA receptors, and which was recently established pursuant to our entry with the University of Wisconsin-Milwaukee Research Foundation, Inc., an affiliate of the University of Wisconsin-Milwaukee (“UWMRF”), into a patent license agreement (the “UWMRF Patent License Agreement”). |
Financing our Platforms
Our major challenge has been to raise substantial equity or equity-linked financing to support research and development plans for our pharmaceutical cannabinoid and neuromodulator platforms, while minimizing the dilutive effect to pre-existing stockholders. At present, we believe that we are hindered primarily by our public corporate structure, our common stock not being listed on a national exchange, and low market capitalization as a result of our low stock price.
For this reason, the Company has implemented an internal restructuring plan through which our two drug platforms have been reorganized into separate business units and may in the future be organized into subsidiaries of RespireRx. We believe that by creating one or more subsidiaries to further the aims of ResolutionRx and EndeavourRx, it may be possible, through separate finance channels, to optimize the asset values of each. We are also planning to commence, assuming the SEC qualifies the offering, a securities offering pursuant to Regulation A under the Securities Act. See Note 9. Subsequent Events – Filing of Form 1-A to the Company’s condensed consolidated financial statements at September 30, 2021.
The Company is also involved in business development efforts (licensing/sub-licensing, joint venture and other commercial structures) with a view to securing strategic partnerships that represent strategic and operational infrastructure additions, as well as cash and in-kind funding opportunities. These efforts have focused on, but have not been limited to, engaging with brand and generic pharmaceutical and biopharmaceutical companies as well as companies with potentially useful formulation or manufacturing capabilities, significant subject matter expertise and financial resources. No assurance can be given that any transaction will come to fruition or that if it does, that the terms will be favorable to the Company.
Below is a chart that represents our current development status for each of our product candidates for the disorders for which they are being developed. Preclinical testing is pre-human testing and includes in vitro and animal studies. Phase 1 clinical trials are primarily safety, generally conducted in healthy adults. Phase 2 clinical trials are generally somewhat larger than Phase 1 and often include dose finding, additional safety and preliminary efficacy. Phase 3 clinical trials are larger studies designed to test efficacy and safety in a broader population. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Form 10-K for more information on our proposed regulatory approach and development plans for our product candidates.
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Below is our current business organization with ResolutionRx and EndeavourRx currently operating as divisions and which are planned to become, initially, wholly-owned subsidiaries.
Technology Rights
University of Illinois License Agreement
See Note 8. Commitments and Contingencies – Significant Agreements and Contracts – University of Illinois 2014 Exclusive License Agreement to our condensed consolidated financial statements at September 30, 2021.
UWMRF Patent License Agreement
See Notes 1, 2 and 8 to our condensed consolidated financial statements at September 30, 2021.
Going Concern
See Note 2. Business – Going Concern to our condensed consolidated financial statements at September 30, 2021.
The Company’s regular efforts to raise capital and to evaluate measures to permit sustainability are time-consuming and intensive. Such efforts may not prove successful and may cause distraction, disruption or other adversity that limits the Company’s development program efforts.
Recent Accounting Pronouncements
See Note 3. Summary of Significant Accounting Policies – Recent Accounting Pronouncements to the Company’s condensed consolidated financial statements at September 30, 2021.
Management does not believe that any recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
Concentration of Risk
See Note 3. Significant Accounting Policies – Concentration of Credit Risk to the Company’s condensed consolidated financial statements at September 30, 2021.
See Note 8. Commitments and Contingencies – University of Illinois 2014 Exclusive License Agreement to the Company’s condensed consolidated financial statements at September 30, 2021.
See Note 8. Commitments and Contingencies – UWMRF Patent License Agreement to the Company’s condensed consolidated financial statements at September 30, 2021.
See Note. Commitments and Contingencies - University of Wisconsin-Milwaukee Outreach Services Agreement to the Company’s condensed consolidated financial statements at September 30, 2021.
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Critical Accounting Policies and Estimates
The Company prepared its condensed consolidated financial statements in accordance with GAAP. The preparation of these condensed 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.
Critical accounting policies and estimates are described in the notes to the Company’s condensed consolidated financial statements and include:
| - | Stock-based awards | |
| - | Research and Development Costs | |
| - | License Agreements | |
| - | Patent Costs | |
| - | Convertible Notes |
See Critical Accounting Policies and Estimates in our 2020 Form 10-K for a complete description.
Results of Operations
The Company’s consolidated statements of operations as discussed herein are presented below.
| Three-Months Ended | Nine-Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative, including related parties | $ | 423,558 | $ | 1,140,204 | $ | 1,495,103 | $ | 1,969,223 | ||||||||
| Research and development, including related parties | 157,751 | 171,776 | 550,343 | 480,242 | ||||||||||||
| Total operating expenses | 581,309 | 1,311,980 | 2,045,446 | 2,449,465 | ||||||||||||
| Loss from operations | (581,309 | ) | (1,311,980 | ) | (2,045,446 | ) | (2,449,465 | ) | ||||||||
| Gain on warrant exchange | - | - | 1,099 | - | ||||||||||||
| Gain/(Loss) on extinguishment of debt and other liabilities in exchange for equity | 62,548 | (65,906 | ) | 62,548 | (389,902 | ) | ||||||||||
| Interest expense, including related parties | (228,253 | ) | (78,678 | ) | (459,566 | ) | (409,994 | ) | ||||||||
| Foreign currency transaction gain (loss) | 38,332 | (22,791 | ) | 70,220 | 7,151 | |||||||||||
| Net loss | $ | (708,682 | ) | $ | (1,479,355 | ) | $ | (2,371,145 | ) | $ | (3,242,210 | ) | ||||
| Deemed dividend associated with most favored nation provisions of convertible notes | $ | (378,042 | ) | $ | - | $ | (378,042 | ) | $ | - | ||||||
| Net loss attributable to common stockholders | $ | (1,086,724 | ) | $ | - | $ | (2,749,187 | ) | $ | - | ||||||
| Net loss per common share - basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.02 | ) | ||||
| Weighted average common shares outstanding - basic and diluted | 90,396,596 | 22,435,203 | 83,757,619 | 13,179,304 | ||||||||||||
Three-months Ended September 30, 2021 and 2020
Revenues. The Company had no revenues during the three-months ended September 30, 2021 and 2020.
General and Administrative. For the three-months ended September 30, 2021 general and administrative expenses were $423,558, a decrease of $716,646, as compared to $1,140,204 for the three-months ended September 30, 2020. The decrease is primarily the result of decreases in share-based expenses of $315,000 and in legal expenses of $445,042 due to reduced usage of professional services, offset by an increase in salaries and wages of $48,300 and several other increases and decreases in general and administrative expenses.
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Research and Development. For the three-months ended September 30, 2021, research and development expenses were $157,751, a decrease of $14,025, as compared to $171,776 for the three-months ended September 30, 2020. The decrease in research and development expenses for the three-months ended September 30, 2021, as compared to the three-months ended September 30, 2020, is primarily due to a decrease in stock-based compensation during the three-months ended September 30, 2021.
Research and development expenses included $2,500 of stock-based compensation for the three-months ended September 30, 2021 and $22,500 for the three-months ended September 30, 2020.
Gain/(Loss) on extinguishment or settlement of debt and other liabilities. There was a gain of $62,548 during the three-months ended September 30, 2021 with respect to a settlement with a vendor. There was loss on extinguishment of debt of $65,906 during the three-months ended September 30, 2020.
Interest Expense. During the three-months ended September 30, 2021, interest expense was $228,253 as compared to $78,678 for the three-months ended September 30, 2020. The increase of $149,575 is primarily the result of interest accruing on convertible notes established in both the three-months ended June 30, 2021 and the three-months ended September 30, 2021 for which the convertible notes from the three-months ended June 30, 2021, incurred a full quarter of interest during the three-months ended September 30, 2021, but not during the three-months ended June 30, 2021.
Foreign Currency Transaction (Loss) Gain. Foreign currency transaction gain was $38,332 for the three-months ended September 30, 2021, as compared to a foreign currency transaction loss of $22,791 for the three-months ended September 30, 2020. The foreign currency transaction (loss) gain relates to the $399,774 loan from SY Corporation, made in June 2012, which is denominated in the South Korean Won.
Net Loss Attributable to Common Stockholders. For the three-months ended September 30, 2021, the Company incurred a net loss of $708,682 as compared to a net loss of $1,479,355 for the three-months ended September 30, 2020. The net loss attributable to common stockholders was $1,086,724 for the three-months ended September 30, 2021 due to a deemed dividend of $378,042 as a result of the issuance of new warrants to certain convertible note and warrant holders in accordance with certain most-favored nation provisions of the transaction documents associated with the issuance of notes and the related warrants. There was no deemed dividend during the three-months ended September 30, 2021.
Nine-months Ended September 30, 2021 and 2020
Revenues. The Company had no revenues during the nine-months ended September 30, 2021 and 2020.
General and Administrative. For the nine-months ended September 30, 2021, general and administrative expenses were $1,495,103, a decrease of $474,120, as compared to $1,969,223 for the nine-months ended September 30, 2020. The decrease is primarily the result of decreases in stock-based expenses of $287,000 and in legal expenses of $565,693 due to reduced usage of professional services, offset by an increase in salaries and wages of $362,600 and several other increases and decreases in general and administrative expenses.
Research and Development. For the nine-months ended September 30, 2021, research and development expenses were $550,343, an increase of $70,101, as compared to $480,242 for the nine-months ended September 30, 2020. The increase in research and development expenses for the nine-months ended September 30, 2021, as compared to the nine-months ended September 30, 2020, is primarily due to the increase in expenses with respect to new product formulation development and for quality testing of active pharmaceutical ingredients for anticipated research and development activities.
Research and development expenses included $26,250 of stock-based compensation for the nine-months ended September 30, 2021 and $22,500 for the nine-months ended September 30, 2020.
Gain/(Loss) on extinguishment or settlement of debt and other liabilities. There was a gain of $62,548 during the nine-months ended September 30, 2021 with respect to a settlement with a vendor. There was no loss on extinguishment of debt during the nine-months ended September 30, 2021 as compared to a loss on extinguishment of debt of $389,902 for the nine-months ended September 30, 2020.
Interest Expense. During the nine-months ended September 30, 2021, interest expense was $459,565 as compared to $409,994 for the nine-months ended September 30, 2020. The increase of $49,571 is primarily the result of the establishment of new convertible notes.
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Foreign Currency Transaction (Loss) Gain. Foreign currency transaction gain was $70,220 for the nine-months ended September 30, 2021, as compared to a foreign currency transaction gain of $7,151 for the nine-months ended September 30, 2020. The foreign currency transaction (loss) gain relates to the $399,774 loan from SY Corporation, made in June 2012, which is denominated in the South Korean Won.
Net Loss Attributable to Common Stockholders. For the nine-months ended September 30, 2021, the Company incurred a net loss of $2,371,145 as compared to a net loss of $3,242,209 for the nine-months ended September 30, 2020. The net loss attributable to common stockholders was $2,749,187 for the nine-months ended September 30, 2021 due to a deemed dividend of $378,042 as a result of the issuance of new warrants to certain convertible note and warrant holders in accordance with certain most-favored nation provisions of the transaction documents associated with the issuance of notes and the related warrants. There was no deemed dividend during the nine-months ended September 30, 2020.
Liquidity and Capital Resources – September 30, 2021
The Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses of $2,371,145 for the nine-months ended September 30, 2021 and $4,301,210 for the fiscal year ended December 31, 2020, has incurred negative operating cash flows of $800,622 for the nine-months ended September 30, 2021 and $513,001 for the fiscal year ended December 31, 2020, had a stockholders’ deficiency of $9,424,888 at September 30, 2021, 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, 2020, expressed substantial doubt about the Company’s ability to continue as a going concern.
At September 30, 2021, the Company had a working capital deficit of $9,092,888, as compared to a working capital deficit of $8,063,320 at December 31, 2020, reflecting an increase in the working capital deficit of $1,029,568 for the nine-months ended September 30, 2021.
At September 30, 2021, the Company had cash of $556, as compared to $825 at December 31, 2020, reflecting a decrease in cash of $269 for the nine-months ended September 30, 2021.
In general, substantially all of the cash raised in financings during the nine-months ended September 30, 2021 and during fiscal year ended December 31, 2020 was utilized to pay general and administrative expenses or the related accounts payable, including, but not limited to, payments to our licensors, our independent registered public accounting firm, our corporate law firm, our patent and intellectual property law firm and for other patent and intellectual property services, our transfer agent, our financial printer and limited cash payments of compensation. Cash was also utilized to pay research and development expenses or the related accounts payable for new product formulation work performed by a contractor with respect to the development of a new proprietary formulation of dronabinol. Cash was also utilized, among other purposes, to make payments pursuant to directors and officers insurance and other insurance financings and to repay, in part, certain advances made by officers and one vendor and payments of certain outstanding accounts payable.
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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 general and administrative and research and development 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. We are planning to commence, assuming the SEC qualifies the offering, a securities offering pursuant to Regulation A under the Securities Act. See Note 9. Subsequent Events – Filing of Form 1-A to the Company’s condensed consolidated financial statement at September 30, 2021.
We provide no assurance that this offering will be qualified, or if qualified, would result in a financing on terms or for net proceeds acceptable to the Company. The Company regularly evaluates various other measures to satisfy the Company’s liquidity needs, including development and other agreements with collaborative partners and, when necessary, seeks 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.
Operating Activities. For the nine-months ended September 30, 2021, operating activities utilized cash of $800,622, as compared to utilizing cash of $350,724 for the nine-months ended September 30, 2020, to support the Company’s ongoing general and administrative expenses as well as its research and development activities.
Financing Activities. For the nine-months ended September 30, 2021, financing activities consisted of net proceeds from convertible note financings of $754,900 net of original issue discounts and note costs, sales of common stock pursuant to an equity line of $117,299 and $66,453 with respect to financing of a new directors and officers insurance policy, offset by a $5,000 partial repayment of an officer advance.
Principal Commitments
Employment Agreements
See Note 8. Commitments and Contingencies – Significant Agreements and Contracts – Employment Agreements to our condensed consolidated financial statements at September 30, 2021.
University of Illinois 2014 Exclusive License Agreement
See Note 8. Commitments and Contingencies – Significant Agreements and Contracts – University of Illinois 2014 Exclusive License Agreement to our condensed consolidated financial statements at September 30, 2021.
UWM Research Foundation Patent License Agreement
See Note 8. Commitments and Contingencies – Significant Agreements and Contracts, UWMRF Patent License Agreement to our condensed consolidated financial statements at September 30, 2021.
University of Wisconsin-Milwaukee Outreach Services Agreement
See Note 8. Commitments and Contingencies – Significant Agreements and Contracts - University of Wisconsin-Milwaukee Outreach Services Agreement to our condensed consolidated financial statements at September 30, 2021.
A table setting forth the Company’s principal cash obligations and commitments for the next five fiscal years as of September 30, 2021, aggregating $2,166,177, is set forth in Note 8. Commitments and Contingencies – Summary of Principal Cash Obligations and Commitments.
Off-Balance Sheet Arrangements
At September 30, 2021, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in the reports that the Company files with the Securities and Exchange Commission (the “SEC”) under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures.
The Company carried out an evaluation, under the supervision and with the participation of its management, consisting of its principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to the Company’s management, consisting of the Company’s principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Management 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. Although the senior executive team has been developing more formalized and regular communication and collaboration processes, thereby improving the control environment, these controls and procedures are not yet sufficient to remediate the Company’s control weaknesses. The Company is current in its SEC periodic reporting obligations, but as of the date of the filing of this Quarterly Report on Form 10-Q, the Company had not yet established adequate internal controls over financial reporting.
The Company’s management, consisting of its principal executive officer and principal financial officer, does not expect that its disclosure controls and procedures or its internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. In addition, as conditions change over time, so too may the effectiveness of internal controls. However, management believes that the financial information included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented.
(b) Changes in Internal Controls over Financial Reporting
The Company’s management, consisting of its principal executive officer and principal financial officer, has determined that no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) occurred during or subsequent to the end of the period covered in this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are periodically subject to various pending and threatened legal actions and claims. See Note 8. Commitments and Contingencies – Pending or Threatened Legal Actions and Claims to our condensed consolidated financial statements at September 30, 2021 for details regarding these matters.
ITEM 1A. RISK FACTORS
As of the date of this filing, there have been no material changes to the Risk Factors included in the Company’s 2020 Form 10-K. The Risk Factors set forth in the 2020 Form 10-K should be read carefully in connection with evaluating the Company’s business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2020 Form 10-K could materially adversely affect the Company’s business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the nine-months ended September 30, 2021 that were not disclosed by the Company on a Current Report on Form 8-K. In connection with previously reported unregistered sales of warrants and convertible notes, there was a cashless exercise of warrants as described in Note 6. Stockholders’ Deficiency – Common Stock, and there were conversions of convertible notes inclusive of accrued interest as disclosed in Note 4. Notes Payable – Convertible Notes Payable of our condensed consolidated financial statements at September 30, 2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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, 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 technical 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 has in the past made several efforts towards a comprehensive resolution of the aforementioned matters involving SY Corporation. During the nine-months ended September 30, 2021, there were no further communications between the Company and SY Corporation.
The note payable to SY Corporation consists of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Principal amount of note payable | $ | 399,774 | $ | 399,774 | ||||
| Accrued interest payable | 447,266 | 411,384 | ||||||
| Foreign currency transaction adjustment | (16,838 | ) | 53,393 | |||||
| $ | 830,202 | $ | 864,551 | |||||
Interest expense with respect to this promissory note was $35,881 and $36,013 for the nine-months ended September 30, 2021 and 2020, respectively, and $12,092 for the three-months ended September 30, 2021 and 2020.
Default on Convertible Notes Payable
As of September 30, 2021, principal and accrued interest on the Original Convertible Note that is subject to a default notice accrues annual interest at 12% instead of 10%, totaled $52,337, of which $27,337 was accrued interest. See Note 4. Notes Payable – Convertible Notes Payable for more information.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
The information below is reported in lieu of information that would be reported under Items 1.01 and 2.03 under Form 8-K.
On September 29, 2021, the Company and Primary Capital LLC (“PC”) amended the investment banking agreement (“PA Agreement”), dated as of August 6, 2021, between the Company and PC to provide that: (1) PC will only solicit institutional investors and will receive a cash fee equal to seven percent (7%) of the gross proceeds raised from the contemplated best-efforts securities offering under Regulation A of the Securities Act (“Reg A Offering”) from institutional investors that are originated by PC, and that Company will also issue a three-year warrant to PC or its designee(s) to purchase seven percent (7%) of that number of shares of the Company’s common stock as are sold to such institutional investors originated by PC; (2) for institutional investors referred/originated by Company that participate in the Reg A Offering, Company will pay to PC a cash fee of four percent (4%) of the gross proceeds raised from the Reg A Offering from such institutional investors originated by Company, and Company will also issue a three-year warrant to PC or its designee(s) to purchase four percent (4%) of that number of shares of the Company’s common stock sold to such institutional investors originated by Company; and (3) PC will neither solicit nor receive a fee from non-institutional investors originated by the Company or existing non-institutional shareholders of the Company that participate in the Reg A Offering.
On October 12, 2021, the Company and PC further amended the PA Agreement to provide that expenses which are incurred by PC or any co-agents in connection with services rendered by such parties to the Company in connection with the Reg A Offering, and for which the Company is responsible, may not exceed $35,000 in the aggregate in the event of a closing of the Reg A Offering. This $35,000 amount would be inclusive of the $25,000 paid by the Company to PC for its legal expenses.
The Company filed a Form 1-A Preliminary Offering Statement with the SEC on August 9, 2021. The SEC has not yet qualified the Reg A Offering. On October 12, 2021, the Company filed a Form 1-A/A amending the Preliminary Offering Statement. See Note 9. Subsequent Events – Filing of Form 1-A/A to the Company’s condensed consolidated financial statements as of September 30, 2021.
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ITEM 6. EXHIBITS
INDEX TO EXHIBITS
The following documents are filed as part of this report:
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SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| RESPIRERX PHARMACEUTICALS INC. | ||
| (Registrant) | ||
| Date: November 15, 2021 | By: | /s/ Timothy Jones |
| Timothy Jones | ||
| President and Chief Executive Officer | ||
| Date: November 15, 2021 | By: | /s/ Jeff Eliot Margolis |
| Jeff Eliot Margolis | ||
| Senior Vice President, Chief Financial Officer, Treasurer and Secretary | ||
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