The following discussion and analysis should be read in conjunction with the
audited financial statements and notes related thereto appearing elsewhere in
this document.
Overview
The mission of 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 affecting millions of
people, but for which there are limited or poor treatment options, including
obstructive sleep apnea ("OSA"), attention deficit hyperactivity disorder
("ADHD"), epilepsy, acute and chronic pain, including inflammatory and
neuropathic pain, and recovery from spinal cord injury ("SCI"), which are
conditions that affect millions of people, and certain orphan disorders.. We are
also considering developing treatment options for other conditions based on
results of preclinical and clinical studies to date.
Our major challenge has been to raise substantial equity or equity-linked
financing to support research and development plans for our 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 OTC Pink Markets listing, and low market
capitalization as a result of our low stock price as well as the weakness of our
balance sheet.
For this reason, the Company has effected 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, one of which was formed on January
11, 2023, to further the aims of ResolutionRx and EndeavourRx, it may be
possible, through separate finance channels, to unlock the unrealized asset
values of each and set up its programs for partnering or sale.
This restructuring plan is based upon our two research platforms: pharmaceutical
cannabinoids and neuromodulators. The business unit focused on pharmaceutical
cannabinoids is referred to as ResolutionRx and the business unit focused on
neuromodulators is referred to as EndeavourRx. It is anticipated that the
Company will use, at least initially, its management personnel to provide
management, operational and oversight services to these two business units.
(i) ResolutionRx Ltd, which will hold our pharmaceutical cannabinoids platform,
is as of January 11, 2023, a wholly-owned subsidiary of the Company, and 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) EndeavourRx, our neuromodulators platform is made up of two programs: (a)
our AMPAkines program, which is developing proprietary compounds that act
as positive allosteric modulators ("PAMs") of AMPA-type glutamate receptors
to promote neuronal function and (b) our GABAkines program, which is
developing proprietary compounds that act as 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").
34
Management has begun to organize our ResolutionRx and EndeavourRx business units
into two independent subsidiaries: (i) a ResolutionRx subsidiary has been formed
and into which we intend to contribute our pharmaceutical cannabinoid platform
and its related tangible and intangible assets and certain of its liabilities
and (ii) an EndeavourRx subsidiary, into which we would contribute our part or
all of our neuromodulator platform, including either or both the AMPAkine and
GABAkine programs and their related tangible and intangible assets and certain
of their liabilities.
Management believes that there are advantages to separating these platforms
formally into newly formed subsidiaries, including but not limited to optimizing
their asset values through separate financing channels and making them more
attractive for capital raising as well as for strategic transactions.
The Company is also engaged 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, transacting with
brand and generic pharmaceutical and biopharmaceutical companies as well as
companies with potentially useful contract research, formulation or
manufacturing capabilities, significant subject matter expertise and financial
resources. No assurance can be given that any transaction will come to fruition
and that if it does, that the terms will be favorable to the Company.
Financing our Platforms
Our major challenge has been to raise substantial equity or equity-linked
financing to support research and development plans for our 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 OTC Pink Market listing, and low market
capitalization as a result of our low stock price.
The formation on January 11, 2023 , of ResolutionRx Ltd, a public, unlisted
Australian subsidiary, currently wholly-owned by the Company, provides
potentially new opportunities to raise capital, particularly for the cannabinoid
platform.
On January 27, 2023, ResolutionRx entered into a Term Sheet and Letter of Intent
with Radium Capital. for a series of debt financings secured by the Australian
Research and Development Tax Incentive ("R&DTI"), a tax credit or rebate
available for the component of R&D activities that are qualified core and
supporting activities. In the case of ResolutionRx, this is anticipated to be a
43.5% tax rebate, with up to, and at the discretion of ResolutionRx, 80% to be
financed by Radium and collateralized by the rebate. The Company and
ResolutionRx believe that this is one step taken in a series of anticipated
transactions that will enable the debt and equity or equity-linked financing of
ResolutionRx, to support its R&D efforts budgeted at approximately $16.5 million
over the next approximately two and half years.
35
RespireRx intends to enter into a Master Services Agreement ("Master Services
Agreement") with ResolutionRx pursuant to which the Company will provide certain
services to ResolutionRx for which the Company will be paid. See Note 10.
Subsequent Events to our consolidated financial statements as of December 31,
2022 for more details about ResolutionRx.
On February 27, 2023, ResolutionRx entered into a services agreement
("Australian CRO Agreement) with iNGENu CRO Pty Ltd (iNGENu), a contract
research organization ("CRO"), pursuant to which iNGENu is to act as a full
service CRO in support of ResolutionRx's research and development ("R&D")
program, by conducting laboratory experiments to determine a final optimum
dronabinol formulation, scaling up and manufacturing the chosen formulation for
clinical use, preparing and submitting regulatory documents and designing and
conducting clinical trials, including pharmacokinetic/pharmacodynamic, safety
and pivotal efficacy studies. The Radium financing is intended to advance these
programs which may make such programs more appealing to investors and strategic
partners. See Note 10. Subsequent Events to our consolidated financial
statements as of December 31, 2022 for more details about ResolutionRx.
On April 3, 2023, the Company filed a Certificate of Designation, Preferences,
Rights and Limitations of its Series I Preferred Stock ("Series I Certificate of
Designation") with the Secretary of State of the State of Delaware to amend the
Company's certificate of incorporation. The filing of the Series I Certificate
of Designation was approved by the Company's Board of Directors. The Series I
Certificate of Designation sets forth the preferences, rights and limitations of
the Series I Preferred Stock, a brief summary of which is as follows:
The number of shares designated as Series I 8% Redeemable Preferred Stock
("Series I Preferred Stock") is 3,500 (which is not subject to increase without
the written consent of a majority of the holders (each a "Series I Holder") of
the Series I Preferred Stock or as otherwise set forth in the Certificate of
Designation). The Series I Preferred Stock Par Value is $0.001 and the Series I
Preferred Stock Stated Value is $100.00. The dividend rate is 8% per annum based
on a 365 day year, payable in-kind.
Redemption shall happen upon the payment of a Series I "Eligible Payment" which
takes place upon the occurrence of an Eligible Payment Event, as both terms are
defined in the Certificate. The Series I Eligible Payment is calculated as the
Series I Maximum Appreciated Price, which is $0.02, subject to certain
adjustments (unless a lesser price is agreed by the Corporation and the Series I
Holder) multiplied by the number of shares of Common Stock corresponding to the
number of Series I Preferred Shares divided by the Series I Base Measurement
Price ($0.0015), multiplied by the Series I Preferred Stock Stated Value. A
Series I Eligible Payment Event shall include: (i) any license, sublicense,
joint venture or similar transaction resulting in an upfront payment of at least
$15,000,000.00, or (ii) any milestone payment with respect to research and
development of at least $15,000,000.00, or (iii) receipt of royalties in any one
year of at least $15,000,000.00 or (iv) any event resulting in the Company's
receipt of an amount deemed by the Company's Board of Directors to be establish
a Series I Eligible Payment Event. Certain Fundamental Transactions as defined
in the Series I Certificate of Designation may be Series I Eligible Payment
Events.
For a detailed description the Series Certificate of Designation and the Series
I Preferred Stock to be issued, please refer to our Current Report on Form 8-K,
filed with the SEC on April 6, 2023, including but not limited to Exhibit 3.1 to
the Current Report of Form 8-K.
36
On April 5, 2023 entered into a securities purchase agreement ("Series I
Purchase Agreement) as a first closing of a securities offering exempt from
registration under federal securities laws, rules and regulation and those of
the various states, with two individual accredited investors investing jointly
("Investors"). Pursuant to the terms of the Securities I Purchase Agreement, the
investors invested $25,000 for 250 shares of Series I Preferred Stock. The
Series I Purchase Agreement, the Certificate of Designation and the delivery of
the Series I Preferred Stock was approved by the Company's Board of Directors.
For a detailed description the Series I Purchase Agreement, please refer to our
Current Report on Form 8-K, filed with the SEC on April 6, 2023, including but
not limited to Exhibit 99.1 to the Current Report of Form 8-K.
On April 11, 2023, the Company's Board of Directors authorized an amendment to
the Company certificate of incorporation to establish a Series J 8% Voting,
Participating, Redeemable Preferred Stock (Series J Certificate of
Designation"). On April 12, 2023, the Company filed the Series J Certificate of
Designation with the Secretary of State of the state of Delaware.
The Series J Certificate of Designation sets forth the preferences, rights and
limitations of the Series J Preferred Stock, a summary of which is as follows:
The number of shares designated as Series J 8% Redeemable Preferred Stock
("Series J Preferred Stock") is 15,000 (which is not subject to increase without
the written consent of a majority of the holders (each a "Series J Holder") of
the Series J Preferred Stock or as otherwise set forth in the Series J
Certificate of Designation). The Series J Preferred Stock Par Value is $0.001
and the Series J Preferred Stock Stated Value is $100.00. The dividend rate is
8% per annum based on a 365 day year, payable in-kind.
Redemption shall happen upon the payment of a Series J "Eligible Payment" which
takes place upon the occurrence of a Series J Eligible Payment Event, as both
terms are defined in the Series J Certificate. The Series J Eligible Payment is
calculated as the Maximum Appreciated Price, which is closing price per share of
Common Stock or its equivalent on the day that is the trading day on which an
Series J Eligible Payment Event is publicly announced prior to the opening of
financial markets, or the trading day following the public announcement of the
Series J Eligible Payment Event if announced after the opening of the financial
markets on the date of the Series J Eligible Payment Event (unless a lesser
price is agreed by the Company and the Series I Holder) multiplied by the number
of shares of Common Stock corresponding to the number of Series J Preferred
Shares divided by the Series J Base Measurement Price ($0.006), subject to
certain adjustments, multiplied by the Series J Preferred Stock Stated Value. A
Series J Eligible Payment Event shall include: (i) any license, sublicense,
joint venture or similar transaction resulting in an upfront payment of at least
$20,000,000.00, or (ii) any milestone payment with respect to research and
development of at least $20,000,000.00, or (iii) receipt of royalties in any one
year of at least $20,000,000.00 or (iv) any event resulting in the Corporation's
receipt of an amount deemed by the Corporation's Board of Directors to be
establish a Series J Eligible Payment Event. Certain Fundamental Transactions as
defined in the Series J Certificate of Designation may be Series J Eligible
Payment Events.
Each share of Series J Preferred Stock shall be entitled to that number of
votes, which shall be eligible to vote along with the Common Stockholders, or,
as the case may be, when voting as a class, that is equal to one hundred (100x)
times number calculated by dividing the number of shares of Series J Preferred
Stock by the Base Measurement Price as of the record date for such vote or
written consent or, if there is no specified record date, as of the date of such
vote or written consent.
Upon any liquidation, dissolution or winding-up of the Company, no distribution
shall be made to the holders of any shares of capital stock of the Company
unless, prior thereto, the Series J Holders receive (i) an amount equal to 100%
of the stated value, plus any accrued and unpaid dividends plus (ii) an amount
equal to a pro rata portion of the Series J Eligible Payment Amount less the
Series J Preferred Stock Stated Value paid pursuant to (i) above, plus (iii) the
pro rata amount when considered with all outstanding shares of Common Stock and
any securities that may be convertible into, exercisable for or exchanged for
Common Stock that have similar rites, of any remaining distribution. The
distribution shall result in a Redemption. If the assets of the Company are
insufficient to pay in full such amounts due the Series J Holders or any holders
of another class that is parri pasu with the Series J Holders ("Series J Pari
Passu Holders"), then the entire assets shall be distributed ratably among the
Series J Holders and Series J Pari Passu Holders in accordance with the
respective amounts that would be payable on such shares if all amounts payable
thereon were paid in full and such distribution shall result in a Redemption. A
Fundamental Transaction, or a Change of Control Transaction, each as defined in
the Certificate, shall be deemed to be Liquidations.
On April 12, 2023, RespireRx entered into an exchange agreement and two exchange
and settlement agreements with two executive officrs and one vendor
collectively, the "Series J Settlement Agreements" and the executive officers
and vendor are referred to herein as the "Series J Exchangers."
Pursuant to the terms of the Settlement Agreements, the Company, in exchange for
the issuance of Series J Preferred Stock to the Exchangers, the Exchangers
exchanged or settled their rights to receive an aggregate of $570,000 of accrued
compensation or debt, advances or other liabilities owed to them. The Series J
Preferred Stock is transferrable to Affiliates as such term is defined in the
Series J Certificate of Designation. The two executives immediately transferred
all of their shares of Series J Preferred Stock to separate trusts of which each
is separately the grantor and that are Affiliates of each. The vendor
immediately transferred its shares to an individual Affiliate of the vendor..
37
The Settlement Agreements, the transfer requests and the Series J Certificate of
Designation and the delivery of the Series J Preferred Stock was approved by the
Company's Board of Directors.
For a detailed description the Series J Certificate of Designation, the Series J
Preferred Stock, the Settlement Agreements and the transfer letter agreements,
please refer to our Current Report on Form 8-K, filed with the SEC on April 13,
2023, including but not limited to Exhibit 3.1 and Exhibit 99.1 through 99.6 to
the Current Report of Form 8-K.
Recent Developments
University of Illinois at Chicago 2014 License Agreement Second Amendment
See Note 9. Commitments and Contingencies - Significant Agreements and Contracts
- University of Illinois 2014 Exclusive License Agreement in the notes to
consolidated financial statements for the years ended December 31, 2022 and
2021, included in this report.
GRIA UIL collaboration
The Company entered into a material transfer agreement with University College
London (UCL) as part of a collaborative research effort involving Dr. Ian Coombs
and Prof. Mark Farrant, founder members of the GRIA Scientific Advisory Board of
the CureGRIN Foundation ("CureGRIN") and from the UCL Department of
Neuroscience, Physiology, and Pharmacology. The UCL group, which also includes
Prof, Stuart Cull-Candy F.R.S., has been awarded funding from CureGRIN, and will
be working with the RespireRx research team to study the possibility of using
CX1739, RespireRx's lead clinical AMPAkine, for the treatment of a major class
of GRIA disorders. GRIA Disorder refers to a family of rare genetic diseases
caused by mutations in the AMPA glutamate receptor genes that cause either a
loss or gain in the functioning of these receptors, which are the site of action
of RespireRx's AMPAkines and which play an important role in learning and memory
as well as other critical biological functions.
38
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 3-Summary of
Significant Accounting Policies-Recent Accounting Pronouncements to the
consolidated financial statements for the fiscal years ended December 31, 2022
and 2021, included with this report.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents. The Company limits
its exposure to credit risk by investing its cash with high credit quality
financial institutions.
The Company's research and development efforts and potential products rely on
licenses from research institutions and if the Company loses access to these
technologies or applications, its business could be substantially impaired.
Through the merger with Pier, the Company gained access to the 2007 License
Agreement that Pier had entered into with the University of Illinois which was
terminated effective March 21, 2013 and on June 27, 2014, the Company entered
into the 2014 License Agreement with the University of Illinois, the material
terms of which were similar to the 2007 License Agreement and also included the
assignment of rights to the University of Illinois, to certain patent
applications filed by RespireRx. The 2014 License Agreement was amended on July
25, 2017 which first amendment was to extend certain timeframes. Effective
December 15, 2022, the Company and the Board of Trustees of the University of
Illinois ("UIL") entered into the Second Amendment to RespireRx-University of
Illinois Exclusive License Agreement. The parties entered into the Second
Amendment in order to eliminate accrued financial obligations to UIL and reduce
future obligations. Annual $100,00 payments by the Company to UIL are eliminated
and the unpaid amount of $200,000 for calendar years 2021 and 2022 are no longer
due and payable. Among other changes, the $75,000 payment that was due after the
dosing of the 1st patient in a Phase II study anywhere in the world is now
reduced to $10,000 and UIL has been given an extension in the term of the
License and a deferred compensation obligation of RespireRx including the 4%
royalty on net sales due to UIL has been extended for up to 8 years after the
original patent rights expire by including a royalty on the net sales protected
by a patent application submitted by the Company describing a new formulation of
dronabinol. See Note 9. Commitments and Contingencies-Significant Agreements and
Contracts-University of Illinois Exclusive License Agreement in our consolidated
financial statement for the fiscal year ended December 31, 2022 for more
details.
39
Critical Accounting Policies and Estimates
SEC guidance defines Critical Accounting Estimates as those estimates made in
accordance with GAAP that involve a significant level of estimation uncertainty
and have had or are reasonably likely to have a material impact on the financial
condition or results of operation of the registrant. These items require the
application of management's most difficult, subjective or complex judgments,
often because of the need to make estimates about the effect of matters that are
inherently uncertain and that may change in subsequent periods. In preparing our
consolidated financial statements in accordance with GAAP, management has made
estimates, assumptions and judgments that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods.
In preparing these financial statements, management has utilized available
information, including our past history, industry standards and the current and
projected economic environment, among other factors, in forming its estimates,
assumptions and judgments, giving due consideration to materiality. Because the
use of estimates is inherent in GAAP, actual results could differ from those
estimates. In addition, other companies may utilize different estimates, which
may impact comparability of our results of operations to those of companies in
similar businesses. A summary of the accounting estimates that management
believes are critical to the preparation of our consolidated financial
statements is set forth below. See Note 3 in the notes to consolidated financial
statements as of December 31, 2022 for additional disclosures regarding our
significant accounting policies.
Research and Development Costs
Research and development costs consist primarily of fees paid to consultants and
outside service providers and organizations (including research institutes at
universities) and other expenses relating to the acquisition, design,
development and testing of the Company's treatments and product candidates.
Research and development costs include salaries of our officers who also perform
limited administrative duties for the Company. Management makes an allocation of
those salaries to research and development based on estimates of time spent on
those activities.
Research and development costs incurred by the Company under research grants are
expensed as incurred over the life of the underlying contracts, unless the terms
of the contract indicate that a different expensing schedule is more
appropriate.
40
License Agreements
Obligations incurred with respect to mandatory payments provided for in license
agreements are recognized ratably over the appropriate period, as specified in
the underlying license agreement, and are recorded as liabilities in the
Company's consolidated balance sheet, with a corresponding charge to research
and development costs in the Company's consolidated statement of operations.
Obligations incurred with respect to milestone payments provided for in license
agreements are recognized when it is probable that such milestone will be
reached and are recorded as liabilities in the Company's consolidated balance
sheet, with a corresponding charge to research and development costs in the
Company's consolidated statement of operations. Payments of such liabilities are
made in the ordinary course of business.
Patent Costs
Due to the significant uncertainty associated with the successful development of
one or more commercially viable products based on the Company's research efforts
and any related patent applications, all patent costs, including patent-related
legal and filing fees, are expensed as incurred and, in accordance with
generally accepted accounting principles, are charged to general and
administrative expenses.
Results of Operations
The Company's consolidated statements of operations as discussed herein are
presented below.
Years Ended December 31,
2022 2021
Operating expenses:
General and administrative, including $351,600
and $1,104,226 to related parties for the years
ended December 31, 2022 and 2021, respectively $ 1,149,823 $ 1,857,085
Research and development, including $339,600 and
$448,625 to related parties for the years ended
December 31, 2022 and 2021, respectively 429,532 702,043
Total operating costs and expenses 1,579,355 2,559,128
Loss from operations (1,579,355 ) (2,559,128 )
Gain on warrant exchange - 1,099
Gain/(Loss) on settlement or modification of
debt and other liabilities 100,000 62,548
Loss on note modification (71,161 ) -
Interest expense, including $13,536 and $12,289
to related parties for the years ended December
31, 2022 and 2021, respectively (603,818 ) (724,769 )
Foreign currency transaction gain (loss) 51,614 75,410 )
Net loss (2,102,720 ) (3,144,840 )
Deemed dividends from warrant anti-dilution
provisions (1,870,273 ) (378,042 )
Net loss attributable to common shareholders $ (3,972,993 ) $ (3,522,882 )
Net loss per common share - basic and diluted
respectively (reflected on a post 10 for 1
reverse stock split basis which occurred on
January 5, 2021) $ (0.04 ) $ (0.04 )
Weighted average common shares outstanding -
basic and diluted respectively (reflected on a
post 10 for 1 reverse stock split basis which
occurred on January 5, 2021) 111,322,742 88,347,206
41
Years Ended December 31, 2022 and 2021
Revenues. During the years ended December 31, 2022 and 2021, the Company had no
revenues.
General and Administrative. For the year ended December 31, 2022, general and
administrative expenses were $1,149,823, a decrease of $707,262 as compared to
$1,857,085 for the year ended December 31, 2021.
Salaries were $300,000 as compared to $839,900 for the year ended December 31,
2022 and December 31, 2021, respectively, a reduction of $539,900 as a result of
the resignation an termination of our former President and Chief Executive
Officer as of January 31, 2022. Associated with the reduction in salaries was a
year-to-year reduction of $51,127 in employee benefits. Board of Directors fees
were $30,000 for the year ended December 31, 2022 as compared to $60,000 for the
year ended December 31, 2021, due to the resignation of single director
effective July 31, 2022. Accounting expenses declined $15,462 to $204,543 for
the year ended December 31, 2022 as compared to $220,005 for the year ended
December 31, 2021 due to a lower utilization of accounting services. Stock-based
compensation costs and fees included in general and administrative expenses were
$0 for the year ended December 31, 2022, as compared to $28,000 for the year
ended December 31, 2021, reflecting a decrease of $28,000. The decrease is the
result of the fact that there were no stock option grants to general and
administrative employees and consultants and service providers of the Company
during the year ended December 31, 2022 as compared to the year ended December
31, 2021. Legal fees for general corporate purposes were $36,798 for the year
ended December 31, 2022 as compared to $250,950 for the year ended December 31,
2021, a decrease of $214,152 related to reduced utilization of legal services
for general, non-financing related corporate matters. Legal fees associated with
our filing of a Form 1-A offering statement and having it become qualified have
been charged to miscellaneous general and administrative expenses in the amount
of $177,883, during the fiscal year ended December 31, 2022 due to the lack of
likelihood of completing the offering, having previously been recorded as a
deferred financing cost, a current asset, on our consolidated balance sheet as
of December 31, 2021. Insurance costs were $107,776 for the year ended December
31, 2022 as compared to $98,948 for the year ended December 31, 2021, an
increase of $8,828, primarily as a result of an increase in the premium for our
directors and officer liability insurance policy. Investor relations expenses
increased $24,322 to $29,322 from $5,000 for the years ended December 31, 2022
and 2021, respectively due to the completion of one investor relations program
in 2021 and the inception of a new digital media program in 2022. SEC filing and
other expenses and OTC Market listing fees declined $19,677 totaling $16,245 for
the year ended December 31, 2022 as compared to $35,921 for the year ended
December 31, 2021 due primarily to a reduction in OTC Market listing fees upon
downlisting from the OTC QB Venture Market to the OTC Pink Market. Our transfer
agent fees declined $16,249 due to the fact that there was a non-recurring
reverse stock split expense in January 2021 and no similar charge in 2022.
Research and Development. For the year ended December 31, 2022, research and
development expenses were $429,532, a decrease of $272,511 as compared to
$702,043for the year ended December 31, 2021, primarily associated with the
completion in 2021 of a contract and consultant's work associated with the
development of new proprietary dronabinol formulations and the completion of a
contract in 2021 with the University of Wisconsin as part of their outreach
services associated with the production of active pharmaceutical ingredient in
anticipation of the commencement of additional preclinical studies in our
GABAkines program.
Gain or Loss on Extinguishment of Debt and other Liabilities in Exchange for
Equity. There was a gain of $100,000 resulting from the modification of
liabilities associated with the Second Amendment to the University of Illinois
at Chicago 2014 License Agreement during the year ended December 31, 2022 as
compared to a gain of $62,548 associated with the payment settlement agreement
associated with a vendor agreement during the year ended December 31, 2021.
Losses on convertible note modifications resulting from the issuance of
incentive shares associated with certain waivers during the year ended December
31, 2022 were $71,161 with no similar losses during the year ended December 31,
2021.
42
Interest Expense. During the year ended December 31, 2022, interest expense was
$603,818 (including $13,536 to related parties), a decrease of $120,951, as
compared to $724,769 (including $12,289 to related parties) for the year ended
December 31, 2021. The decrease in interest expense resulted primarily from the
maturity and repayment by conversion in whole or in part of four convertible
notes during the fiscal year ended December 31, 2021 aggregating principal
amounts of $317,500 offset in part, by the establishment of four new, generally
smaller convertible notes during the year ended December 31, 2022. Also included
in interest expense is the amortization of note discounts.
Foreign Currency Transaction Gain. The foreign currency transaction gain was
$51,614 for the year ended December 31, 2022, as compared to a foreign currency
transaction gain of $75,410 for the year ended December 31, 2021. The foreign
currency transaction loss or gain relates to the $399,774 loan from SY
Corporation Co., Ltd., formerly known as Samyang Optics Co. Ltd. ("SY
Corporation"), made in June 2012, which is denominated in the South Korean Won.
Net Loss. For the year ended December 31, 2022, the Company incurred a net loss
of $2,102,720 and a net loss attributable to common shareholders of $3,972,993
(after deemed dividends), as compared to a net loss of $3,144,840 and a net loss
attributable to commons shareholders of $3,522,882 (after deemed dividends) for
the year ended December 31, 2021.
Liquidity and Capital Resources
Working Capital and Cash
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses of $2,102,720 for the fiscal year ended December 31, 2022
and $3,144,840 for the fiscal year ended December 31, 2021, and negative
operating cash flows of $143,905 and $956,172 for the fiscal years ended
December 31, 2022 and 2021 respectively. The Company had a stockholders'
deficiency of $11,880,320 as of December 31, 2022 and expects to continue to
incur net losses and negative operating cash flows for at least the next few
years. Additionally, the Company has convertible notes outstanding with
principal and accrued interest amounts otalling $1,269,622, all but $109,345 has
already matured and the $109,354 matures on May 31, 2023. In the past, the
Company has been successful in getting maturity dates extended or having
convertible note holders repaid via conversion. In addition, the Company has
been successful in having license payment due dates extended and then meeting
the payment obligations on such extended dates or further extended dates. There
can be no assurance that the Company will remain successful in those efforts. As
a result, management has concluded that there is substantial doubt about the
Company's ability to continue as a going concern. In addition, the Company's
independent registered public accounting firm, in its report on the Company's
consolidated financial statements for the year ended December 31, 2022, has
expressed substantial doubt about the Company's ability to continue as a going
concern (see "Going Concern" below).
At December 31, 2022, the Company had a working capital deficit of $11,706,321,
as compared to a working capital deficit of $9,713,758 at December 31, 2021,
reflecting an increase in the working capital deficit of $1,992,563 for the
fiscal year ended December 31, 2022. This increase is comprised of an increase
in total current liabilities of $1,806,606, and a decrease in current assets of
$185,957. The increase in total current liabilities consists of a net increase
in accounts payable and accrued expenses of $488,623, an increase in accrued
compensation and related expenses of $687,300, an increase in convertible notes
payable of $468,162 inclusive of accrued interest, a decrease in the note
payable to SY Corporation inclusive of accrued interest of $3,641 an increase in
notes payable to officers and former officers and advances from officers of
$144,978 and an increase in other short-term notes payable of $662.
At December 31, 2022, the Company had cash aggregating $87 as compared to $1,398
at December 31, 2020, reflecting a decrease in cash of $1,311 during the fiscal
year ended December 31, 2022.
43
Operating Activities
For the fiscal year ended December 31, 2022, operating activities utilized cash
of $143,905 as compared to utilizing cash of $956,172for the fiscal year ended
December 31, 2021, to support the Company's ongoing operations and research and
development activities.
Financing Activities
For the fiscal year ended December 31, 2022, financing activities consisted of
net proceeds from convertible note financings of $95,000 net of original issue
discounts and $117,733 from new officer advances and $89,735 with respect to
financing of a new directors and officers insurance policy and other insurance
policies, net of repayments.
On April 11, 2023, the Company's Board of Directors authorized an amendment to
the Company's Certificate of Incorporation to establish Series J 8% Voting,
Participating, Redeemable Preferred Stock which was filed with the Secretary of
State of the State of Delaware on April 12, 2023. The Company issued 5,700 of
Series J Preferred Stock with respect to $570,000 of forgiven or exchanged
accounts payable, advances by officers and others to company, debt, other
liabilities and accrued but unpaid compensation. The shares of Series J
Preferred Stock are not convertible into Common Stock. For additional
information about the Certificate of Designation of Series J Preferred Stock,
the Series J Preferred Stock, the exchange and exchange and settlement
agreements and the transfer letter agreements, see our Current Report on Form
8-K filed with the SEC on April 13, 2023, including but not limited to Exhibit
3.01 and Exhibit 99.1 through Exhibit 99.6.
On April 5, 2023 entered into a securities purchase agreement ("Series I
Purchase Agreement) as a first closing of a securities offering exempt from
registration under federal securities laws, rules and regulation and those of
the various states, with two individual accredited investors investing jointly
("Investors"). Pursuant to the terms of the Securities I Purchase Agreement, the
investors invested $25,000 for 250 shares of Series I 8% Redeemable Preferred
Stock ("Series I Preferred Stock"). The Series I Preferred Stock is redeemable
upon the occurrence of certain events defined in the Certificate of Designation
of Preferences, Rights and Limitations of Series I 8% Redeemable Preferred Stock
("Certificate of Designation") and is not convertible into Common Stock.The
Series I Purchase Agreement, the Certificate of Designation and the delivery of
the Series I Preferred Stock was approved by the Company's Board of Directors.
On April 3, 2023, the Company filed a Certificate of Designation, Preferences,
Rights and Limitations of its Series I Preferred Stock ("Series I Certificate of
Designation") with the Secretary of State of the State of Delaware to amend the
Company's certificate of incorporation. The filing of the Series I Certificate
of Designation was approved by the Company's Board of Directors.
For a more detailed description of the Series J Preferred Stock and Series I
Preferred Stock, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financing Our Platforms in this report as
well as our Current Reports on Form 8-K, including all exhibits filed with the
SEC on April 13, 2023 and April 6, 2023, respectively.
44
Effective August 22, 2022, the Company and three investors entered into three
separate securities purchase agreements and the Company issued to those three
investors, three separate convertible notes in the aggregate amount of $111,111
and subject to original issue discount of $11,111. The Company received $100,000
in the aggregate upon completion of the closings. The notes carry interest at
10% per annum which interest is guaranteed during the term of the notes which
matures on May 31, 2023. The notes inclusive of accrued interest are repayable
in full at maturity or may be converted at any time until maturity at a
conversion price of $0.0015 per share of Common Stock. In addition, the Company
and the three investors entered into three separate registration rights
agreements similar to those associated with prior convertible notes.
On April 14, 2022, the Company and a single investor entered into a securities
purchase agreement the pursuant to which the investor provided $25,000 to the
Company in return for a convertible promissory note with a face amount of
$27,778 (which difference in value is due to an original issue discount of
$2,778), and a common stock purchase warrant exercisable for five years at an
exercise price of $0.01 per share on a cash or cashless basis, to purchase up to
2,777,800 shares of the Company's common stock, par value $0.001 which was later
adjusted to an exercise price of $0.0015 and 18,518,667 shares of Common Stock
due to most favored nation provisions and the later issuance of the August 22,
2022 notes described below. In addition, the Company and the investor entered
into a piggy-back registration rights agreement. The note contains "blocker
provisions" such that no conversion would result in ownership of more than 4.99%
of the Company's then outstanding Common Stock. The note and the warrant each
contain reserve requirements.
The Note obligated the Company to pay by April 14, 2023 a principal amount of
$27,778 together with interest at a rate equal to 10% per annum. The first
twelve months of interest, equal to $2,778, is guaranteed and earned in full as
of the effective date. The amount due were not paid on April 14, 2023. The
Company has not received a default notice from the investor.
The Company periodically issues convertible notes with similar characteristics.
As described above and in the table in Note 4. Notes Payable - Convertible Notes
Payable in our consolidated financial statements for the fiscal year ended
December 31, 2022 elsewhere in this report.
The RespireRx and ResolutionRx may continue to engage in equity, equity-linked,
non-convertible note or debt, or convertible note or other forms of debt or
hybrid financings, private placements of equity that are exempt from
registration under federal and state securities laws rules and regulations or
similar laws, rules and regulations in Australia or other countries, equity
lines of credit, public offerings of securities and other forms of finance. The
RespireRx and ResolutinRx will continue to consider additional forms of debt,
equity and strategic partner financing throughout 2023.
Going Concern
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses of $2,102,720 and $3,144,840 for the fiscal years ended
December 31, 2022 and 2021, respectively, and negative operating cash flows of
$143,905 and $956,172 for the fiscal years ended December 31, 2022 and 2021,
respectively. The Company also had a stockholders' deficiency of $11,880,320 at
December 31, 2022 and expects to continue to incur net losses and negative
operating cash flows for at least the next few years. Additionally, the Company
has, with respect to nine convertible notes outstanding, $904,439 maturity
amount inclusive of accrued interest which have matured, but for which no
notices of default have been received which must be paid or converted. The
Company will seek to have maturity dates extended in order to avoid a default on
such convertible notes, which the Company has achieved in the past, but with
respect to which, the Company can provide no assurance. The Company has also not
met its payment obligations to the UWM Research Foundation ("UWMRF") of the
University of Wisconsin-Milwaukee, but has not received a notice of default and
is in regular communication with the UWMRF regarding the establishment of a
payment schedule. 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, 2022, expressed substantial doubt about the Company's ability to continue as
a going concern.
45
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 and liabilities. 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 and in that regard, has formed an Australian
subsidiary, ResolutionRx. See Note 10. Subsequent Events. In addition to the
formation of ResolutionRx, such changes could include additional significant
reorganizations, which may include the formation of one or more additional
subsidiaries into which one or more programs may be contributed. As a result of
the Company's current financial situation, the Company has limited access to
external sources of debt and equity financing. Accordingly, there can be no
assurances that the Company will be able to secure additional financing in the
amounts necessary to fully fund its operating and debt service requirements. If
the Company is unable to access sufficient cash resources, the Company may be
forced to discontinue its operations entirely and liquidate.
Principal Commitments
Employment Agreements
Effective on May 6, 2020, Timothy Jones was appointed as RespireRx's President
and Chief Executive Officer and entered into an employment agreement as of that
date. See Note 9 - Commitments and Contingencies - Significant Agreements and
Contracts - Employment Agreements to the consolidated financial statements as of
December 31, 2021. Effective January 31 2022, Mr. Jones resigned as RespireRx's
President and Chief Executive Officer as well as a member of RespireRx's Board
of Directors pursuant to an Employment Agreement Termination and Separation
Agreement dated February 8, 2022.
Effective January 31, 2022, Dr. Lippa was appointed as RespireRx's Interim
President and Interim Chief Executive Officer. Dr. Lippa continues to serve as
RespireRx's Executive Chairman and as a member of the Board of Directors as well
as the Company's Chief Scientific Officer. See Note 9 - Commitments and
Contingencies - Significant Agreements and Contracts - Employment Agreements to
the consolidated financial statements as of December 31, 2021. See Note 10.
Subsequent Events to the consolidated financial statements as of December 31,
2022.
Jeff E. Margolis currently serves as the Company's Senior Vice President, Chief
Financial Officer, Treasurer and Secretary. Mr. Margolis also serves on the
Company's Board of Directors. See Note 9. Commitments and Contingencies -
Significant Agreements and Contracts - Employment Agreements to the consolidated
financial statements as of December 31, 2022.
46
University of Illinois 2014 Exclusive License Agreement
On June 27, 2014, the Company entered into an Exclusive License Agreement (the
"2014 License Agreement") with the University of Illinois, the material terms of
which were similar to a License Agreement between the parties that had been
previously terminated on March 21, 2013. The 2014 License Agreement became
effective on September 18, 2014. The 2014 License Agreement was amended by the
first amendment on July 25, 2017 to extend certain timeframes. Effective
December 15, 2022, the Company and the Board of Trustees of the University of
Illinois ("UIL") entered into the Second Amendment to RespireRx -University of
Illinois Exclusive License Agreement. The parties entered into the Second
Amendment in order to eliminate accrued financial obligations to UIL and reduce
future obligations. Annual $100,00 payments by the Company to UIL are eliminated
and the unpaid amount of $200,000 for calendar years 2021 and 2022 are no longer
due and payable. Among other changes, the $75,000 payment that was due after the
dosing of the 1st patient in a Phase II study anywhere in the world is now
reduced to $10,000 and UIL has been given an extension in the term of the
License and a deferred compensation obligation of RespireRx including the 4%
royalty on net sales due to UIL has been extended for up to 8 years after the
original patent rights expire by including a royalty on the net sales protected
by a patent application submitted by the Company describing a new formulation of
dronabinol. See Note 9. Commitments and Contingencies-Significant Agreements and
Contracts-University of Illinois Exclusive License Agreement for more details.
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 was subsequently assigned by Noramco to its subsidiary, Purisys LLC. See
Note 9. Commitments and Contingencies - Significant Agreements and Contracts -
Normaco Inc. - Dronabinol Development and Supply Agreement to the consolidated
financial statements as of December 31, 2022.
UWM Research Foundation
On August 1, 2020, RespireRx exercised its option pursuant to its option
agreement dated March 2, 2020, between RespireRx and UWM Research Foundation, an
affiliate of the University of Wisconsin-Milwaukee ("UWMRF"). Upon exercise
RespireRx and UWMRF executed the UWMRF Patent License Agreement effective August
1, 2020 pursuant to which RespireRx licensed the identified intellectual
property. Note 9. Commitments and Contingencies - Significant Agreements and
Contracts - UWMRF Patent License Agreement to the consolidated financial
statements as of December 31, 2022.
Off-Balance Sheet Arrangements
At December 31, 2022, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
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