| Commitments and Contingencies | 8. Commitments and Contingencies Pending or Threatened Legal Actions
and Claims By letter dated
May 18, 2018, the Company received notice from counsel claiming to represent TEC Edmonton and The Governors of the University of
Alberta, which purports to terminate, effective December 12, 2017, the license agreement dated May 9, 2007 between the Company
and The Governors of the University of Alberta. The Company, through its counsel, disputed any grounds for termination and
has notified the representative of its intention to invoke Section 13 of that license agreement, which mandates a meeting
to be attended by individuals with decision-making authority to attempt in good faith to negotiate a resolution to the dispute.
No assurance can be provided that the parties will reach an acceptable resolution and, in light of the early stages of the disagreement,
we cannot estimate the possible impact of this disagreement on the Company’s operations or business prospects. By letter dated
November 11, 2014, a former director of the Company, who joined the Company’s Board of Directors on August 10, 2012 in conjunction
with the Pier transaction and who resigned from the Company’s Board of Directors on September 28, 2012, asserted a claim
for unpaid consulting compensation of $24,000. The Company has not received any further communications from the former director
with respect to this matter. By letter dated
February 5, 2016, the Company received a demand from a law firm representing a professional services vendor of the Company alleging
an amount due and owing for unpaid services rendered. On January 18, 2017, following an arbitration proceeding, an arbitrator awarded
the vendor the full amount sought in arbitration of $146,082. Additionally, the arbitrator granted the vendor attorneys’
fees and costs of $47,937. All such amounts have been accrued at March 31, 2018 and December 31, 2017. By e-mail dated
July 21, 2016, the Company received a demand from an investment banking consulting firm that represented the Company in 2012 in
conjunction with the Pier transaction alleging that $225,000 is due and owing for unpaid investment banking services rendered.
Such amount has been accrued at March 31, 2018 and December 31, 2017. The Company is periodically
the subject of various pending and threatened legal actions and claims. In the opinion of management of the Company, adequate provision
has been made in the Company’s consolidated financial statements at March 31, 2018, December 31, 2017 and March 31, 2017
with respect to such matters, including, specifically, the matters noted above. The Company intends to vigorously defend itself
if any of the matters described above results in the filing of a lawsuit or formal claim. Significant Agreements and Contracts Consulting
Agreement Richard Purcell
was appointed as the Company’s Senior Vice President of Research and Development effective October 15, 2014. Mr. Purcell
provides his services to the Company on a month-to-month basis through his consulting firm, DNA Healthlink, Inc., through which
the Company has contracted for his services, for a monthly cash fee of $12,500. Additional information with respect to shares of
common stock issued to Mr. Purcell is provided at Note 6. Cash compensation expense pursuant to this agreement totaled $37,608
for the three months ended March 31, 2018 and 2017, which is included in research and development expenses in the Company’s
condensed consolidated statements of operations for such periods. Employment
Agreements On August 18, 2015,
the Company entered into an employment agreement with Dr. James S. Manuso, Ph.D., to be its new President and Chief Executive Officer.
Pursuant to the agreement, which is for an initial term through September 30, 2018 (and which will be deemed to be automatically
extended, upon the same terms and conditions, for successive periods of one year, unless either party provides written notice of
its intention not to extend the term of the agreement at least 90 days prior to the applicable renewal date), Dr. Manuso received
an annual base salary of $375,000. Dr. Manuso is also eligible to earn a performance-based annual bonus award of up to 50% of his
base salary, based upon the achievement of annual performance goals established by the Board of Directors in consultation with
the executive prior to the start of such fiscal year, or any amount at the discretion of the Board of Directors. Additionally,
Dr. Manuso was granted stock options to acquire 261,789 shares of common stock of the Company and is eligible to receive additional
awards under the Company’s Plans in the discretion of the Board of Directors. Dr. Manuso is also entitled to receive, until
such time as the Company establishes a group health plan for its employees, $1,200 per month, on a tax-equalized basis, as additional
compensation to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as additional compensation
for a term life insurance policy and disability insurance policy. Dr. Manuso is also entitled to be reimbursed for business expenses.
Additional information with respect to the stock options granted to Dr. Manuso is provided at Note 6. Cash compensation accrued
pursuant to this agreement totaled $103,650 for each of the three months ended March 31, 2018, and 2017, respectively. Such amounts
were included in accrued compensation and related expenses in the Company’s condensed consolidated balance sheet at March
31, 2018 and 2017, respectively, and in general and administrative expenses in the Company’s consolidated statement of operations
for the three months ended March 31, 2018 and 2017. On December 9, 2017, Dr. Manuso forgave $878,360 of accrued compensation and
related expenses which was the amount owed by the Company as of September 30, 2017, as described in more detail below. On the same
date, Dr. Manuso received options to purchase 608,704 shares of common stock, as described in more detail below. Dr. Manuso does
not receive any additional compensation for serving as Vice Chairman or a member of on the Board of Directors. Such amounts have
not been paid to Dr. Manuso. On August 18, 2015,
concurrently with the hiring of Dr. James S. Manuso as the Company’s new President and Chief Executive Officer, Dr. Arnold
S. Lippa resigned as the Company’s President and Chief Executive Officer. Dr. Lippa continues to serve as the Company’s
Executive Chairman and as a member of the Board of Directors. Also on August 18, 2015, Dr. Lippa was named Chief Scientific Officer
of the Company, and the Company entered into an employment agreement with Dr. Lippa in that capacity. Pursuant to the agreement,
which is for an initial term through September 30, 2018 (and which will be deemed to be automatically extended, upon the same terms
and conditions, for successive periods of one year, unless either party provides written notice of its intention not to extend
the term of the agreement at least 90 days prior to the applicable renewal date), Dr. Lippa received an annual base salary of $300,000.
Dr. Lippa is also eligible to earn a performance-based annual bonus award of up to 50% of his base salary, based upon the achievement
of annual performance goals established by the Board of Directors in consultation with the executive prior to the start of such
fiscal year, or any amount at the discretion of the Board of Directors. Additionally, Dr. Lippa was granted stock options to acquire
30,769 shares of common stock of the Company and is eligible to receive additional awards under the Company’s Plans at the
discretion of the Board of Directors. Dr. Lippa is also entitled to receive, until such time as the Company establishes a group
health plan for its employees, $1,200 per month, on a tax-equalized basis, as additional compensation to cover the cost of health
coverage and up to $1,000 per month, on a tax-equalized basis, as reimbursement for a term life insurance policy and disability
insurance policy. Dr. Lippa is also entitled to be reimbursed for business expenses. Additional information with respect to the
stock options granted to Dr. Lippa is provided at Note 6. Cash compensation accrued pursuant to this agreement totaled $84,900
for each of the three months ended March 31, 2018 and 2017, respectively, which is included in accrued compensation and related
expenses in the Company’s consolidated balance sheet at March 31, 2018 and 2017, and in research and development expenses
in the Company’s consolidated statement of operations. Cash compensation accrued to Dr. Lippa for bonuses and under a prior
superseded arrangement, while still serving as the Company’s President and Chief Executive Officer, totaled $94,758 and was
part of the amount forgiven on December 9, 2017 and therefore is no longer included in accrued compensation and related expenses
as of March 31, 2018. Dr. Lippa does not receive any additional compensation for serving as Executive Chairman and on the Board
of Directors. On December 9, 2017, Dr. Lippa forgave $807,497 of accrued compensation and related expenses which was the amount
owed by the Company as of September 30, 2017. On the same date, Dr. Lippa received options to purchase 559,595 shares of common
stock, as described in more detail below. On August 18, 2015,
the Company also entered into an employment agreement with Jeff E. Margolis, in his continuing role as Vice President, Secretary
and Treasurer. Pursuant to the agreement, which was for an initial term through September 30, 2016 (and which will be deemed to
be automatically extended upon the same terms and conditions, for successive periods of one year, unless either party provides
written notice of its intention not to extend the term of the agreement at least 90 days prior to the applicable renewal date),
Mr. Margolis received an annual base salary of $195,000, and is also eligible to receive performance-based annual bonus awards
ranging from $65,000 to $125,000, based upon the achievement of annual performance goals established by the Board of Directors
in consultation with the executive prior to the start of such fiscal year, or any amount at the discretion of the Board of Directors.
Additionally, Mr. Margolis was granted stock options to acquire 30,769 shares of common stock of the Company and is eligible to
receive additional awards under the Company’s Plans at the discretion of the Board of Directors. Mr. Margolis is also entitled
to receive, until such time as the Company establishes a group health plan for its employees, $1,200 per month, on a tax-equalized
basis, as additional compensation to cover the cost of health coverage and up to $1,000 per month, on a tax-equalized basis, as
reimbursement for a term life insurance policy and disability insurance policy. Mr. Margolis is also each entitled to be reimbursed
for business expenses. Additional information with respect to the stock options granted to Mr. Margolis is provided at Note 6.
Cash compensation accrued pursuant to this agreement totaled $80,400 for Mr. Margolis for the three months ended March 31, 2018
and $54,150 for the three months ended March 31, 2017, which is included in accrued compensation and related expenses in the Company’s
consolidated balance sheet at March 31, 2018 and 2017, and in general and administrative expenses in the Company’s consolidated
statement of operations. On December 9, 2017, Mr. Margolis forgave $560,876 of accrued compensation and related expenses which
was the amount owed by the Company as of September 30, 2017. On the same date, Mr. Margolis received options to purchase 388,687
shares of common stock, as described in more detail below. Cash compensation accrued to Mr. Margolis for bonuses and under prior
superseded arrangements totaled $75,806 and was part of the amount forgiven on December 9, 2017 and therefore is no longer included
in accrued compensation and related expenses as of March 31, 2018. Mr. Margolis serves as a Director of the Company but does not
receive any additional compensation for serving on the Board of Directors. The employment agreements
between the Company and each of Dr. Manuso, Dr. Lippa, and Mr. Margolis, respectively, provided that the payment obligations associated
with the first year base salary were to accrue, but no payments were to be made, until at least $2,000,000 of net proceeds from
any offering or financing of debt or equity, or a combination thereof, was received by the Company, at which time scheduled payments
were to commence. As this financing milestone has not been achieved, Dr. Manuso, Dr. Lippa, and Mr. Margolis (who are each also
directors of the Company) have each agreed, effective as of August 11, 2016, to continue to defer the payment of such amounts indefinitely,
until such time as the Board of Directors of the Company determines that sufficient capital has been raised by the Company or is
otherwise available to fund the Company’s operations on an ongoing basis. Jeff E. Margolis’
employment agreement was amended effective July 1, 2017. The employment agreement amendment called for payment in three installments
in cash of the $60,000 bonus granted on June 30, 2015. A minimum of $15,000 was to be payable in cash as follows: (a) $15,000 payable
in cash upon the next closing (after July 1, 2017) of any financing in excess of $100,000 (b) $15,000 payable by the end of the
following month assuming cumulative closings (beginning with the closing that triggered (a)) in excess of $200,000 and (c) $30,000
payable in cash upon the next closing of any financing in excess of an additional $250,000. The conditions of (a), (b) and (c)
above were met as of December 31, 2017, however Mr. Margolis has waived the Company’s obligation to make any payments of
the cash bonus until the Board of Directors of the Company determines that sufficient capital has been raised by the Company or
is otherwise available to fund the Company’s operations on an ongoing basis. Obligations through September 30, 2017 were
forgiven by Mr. Margolis as described in the next paragraph below. On December 9, 2017,
the Company accepted offers from Dr. Arnold S. Lippa, Dr. James S. Manuso, Jeff E. Margolis, James E. Sapirstein, Kathryn MacFarlane
and Robert N. Weingarten (former Chief Financial Officer) pursuant to which such individuals would forgive accrued compensation
and related accrued expenses as of September 30, 2017 in the following amounts: $807,497, $878,360, $560,876, $55,000, $55,000,
and $200,350 respectively for a total of $2,557,083. On the same date, the Company granted to the same individuals, or designees
of such individuals from the 2015 Plan, non-qualified stock options, exercisable for 10 years with an exercise price of $1.45 per
share of common stock, among other terms and features as follows: 559,595, 608,704, 388,687, 38114, 38,114, and 138,842 respectively,
for options exercisable into a total of 1,772,055 shares of common stock with a total value of $2,475,561. University
of California, Irvine License Agreements The Company entered
into a series of license agreements in 1993 and 1998 with the University of California, Irvine (“UCI”) that granted
the Company proprietary rights to certain chemical compounds that acted as ampakines and to their therapeutic uses. These agreements
granted the Company, among other provisions, exclusive rights: (i) to practice certain patents and patent applications, as defined
in the license agreement, that were then held by UCI; (ii) to identify, develop, make, have made, import, export, lease, sell,
have sold or offer for sale any related licensed products; and (iii) to grant sub-licenses of the rights granted in the license
agreements, subject to the provisions of the license agreements. The Company was required, among other terms and conditions, to
pay UCI a license fee, royalties, patent costs and certain additional payments. Under such license
agreements, the Company was required to make minimum annual royalty payments of approximately $70,000. The Company was also required
to spend a minimum of $250,000 per year to advance the ampakine compounds until the Company began to market an ampakine compound.
The commercialization provisions in the agreements with UCI required the Company to file for regulatory approval of an ampakine
compound before October 2012. In March 2011, UCI agreed to extend the required date for filing regulatory approval of an ampakine
compound to October 2015. During December 2012, the Company informed UCI that it would be unable to make the annual payment due
to a lack of funds. The Company believes that this notice, along with its subsequent failure to make its minimum annual payment
obligation, constituted a default and termination of the license agreements. On April 15, 2013,
the Company received a letter from UCI indicating that the license agreements between UCI and the Company had been terminated due
to the Company’s failure to make certain payments required to maintain the agreements. Since the patents covered in these
license agreements had begun to expire and the therapeutic uses described in these patents were no longer germane to the Company’s
new focus on respiratory disorders, the loss of these license agreements is not expected to have a material impact on the Company’s
current drug development programs. In the opinion of management, the Company has made adequate provision for any liability relating
to this matter in its consolidated financial statements at March 31, 2018 and December 31, 2017. University
of Alberta License Agreement On May 9, 2007,
the Company entered into a license agreement, as amended, with the University of Alberta granting the Company exclusive rights
to practice patents held by the University of Alberta claiming the use of ampakines for the treatment of various respiratory disorders.
The Company agreed to pay the University of Alberta a licensing fee and a patent issuance fee, which were paid, and prospective
payments consisting of a royalty on net sales, sublicense fee payments, maintenance payments and milestone payments. The prospective
maintenance payments commence on the enrollment of the first patient into the first Phase 2B clinical trial and increase upon the
successful completion of the Phase 2B clinical trial. As the Company does not at this time anticipate scheduling a Phase 2B clinical
trial in the near term, no maintenance payments to the University of Alberta are currently due and payable, nor are any maintenance
payments expected to be due in the near future in connection with the license agreement. See Note 9. Subsequent Events. Transactions
with Biovail Laboratories International SRL In March 2010, the
Company entered into an asset purchase agreement with Biovail Laboratories International SRL (“Biovail”). Pursuant
to the asset purchase agreement, Biovail acquired the Company’s interests in CX717, CX1763, CX1942 and the injectable dosage
form of CX1739, as well as certain of its other ampakine compounds and related intellectual property for use in the field of respiratory
depression or vaso-occlusive crises associated with sickle cell disease. The agreement provided the Company with the right to receive
milestone payments in an aggregate amount of up to $15,000,000 plus the reimbursement of certain related expenses, conditioned
upon the occurrence of particular events relating to the clinical development of certain assets that Biovail acquired. None of
these events occurred. As part of the transaction,
Biovail licensed back to the Company certain exclusive and irrevocable rights to some acquired ampakine compounds, other than CX717,
an injectable dosage form of CX1739, CX1763 and CX1942, for use outside of the field of respiratory depression or vaso-occlusive
crises associated with sickle cell disease. Accordingly, following the transaction with Biovail, the Company retained its rights
to develop and commercialize the non-acquired ampakine compounds as a potential treatment for neurological diseases and psychiatric
disorders. Additionally, the Company retained its rights to develop and commercialize the ampakine compounds as a potential treatment
for sleep apnea disorders, including an oral dosage form of ampakine CX1739. In September 2010,
Biovail’s parent corporation, Biovail Corporation, combined with Valeant Pharmaceuticals International in a merger transaction
and the combined company was renamed “Valeant Pharmaceuticals International, Inc.” (“Valeant”). Following
the merger, Valeant and Biovail conducted a strategic and financial review of their product pipeline and, as a result, in November
2010, Biovail announced its intent to exit from the respiratory depression project acquired from the Company in March 2010. Following that announcement,
the Company entered into discussions with Biovail regarding the future of the respiratory depression project. In March 2011, the
Company entered into a new agreement with Biovail to reacquire the ampakine compounds, patents and rights that Biovail had acquired
from the Company in March 2010. The new agreement provided for potential future payments of up to $15,150,000 by the Company based
upon the achievement of certain developments, including new drug application submissions and approval milestones. Biovail is also
eligible to receive additional payments of up to $15,000,000 from the Company based upon the Company’s net sales of an intravenous
dosage form of the compounds for respiratory depression. At any time following
the completion of Phase 1 clinical studies and prior to the end of Phase 2A clinical studies, Biovail retains an option to co-develop
and co-market intravenous dosage forms of an ampakine compound as a treatment for respiratory depression and vaso-occlusive crises
associated with sickle cell disease. In such an event, the Company would be reimbursed for certain development expenses to date
and Biovail would share in all such future development costs with the Company. If Biovail makes the co-marketing election, the
Company would owe no further milestone payments to Biovail and the Company would be eligible to receive a royalty on net sales
of the compound by Biovail or its affiliates and licensees. University
of Illinois 2014 Exclusive License Agreement On June 27, 2014,
the Company entered into an Exclusive License Agreement (the “2014 License Agreement”) with the University of Illinois,
the material terms of which were similar to a License Agreement between the parties that had been previously terminated on March
21, 2013. The 2014 License Agreement became effective on September 18, 2014, upon the completion of certain conditions set forth
in the 2014 License Agreement, including: (i) the payment by the Company of a $25,000 licensing fee, (ii) the payment by the Company
of outstanding patent costs aggregating $15,840, and (iii) the assignment to the University of Illinois of rights the Company held
in certain patent applications, all of which conditions were fulfilled. The 2014 License
Agreement granted the Company (i) exclusive rights to several issued and pending patents in numerous jurisdictions and (ii) the
non-exclusive right to certain technical information that is generated by the University of Illinois in connection with certain
clinical trials as specified in the 2014 License Agreement, all of which relate to the use of cannabinoids for the treatment of
sleep related breathing disorders. The Company is developing dronabinol (Δ9-tetrahydrocannabinol), a cannabinoid, for the
treatment of OSA, the most common form of sleep apnea. The 2014 License
Agreement provides for various commercialization and reporting requirements commencing on June 30, 2015 and also requires the Company
to pay the University of Illinois a license fee, royalties, patent costs and certain milestone payments. The 2014 License Agreement
provides for various royalty payments by the Company, including a royalty on net sales of 4%, payment on sub-licensee revenues
of 12.5%, and a minimum annual royalty of $100,000 beginning in 2015, which is due and payable on December 31 of each year. The
2017 minimum annual royalty of $100,000 was paid as scheduled in December 2017. In the year after the first application for market
approval is submitted to the FDA and until approval is obtained, the minimum annual royalty will increase to $150,000. In the year
after the first market approval is obtained from the FDA and until the first sale of a product, the minimum annual royalty payable
by the Company 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 2014 License
Agreement also provides for certain one-time milestone payments by the Company. A payment of $75,000 is due within five days after
any one of the following: (a) dosing of the first patient with a product in a Phase 2 human clinical study anywhere in the world
that is not sponsored by the University of Illinois, (b) dosing of the first patient in a Phase 2 human clinical study anywhere
in the world with a low dose of dronabinol, or (c) dosing of the first patient in a Phase 1 human clinical study anywhere in the
world with a proprietary reformulation of dronabinol. A payment of $350,000 is due within five days after dosing of the first patient
with a product in a Phase 3 human clinical trial anywhere in the world. A payment of $500,000 is due within five days after the
first new drug application filing with the FDA or a foreign equivalent for a product. A payment of $1,000,000 is due within 12
months after the first commercial sale of a product. During the three
months ended March 31, 2018 and 2017, the Company recorded a charge to operations of $25,000 and $25,000, respectively, with respect
to its 2018 and 2017 minimum annual royalty obligation, which is included in research and development expenses in the Company’s
condensed consolidated statement of operations for the three months ended March 31, 2018 and 2017. Research Contract
with the University of Alberta On January 12, 2016,
the Company entered into a Research Contract with the University of Alberta in order to test the efficacy of ampakines at a variety
of dosage and formulation levels in the potential treatment of Pompe Disease, apnea of prematurity and spinal cord injury, as well
as to conduct certain electrophysiological studies to explore the ampakine mechanism of action for central respiratory depression.
The Company agreed to pay the University of Alberta total consideration of approximately CAD$146,000 (approximately US$111,000),
consisting of approximately CAD$85,000 (approximately US$65,000) of personnel funding in cash in four installments during 2016,
to provide approximately CAD$21,000 (approximately US$16,000) in equipment, to pay patent costs of CAD$20,000 (approximately US$15,000),
and to underwrite additional budgeted costs of CAD$20,000 (approximately US$15,000). As of December 31, 2017, the Company had recorded
final amounts payable in respect to this Research Contract of US$16,207 (CAD$21,222) which amount was paid in US dollars in January
2018 and completed the payments under the contract. The conversion to US dollars above utilizes an exchange rate of approximately
US$0.76 for every CAD$1.00. The University of
Alberta received matching funds through a grant from the Canadian Institutes of Health Research in support of this research. The
Company retained the rights to research results and any patentable intellectual property generated by the research. Dr. John Greer,
faculty member of the Department of Physiology, Perinatal Research Centre and Women & Children’s Health Research Institute
at the University of Alberta collaborated on this research. The studies were completed in 2016. National Institute
of Drug Abuse Agreement As a result of agreements
entered into on October 19, 2015 and January 19, 2016, the Medications Development Program of the National Institute of Drug Abuse
(“NIDA”) funded and conducted research on the Company’s ampakine compounds CX717 and CX1739 to determine their
potential usefulness for the treatment of cocaine and methamphetamine addiction and abuse. The Company retains all intellectual
property resulting from this research, as well as proprietary and commercialization rights to these compounds. In general, the ampakines
did not produce in rats and mice behavioral effects that are commonly associated with administration of stimulants such as
cocaine or amphetamines. Instead, the ampakines reduced the stimulation produced by both of these drugs. The absence
of stimulation on the part of the ampakines may confirm their value as potential non-stimulant treatments for ADHD. In addition,
the ampakines did not affect the behavior of rats that had been trained to recognize whether they had been administered cocaine
or methamphetamine. Duke University
Clinical Trial Agreement On January 27, 2015,
the Company entered into a Clinical Study and Research Agreement (the “Agreement”) with Duke University to develop
and conduct a protocol for a program of clinical study and research which was amended on October 30, 2015 and further amended on
July 28, 2016, which agreement, as amended, resulted in a total amount payable under the Agreement to $678,327. During the three
months ended March 31, 2018 and 2017, the Company charged $0 to research and development expenses with respect to work conducted
pursuant to the amended Agreement. The clinical trial completed in October 2016 and the Company announced the study results on
December 15, 2016. Sharp Clinical
Services, Inc. Agreement The Company has
various agreements with Sharp Clinical Services, Inc. to provide packaging, labeling, distribution and analytical services. Covance Laboratories
Inc. Agreement On October 26, 2016,
the Company entered into a twelve month agreement with Covance Laboratories Inc. to provide compound testing and storage services
with respect to CX1739, CX1866 and CX1929 at a total budgeted cost of $35,958. This agreement was renewed in October 2017. 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 March 31, 2018,
aggregating $1,034,400. Amounts included in the 2018 column represent amounts contractually due at March 31, 2018 during the remainder
of the 2018 fiscal year ending December 31, 2018.
Payments Due By Year
Total 2018 2019 2020 2021 2022
Research and development contracts $ - $ - $ - $ - $ - $ -
Clinical trial agreements - - - - - -
License agreements 475,000 75,000 100,000 100,000 100,000 100,000
Digital media consulting agreement 12,500 12,500
Employment and consulting agreements (1) 546,900 546,900 - - - -
Total $ 1,034,400 $ 634,400 $ 100,000 $ 100,000 $ 100,000 $ 100,000 (1) The payment of such amounts has
been deferred indefinitely, as described above at “Employment Agreements”. |
