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Commitments and Contingencies
 6 Months Ended
Jun. 30, 2023
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

8. Commitments and Contingencies

 

Phantom Stock

 

The features and terms of the Phantom Stock are delineated in Phantom Stock Award Agreements (“Phantom Stock Award Agreements”) which describe that the shares of Phantom Stock that were awarded are non-forfeitable but unvested on the award date which was June 7, 2023 and vest as to the economic value of 50% of the shares of Phantom Stock awarded on the first event payment date (“First Event Payment Date”) and as to the economic value of 50% of the shares of Phantom Stock awarded on the second event payment date (“Second Event Payment Date”). The Phantom Stock Award Agreements terminate on the earlier of the payment to the participant (“Participant”) as a result of the second event or the 15th anniversary of the Phantom Stock Award Agreement.

 

Shares of Phantom Stock are not convertible, exercisable or exchangeable into RespireRx’s Common Stock.

 

Upon the occurrence of a payment Event (“Payment Event”), RespireRx will incur a liability to each Participant that is to be remitted as a cash payment (“Payment”), subject to certain limitations as described below, equal to: (x) the number of vested shares of Phantom Stock held by such Participant, multiplied by (y) the fair market value which on any given day is the value of one share of Common Stock.

 

The Payment, subject to any limitations, shall be made within thirty (30) days after receipt of funds by RespireRx as a result of the Payment Event, and all of such Participant’s shares of Phantom stock that vested as a result of the Payment Date Event shall terminate and be cancelled upon the payment, and the Participant shall have no further rights in respect of that portion of Participant’s shares of Phantom Stock other than rights to receive any unpaid portion of the Payment that was limited by any limitations described below. Any Payment due to a Participant is subject to the execution and non-revocation of general release of claims, in a form provided by RespireRx, and continuous compliance with any restrictive covenant agreement, confidentiality agreement or other agreement entered into between the Participant and RespireRx or its subsidiaries and affiliates.

 

A Payment Event is a monetization event with an unrelated, unaffiliated third party, such as a sale of all or substantially all of an asset, the entering into a joint venture, license or sublicense or a similar transaction structure, that is not an equity or similar or debt investment in RespireRx or a subsidiary unless such equity or similar investment results in a unrelated, unaffiliated third party or group of parties acting together, resulting in such party or parties owning more than a 50% voting interest in RespireRx or a subsidiary and resulting in payments aggregating at least $25,000,000 within a twelve month period to RespireRx. The Payment Event Date, as defined in the Phantom Stock Award Agreement is the first date within twelve months of receipt by RespireRx of cash resulting from a Payment Event, on which RespireRx has received, in the aggregate, at least $25,000,000. The First Payment Event Date shall occur when the first Payment Event has achieved a Payment Event Date at which time a payment is due to the Participant. Similarly, the Second Payment Event Date occurs when the second Payment Event has reached a Payment Event Date at which time a payment is due to the Participant. If two or more of the Company’s assets or platforms or subsidiaries are the subject of a single transaction or series of related transactions, such transactions or series of transactions shall be deemed to represent two Payment Events and the payments to the Company within a twelve-month period as described above would be required to aggregate at least $50,000,000.

 

 

If the calculation of the payment based on the definition of Fair Market Value, exceeds 50% the amount of cash received by RespireRx with respect to a Payment Event, an initial payment shall be limited to 50% of the cash received by RespireRx with respect to the Payment Event and the unpaid balance shall be carried as a liability due to the Participant to be added to the payment amount of the Second Payment Event, subject to the same limitation. Any remaining liability resulting from the payment amount limitation described in this section after the Second Payment Event shall be reduced to that amount agreed in good faith by the Participant and RespireRx and if no amount can be agreed within ninety (90) days, shall be determined by mediation.

 

Other than adjustments for stock splits, reverse stock splits, stock dividends and similar recapitalizations, the Phantom Stock Award Agreements do not provide for distributions or anti-dilution protections.

 

Nothing contained in the Phantom Stock Award Agreements or RespireRx’s 2014 Equity Plan shall prevent RespireRx from adopting or continuing in effect other compensation arrangements.

 

Jeff Margolis, and Arnold Lippa, each an officer and a director of RespireRx received awards of 120,000,000 and 70,000,000 shares of Phantom Stock, respectively. Our independent director, Joseph R. Siegelbaum was awarded 20,000,000 shares of Phantom Stock. The remaining 96,000,000 of shares of Phantom Stock awarded were awarded to five vendors, consultants, advisors or their designees, one of which is an affiliate. A total of 306,000,000 shares of Phantom Stock were awarded on June 7, 2023. Jeff Margolis and Arnold Lippa immediately transferred all of their shares of Phantom Stock to family trusts in accordance with the terms of the 2014 Plan.

 

The value of the Phantom Stock Awards cannot be determined at this time and can only be estimated or determined upon the occurrence of a Payment Event. Therefore, no amount has been recorded as a commitment or contingency. When or if a Payment Event occurs, an amount will be estimable or determinable and such amount will be recorded as a change in an estimate.

 

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 June 30, 2023, consolidated financial statements as of December 31, 2022 and condensed consolidated financial statements as of June 30, 2022 with respect to such matters. See Note 5. Settlement and Payment Agreements for additional items and details.

 

Significant Agreements and Contracts

 

Consulting Agreements

 

Richard Purcell, RespireRx’s Senior Vice President of Research and Development since October 15, 2014, has provided his services to RespireRx on an at will and month-to-month basis. Since agreeing to a payment and settlement agreement, RespireRx has contracted for his services on a prepaid hourly basis at a rate of $250 per hour, through his consulting firm, DNA Healthlink, Inc. See Note 5. Payment and Settlement Agreements for a description of the current payment terms. During the six-month period ended June 30, 2023 and the year ended December 31, 2022, Mr. Purcell did not provide any services to RespireRx. The Company anticipates that Mr. Purcell will provide services to the Company during the fiscal year ended December 31, 2023.

 

RespireRx entered into a consulting contract with David Dickason effective September 15, 2020 pursuant to which Mr. Dickason was appointed to and serves as RespireRx’s Senior Vice President of Pre-Clinical Product Development on an at-will basis at the rate of $250 per hour. During the six-month periods ended June 30, 2023 and 2022, Mr. Dickason did not provide any services to RespireRx.

 

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. 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. See Note 5. Payment and Settlement Agreements.

 

 

Effective January 31, 2022, Dr. Lippa was appointed as RespireRx’s Interim President and Interim Chief Executive Officer (“CEO”). 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 (“CSO”). Effective January 11, 2023, Dr. Lippa was appointed as ResolutionRx’s Co-CEO and CSO and is a director of ResolutionRx.

 

Jeff E. Margolis currently serves as RespireRx’s Senior Vice President, Chief Financial Officer, Treasurer and Secretary. Mr. Margolis also serves on RespireRx’s Board of Directors. Effective January 11, 2023, Mr. Margolis was appointed as ResolutionRx’s Co-CEO and Senior Financial Officer and is a director of ResolutionRx.

 

The table below summarized the current cash commitments to Dr. Lippa and Mr. Margolis through the next September 30th renewal date.

 

   Contract year ending 
   September 30, 2023 
   Three months 
   Base         
   Salary   Benefits   Total 
             
Arnold S. Lippa  $75,000   $9,900   $84,900 
Jeff E. Margolis   75,000    5,400    80,400 
                
   $150,000   $15,300   $165,300 

 

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 RespireRx’s ability to make such payments.

 

UWMRF Patent License Agreement

 

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.

 

Under the UWMRF Patent License Agreement, RespireRx 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 RespireRx, 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 RespireRx’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.

 

Under the UWMRF Patent License Agreement, in consideration for the licenses granted, RespireRx 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 RespireRx’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 RespireRx yield an aggregate rate beyond a stated threshold. RespireRx will pay to UWMRF certain percentages of revenues generated from sublicenses of the licenses provided under the UWMRF Patent License Agreement by RespireRx to third parties.

 

 

Certain payments under the UWMRF Patent License Agreement have not been paid by RespireRx. RespireRx is in regular discussions with UWMRF regarding when RespireRx may be able to commence making payments. RespireRx has not received a notification of default either during or before the six-month period ended June 30, 2023 or in any subsequent periods. All amounts due under the UWMRF Patent License Agreement are reflected in the Company’s condensed consolidated financial statements as of June 30, 2023 and December 31, 2022 in accounts payable and accrued expenses.

 

University of Wisconsin-Milwaukee Outreach Services Agreement

 

On July 12, 2021, RespireRx 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 RespireRx 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 payments that were due on January 12, 2022 and April 12, 2022 have not yet been paid. The agreement terminated on June 30, 2022. Amounts due totaling $50,000 on January 12, 2022 and April 12, 2022 are recorded in accounts payable as of June 30, 2023 and December 31, 2022. Payment of $35,185 comprised of $30,185, which is 50% of the patent fees identified in the license, and $5,000 annual maintenance fee were due but unpaid at August 1, 2023.

 

University of Illinois 2014 Exclusive License Agreement

 

On June 27, 2014, RespireRx 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 RespireRx of a $25,000 licensing fee, (ii) the payment by RespireRx of outstanding patent costs aggregating $15,840, and (iii) the assignment to the University of Illinois of rights RespireRx held in certain patent applications, all of which conditions were fulfilled. The 2014 License Agreement was amended on July 25, 2017 and effective December 15, 2022, the first amendment was to extend certain timeframes and the second amendment represented an extensive set of modifications (“2nd Amendment”).

 

The 2014 License Agreement granted RespireRx (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.

 

Among other things, the 2nd Amendment redefined the term “Product” primarily to include in the definition, any product or process that would be enforceable under the licensed patent rights after the patent rights have expired. In addition, new definitions were added for “Deferred Compensation Annual Net Sales Payments” and “Deferred Compensation Minimum Payment(s),” both of which only become due and payable after the expiration of the patent rights and shall not be due and payable while any of the patent rights have not yet expired. These deferred compensation arrangements were in consideration for deferment of certain financial obligations. The deferred payments are due for eight years from the first commercial sale of a regulatory approved product but after the patent rights have expired. The 2nd Amendment also modified the term to the period of time from the effective date until the later of the date: (a) of the last to lapse, expire or terminate of the patent rights or (b) when the licensee (RespireRx) provides notice that the use of technical information as defined in the 2014 License Agreement as amended has ceased or (c) of the expiration of the last form of market exclusivity or (d) of the last date in which the Licensee (RespireRx) owes payments to the University. The 2nd Amendment amended and clarified Schedule 2 to the 2014 License Agreement, as amended by among other things, by (i) including a 4% royalty on Net Sales by the Licensee or sublicensee as Deferred Compensation Annual License Payments

 

 

The 2014 License Agreement provides for various commercialization and reporting requirements commencing on June 30, 2015. In addition, the 2014 License Agreement provides for various royalty payments, including a royalty on net sales of 4%, payment on sub-licensee revenues of 12.5%, and a minimum annual royalty beginning in 2015 of $100,000, which is due and payable on December 31 of each year beginning on December 31, 2015. The minimum annual royalty obligation of $100,000 due on December 31, 2021, was extended to May 31, 2022 and then further extended to an indefinite future date while discussions to amend the obligation are taking place. The minimum annual royalty obligation due on December 31, 2021 has not yet been paid. What was the $100,000 annual minimum that existed from inception through December 31, 2020 was eliminated and therefore the amounts previously recorded in accounts payable and accrued expenses, were reduced to $0. The annual minimum amount due the first year with a market approval from the US FDA (United States Food and Drug Administration) or a foreign equivalent and every year thereafter until the first commercial sale of $350,000 of a product replaced two similarly timed payments of $150,000 and $200,000. The first year with a commercial sale of a product and every year thereafter is now $400,000 whereas it was previously $250,000 after the first year of commercial sale. One time milestone payments have been changed to read as follows:

 

  (i) $10,000 due within 5 days after dosing of the first patient with a product in a Phase II human clinical study anywhere in the world.
  (ii) $150,000 due within 5 days after dosing of the first patient with a product in a Phase III human clinical study anywhere in the world.
  (iii) $350,000 due within 5 days after the earlier date of the following (a) enrolling 80% of the patients with a product in the Phase III human clinical study anywhere in the world, (b) one year after the initiation of the Phase III human clinical study anywhere in the world, or (c) termination of the Phase III human clinical study anywhere in the world.
  (iv) $500,000 due within 5 days after the first NDA (New Drug Application) filed with the US FDA or any other foreign equivalent regulatory agency for a product anywhere in the world.
  (v) $1,000,000 due within twelve (12) months after the first commercial sale of a product anywhere in the world.

 

There are reporting requirements by the Licensee to the University.

 

Royalty stacking provisions remained unchanged in the 2nd Amendment.

 

The concept of reduced royalties upon expiration of the patent rights, but while technical information was being used, was eliminated with the 2nd Amendment.

 

During the six-months ended June, 2023 and 2022, the Company recorded charges to operations of $0 and $50,000, respectively representing, in 2022, the pre-amendment annual minimum royalty, which was included in research and development expenses in the Company’s condensed consolidated statement of operations. The $100,000 from the fiscal year ended December 31, 2021 was reversed as a result of the effectiveness of the 2nd Amendment as of December 15, 2022 and the estimate for the fiscal year ended December 31, 2022 was $0.

 

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 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 RespireRx with access or a right of reference letter entitling RespireRx to make continuing reference to the DMFs during the term of the agreement in connection with any regulatory filings made with the FDA by RespireRx, (iii) participate on a development committee, and (iv) make available its regulatory consultants, collaborate with any regulatory consulting firms engaged by RespireRx 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, RespireRx has agreed to purchase exclusively from Noramco during the commercialization phase all API for its Products as defined in the Development and Supply Agreement at a pre-determined price subject to certain producer price adjustments and agreed to Noramco’s participation in the economic success of the commercialized Product or Products up to the earlier of the achievement of a maximum dollar amount or the expiration of a period of time.

 

There was no activity during the six-month periods ended June 30, 2023 or 2022 with respect to the Purisys Agreement. During June 2023, the Company engaged in discussions with Purisys with the intent of amending the Purisys Agreement or cancelling the Purisys Agreement and establishing a new agreement. The anticipated new formulations and the formation of ResolutionRx in Australia are the primary reasons for participating in such discussions.

 

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 June 30, 2023, aggregating $255,485. License agreement amounts included in the 2023 column represent amounts contractually due from July 1, 2023 through December 31, 2023 (six months) and in each of the subsequent years, represents the full year. Employment agreement amounts included in the 2023 column represent amounts contractually due from July 1, 2023 through September 30, 2023 (three months) when such contracts expire unless extended pursuant to the terms of the contracts.

 

       Payments Due By Year 
   Total   2023   2024   2025   2026   2027 
License agreements  $90,185   $35,185   $10,000   $15,000   $15,000   $15,000 
Employment agreements (1)   165,300    165,300    -    -    -    - 
Total  $255,485   $200,485   $10,000   $15,000   $15,000   $15,0000 

 

(1) The payment of certain of such amounts has been deferred indefinitely, as described above in “Employment Agreements.”