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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
X Annual Report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 For the fiscal year ended June 30, 1997
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OR
Transition Report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 For the transition period from __________________
to ____________
Commission file number 0-17951
CORTEX PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
Delaware 33-0303583
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
15241 Barranca Parkway, Irvine, California, 92618
(Address of principal executive offices, including zip code)
(714) 727-3157
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
(Titles of Classes)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
----- ------
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
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Revenues for the issuer's most recent fiscal year were $0. The aggregate market
value of the voting stock held by non-affiliates as of May 6, 1997 was
$24,307,104 (based on the last sale price of the common stock as reported by
Nasdaq).
As of September 22, 1997, there were 9,466,565 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one): YES NO X
----- ----
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DOCUMENTS INCORPORATED BY REFERENCE
PART III: Portions of the registrant's definitive proxy statement for the Annual
Meeting of Stockholders to be held on December 11, 1997.
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters . . . 12
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . 13
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . 15
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. . . . . . . 15
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . 15
Item 11. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . . 15
Item 12. Certain Relationships and Related Transactions . . . . . . . . 15
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
EXHIBIT INDEX AND EXHIBITS . . . . . .(Attached to this Report on Form 10-KSB)
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INTRODUCTORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include statements regarding (i) future research
plans, expenditures and results, (ii) potential collaborative arrangements,
(iii) the potential utility of the Company's proposed products and (iv) the need
for, and availability of, additional financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, actual results may differ
materially from those set forth in the forward-looking statements. In light of
the significant uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be regarded as
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Cortex Pharmaceuticals, Inc. ("Cortex" or the "Company") is a development stage
enterprise that was organized in 1987 to engage in the discovery, development
and commercialization of innovative pharmaceuticals for the treatment of
neurodegenerative diseases and other neurological and psychiatric disorders. The
primary effort at Cortex is centered on developing products that affect the
AMPA-type glutamate receptor, a complex of proteins that is involved in most
"excitatory" communication between nerve cells in the human brain. Cortex is
developing a family of chemical compounds, known as AMPAKINEs-TM-, to enhance
the activity of this receptor. Cortex believes that AMPAKINEs hold promise for
correcting deficits brought on by a variety of diseases and disorders that are
known, or thought, to involve depressed functioning of pathways in the brain
that use glutamate as a neurotransmitter. In October 1994, the Company initiated
human safety studies with CX516 (AMPALEX-TM-) for the potential treatment of
deficits of memory and cognition due to Alzheimer's disease. These studies have
involved healthy young adult and healthy elderly volunteers and, more recently,
patients with Alzheimer's disease and with schizophrenia. In the fiscal years
ended June 30, 1997 and 1996, the Company's expenditures on research and
development were $3,376,284 and $2,677,577, respectively, with the increase
attributable to the costs of Phase I/IIa human clinical testing of AMPALEX.
Each of Cortex's programs addresses a large potential market. Accordingly, the
Company's current commercial development plans involve partnering with larger
pharmaceutical companies for Phase II and later clinical testing, manufacturing
and global marketing of its proposed products. The Company may retain the right
to eventually co-promote in the United States. If the Company is successful in
the pursuit of this partnering strategy, it is intended that it will be in a
position to contain its costs over the next few years, to maintain its focus on
the research and early development of novel pharmaceuticals (where it believes
that it has the ability to compete) and eventually to participate more fully in
the commercial development of its proposed products in the United States. Cortex
continues to seek collaborative or licensing arrangements with larger
pharmaceutical companies that will permit AMPALEX and/or other AMPAKINEs to be
advanced into later stages of clinical development and provide access to the
extensive clinical trials management, manufacturing and marketing expertise of
such companies. There can be no
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assurance, however, that the Company will secure such arrangements on favorable
terms, or at all, or that its products will be successfully developed and
approved for marketing by government regulatory agencies.
AMPA RECEPTOR PROGRAM
In June 1993, Cortex licensed from the University of California a new class of
compounds--the AMPAKINEs--that facilitate the functioning of the AMPA receptor.
These AMPAKINE compounds interact in a highly specific manner with the AMPA
receptor in the brain, lowering the amount of neuronal stimulation required to
generate a response. The Company believes that this selective amplification of
the normal signal will eventually find utility in the treatment of neurological
diseases and disorders characterized by depressed functioning of brain pathways
that utilize glutamate as a neurotransmitter. Two prominent diseases that may
benefit from AMPA receptor-directed therapeutics are Alzheimer's disease and
schizophrenia, each of which represents a large unmet medical need.
DEFICITS OF MEMORY AND COGNITION -- ALZHEIMER'S DISEASE
Impairment of memory and cognition is a very serious problem that is becoming
more severe as the elderly proportion of the population continues to increase.
While not fatal (except when associated with diseases such as Alzheimer's
disease), the incidence and prevalence of cognitive deficits increase inexorably
with age. Many elderly individuals are confined to nursing homes because of
psychological disorientation and functional difficulties. According to a 1985
survey of nursing homes conducted by the National Center for Health Statistics,
over half of the individuals in nursing homes have some degree of cognitive
impairment. Pharmaceuticals that alleviate deficits in memory and cognition
could potentially enable many of the elderly to remain independent longer.
Memory is not located in a specific area of the brain, but rather becomes
established in multiple areas of the brain that are involved with different
types of sensory information. The prevailing scientific theory is that the brain
deals with new information by constructing electrochemical and structural
frameworks to put the information into some sort of context. Most of this
processing appears to be handled in the cerebral cortex, where the brain
generates thoughts, language and plans; controls sensations and voluntary
movements; evokes imagination; and stores certain types of permanent memory.
Substantial scientific evidence points to a long-lasting change--known as "long-
term potentiation," or LTP--in synapses (junctions between neurons) as the basis
of many types of memory. Long-term potentiation involves a series of chemical
reactions that create a more stable information transfer point between neurons.
Experimental disruption of these chemical reactions in lower animals has been
shown to cause a disruption of memory formation.
Although disease and physiological malfunctions are thought to be the
fundamental cause of severe mental decline, age itself is a contributory factor.
The human brain loses about 10% of its weight over a normal life span. AMPA
receptors and synapses decline in number with aging, making it more difficult
for information to pass through and between areas of the cerebral cortex.
Alzheimer's disease is the best known destroyer of memory, afflicting some four
million Americans. With the aging of our population, the number of Americans
with Alzheimer's disease is expected to double over the next two decades unless
a treatment is found. According to the Alzheimer's Association, Alzheimer's
disease is the third most expensive disease in the U.S. (after heart disease and
cancer), with an estimated annual cost to society of $100 billion and a lifetime
cost per patient of $174,000. The impact of an effective treatment, even a
symptomatic one, would be enormous.
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Alzheimer's disease is a progressive, degenerative and ultimately fatal disease
that slowly destroys the brain. The early symptoms are problems with memory of
recent events and difficulty performing familiar tasks. As the disease
progresses, other symptoms appear. These include confusion, personality change,
behavioral change, impaired judgment, and difficulty finding words, finishing
thoughts, or following directions. While the disease progresses at different
rates in different individuals, eventually the victims are unable to care for
themselves. Ultimately, they become less resistant to infections and other
illnesses, which are often the actual cause of death.
It is in the early stages of Alzheimer's disease--the first few years--that
Cortex believes AMPAKINEs may someday play a valuable role, enhancing the
effectiveness of the brain cells that have not yet succumbed to the disease.
There is also a possibility that treatment with AMPAKINEs may slow the
progression of Alzheimer's disease. The reason for this is that brain cells, or
neurons, require continual input from other brain cells to remain alive. As
neurons die, other neurons begin to lose their inputs, hastening their death.
The first major results of AMPAKINE testing in animal behavioral models of
learning and memory were reported in early 1994 in the PROCEEDINGS OF THE
NATIONAL ACADEMY OF SCIENCES. In these studies, which involved tests of both
short- and long-term memory, AMPAKINE-treated rats performed significantly
better than untreated control animals.
Perhaps the most compelling of the animal studies conducted to date involved an
assessment of the effects of an AMPAKINE on memory performance in middle-aged
rats. A number of researchers have demonstrated that healthy middle-aged rats
have significant deficits in memory performance when compared to younger
animals. This provides an animal model for age-associated memory impairment in
humans. In the study, which was published in SYNAPSE, the authors found that
middle-aged rats showed striking deficits in performance on a maze task when
compared with young adult animals. When they were administered an AMPAKINE, the
performance of the middle-aged rats was improved to levels equivalent to those
found in young animals.
In these and other preclinical studies, the experimental compounds demonstrated
pharmaceutically attractive qualities, including apparent low toxicity, rapid
onset of action and an ability to freely cross the blood-brain barrier (a
barrier that prevents many drugs from getting into the brain).
Three human clinical studies have been completed with CX516 ("AMPALEX"). In all
three studies, CX516 was safe and well-tolerated on acute oral administration
and, importantly, statistically-significant positive effects on memory
performance were seen in healthy volunteers.
The initial study, conducted by AFB Parexel in Berlin, involved single
administrations of drug or placebo to a total of 48 healthy young adult
volunteers, ranging in age from 18 to 35. The trial was double-blinded and
placebo controlled, and involved administering a single dose of drug, in capsule
form, to each volunteer. Several dosages of drug were tested, including levels
that exceeded the expected therapeutic range. At all dosages, the drug was safe
and well-tolerated. In addition, analysis of the psychological data that was
collected revealed a highly statistically significant positive effect on a test
of memory performance that involved recall of a list of nonsense syllables.
The second trial, at the same clinical site in Berlin, involved 30 healthy
elderly volunteers, aged 65 to 76, each of whom was administered a single oral
dose of drug or placebo. In this double-blinded trial, AMPALEX was again found
to be safe and well-tolerated. The elderly volunteers were given the same
nonsense syllable memory test that was given to the young volunteers in the
first study. In the absence of drug, the elderly volunteers' memory was
substantially worse than that of the young volunteers. In the presence of drug,
the positive effect on memory performance that was seen in the earlier study was
replicated. Several of the elderly volunteers receiving the highest dosage of
AMPALEX scored at or above the average score achieved by the young volunteers in
the earlier study.
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The third study, at the Karolinska Hospital in Stockholm, Sweden, involved
administration of CX516 to healthy young adults under double-blind, placebo-
controlled conditions. The five-day study involved administration of placebo on
days 1, 4 and 5 and drug on days 2 and 3, with psychological testing conducted
on each day. AMPALEX was safe and well-tolerated by all volunteers receiving
drug, with no adverse events reported. Statistically significant improvements in
performance on several measures of learning and memory were again noted in the
group that received CX516.
On the basis of the encouraging results that were obtained in these three
studies, Cortex has initiated a Phase I/IIa study in patients experiencing
deficits of memory and cognition due to Alzheimer's disease. The study is being
conducted at the National Institutes of Health in Bethesda, Maryland. The
double-blind, placebo-controlled dose escalation study involves administration
of CX516 to from 16 to 20 patients for up to 28 consecutive days.
While preliminary indications of the desired effects on memory and cognition may
be obtained from this study, psychological testing of patients with Alzheimer's
disease is characterized by a high level of variability. Full-scale Phase II
studies designed to achieve significance on broad psychological measures will
require larger numbers of patients. The Company is hopeful that the results from
this preliminary study will encourage prospective pharmaceutical company
partners to commit the financial and other resources to undertake additional
clinical studies.
SCHIZOPHRENIA
Schizophrenia is a major health care problem. The worldwide incidence of the
disease is approximately one percent, regardless of ethnic, cultural or
socioeconomic status. On any given day, approximately 100,000 of the estimated
two million U.S. patients are in public mental hospitals.
Schizophrenia typically develops in late adolescence or early adulthood and is
best understood as a syndrome, or collection of symptoms. These are generally
characterized as POSITIVE SYMPTOMS (delusions and hallucinations), NEGATIVE
SYMPTOMS (social withdrawal and loss of emotional responsiveness) and COGNITIVE
SYMPTOMS (disordered thought and attentional deficits).
The first "wonder drugs" for schizophrenia, the so-called neuroleptics or
conventional anti-psychotics, were developed in the 1950s and 1960s. These
drugs, such as chlorpromazine and haloperidol, helped to reduce the positive
symptoms of the disease and greatly reduced the need for chronic
hospitalization. However, these drugs, which are still in use today, are
characterized by troublesome and occasionally life-threatening side effects. The
most common side effect is "extrapyramidal signs" or EPS, which includes
restlessness and tremors. EPS side effects have a strongly negative impact on
quality of life and lead to poor patient compliance with medication.
More recently, a new type of anti-psychotic agent, referred to as ATYPICAL due
to the virtual lack of EPS side effects, has been developed. Clozapine was the
first such drug. It was first studied in the 1970s, but clinical trials were
halted due to the risk of a fatal blood disorder known as agranulocytosis and a
dose-dependent risk of seizures. Clozapine was reintroduced in the 1980s, with
approval by the FDA for use in patients who cannot be adequately controlled on
typical neuroleptics, because of lack of efficacy or the presence of side
effects. Risperidone is another recent clozapine-like anti-psychotic.
The newer atypical agents achieve good control of positive symptoms, partial
control of negative symptoms and better patient compliance with medication due
to lower levels of EPS side effects. However, schizophrenia clinicians agree
that there are still substantial side effects and that the cognitive symptoms of
schizophrenia are not addressed by any available agents. It is the persistence
of these
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cognitive symptoms that keeps all but a few of the victims of schizophrenia from
successfully reintegrating into society.
Schizophrenia has long been thought to have its biochemical basis in an
overactivity of dopamine pathways projecting into certain regions of the brain.
More recently, a developing body of evidence suggests that schizophrenia also
involves an UNDERACTIVITY of glutamate pathways projecting into the same areas.
Cortex is therefore studying whether AMPAKINEs, which increase current flow
through the AMPA subtype of glutamate receptor, might have relevance to the
treatment of schizophrenia.
In 1995, Cortex announced that Professor John Larson, a University of
California, Irvine neuroscientist and Cortex consultant, found that an AMPAKINE
reduced stereotypic behavior (mechanical repetition of posture or movement) in
rats injected with methamphetamine. Reduction of methamphetamine-induced
stereotypic behavior is widely used for initial screening of anti-psychotic
drugs. These results have now been extended by scientists at UCI and Cortex to
include additional AMPAKINEs. Cortex scientists have demonstrated that AMPAKINEs
in combination with either conventional or atypical anti-psychotic drugs have
additive effects in this model system.
The Company has initiated a study with CX516 in patients with schizophrenia. The
study, which involves approximately 20 patients, is being conducted at the Erich
Lindemann Mental Health Center in Boston. This study is designed as a safety
study, but psychological testing will be conducted in an attempt to obtain a
preliminary indication that CX516 has a beneficial effect on the symptoms of the
disease, particularly the cognitive symptoms that have thus far been resistant
to treatment.
CALPAIN INHIBITOR PROGRAM
Calpain is a protease, a protein that digests other proteins. It is involved in
a variety of biological processes throughout the body, and has been implicated
in the pathology of several diseases and disorders. These include brain damage
following stroke or head injury and spasming of blood vessels (vasospasm).
In the early years of the Company, Cortex was attempting to develop calpain
inhibitor therapeutics for the potential treatment of brain damage following
stroke. More than 500,000 Americans experience a stroke each year. Approximately
150,000 die, and most survivors are left with some degree of permanent residual
disability due to damage to brain tissue. Although stroke is the third leading
cause of death in the U.S., no satisfactory therapy yet exists to prevent the
brain damage brought on by this condition.
Interruption of the supply of oxygen and nutrients to the brain following a
stroke is not in and of itself responsible for the widespread destruction of
neurons that often follows. Rather, it is believed that these disruptions
trigger biochemical changes that lead over a period of hours or days to death of
the affected neurons. It is now fairly well accepted that this crucial period of
time between a stroke and the actual death of brain cells provides a "window of
opportunity" during which a therapy might be administered, to limit or prevent
damage to nerve cells and thereby maintain their viability until equilibrium is
re-established.
Release of excessive glutamate appears to initiate the destructive process.
Glutamate builds up in the extra-cellular space following a stroke, allowing an
excessive amount of calcium to enter nerve cells. This causes activation of
certain calcium-dependent enzymes, notably calpain. At higher levels, calpain
can degrade the neuron's cytoskeleton and cause progressively greater damage.
Eventually the cell is no longer able to recover.
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In 1990 and 1991, Cortex established laboratory models of ischemia and used them
to identify a range of calpain inhibitor compounds that appeared to have the
potential to block brain damage due to stroke and other ischemic events. In
January 1992, Cortex entered into a Development and License Agreement, which was
amended in October 1992, (the "Alkermes Agreement") with Alkermes, Inc.
("Alkermes"), another neuroscience company. Cortex granted to Alkermes an
exclusive worldwide license, with a right to sublicense, to commercialize
products using the Company's calpain inhibitor technology for products for the
prevention or treatment of acute and chronic neurodegenerative diseases and
disorders of the nervous system.
Subsequently, Cortex shifted its own emphasis into AMPA receptor and calpain
inhibitor research outside the nervous system. The Company was particularly
active in investigating the potential role of calpain inhibitors as therapeutics
for the treatment of vasospasm and restenosis, two serious vascular disorders.
The Company established research collaborations and began screening compounds
for these purposes and reported on its progress in its 1993 annual report. This
report of progress included a discussion of the Company's research in cerebral
vasospasm, which involved reversal of an existing spasm of blood vessels in the
brain. In October 1993, Alkermes notified the Company that Alkermes believed
that it had rights to this indication under the Alkermes Agreement. In November
1993, Alkermes filed an action alleging that the Company had breached the
Alkermes Agreement by developing calpain inhibitors for cerebral vasospasm.
In October 1995, the Company and Alkermes agreed to a settlement of the dispute.
Alkermes agreed to dismiss its action against the Company and to relinquish all
rights previously granted them by the Company, as well as rights to related
technologies developed by Alkermes. In connection with the settlement, the
Company issued to Alkermes a $1,000,000 non-transferable, three-year promissory
note accruing interest semi-annually at the federal funds rate. The Company also
committed to pay Alkermes a graduated royalty on calpain inhibitor development
proceeds, as defined and subject to certain limitations. The Company has
reinstituted an active research program on calpain inhibitors and recently
confirmed, in an animal model, the earlier finding that calpain inhibitors are
capable of blocking vasospasm. Cortex is seeking a larger pharmaceutical company
partner for the further development of the calpain inhibitor technology.
MANUFACTURING
Cortex has no experience in manufacturing pharmaceutical products and relies,
and presently intends to rely, on the manufacturing and quality control
expertise of contract manufacturing organizations or prospective corporate
partners. There is no assurance that the Company will be able to enter into
arrangements for manufacturing of its proposed products on favorable terms.
MARKETING
The Company has no experience in the marketing of pharmaceutical products and
does not anticipate having the resources to distribute and broadly market any
products that it may develop. The Company will therefore continue to seek
commercial development arrangements with other pharmaceutical companies for its
proposed products. In entering into such arrangements, the Company may seek to
retain the right to co-promote certain products in the United States to selected
medical specialties (such as geriatric physicians, neurologists and
psychiatrists). The Company believes that these specialties can be effectively
addressed with a relatively small sales force. There is no assurance that the
Company will be able to enter into co-promotional arrangements in connection
with its licensing activities, or that any retention of co-promotional rights
will lead to greater revenues for the Company.
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TECHNOLOGY RIGHTS AND COLLABORATIVE AGREEMENTS
AMPA RECEPTOR MODULATING COMPOUNDS
In June 1993, Cortex entered into an agreement with the Regents of the
University of California, under which Cortex secured exclusive commercial rights
to AMPA receptor modulating compounds (AMPAKINEs) for the treatment of deficits
of memory and cognition. Under the agreement, the Company paid an initial
license fee and is obligated to make additional payments, including license
maintenance fees creditable against future royalties, over the course of
initiating and conducting human clinical testing and obtaining regulatory
approvals. When and if sales of licensed products commence, the Company will
begin paying royalties on net sales.
CALPAIN INHIBITORS
Beginning in February 1991, Cortex entered into a series of agreements with
Georgia Tech Research Corporation, the licensing arm of the Georgia Institute of
Technology ("Georgia Tech"), under which Cortex secured exclusive commercial
rights, for selected disorders, to several novel classes of chemical compounds
that the Company has demonstrated are effective as calpain inhibitors. Under the
agreement, the Company paid an initial license fee and is obligated to make
additional payments, including license maintenance fees creditable against
future royalties, over the course of initiating and conducting human clinical
testing and obtaining regulatory approvals. When and if sales of licensed
products commence, the Company will begin paying royalties on net sales.
PATENTS AND PROPRIETARY RIGHTS
The Company is aggressively pursuing patent protection of its technologies.
Cortex owns or has exclusive rights (within its areas of product development) to
a number of issued U.S. patents and a range of U.S. patent applications and
their international counterparts.
There can be no assurance that issued patents, whether already issued or issuing
in the future in connection with current or future patent applications, will
afford effective protection against competitors with similar technology. There
can also be no assurance that any patents issued or licensed to Cortex will not
be infringed upon or designed around by others. Further, since issuance of a
patent does not guarantee the right to practice the claimed invention, there can
be no assurance that others will not obtain patents that the Company would need
to license or design around in order to practice its patented technologies, or
that licenses that might be required to practice these technologies due to
patents of others would be available on reasonable terms. Additionally, there
can be no assurance that any unpatented manufacture, use or sale of the
Company's technology, processes or products will not infringe on patents or
proprietary rights of others. The Company may be unable to obtain licenses or
other rights to these other technologies that may be required for
commercialization of the Company's proposed products or processes.
Cortex relies to a certain extent upon unpatented proprietary technology and may
determine in some cases that its interests would be better served by reliance on
trade secrets or confidentiality agreements rather than patents. No assurance
can be made that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to or disclose
such technology. In addition, there is no assurance that Cortex can meaningfully
protect its rights in such unpatented proprietary technology or that others will
not wrongfully obtain such technology.
In December 1994, the United States adopted the Uruguay Round Agreements Act
("URAA") to implement the General Agreement on Tariffs and Trade ("GATT"). The
URAA significantly alters many United States intellectual property laws. One of
the most significant changes is to patent term length.
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Any patent issued on an application filed on or after June 8, 1995 will have a
term that begins on the date the patent issues and ends 20 years from the
earliest United States filing date claimed in the patent. This is in contrast to
the 17-year term measured from the patent issue date, which has been the law in
the United States for nearly two centuries. Given the significance of this
change, the new law has a transition provision that applies to patents issuing
on applications filed before June 8, 1995 and to all patents still in force on
June 8, 1995. The term for these patents is the longer of either 17 years from
the date of issuance or 20 years from the earliest United States filing date.
These changes are not presently expected to have a material impact on the
Company's business.
If Cortex is unable to obtain strong protection of its proprietary rights in its
products or processes prior to or after obtaining regulatory clearance, whether
through patents, trade secrets or otherwise, competitors may be able to market
competing products by obtaining regulatory clearance through demonstration of
equivalency to the Company's products, without being required to conduct the
same lengthy clinical tests conducted by the Company.
GOVERNMENT REGULATION
In order to test, produce and market human therapeutic products in the United
States, mandatory procedures and safety standards established by the Food and
Drug Administration ("FDA") must be satisfied. Obtaining FDA approval has
historically been a costly and time-consuming process. The Company is conducting
Phase I/IIa studies in the U.S. with CX516 in patients with Alzheimer's disease
and in patients with schizophrenia under INDs filed by its clinical
collaborators. It is the Company's intent that a larger pharmaceutical company
partner or partners, which the Company is seeking, will pursue the required
regulatory approvals to conduct larger-scale clinical tests in the United States
and elsewhere.
Clinical trials are normally conducted in three phases. Phase I trials are
concerned primarily with the safety of the drug, involve fewer than 100
subjects, and may take from six months to over a year. Phase II trials normally
involve a few hundred patients and are designed primarily to demonstrate
effectiveness in treating or diagnosing the disease or condition for which the
drug is intended, although short-term side effects and risks in people whose
health is impaired may also be examined. Phase III trials may involve up to
several thousand patients who have the disease or condition for which the drug
is intended, to approximate more closely the conditions of ordinary medical
practice. Phase III trials are also designed to clarify the drug's benefit-risk
relationship, to uncover less common side effects and adverse reactions and to
generate information for proper labeling of the drug. The FDA receives reports
on the progress of each phase of clinical testing and may require the
modification, suspension, or termination of clinical trials if an unwarranted
risk is presented to patients. The FDA estimates that the clinical trial period
of drug development can take from two to ten years, and averages five years.
With certain exceptions, once clinical testing is completed, the sponsor can
submit a New Drug Application ("NDA") for approval to market a drug. The FDA's
review of an NDA is also lengthy.
Therapeutic products that may be developed and sold outside the United States
will be subject to regulation by the various countries in which they are to be
distributed. In addition, products manufactured in the United States that have
not yet been cleared for domestic distribution will require FDA approval in
order to be exported to foreign countries for distribution there.
There can be no assurance that any required FDA or other governmental approval
will be granted or, if granted, will not be withdrawn. Governmental regulation
may prevent or substantially delay the marketing of the Company's proposed
products, or cause the Company or its prospective licensees to undertake
additional procedures, which may be both costly and lengthy, and thereby furnish
a competitive advantage to competitors.
<PAGE>
Cortex does not have the financial and other resources to conduct large scale
clinical testing and other procedures required to obtain approval to market its
products and, accordingly, will be dependent on entering into joint ventures or
other collaborative arrangements with third parties with the required resources
in order to obtain the needed approvals. Cortex intends to enter into license or
other arrangements with larger pharmaceutical companies under which those
companies would conduct the required clinical trials and bear the expenses of
obtaining FDA approval for most or all of the Company's proposed products. There
can be no assurance that Cortex will be able to enter into such arrangements on
favorable terms, or at all, or that such arrangements will ultimately result in
obtaining the necessary governmental approvals.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving technology and
intense competition. Many companies of all sizes, including both major
pharmaceutical companies and specialized biotechnology companies, are engaged in
activities similar to those of Cortex. A number of drugs intended for the
treatment of Alzheimer's disease, age-related cognitive deficits, schizophrenia,
stroke and other neurological and psychiatric diseases and disorders are on the
market or in the later stages of clinical testing. For example, over 25 drugs
are under clinical investigation in the U.S. for the treatment of Alzheimer's
disease. The Company's competitors have substantially greater financial and
other resources and larger research and development staffs. Larger
pharmaceutical company competitors also have significant experience in
preclinical testing, human clinical trials and regulatory approval procedures.
In addition, colleges, universities, governmental agencies and other public and
private research organizations will continue to conduct research and are
becoming more active in seeking patent protection and licensing arrangements to
collect license fees, milestone payments and royalties in exchange for license
rights to technology that they have developed, some of which may be directly
competitive with that of the Company. These institutions also compete with
companies such as Cortex in recruiting highly qualified scientific personnel.
The Company expects technological developments in the neuropharmacology field to
continue to occur at a rapid rate and expects that competition will remain
intense as advances continue to be made. Although the Company believes, based on
the technical qualifications and expertise of its Scientific Directors,
consultants and other key scientists, that it will be able to compete in the
discovery and early clinical development of therapeutics for neurological
disorders, the Company does not have the resources, and does not presently
intend, to compete with major pharmaceutical companies in the areas of large
scale clinical testing, manufacturing and marketing.
PRODUCT LIABILITY INSURANCE
The clinical testing, manufacturing and marketing of the Company's products may
expose the Company to product liability claims, against which the Company
maintains liability insurance. Should the Company be subject to a product
liability claim, there can be no assurance that the coverage limits of the
Company's insurance policies will be adequate or that one or more successful
claims brought against the Company would not have a material adverse effect upon
the Company's business, financial condition and results of operations. Further,
if AMPALEX or any other compound is approved by the FDA for marketing, there can
be no assurance that adequate product liability insurance will be available, or
if available, that it will be available at a reasonable cost.
HUMAN RESOURCES
<PAGE>
As of June 30, 1997, Cortex had 21 full-time employees and one part-time
employee and had engaged ten part-time Ph.D.-level scientific consultants. Of
the 21 full-time employees, 14 are engaged in research and development and seven
are engaged in management and administrative support. The Company also sponsors
a substantial amount of research in academic laboratories.
RISK FACTORS
In addition to the other matters set forth in this Report, the Company's
operations and the price of the Company's common stock are subject to the
following:
NEED FOR ADDITIONAL FUNDS. Cortex anticipates that its existing capital
resources are sufficient to maintain current and planned operations through
calendar 1998. The Company will require additional funds to continue its
operations beyond that time. There can be no assurance that the Company will be
able to obtain the additional needed funds on reasonable terms, or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES; DILUTION. Cortex is a development
stage enterprise. From inception on February 10, 1987 through June 30, 1997, the
Company has generated only modest operating revenues and has incurred net losses
aggregating $30,149,604. As of June 30, 1997, the Company had an accumulated
deficit of $32,181,443. The Company will require substantial additional funds to
advance its research and development programs, particularly should the Company
decide to independently conduct later-stage clinical testing of any of its
proposed products. There can be no assurance that such additional financing will
be available on acceptable terms, or at all. If additional funds are raised by
issuing equity securities, further dilution to existing stockholders may result.
If the Company is unable to obtain additional funds when and as needed, the
Company may be required to significantly curtail one or more of its product
development programs. See "Item 6--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
TECHNOLOGICAL UNCERTAINTY; EARLY STAGE OF PRODUCT DEVELOPMENT; NO ASSURANCE OF
REGULATORY APPROVALS. The Company's proposed products are in the preclinical or
early clinical stage of development and will require significant further
research, development, clinical testing and regulatory clearances. They are
subject to the risks of failure inherent in the development of products based on
innovative technologies. These risks include the possibilities that any or all
of the proposed products will be found to be ineffective or toxic, or otherwise
fail to receive necessary regulatory clearances; that the proposed products,
although effective, will be uneconomical to market; that third parties may now
or in the future hold proprietary rights that preclude the Company from
marketing them; or that third parties will develop and market a superior or
equivalent product. Accordingly, the Company is unable to predict whether its
research and development activities will result in any commercially viable
products or applications. Further, due to the extended testing and regulatory
review process required before marketing clearance can be obtained, the Company
does not expect to be able to commercialize any therapeutic drug for at least
several years, either directly or through its prospective licensees. There can
be no assurance that the Company's proposed products will be safe or effective
or receive regulatory approvals that are required for commercial sale. See
"Business--Government Regulation."
DEPENDENCE ON STRATEGIC ALLIANCES AND THIRD PARTIES FOR CLINICAL TESTING,
MANUFACTURING AND MARKETING. The Company does not have the resources, and does
not presently intend, to conduct later-stage human clinical trials or to
manufacture any of its proposed products. The Company is therefore seeking
larger pharmaceutical company partners to conduct these activities for most or
all of its proposed products. In connection with its efforts to secure corporate
partners, the Company may seek to retain certain co-promotional rights to its
proposed products, so that it may promote such products to selected medical
specialists while its corporate partner promotes to the general medical market.
There can be no assurance that the Company will be able to enter into any such
partnering arrangements on this or any other basis. In addition, there can be no
assurance that either the Company or its prospective corporate partners can
successfully introduce its proposed products, that they will achieve acceptance
by patients,
<PAGE>
health care providers and insurance companies, or that they can be manufactured
and marketed at prices that would permit the Company to operate profitably.
LIMITED PROPRIETARY RIGHTS; LACK OF PATENT PROTECTION. The Company has
negotiated license agreements giving it exclusive rights to its proposed
cognition enhancement products and calpain inhibitor products under issued
patents or patent applications owned wholly by other parties or by other parties
as co-owners with the Company. The Company also holds options or other rights to
obtain exclusive licenses under patent applications relating to certain of its
potential products.
There can be no assurance that current or future patent applications in which
Cortex has an interest, either as sole owner or as a current or prospective
licensee, will result in further patents being issued. There can also be no
assurance that patents issuing in the future in connection with current or
future patent applications will afford effective protection against competitors
with similar technology, or that any patents issued or licensed to Cortex will
not be infringed upon or designed around by others.
If Cortex is unable to obtain protection of its proprietary rights in its
products or processes prior to or after obtaining regulatory clearances, whether
through patents, trade secrets or otherwise, competitors may be able to market
competing products by obtaining regulatory clearance through demonstration of
equivalency to the Company's products, without being required to conduct the
same lengthy clinical tests required of the Company.
In some cases, Cortex may rely on trade secrets to protect its innovations.
There can be no assurance that secrecy obligations will be honored or that
others will not independently develop similar or superior technologies. To the
extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to the
Company's projects, disputes may arise as to the proprietary rights to such
information that may not be resolved in favor of the Company. See "Business--
Patents and Proprietary Rights."
Certain of the Company's licenses and other agreements are terminable if the
Company does not make certain minimum annual payments, meet certain milestones
or diligently seek to commercialize the underlying technology. In addition, the
Company's related collaborative and consulting agreements are generally
terminable upon 30 to 60 days' written notice. See "Business--Technology Rights
and Collaborative Agreements."
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION. If all outstanding warrants and
options are exercised prior to their expiration, approximately 2,200,000
additional shares of common stock could become freely tradable without
restriction under the Securities Act. An aggregate of 29,384 shares of common
stock are issuable upon conversion of 9% Preferred Stock and Series B Preferred
Stock outstanding at June 30, 1997. On issuance such shares will be freely
tradable. As of June 30, 1997, 2,727,396 shares of common stock are issuable
upon conversion of 800 currently outstanding shares of Series A Convertible
Preferred Stock (the "Series A Preferred"). If conversions of Series A Preferred
occur at an effective conversion price of $2.75 or higher, the holder of the
shares of Series A Preferred being converted may exercise, at the time of
conversion, rights to purchase additional shares of common stock. The number of
additional shares of common stock subject to this additional purchase right will
equal the number of shares of common stock issuable upon conversion of the
shares of Series A Preferred then being converted. Any right to purchase
additional common stock is forfeited to the extent it is not fully exercised at
the time of conversion. Depending on the date of conversion, the then current
sales price of the common stock and whether any additional purchase rights are
exercised, the exact number of shares of common stock issued upon conversion of
the Series A Preferred may increase or decrease substantially from the number of
shares of common stock issuable as of June 30, 1997 set forth above. All shares
of common stock issuable upon conversion of Series A Preferred, exercise of the
related rights of additional purchase and exercise of the related warrants, may
be freely tradeable. Sales of substantial amounts of common stock in the public
market could adversely affect the prevailing market price of the common stock
and, dependent upon the then current market price of the common stock, increase
the number of shares of
<PAGE>
common stock that are issuable upon conversion of Series A Preferred. See "Item
5--Market for Common Equity and Related Stockholder Matters" and Notes 3 and 4
of Notes to Financial Statements.
INTENSE COMPETITION. The Company's business is characterized by intensive
research efforts. Many companies, research institutes and universities are
working to develop therapeutic products similar to those being developed by the
Company. Most of these companies, research institutes and universities have
substantially greater financial, technical, and/or other resources than Cortex.
In addition, many have experience in undertaking human clinical trials of new or
improved therapeutic products and obtaining FDA and other regulatory clearances.
The Company has no experience in conducting and managing large-scale clinical
testing or in preparing applications necessary to gain regulatory clearances to
market. Accordingly, others may succeed in developing products that are safer or
more effective than those being developed by the Company and in obtaining FDA
clearances for such products more rapidly than the Company. Further, it is
expected that competition in this field will continue to intensify. See
"Business--Competition."
DEPENDENCE UPON KEY PERSONNEL. Cortex is highly dependent upon key management
and technical personnel. Competition for qualified employees among
pharmaceutical and biotechnology companies is intense, and the loss of any of
such persons, or an inability to attract, retain and motivate the additional
highly-skilled employees and consultants required for the Company's activities
could materially adversely affect its business and prospects. There can be no
assurance that Cortex will be able to retain its existing personnel or attract
additional qualified employees when they are needed. See "Business--Human
Resources."
DEPENDENCE ON RELATIONSHIPS WITH CONSULTANTS AND THE UNIVERSITY OF CALIFORNIA,
IRVINE. The Company is dependent upon its relationships with a number of
academic consultants, particularly Drs. Carl W. Cotman and Gary S. Lynch of the
University of California, Irvine ("UCI"). Drs. Cotman and Lynch play a role in
guiding the internal research of the Company. In addition, Cortex sponsors in
the laboratories of Dr. Lynch at UCI, preclinical research that is a component
of the Company's product development and corporate partnering profile. Were
Cortex's relationships with Dr. Lynch or UCI to be disrupted, it is possible
that the Company's AMPA receptor research program would be adversely affected.
Further, there is no assurance that the Company would be able to conduct the
sponsored research internally at reasonable cost, or at all. The Company's
agreements with its consultants, including those with Drs. Cotman and Lynch, are
generally terminable by the consultant on short notice.
GOVERNMENT REGULATION. Products such as those Cortex is attempting to develop
are subject to an extensive and lengthy regulatory review and approval process
by the FDA and comparable agencies in other countries. Prior to
commercialization, the Company's products will require governmental approvals
that have not yet been obtained and that are not expected to be obtained for at
least several years, if at all. The testing and regulatory approval process,
which includes preclinical, clinical and post-clinical testing of the Company's
products to establish their safety and efficacy, will take many years and
require the expenditure of substantial resources. There can also be no assurance
that, even after such time and expenditures, regulatory clearances will be
obtained for any of the Company's products. If regulatory clearances are
obtained, a marketed product remains subject to continual review and later
discovery of previously unknown problems may result in restrictions on marketing
or withdrawal of the product from the market. See "Business--Government
Regulation."
LIMITED PUBLIC MARKET; CHANGE IN LISTING STANDARDS; POSSIBLE VOLATILITY OF STOCK
PRICE. The Company's common stock has been traded on the Nasdaq Small Cap
Market since 1989. Although approximately 20 firms make a market in Cortex
common stock, there can be no assurance that an active or established trading
market will be maintained or that the Company's common stock will continue to be
traded on the Nasdaq Small Cap Market.
Nasdaq has recently announced approval of changes to the listing standards for
the Nasdaq Small Cap Market that institute a net tangible asset, market
capitalization, or net income test in place of the current total asset and total
equity tests. In the event the Company does not meet such requirements, the
<PAGE>
Company's common stock may be removed from the Nasdaq Small Cap Market. In such
event, the liquidity of the Company's common stock may be impaired and its
trading price reduced. In addition, in such event, the holders of the Company's
Series A Preferred Stock may request the Company to redeem such shares for cash.
There is significant volatility in the market price of securities of early stage
life sciences companies and the trading price of the Company's common stock has
been subject to wide fluctuations. See "Item 5--Market for Common Equity and
Related Stockholder Matters." Various factors and events, including
announcements by the Company or its competitors concerning technological
innovations, new products, proposed governmental regulations or actions,
developments or disputes relating to patents or proprietary rights and public
concern over the safety of therapeutic products or other factors that affect the
market generally may have a significant effect on the Company's business and on
the market price of the Company's securities.
DIVIDENDS. The Company has not paid cash dividends on its common stock and does
not anticipate doing so in the foreseeable future. The Company may not pay any
dividends on its common stock until accrued and unpaid dividends on the
9% Preferred Stock have been paid in full. As of June 30, 1997, accrued and
unpaid dividends on the 9% Preferred Stock were $74,250.
ANTI-TAKEOVER PROVISIONS. The Board of Directors has the authority, without
further approval of the Company's stockholders, to issue up to 549,100 shares of
Preferred Stock having such rights, preferences and privileges as the Board of
Directors may determine. Any such issuance of additional shares of Preferred
Stock could have the effect of delaying or preventing a change in control of the
Company and may adversely affect the rights of holders of common stock.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 30,000 square feet of office, research
laboratory and expansion space under an operating lease that expires May 31,
1999, with an additional five-year option at 95% of the then fair market rental
rate. Current monthly rent on these facilities is approximately $20,000. The
Company believes that this facility will be adequate for its research and
development activities for at least the next three years.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1997, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (Nasdaq symbol: CORX) began trading publicly in the
over-the-counter market on July 18, 1989 and is currently traded on the Nasdaq
Small-Cap Market. The following table presents quarterly information on the high
and low sale prices of the common stock for the fiscal years ended June 30, 1997
and 1996, as reported by Nasdaq.
High Low
---- ---
FISCAL YEAR ENDED JUNE 30, 1997
<PAGE>
Fourth Quarter. . . . . . . . . . . . . . . . . . $ 3-5/8 $ 2-7/16
Third Quarter . . . . . . . . . . . . . . . . . . 5-1/4 2-11/16
Second Quarter. . . . . . . . . . . . . . . . . . 7-1/4 2-7/16
First Quarter . . . . . . . . . . . . . . . . . . 4-1/2 2-5/8
FISCAL YEAR ENDED JUNE 30, 1996
Fourth Quarter. . . . . . . . . . . . . . . . . . $ 7-1/4 $ 4
Third Quarter . . . . . . . . . . . . . . . . . . 8-3/4 3-1/2
Second Quarter. . . . . . . . . . . . . . . . . . 5-17/32 2-3/8
First Quarter . . . . . . . . . . . . . . . . . . 6-3/8 2-7/8
As of June 30, 1997, there were 718 stockholders of record of the Company's
common stock, and approximately 9,500 beneficial owners. The last sale price of
the Company's common stock on September 22, 1997, as reported by Nasdaq, was
$2-15/16.
The Company has never paid cash dividends on its common stock and does not
anticipate paying such dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in the Company's
business. The outstanding shares of 9% Preferred Stock bear a fixed dividend
rate of $0.09 per share per annum, which accrue in equal semiannual installments
on June 15 and December 15 of each year, which dividends must be paid in full
before any dividends can be paid on the common stock. The Company paid the
semiannual dividends on the 9% Preferred Stock that accrued in 1989, but elected
not to distribute subsequent dividends in order to conserve capital for
operations. At June 30, 1997, accrued and unpaid dividends on the 9% Preferred
Stock totaled $74,250. The payment of future dividends, if any, will be
determined by the Board of Directors in light of conditions then existing,
including the Company's financial condition and requirements, future prospects,
restrictions in financing agreements, business conditions and other factors
deemed relevant by the Board of Directors.
On June 5, 1997, the Company issued 200 shares of newly created Series A
Preferred Stock ("Series A Preferred") and warrants to purchase up to 400,000
shares of the Company's common stock to eleven institutional investors for gross
proceeds of $2,000,000 in the first tranche of a two-part Regulation D private
placement. The Company sold an additional 200 shares of Series A Preferred (and
warrants to purchase another 400,000 shares of the Company's common stock) to
the same investors for $2,000,000 of additional gross proceeds on June 30, 1997,
three business days following the effectiveness of a resale Registration
Statement on Form SB-2. The Registration Statement covers resales of shares of
common stock issuable upon conversion of the Series A Preferred and upon
exercise of the warrants. The issuances were made pursuant to Section 4(2) of
the Securities Act. For the 75 days following the first closing date, the Series
A Preferred is convertible at an effective per share conversion price of 100% of
the lowest of the dollar volume weighted average trading prices of the Company's
common stock during the five trading days immediately preceding the conversion
date (the "Average Stock Price"). Thereafter, if the Average Stock Price is
greater than $2.50 per share, the effective conversion price shall equal 80% of
the Average Stock Price. If the Average Stock Price is greater than $2.10 and
less than or equal to $2.50 per share, then the effective conversion price shall
be $2.00. If the Average Stock Price is less than $2.10 per share, the effective
conversion price shall be 95% of the Average Stock Price. If the Average Stock
Price on the date of conversion is equal to or greater than $2.75, the holder
may purchase up to the same number of shares of common stock as the holder is
acquiring on conversion, at a price per share equal to such Average Stock Price.
The effective conversion rate is subject to adjustment at the rate of six
percent per annum based on the length of the period from original issuance of
the Series A Preferred until its conversion. See "Note 3" of Notes to Financial
Statements.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS; PLAN OF OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN.
RESULTS OF OPERATIONS
From inception (February 10, 1987) through June 30, 1997, the Company's revenue
has consisted of (i) $3,600,000 of license fees and research and development
funding from the Company's agreement with Alkermes, Inc. ("Alkermes", see Note 5
of Notes to Financial Statements), (ii) net interest income aggregating
$1,489,000 and (iii) $95,000 of grant revenue.
From inception (February 10, 1987) through June 30, 1997, the Company sustained
losses aggregating $30,150,000. Continuing losses are anticipated over the next
several years, as the Company's ongoing operating expenses for preclinical
research and early clinical development will only be offset, if at all, by
licensing revenues under planned strategic alliances with larger pharmaceutical
companies that the Company is seeking for the later-stage clinical development,
manufacturing and marketing of its products. The nature and timing of payments
to Cortex under these planned strategic alliances, if and as entered into, is
likely to significantly affect the Company's operations and to produce
substantial period-to-period fluctuations in reported financial results. Over
the longer term, the Company will be dependent upon successful commercial
development of its products by its prospective partners to attain profitable
operations from product royalties or other revenues based on product sales.
The Company believes that inflation and changing prices have not had a material
impact on its ongoing operations to date.
FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
For the year ended June 30, 1997, the Company's loss from operations was
$4,929,000 compared to a loss from operations of $4,158,000 for the prior year,
with the increase attributable to higher levels of research and development
spending.
Research and development expenses increased to $3,376,000, or by 26%, during the
year ended June 30, 1997 compared to the prior year. Most of the increase
related to the commencement of Phase I/IIa clinical testing of AMPALEX in
patients with Alzheimer's disease and a similar study of AMPALEX in patients
suffering from schizophrenia. Salary expenses for scientific personnel added
late in the prior year and a concomitant increase in spending for laboratory
supplies contributed most of the remaining increase, along with higher outlays
for sponsored external research.
General and administrative expenses were $1,709,000 for the year ended June 30,
1997, increasing 4% from the prior year. The slight increase primarily
represented a full year of salary and related expenses for the Chief Executive
Officer, who joined the Company in the fourth quarter of the prior year.
PLAN OF OPERATION; LIQUIDITY AND CAPITAL RESOURCES
CORTEX has funded its organizational and research and development activities
primarily from the issuance of equity securities, with net proceeds from
inception (February 10, 1987) through June 30, 1997 aggregating $36 million. An
additional $3.6 million in research and license payments was received from
Alkermes in 1992 and 1993 in connection with the development and license
agreement with that firm (see Note 5 of Notes to Financial Statements). Interest
income from inception through June 30, 1997, which approximates funds received,
was $1.5 million.
<PAGE>
As of June 30, 1997, the Company had cash, cash equivalents and short-term
investments totaling $7.6 million and working capital of $7.0 million. In
comparison, as of June 30, 1996, the Company had cash, cash equivalents and
short-term investments of $4.1 million and working capital of $3.8 million. The
increases resulted from an aggregate of $7.6 million of net proceeds received
from the private placements of Series D Preferred Stock and Series A Preferred
Stock completed in February and June 1997, respectively, partially offset by
amounts required to fund operating losses and to purchase capital equipment.
From inception (February 10, 1987) through June 30, 1997, net expenditures for
furniture, equipment and leasehold improvements aggregated $2.0 million.
The June 1997 private placement of Series A Preferred Stock included the
issuance of special purchase rights that, under certain circumstances, allow the
investors to purchase additional shares of common stock at the conversion price
in effect at the time of conversion of the Series A Preferred. These rights are
only exercisable at the time of such conversion, and expire to the extent they
are not utilized. If fully exercised, of which there can be no assurance, the
special purchase rights would provide approximately $4 million of additional
working capital.
As of June 30, 1997, Cortex had 110,000 outstanding shares of 9% cumulative
convertible preferred stock, which accrue cumulative semi-annual dividends at an
annual rate of $0.09 per share. To conserve capital for operations, the Company
has elected not to distribute the dividends that have accrued since 1989.
Accrued and unpaid dividends as of June 30, 1997 were $74,250.
The Company leases approximately 30,000 square feet of research laboratory,
office and expansion space under an operating lease that expires May 31, 1999,
with an additional five-year option at 95% of the then fair market rental rate.
The commitments under the lease agreement for the years ending June 30, 1998 and
1999 are $243,000 and $229,000, respectively.
In connection with the settlement of the license dispute with Alkermes (see
Note 5 of Notes to Financial Statements), in October 1995 the Company issued to
Alkermes a $1,000,000 three-year promissory note accruing interest semi-annually
at the then federal funds rate. The Company also agreed to pay Alkermes a
graduated royalty on calpain inhibitor development proceeds, as defined and
subject to certain limitations.
Over the next twelve months, the Company plans to conduct additional preclinical
and Phase I/II clinical studies on its AMPAKINE compounds, which may involve a
twelve-month expenditure of approximately $1.3 million. The Company is also
committed to an additional $611,000 of funding for sponsored research in
academic laboratories. Neither significant investments in plant or equipment nor
substantial changes to staffing levels are contemplated under current spending
plans for the upcoming fiscal year. As of June 30, 1997, Cortex had 21 full-time
employees and one part-time employee.
Cortex anticipates that its existing cash, cash equivalents and short-term
investments, along with a modest amount of anticipated interest income will be
sufficient to satisfy its capital requirements through calendar 1998 under
current spending plans.
Over the longer term, the Company will require substantial additional funds to
maintain and expand its research and development activities and ultimately to
commercialize, with or without the assistance of corporate partners, any of its
proposed products. The Company is seeking collaborative or other arrangements
with larger pharmaceutical companies, under which such companies would provide
additional capital to the Company in exchange for exclusive or non-exclusive
license or other rights to certain of the technologies and products the Company
is developing. However, the competition for such arrangements with major
pharmaceutical companies is intense, with a large number of biopharmaceutical
<PAGE>
companies attempting to satisfy their funding requirements through such
arrangements. Accordingly, although the Company is presently engaged in
discussions with a number of suitable candidate companies, there can be no
assurance that an agreement or agreements will arise from these discussions in a
timely manner, or at all, or that revenues that may be generated thereby will
offset operating expenses sufficiently to reduce the Company's short- or long-
term funding requirements. Additional equity or debt financings will be
required, and there can be no assurance that funds will be available from such
financings on favorable terms, or at all. If additional funds are raised by
issuing equity securities, depending upon the nature and timing of such
issuances, dilution to then existing stockholders is likely to result.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company and other information required by this
item are set forth herein in a separate section beginning with the Index to
Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The sections entitled "Nominees for Director," "Executive Officers" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" included
in the Company's Proxy Statement are incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation," "Option Matters," "Employment
and Consulting Agreements" and "Director Compensation" included in the Company's
Proxy Statement are incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Principal Stockholders" included in the Company's Proxy
Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" included in the Company's Proxy
Statement is incorporated herein by reference.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) ITEM 601 EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation dated April 11, 1989, as
amended by Certificate of Amendment on June 27, 1989, by Certificate
of Designation filed April 29, 1991, by Certificate of Correction
filed May 1, 1991, by Certificate of Amendment of Certificate of
Designation filed June 13, 1991, by Certificate of Amendment of
Certificate of Incorporation filed November 12, 1992, by Certificate
of Amendment of Restated Certificate of Incorporation filed
January 11, 1995, by Certificate of Designation filed December 8,
1995, by Certificate of Designation filed October 15, 1996, and by
Certificate of Designation filed June 4, 1997, incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form SB-2 filed June 18, 1997.
3.2 By-Laws of the Company, as adopted March 4, 1987, and amended
through October 8, 1996, incorporated by reference to Exhibit
3.2 to the Company's Annual Report on Form 10-KSB filed October 15,
1996.
10.2 Consulting Agreement, dated October 30, 1987, between the Company
and Carl W. Cotman, Ph.D. *
10.3 Consulting Agreement, dated as October 30, 1987, between the Company
and Gary S. Lynch, Ph.D. *
10.8 1989 Incentive Stock Option, Nonqualified Stock Option and Stock
Purchase Plan. *
10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan. *
10.18 License Agreement, dated February 11, 1991 between the Company and
Georgia Tech Research Corporation, incorporated by reference to
Exhibit 10.18 of the Company's Amendment on Form 8 filed November
27, 1991 to the Company's Annual Report on Form 10-K filed September
30, 1991. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to the
Company's application requesting confidential treatment under
Rule 24b-2 under the Securities Exchange Act of 1934).
10.19 License Agreement dated March 27, 1991 between the Company and the
Regents of the University of California, incorporated by reference
to Exhibit 10.19 of the Company's Amendment on Form 8 filed November
27, 1991 to the Company's Annual Report on Form 10-K filed September
30, 1991. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to the
Company's application requesting confidential treatment under
Rule 24b-2 under the Securities Exchange Act of 1934).
10.28 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted October 22, 1992, incorporated by
reference to Exhibit 10.28 of the Company's Annual Report on Form
10-K filed September 16, 1992.
10.31 License Agreement dated June 25, 1993 between the Company and the
Regents of the University of California, incorporated by reference
to the Company's Amendment of Annual Report on Form 10-KSB/A filed
November 26, 1993. (Portions of this Exhibit are omitted and were
filed separately with the Secretary of the Commission pursuant to
the Company's application requesting confidential treatment under
Rule 24b-2 of the Securities Exchange Act of 1934).
10.34 Warrant for the Purchase of shares of common stock dated July 23,
1993 issued to Vector Securities International, Inc., incorporated
by reference to Exhibit 10.34 of the Company's Annual Report on Form
10-KSB filed October 13, 1993.
10.36 Amended and Restated Employment Agreement between the Company and D.
Scott Hagen, dated September 1, 1993, incorporated by reference to
Exhibit 10.36 of the Company's Annual Report on Form 10-KSB filed
October 13, 1993.
10.36.1 Amendment No. 1, dated January 1, 1995, to the Amended and Restated
Employment Agreement between the Company and D. Scott Hagen, dated
September 1, 1993, incorporated by reference to the same numbered
Exhibit to the Company's Quarterly Report on Form 10-QSB filed April
28, 1995.
10.41 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted December 13, 1993, incorporated by
reference to Exhibit 4.9 of the Company's Registration Statement on
Form S-8 filed January 28, 1994.
<PAGE>
10.42 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 13, 1993, incorporated by reference
to Exhibit 4.8 of the Company's Registration Statement on Form S-8
filed January 28, 1994.
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
10.43 Amendment to Executive Stock Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.7 of the Company's
Registration Statement on Form S-8 filed January 28, 1994.
10.44 Lease Agreement, dated January 31, 1994, for the Company's
facilities in Irvine, California, incorporated by reference to
Exhibit 10.44 of the Company's Quarterly Report on Form 10-QSB filed
May 16, 1994.
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted December 15, 1994, incorporated by
reference to Exhibit 4.10 of the Company's Registration Statement on
Form S-8 filed February 8, 1995.
10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 1994, incorporated by reference to
Exhibit 4.9 of the Company's Registration Statement on Form S-8
filed February 8, 1995.
10.47 Amendment to Executive Stock Plan adopted September 9, 1994,
incorporated by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-KSB filed October 13, 1995.
10.48 Amendment to the Non-Employee Director Formula Grant Plan, adopted
December 15, 1994, incorporated by reference to the same numbered
Exhibit to the Company's Annual Report on Form 10-KSB filed
October 13, 1995.*
10.49 Settlement Agreement between the Company and Alkermes, Inc., dated
October 5, 1995, incorporated by reference to the same numbered
Exhibit to the Company's Annual Report on Form 10-KSB filed
October 13, 1995. (Portions of this Exhibit are omitted and were
filed separately with the Secretary of the Commission pursuant to
the Company's Application requesting confidential treatment under
Rule 406 of the Securities Act of 1933).
10.50 Form of Subscription Agreement entered into with each purchaser of
Series C Preferred Stock, incorporated by reference to Exhibit 4.1
of the Company's Current Report on Form 8-K filed December 22, 1995.
10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued to
Swartz Investments, Inc., incorporated by reference to Exhibit 4.3
of the Company's Current Report on Form 8-K filed December 22, 1995.
10.52 Registration Rights Agreement dated December 8, 1995, entered into
with purchasers of Series C Preferred Stock and Swartz Investments,
Inc., incorporated by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K filed December 22, 1995.
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued to
Vector Securities International, Inc., incorporated by reference to
the same numbered Exhibit to the Company's Pre- Effective Amendment
No. 1 to Post Effective Amendment No. 2 to Registration Statement on
Form SB-2, No. 33-71894, filed January 26, 1996.
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares issued
to Vector Securities International, Inc., incorporated by reference
to the same numbered Exhibit to the Company's Pre-Effective
Amendment No. 1 to Post Effective Amendment No. 2 to Registration
Statement on Form SB-2, No. 33-71894, filed January 26, 1996.
10.56 Employment Agreement dated May 15, 1996, between the Company and
Vincent F. Simmon, Ph.D., incorporated by reference to the same
numbered Exhibit to the Company's Current Report on Form 8-K filed
June 4, 1996.
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted December 12, 1995, incorporated by
reference to Exhibit 4.11 of the Company's Registration Statement on
Form S-8 filed September 13, 1996.
10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 12, 1995, incorporated by reference
to Exhibit 4.10 of the Company's Registration Statement on Form S-8
filed September 13, 1996.
10.59 Securities Subscription Agreement for Series D Preferred Stock dated
October 15, 1996, between the Company and Ashline Ltd., incorporated
by reference to the same numbered Exhibit to the Company's Quarterly
Report on Form 10-QSB filed November 12, 1996.
<PAGE>
10.60 1996 Stock Incentive Plan, incorporated by reference to the same
numbered Exhibit to the Company's Quarterly Report on Form 10-QSB
filed November 12, 1996.
10.61 Form of Subscription Agreement with each purchaser of Series A
Preferred Stock, incorporated by reference to Exhibit 10.61 to the
Company's Registration Statement on Form SB-2 filed June 18, 1997.
10.62 Form of Warrant issued to each purchaser of Series A Preferred
Stock, incorporated by reference to Exhibit 10.62 to the Company's
Registration Statement on Form SB-2 filed June 18, 1997.
EXHIBIT
NUMBER DESCRIPTION
- ------------------------------------------------------------------------------
10.63 Registration Rights Agreement with holder of Series A Preferred
Stock dated June 5, 1997, incorporated by reference to Exhibit 10.63
to the Company's Registration Statement on Form SB-2 filed June 18,
1997.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, independent auditors.
24 Power of Attorney (included on Signature page).
27 Financial Data Schedule.
- -------------------------
* Incorporated by reference to the same numbered exhibit of the
Company's Registration Statement on Form S-1, No. 33-28284,
effective on July 18, 1989.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CORTEX PHARMACEUTICALS, INC.
By: /s/ Vincent F. Simmon
----------------------------------------
Vincent F. Simmon, Ph.D.
President and Chief Executive Officer
Know all men by these presents, that each person whose signature appears below
constitutes and appoints each of Vincent F. Simmon, Ph.D. and D. Scott Hagen,
acting singly, as his true and lawful attorney-in-fact and agent, with full
power of substitution, and for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments to this report, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto each of said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Vincent F. Simmon, Ph.D. President and Chief September 24, 1997
- ------------------------------------ Executive Officer, Director
Vincent F. Simmon, Ph.D.
(Principal Executive Officer)
/s/ D. Scott Hagen Vice President, Chief Financial September 24, 1997
- ------------------------------------ Officer and Secretary
D. Scott Hagen
(Principal Financial and
Accounting Officer)
/s/ Harvey S. Sadow, Ph.D. Chairman of the Board September 24, 1997
- ------------------------------------ and Director
Harvey S. Sadow, Ph.D.
/s/ Robert F. Allnutt Director September 24, 1997
- ------------------------------------
Robert F. Allnutt
/s/ Charles J. Casamento Director September 24, 1997
- ------------------------------------
Charles J. Casamento
-S-1-
<PAGE>
/s/ Carl W. Cotman, Ph.D.
- ------------------------------------ Director September 24, 1997
Carl W. Cotman, Ph.D.
/s/ Michael G. Grey Director September 24, 1997
- ------------------------------------
Michael G. Grey
/s/ Davis L. Temple, Jr., Ph.D. Director September 24, 1997
- ------------------------------------
Davis L. Temple, Jr., Ph.D.
</TABLE>
-S-2-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . F-2
Balance Sheets--As of June 30, 1997 and 1996. . . . . . . . . . . . F-3
Statements of Operations--For the years ended June 30, 1997 and
1996 and the period from inception (February 10, 1987)
through June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Stockholders' Equity--For the period from
inception (February 10, 1987) through June 30, 1997. . . . . . . . F-5
Statements of Cash Flows--For the years ended June 30, 1997 and
1996 and the period from inception (February 10, 1987)
through June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-10
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE STOCKHOLDERS AND BOARD OF DIRECTORS
CORTEX PHARMACEUTICALS, INC.
We have audited the accompanying balance sheets of Cortex Pharmaceuticals, Inc.
(a development stage enterprise) as of June 30, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended June 30, 1997 and for the period from inception
(February 10, 1987) through June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cortex Pharmaceuticals, Inc. (a
development stage enterprise) at June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the two years in the period ended
June 30, 1997 and for the period from inception (February 10, 1987) through June
30, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
July 17, 1997
F-2
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,568,803 $ 4,091,550
Other current assets 71,530 88,427
------------ ------------
Total current assets 7,640,333 4,179,977
Furniture, equipment and leasehold improvements, net 669,844 807,601
Other 23,130 26,342
------------ ------------
$ 8,333,307 $ 5,013,920
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 501,603 $ 217,332
Accrued dividends 74,250 64,350
Accrued wages, salaries and related expenses 58,683 40,145
Current obligations under capital lease 1,499 8,501
------------ ------------
Total current liabilities 636,035 330,328
Obligations under capital leases -- 1,499
Note payable to Alkermes, Inc. 1,092,265 1,037,330
Redeemable preferred stock:
Series A convertible preferred stock, $0.001
par value; $10,000 per share liquidation
preference; shares authorized: 400;
shares issued and outstanding: 400 (1997) 3,936,720 --
Stockholders' equity:
9% cumulative convertible preferred stock,
$0.001 par value; $1.00 per share liquidation
preference; shares authorized: 1,250,000;
shares issued and outstanding: 110,000 110,000 110,000
Series B convertible preferred stock, $0.001
par value; $0.6667 per share liquidation
preference; shares authorized: 3,200,000;
shares issued and outstanding: 150,000 86,810 86,810
Series C convertible preferred stock, $0.001
par value; $25,000 per share liquidation
preference; shares authorized: 160;
shares issued and outstanding: 35 (1996) -- 752,476
Common stock, $0.001 par value; shares
authorized: 20,000,000; shares issued and
outstanding: 9,394,249 (1997) and
7,495,576 (1996) 9,394 7,496
Additional paid-in capital 34,643,526 28,047,279
Deficit accumulated during the development stage (32,181,443) (25,359,298)
------------ ------------
Total stockholders' equity 2,668,287 3,644,763
------------ ------------
$ 8,333,307 $ 5,013,920
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
inception
(February 10,
Years ended June 30, 1987) through
----------------------------------- June 30,
1997 1996 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Research and license revenue under an
agreement with Alkermes, Inc. $ -- $ -- $ 3,600,000
Grant revenue -- -- 94,717
------------- -------------- -------------
Total revenues -- -- 3,694,717
------------- -------------- -------------
Operating expenses:
Research and development 3,376,284 2,677,577 22,345,396
General and administrative 1,709,320 1,643,732 11,759,879
Settlement with Alkermes, Inc. -- -- 1,227,977
------------- -------------- -------------
Total operating expenses 5,085,604 4,321,309 35,333,252
------------- -------------- -------------
Loss from operations (5,085,604) (4,321,309) (31,638,535)
Interest income, net 155,624 163,062 1,488,931
------------- -------------- -------------
Net loss before preferred stock
accretion and dividends $ (4,929,980) $ (4,158,247) $ (30,149,604)
------------- -------------- -------------
Preferred stock accretion and dividends:
Accretion of and dividends on 9% Cumulative
Convertible Preferred Stock 9,900 9,900 604,774
Imputed dividends for Series D Convertible
Preferred Stock 879,672 -- 879,672
Imputed dividends for Series A Convertible
Preferred Stock 1,012,493 -- 1,012,493
------------- -------------- -------------
Net loss applicable to common stock $ (6,832,045) $ (4,168,147) $ (32,646,543)
------------- -------------- -------------
------------- -------------- -------------
Weighted average common shares outstanding 8,252,047 6,532,884
------------- --------------
Net loss per share $ (0.83) $ (0.64)
------------- --------------
------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible
preferred preferred preferred preferred Common
stock stock stock stock stock
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 10, 1987
(date of inception) $ -- $ -- $ -- $ -- $ --
Sale of 1,420,000 shares of common stock,
$0.005 per share -- -- -- -- 1,420
Sale of 500,000 shares of common stock,
$2.50 per share, net of expenses -- -- -- -- 500
Issuance of 11,000 shares of common stock
for services, $2.50 per share -- -- -- -- 11
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1988 -- -- -- -- 1,931
Conversion of subordinated convertible note
and interest payable into 83,868 shares of
common stock, $2.50 per share -- -- -- -- 84
Issuance of 500 shares of common stock for
services, $2.50 per share -- -- -- -- 1
Conversion of 5,000 shares of 9% preferred
stock into 3,333 shares of common stock -- -- -- -- 3
9% preferred stock dividends -- -- -- -- --
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1989 -- -- -- -- 2,019
Initial public offering of 660,000 shares of
common stock, $10.00 per share,
net of expenses -- -- -- -- 660
Redemption of 70,000 shares of common
stock, $0.005 per share -- -- -- -- (70)
9% preferred stock dividends -- -- -- -- --
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1990 -- -- -- -- 2,609
Sale of 3,181,253 shares of Series B
convertible preferred stock, $0.6667
per share, net of expenses -- 1,841,108 -- -- --
Conversion of 182,200 shares of 9% preferred
stock into 24,293 shares of common stock -- -- -- -- 24
Issuance of compensatory stock options -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- --
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1991 $ -- $ 1,841,108 $ -- $ -- $ 2,633
----------- ----------- ----------- ----------- -----------
Unrealized loss Deficit
on available accumulated
Additional for sale U.S. during the
paid-in Deferred Government development
capital compensation securities stage Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 10, 1987
(date of inception) $ -- $ -- $ -- $ -- $ --
Sale of 1,420,000 shares of common stock,
$0.005 per share 5,680 -- -- -- 7,100
Sale of 500,000 shares of common stock,
$2.50 per share, net of expenses 1,076,089 -- -- -- 1,076,589
Issuance of 11,000 shares of common stock
for services, $2.50 per share 27,489 -- -- -- 27,500
9% preferred stock accretion -- -- -- (2,560) (2,560)
Net loss -- -- -- (400,193) (400,193)
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1988 1,109,258 -- -- (402,753) 708,436
Conversion of subordinated convertible note
and interest payable into 83,868 shares of
common stock, $2.50 per share 209,586 -- -- -- 209,670
Issuance of 500 shares of common stock for
services, $2.50 per share 1,249 -- -- -- 1,250
Conversion of 5,000 shares of 9% preferred
stock into 3,333 shares of common stock 22,903 -- -- -- 22,906
9% preferred stock dividends (55,125) -- -- -- (55,125)
9% preferred stock accretion -- -- -- (32,733) (32,733)
Net loss -- -- -- (1,222,517) (1,222,517)
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1989 1,287,871 -- -- (1,658,003) (368,113)
Initial public offering of 660,000 shares of
common stock, $10.00 per share,
net of expenses 5,244,230 -- -- -- 5,244,890
Redemption of 70,000 shares of common
stock, $0.005 per share (280) -- -- -- (350)
9% preferred stock dividends (110,250) -- -- -- (110,250)
9% preferred stock accretion -- -- -- (33,064) (33,064)
Net loss -- -- -- (2,187,870) (2,187,870)
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1990 6,421,571 -- -- (3,878,937) 2,545,243
Sale of 3,181,253 shares of Series B
convertible preferred stock, $0.6667
per share, net of expenses -- -- -- -- 1,841,108
Conversion of 182,200 shares of 9% preferred
stock into 24,293 shares of common stock 170,039 -- -- -- 170,063
Issuance of compensatory stock options 330,084 (291,938) -- -- 38,146
Amortization of deferred compensation -- 90,016 -- -- 90,016
9% preferred stock dividends (85,653) -- -- -- (85,653)
9% preferred stock accretion -- -- -- (32,075) (32,075)
Net loss -- -- -- (2,593,968) (2,593,968)
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1991 $ 6,836,041 $ (201,922) $ -- $(6,504,980) $ 1,972,880
----------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible
preferred preferred preferred preferred Common
stock stock stock stock stock
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1991 $ -- $ 1,841,108 $ -- $ -- $ 2,633
Sale of 150,000 shares of common stock to
Alkermes, Inc., $10.00 per share -- -- -- -- 150
Conversion of 306,275 shares of 9% preferred
stock into 40,835 shares of common stock -- -- -- -- 40
Conversion of 1,525,003 shares of Series B
preferred stock into 149,629 shares of
common stock -- (882,576) -- -- 150
Issuance of 73,979 shares of common stock
upon exercise of stock options -- -- -- -- 74
Issuance of two shares of common stock upon
exercise of warrants -- -- -- -- --
Issuance of compensatory stock options -- -- -- --
Forfeiture of compensatory stock options -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- --
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 1992 -- 958,532 -- -- 3,047
Conversion of 287,150 shares of 9% preferred
stock into 38,287 shares of common stock -- -- -- -- 38
Conversion of 1,081,250 shares of Series B
preferred stock into 106,088 shares of
common stock -- (625,758) -- -- 106
Redemption of 12,627 shares of common
stock, $7.65 per share -- -- -- -- (12)
Issuance of 30,789 shares of common stock
upon exercise of stock options -- -- -- -- 31
Issuance of compensatory stock options -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- --
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 1993 $ -- $ 332,774 $ -- $ -- $ 3,210
----------- ----------- ----------- ----------- -----------
CONTINUED . . .
Unrealized loss Deficit
on available accumulated
Additional for sale U.S. during the
paid-in Deferred Government development
capital compensation securities stage Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1991 $ 6,836,041 $ (201,922) $ -- $(6,504,980) $ 1,972,880
Sale of 150,000 shares of common stock to
Alkermes, Inc., $10.00 per share 1,499,850 -- -- -- 1,500,000
Conversion of 306,275 shares of 9% preferred
stock into 40,835 shares of common stock 335,283 -- -- -- 335,323
Conversion of 1,525,003 shares of Series B
preferred stock into 149,629 shares of
common stock 882,426 -- -- -- --
Issuance of 73,979 shares of common stock
upon exercise of stock options 110,313 -- -- -- 110,387
Issuance of two shares of common stock upon
exercise of warrants 27 -- -- -- 27
Issuance of compensatory stock options 24,532 (19,375) -- -- 5,157
Forfeiture of compensatory stock options (146,182) 146,182 -- -- --
Amortization of deferred compensation -- 58,567 -- -- 58,567
9% preferred stock dividends (68,906) -- -- -- (68,906)
9% preferred stock accretion -- -- -- (23,242) (23,242)
Net loss -- -- -- (2,354,770) (2,354,770)
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1992 9,473,384 (16,548) -- (8,882,992) 1,535,423
Conversion of 287,150 shares of 9% preferred
stock into 38,287 shares of common stock 360,398 -- -- -- 360,436
Conversion of 1,081,250 shares of Series B
preferred stock into 106,088 shares of
common stock 625,652 -- -- -- --
Redemption of 12,627 shares of common
stock, $7.65 per share (96,662) -- -- -- (96,674)
Issuance of 30,789 shares of common stock
upon exercise of stock options 60,915 -- -- -- 60,946
Issuance of compensatory stock options 350,000 (280,000) -- -- 70,000
Amortization of deferred compensation -- 36,897 -- -- 36,897
9% preferred stock dividends (53,028) -- -- -- (53,028)
9% preferred stock accretion -- -- -- (16,000) (16,000)
Net loss -- -- -- (761,536) (761,536)
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1993 $10,720,659 $ (259,651) $ -- $(9,660,528) $ 1,136,464
----------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible
preferred preferred preferred preferred Common
stock stock stock stock stock
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 $-- $332,774 $-- $-- $3,210
Sale of 2,750,000 shares of
common stock, $5.00 per share,
net of expenses -- -- -- -- 2,750
Sale of 103,577 shares of
common stock, $6.40 per share,
net of expenses -- -- -- -- 104
Conversion of 15,625 shares
of 9% preferred stock into
2,083 shares of common stock -- -- -- -- 2
Conversion of 50,000 shares
of Series B preferred stock
into 4,906 shares of
common stock -- (28,937) -- -- 5
Issuance of compensatory
stock options -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- --
Issuance of 3,401 shares
of common stock upon
exercise of stock options -- -- -- -- 3
9% preferred stock dividends -- -- -- -- --
Unrealized loss on available
for sale U.S. Government
securities -- -- -- -- --
Net loss -- -- -- -- --
----- ------- ------- ------ -----
BALANCE, JUNE 30, 1994 -- 303,837 -- -- 6,074
Reclassification of
unredeemed 9% preferred
stock 370,000 -- -- -- --
Issuance of warrants
to purchase 265,000 shares
of common stock -- -- -- -- --
Adjustment of accrued
dividends for redemption
of 9% preferred stock -- -- -- -- --
Issuance of 11,272 shares
of common stock upon
exercise of stock options -- -- -- -- 11
Amortization of deferred
compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- --
Decrease in unrealized loss
on available for sale
U.S. Government securities -- -- -- -- --
Net loss -- -- -- -- --
BALANCE, JUNE 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $ 6,085
</TABLE>
CONTINUED . . .
<TABLE>
<CAPTION> Unrealized loss Deficit
on available accumulated
Additional for sale U.S. during the
paid-in Deferred Government development
capital compensation securities stage Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 $ 10,720,659 $ (259,651) $ -- $ (9,660,528) $ 1,136,464
Sale of 2,750,000 shares
of common stock, $5.00
per share, net of
expenses $ 12,359,611 $ -- -- -- $ 12,362,361
Sale of 103,577 shares of
common stock, $6.40 per
share, net of expenses $ 510,707 $ -- -- -- $ 510,811
Conversion of 15,625 shares
of 9% preferred stock
into 2,083 shares of
common stock $ 20,545 $ -- -- -- $ 20,547
Conversion of 50,000 shares
of Series B preferred
stock into 4,906 shares
of common stock $ 28,932 -- $ -- $ -- $ --
Issuance of compensatory
stock options $ 100,625 -- $ -- $ -- $ 100,625
Amortization of
deferred compensation $ -- 58,200 $ -- $ -- $ 58,200
Issuance of 3,401 shares
of common stock upon
exercise of stock options $ 6,461 $ -- -- -- $ 6,464
9% preferred stock dividends $ (39,038) $ -- -- -- $ (39,038)
Unrealized loss on available
for sale U.S. Government
securities $ -- $ -- (163,562) -- $ (163,562)
Net loss $ -- -- $ -- $ (4,704,991) $ (4,704,991)
BALANCE, JUNE 30, 1994 $23,708,502 $ (201,451) (163,562) $ (14,365,519) $ 9,287,881
Reclassification of
unredeemed 9% preferred
stock $ -- $ -- -- $ -- $ 370,000
Issuance of warrants
to purchase 265,000
shares of common stock 232,746 $ -- -- -- $ 232,746
Adjustment of accrued
dividends for redemption
of 9% preferred stock $ 25,819 $ -- -- -- $ 25,819
Issuance of 11,272 shares
of common stock upon
exercise of stock options $ 24,023 $ -- -- -- $ 24,034
Amortization of deferred
compensation $ -- 56,092 $ -- $ -- $ 56,092
9% preferred stock
dividends $ (33,300) $ -- -- -- $ (33,300)
Decrease in unrealized
loss on available for
sale U.S. Government
securities -- -- 144,956 -- 144,956
Net loss -- -- $ -- (6,835,532) (6,835,532)
------------ ---------- --------- ------------- ------------
BALANCE, JUNE 30, 1995 $ 23,957,790 $ (145,359) $ (18,606) $ (21,201,051) $ 3,272,696
------------ ---------- --------- ------------- ------------
</TABLE>
CONTINUED . . .
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible
preferred preferred preferred preferred Common
stock stock stock stock stock
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $ 6,085
Sale of 160 shares of
Series C convertible
preferred stock, $25,000
per share, net of expenses -- -- 3,576,544 -- --
Issuance of warrants to
purchase 106,195 shares of
common stock -- -- (136,654) -- --
Conversion of 260,000 shares
of 9% preferred stock
into 34,667 shares of
common stock (260,000) -- -- -- 35
Conversion of 375,000 shares
of Series B preferred stock
into 36,793 shares of
common stock -- (217,027) -- -- 37
Conversion of 125 shares of
Series C preferred stock
into 1,133,037 shares of
common stock -- -- (2,687,414) -- 1,133
Adjustment of accrued dividends
for conversion of 9%
preferred stock -- -- -- -- --
Issuance of 205,878 shares
of common stock upon exercise
of stock options -- -- -- -- 206
Amortization of deferred
compensation -- -- -- -- --
Reversal of unamortized deferred
compensation upon resignation
of Chief Executive Officer -- -- -- -- --
9% preferred stock dividends -- -- -- -- --
Decrease in unrealized loss
on available for sale
U.S. Government securities -- -- -- -- --
Net loss -- -- -- --
BALANCE, JUNE 30, 1996 110,000 86,810 752,476 -- 7,496
Series A preferred stock
imputed dividends -- -- -- -- --
Sale of 400 shares of
Series D convertible
preferred stock, $10,000
per share, net of expenses -- -- -- 3,719,636 --
Series D preferred stock
imputed dividends -- -- -- -- --
Conversion of 35 shares of
Series C convertible preferred
stock into 384,574 shares
of common stock -- -- (752,476) -- 384
Conversion of 400 shares of
Series D convertible preferred
stock into 1,433,437
shares of common stock -- -- -- (3,719,636) 1,433
Issuance of 50,000 shares of
common stock upon exercise
of warrant -- -- -- -- 50
Issuance of 30,662 shares of
common stock upon exercise
of stock options -- -- -- -- 31
9% preferred stock dividends -- -- -- -- --
Net loss -- -- -- --
BALANCE, JUNE 30, 1997 $110,000 $86,810 $ -- $ -- $ 9,394
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
Additional for sale U.S. during the
paid-in Deferred Government development
capital compensation securities stage Total
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 23,957,790 $ (145,359) $ (18,606) $ (21,201,051) $ 3,272,696
Sale of 160 shares of
Series C convertible
preferred stock, $25,000
per share, net of expenses -- -- -- -- 3,576,544
Issuance of warrants
to purchase 106,195 shares
of common stock 136,654 -- -- -- --
Conversion of 260,000 shares
of 9% preferred stock
into 34,667 shares of
common stock 259,965 -- -- -- --
Conversion of 375,000 shares
of Series B preferred
stock into 36,793 shares
of common stock 216,990 -- -- -- --
Conversion of 125 shares of
Series C preferred stock
into 1,133,037 shares of
common stock 2,686,281 -- -- -- --
Adjustment of accrued
dividends for conversion
of 9% preferred stock 128,700 -- -- -- 128,700
Issuance of 205,878 shares
of common stock upon
exercise of stock options 774,049 -- -- -- 774,255
Amortization of deferred
compensation -- 42,109 -- -- 42,109
Reversal of unamortized
deferred compensation upon
resignation of Chief
Executive Officer (103,250) 103,250 -- -- --
9% preferred stock dividends (9,900) -- -- -- (9,900)
Decrease in unrealized
loss on available for
sale U.S. Government
securities -- -- 18,606 -- 18,606
Net loss -- -- -- (4,158,247) (4,158,247)
BALANCE, JUNE 30, 1996 28,047,279 -- -- (25,359,298) 3,644,763
Series A preferred stock
imputed dividends 1,012,493 -- -- (1,012,493) --
Sale of 400 shares of
Series D convertible
preferred stock, $10,000
per share, net of expenses -- -- -- -- 3,719,636
Series D preferred stock
imputed dividends 879,672 -- -- (879,672) --
Conversion of 35 shares of
Series C convertible
preferred stock into 384,574
shares of common stock 752,092 -- -- -- --
Conversion of 400 shares of
Series D convertible
preferred stock into
1,433,437 shares of common
stock 3,718,203 -- -- -- --
Issuance of 50,000 shares
of common stock upon
exercise of warrant 149,950 -- -- -- 150,000
Issuance of 30,662 shares
of common stock upon
exercise of stock options 93,737 -- -- -- 93,768
9% preferred stock dividends (9,900) -- -- -- (9,900)
Net loss -- -- -- (4,929,980) (4,929,980)
BALANCE, JUNE 30, 1997 34,643,526 $ -- $ -- $ (32,181,443) $ 2,668,287
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
inception
(February 10,
Years ended June 30, 1987) through
--------------------------------- June 30,
1997 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
NET LOSS $ (4,929,980) $ (4,158,247) $ (30,149,604)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 198,059 230,224 1,307,081
Settlement with Alkermes, Inc. -- -- 1,227,977
Changes in operating assets/liabilities:
Accounts payable and accrued expenses 302,809 (155,335) 560,286
Accrued interest on U.S. Government securities (12,673) (130,759) (161,393)
Other current assets 16,897 3,785 (71,530)
Interest receivable from former officer -- -- (19,274)
Realized loss on sale of U.S. Government securities -- 1,270 54,317
Stock option compensation expense -- 42,109 555,809
Stock issued for services -- -- 28,750
Reduction in note receivable from former
officer -- compensation expense -- -- 22,600
Changes in other assets and other liabilities 54,935 37,330 100,254
------------- ------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (4,369,953) (4,129,623) (26,544,727)
------------- ------------- --------------
Cash flows from investing activities:
U.S. Government securities -- available for sale
Purchases (937,327) (19,298,746) (37,083,743)
Sales 950,000 23,136,197 37,190,820
Purchase of fixed assets (61,054) (108,807) (1,948,401)
Sale of fixed assets 752 2,777 10,988
Decrease (increase) in --
Other assets 3,212 (3,212) (39,870)
Note receivable from former officer -- -- (100,000)
------------- ------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (44,417) 3,728,209 (1,970,206)
------------- ------------- --------------
Cash flows from financing activities:
Proceeds from issuance of 9% preferred stock -- -- 1,076,588
Redemption of 9% preferred stock -- -- (63,750)
Payment of 9% preferred stock dividends -- -- (110,250)
Proceeds from issuance of Series B
convertible preferred stock -- -- 1,841,108
Proceeds from issuance of Series C
convertible preferred stock -- 3,576,543 3,576,543
Proceeds from issuance of Series D
convertible preferred stock 3,719,636 -- 3,719,636
Proceeds from issuance of Series A
convertible preferred stock 3,936,720 -- 3,936,720
Proceeds from issuance of common stock 243,768 774,255 21,921,282
Proceeds from subordinated convertible note -- -- 208,333
Principal payments on capitalized leases (8,501) (7,714) (22,474)
------------- ------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,891,623 4,343,084 36,083,736
------------- ------------- --------------
Increase in cash and cash equivalents 3,477,253 3,941,670 7,568,803
Cash and cash equivalents, beginning of period 4,091,550 149,880 --
------------- ------------- --------------
Cash and cash equivalents, end of period $ 7,568,803 $ 4,091,550 $ 7,568,803
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Period from inception (February 10, 1987) through June 30, 1997
NOTE 1 -- BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Cortex Pharmaceuticals, Inc. (the "Company") was formed to engage in
the discovery, development and commercialization of innovative pharmaceuticals
for the treatment of neurological and psychiatric disorders. Since its formation
in 1987, the Company has been engaged in research and early clinical development
activities.
BASIS OF PRESENTATION; DEVELOPMENT STAGE ENTERPRISE -- From inception through
June 30, 1997, the Company has generated only modest operating revenues and has
incurred losses aggregating $30,149,604. Successful completion of the Company's
development program and its transition, ultimately, to attaining profitable
operations is dependent upon obtaining additional financing adequate to fulfill
its research and development activities, and achieving a level of revenue
adequate to support the Company's cost structure. There can be no assurance that
the Company will be successful in these areas. To supplement its existing
resources, the Company is likely to raise additional capital through the sale of
debt or equity. There can be no assurance that such capital will be available on
favorable terms, or at all, and if additional funds are raised by issuing equity
securities, dilution to existing stockholders is likely to result.
The Company is seeking collaborative or other arrangements with larger
pharmaceutical companies, under which such companies would provide additional
capital to the Company in exchange for exclusive or non-exclusive license or
other rights to certain of the technologies and products the Company is
developing. Competition for corporate partnering arrangements with major
pharmaceutical companies is intense, with a large number of biopharmaceutical
companies attempting to arrive at such arrangements. Accordingly, although the
Company is presently engaged in discussions with a number of candidate
companies, there can be no assurance that an agreement will arise from these
discussions in a timely manner, or at all, or that any agreement that may arise
from these discussions will successfully reduce the Company's short-term or
long-term funding requirements.
CASH EQUIVALENTS -- The Company considers all highly liquid short-term
investments with maturities of less than three months when acquired to be cash
equivalents.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Furniture, equipment and
leasehold improvements are recorded at cost and are being depreciated on a
straight-line basis over the lesser of their estimated useful lives, ranging
from five to ten years, or the life of the lease, as appropriate.
REVERSE STOCK SPLIT; AUTHORIZED SHARES -- On January 11, 1995, the Company
effected a one-for-five reverse stock split of its common stock and revised the
authorized number of shares of common stock from 50,000,000 to 20,000,000, with
no change in the par value of $0.001 per share. The accompanying financial
statements and all references to the number of shares and per share amounts have
been adjusted to reflect the reverse split.
NET LOSS PER SHARE -- Net loss per share is computed based on the weighted
average number of common shares outstanding and includes preferred stock
dividends. Shares issuable upon conversion of preferred stock and upon exercise
of outstanding stock options and warrants are not included since the effects
would be anti-dilutive. For purposes of computing net loss per share, preferred
stock dividends include dividends that actually accrued and 'imputed dividends'
for preferred stock issued with a nondetachable beneficial conversion feature
near the date of issuance. Imputed dividends represent the aggregate difference
between conversion price and the fair market value of the common stock as of the
date of issuance of the preferred stock, without regard to the actual date upon
which the preferred stock may be converted.
EMPLOYEE STOCK OPTIONS -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), in accounting for its employee stock options because the alternative fair
value accounting provided for under Statement of Financial Accounting Standards
No. 123,
F-12
<PAGE>
"Accounting for Stock-Based Compensation" (SFAS 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. According to APB 25, no compensation expense is recognized since the
exercise price of the Company's stock options generally equals the market price
of the underlying stock on the date of grant.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute net loss per share and to restate prior
periods. Under the new requirements, the dilutive effect of stock options will
be excluded in calculating primary earnings per share. The impact of SFAS 128 on
the calculation of net loss per share is not expected to be material.
RESEARCH AND DEVELOPMENT COSTS -- All costs related to research and development
activities are treated as expenses in the period incurred.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts may differ from those estimates.
RECLASSIFICATIONS -- Certain previously reported amounts have been reclassified
to conform with the June 30, 1997 presentation.
NOTE 2 -- FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
June 30,
--------------------------------
1997 1996
--------------------------------
Laboratory equipment $ 1,017,461 $ 990,329
Leasehold improvements 620,716 619,566
Furniture and equipment 90,689 89,773
Computers and software 223,030 193,372
------------ -----------
1,951,896 1,893,040
Accumulated depreciation (1,282,052) (1,085,439)
------------ -----------
$ 669,844 $ 807,601
------------ -----------
------------ -----------
NOTE 3 -- REDEEMABLE PREFERRED STOCK
In May 1997, the Board of Directors designated 400 shares of a newly created
series of preferred stock, the Series A Convertible Preferred Stock ("Series A
Preferred"). Series A Preferred at June 30, 1997 consisted of 400 shares issued
in a two-tranche private placement during June 1997. Prior to August 20, 1997,
the Series A Preferred is convertible at an effective conversion price equal to
the lowest of the dollar volume weighted average trading prices of the Company's
common stock for each of the five trading days immediately preceding the
conversion date ("Average Stock Price"). Thereafter, the effective conversion
price will be equal to 80% of the Average Stock Price if the Average Stock Price
is greater than $2.50 per share; $2.00 per share if the Average Stock Price is
less than $2.50 but greater than $2.10 per share; or 95% of the Average Stock
Price if the Average Stock Price is less than or equal to $2.10 per share. The
conversion rate is subject to adjustment at the rate of six percent per annum
based on the length of the period from issuance of the Series A Preferred until
its conversion. Provided the effective conversion price for a given conversion
is equal to or greater than $2.75 per share, the holder of the Series A
Preferred may purchase up to the same number of common shares as the holder is
acquiring upon such conversion at the effective conversion price. Any election
to exercise this right to purchase additional shares must be made at the time of
conversion of the related Series A Preferred, and the right is forfeited to the
extent that it is not fully exercised at such time. Holders of the Series A
Preferred are entitled to a liquidation preference, after payment of full
liquidation preference to
F-13
<PAGE>
holders of the 9% Preferred and Series B Preferred, of an amount equal to
$10,000 per share, plus $600 per share for each year that such share is
outstanding. The Series A Preferred holders may elect to redeem their shares
under certain circumstances, such as the delisting of the Company's common stock
from Nasdaq, at prices up to 125% of the liquidation preference. The Series A
Preferred automatically converts into common stock on the third anniversary from
the date of issuance of such shares. Imputed dividends of $1,012,493 related to
the private placement have been recorded and included in the computation of net
loss per share (Note 1).
NOTE 4 -- STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized a total of 5,000,000 shares of preferred stock, par
value $0.001 per share, of which 1,250,000 shares have been designated as
9% Cumulative Convertible Preferred Stock (non-voting, "9% Preferred");
3,200,000 shares have been designated as Series B Convertible Preferred Stock
(non-voting, "Series B Preferred"); 500 shares have been designated as Series D
Convertible Preferred Stock (non-voting, "Series D Preferred"); 400 shares have
been designated as Series A Convertible Preferred Stock (non-voting, "Series A
Preferred"); and 549,100 shares are presently undesignated and may be issued
with such rights and powers as the Board of Directors may designate.
The 9% Cumulative Convertible Preferred Stock as of June 30, 1997 and June 30,
1996 consisted of 110,000 shares of an original 1,250,000 shares of 9% Preferred
issued in a 1988 private placement. Each share of 9% Preferred is convertible
into approximately 0.1333 shares of common stock at an effective conversion
price of $7.50 per share of common stock, subject to adjustment under certain
circumstances, such as stock splits or stock dividends. Cash dividends on the 9%
Preferred accrue semi-annually on June 15th and December 15th at the rate of
$0.09 per share per annum. In order to conserve capital for operations, the
Company has elected not to distribute the dividends that have accrued from
June 15, 1990. Upon conversion of 9% Preferred, accrued and unpaid dividends are
credited to additional paid-in capital. Accrued and unpaid dividends as of
June 30, 1997 and June 30, 1996 were $74,250, and $64,350, respectively. The
Company may redeem the 9% Preferred at any time at a price of $1.00 per share,
an amount equal to its liquidation preference, upon not less than 30 nor more
than 60 days' notice.
Series B Convertible Preferred Stock as of June 30, 1997 and June 30, 1996
consisted of 150,000 shares of Series B Preferred issued in a May 1991 private
placement. Each share of Series B Preferred is convertible into approximately
0.09812 shares of common stock at an effective conversion price of $6.795 per
share of common stock, subject to adjustment under certain circumstances such as
stock splits or stock dividends. The Series B Preferred may be redeemed by the
Company at a price of $0.6667 per share, an amount equal to its liquidation
preference, at any time upon 30 days' notice. The liquidation preference of the
Series B Preferred is subordinate to that of the 9% Preferred.
Series C Convertible Preferred Stock at June 30, 1996 consisted of 35 shares of
an original 160 shares of Series C Preferred issued in a private placement
completed in December 1995. During the year ended June 30, 1997, all outstanding
shares of Series C Preferred were converted into common stock in accordance with
a formula that was indexed to the average bid price of the Company's common
shares.
In October 1996, the Board of Directors designated 500 shares of a new series of
preferred stock, the Series D Convertible Preferred Stock ("Series D
Preferred"). An aggregate of 400 shares of Series D Preferred were issued in a
three-tranche private placement initiated in October 1996 and completed in
February 1997. Each share of Series D Preferred was convertible into common
stock at an effective per share conversion price that was the lower of (i) 110%
of the average closing bid price for the five trading days immediately preceding
the closing date ($2.9425, $4.52375 and $4.63375 for the first, second and third
tranches, respectively) or (ii) that price that was 18% below the average
closing bid price for the five trading days immediately preceding the conversion
date, in each case subject to adjustment at the rate of six percent per annum
based on the length of the period from issuance of the Series D Preferred until
its conversion. As of June 30, 1997, the Series D Preferred had all been
converted into an aggregate of 1,433,437 shares of the Company's common stock at
effective conversion prices ranging from $2.06 to $3.35 per share of common
stock. Imputed dividends aggregating $879,672 were recorded in connection with
the three tranches, and have been included in the computation of net loss per
share (Note 1).
F-14
<PAGE>
COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS
In connection with the December 1995 private placement of 160 shares of Series C
Preferred Stock, the Company issued the placement agent for the transaction a
five-year non-redeemable warrant to purchase 106,195 shares of common stock at a
price of $2.825 per share, subject to adjustment under certain circumstances.
The warrants contain cashless exercise provisions and include piggyback
registration rights.
In connection with the June 1997 private placement of 400 shares of Series A
Preferred Stock, the Company issued to the eleven participating institutional
investors four-year non-redeemable warrants to purchase an aggregate of 800,000
shares of common stock at a price of $3.08 per share, subject to adjustment
under certain circumstances.
As of June 30, 1997, the Company had reserved an aggregate of 14,667 shares of
common stock for issuance upon conversion of the outstanding 9% Preferred Stock;
14,717 shares for issuance upon conversion of the Series B Preferred Stock;
1,363,698 shares for issuance upon conversion of the Series A Preferred Stock;
1,363,698 shares for issuance upon exercise of the right to purchase additional
shares of common stock upon conversion of the Series A Preferred Stock;
1,085,096 shares for issuance upon exercise of warrants; and 969,179 shares for
issuance upon exercise of outstanding stock options.
STOCK OPTION AND STOCK PURCHASE PLANS
EMPLOYEE/DIRECTOR OPTION PLAN -- The Company's 1989 Incentive Stock Option,
Nonqualified Stock Option and Stock Purchase Plan provides for the granting by
the Company of options and rights to purchase up to an aggregate of 700,000
shares of the Company's authorized but unissued common stock (subject to
adjustment under certain circumstances, such as stock splits, recapitalizations
and reorganizations) to directors, officers and other employees of the Company.
The exercise price of nonqualified stock options and the purchase price of stock
offered under this plan, which terminates February 2, 1999, must be at least 85%
of the fair market value of the common stock on the date of grant. The exercise
price of incentive stock options must be at least equal to the fair market value
of the common stock on the date of grant. As of June 30, 1997, options to
purchase an aggregate of 530,662 shares of common stock were outstanding under
this plan, and an additional 48,054 shares of common stock were reserved for
future option grants.
CONSULTANT PLAN -- The Company's 1989 Special Nonqualified Stock Option and
Stock Purchase Plan provides for the granting by the Company of options and
rights to purchase up to an aggregate of 400,000 shares of the Company's
authorized but unissued common stock (subject to adjustment under certain
circumstances, such as stock splits, recapitalizations and reorganizations) to
consultants to the Company. The exercise price of nonqualified stock options and
the purchase price of stock offered under this plan, which terminates
February 2, 1999, must be at least 50% of the fair market value of the common
stock on the date of grant. As of June 30, 1997, options to purchase an
aggregate of 337,407 shares of common stock were outstanding under this plan,
and an additional 9,026 shares of common stock were reserved for future option
grants.
EXECUTIVE STOCK PLAN -- In connection with his 1991 election as Chairman of the
Board, Harvey S. Sadow, Ph.D. was granted an option to purchase 10,000 shares of
common stock at an exercise price of $2.19 per share, representing 50% of the
fair market value of the common stock on the date of grant. As of June 30, 1997,
options to purchase an aggregate of 10,000 shares of common stock were
outstanding under the Executive Stock Plan, and an additional 208,871 shares of
common stock were reserved for future option grants.
1996 STOCK INCENTIVE PLAN -- The Company's 1996 Stock Incentive Plan ("1996
Plan") was adopted by the Board of Directors on October 25, 1996 and approved by
the Company's stockholders on December 12, 1996. The 1996 Plan provides for the
granting of options and rights to purchase up to an initial aggregate of 613,132
shares of the Company's authorized but unissued common stock (subject to
adjustment under certain circumstances, such as stock splits, recapitalizations
and reorganizations) to qualified employees, officers, directors, consultants
and other service providers. No further options will be granted under the
Company's earlier stock option and stock purchase plans. The exercise price of
nonqualified stock options and the purchase price of stock offered under the
1996 Plan, which terminates October 25, 2006, must be at least 85% of the fair
market value of the common stock of the date of grant. The exercise price of
incentive stock options
F-15
<PAGE>
must be at least equal to the fair market value of the common stock on the date
of grant. Each non-employee director (other than those who serve on the Board of
Directors to oversee an investment in the Company) is automatically granted
options to purchase 15,000 shares of common stock upon commencement of service
as a director and additional options to purchase 6,000 shares of common stock on
the date of each Annual Meeting of Stockholders. Non-employee directors who
serve on the Board of Directors to oversee an investment in the Company receive
options to purchase 7,500 shares of common stock upon commencement of service as
a director and additional options to purchase 3,000 shares of common stock on
the date of each Annual Meeting of Stockholders. These nonqualified options have
an exercise price equal to 100% of the fair market value of the common stock on
the date of grant, have a ten-year term and vest in equal increments of 33 1/3%
on the anniversary dates of the dates of grant. As of June 30, 1997, options to
purchase an aggregate of 91,110 shares of common stock were outstanding under
the 1996 Plan, and an additional 522,022 shares of common stock were reserved
for future option grants.
As of June 30, 1997, options to purchase an aggregate of 529,438 shares of
common stock were exercisable under the Company's stock option plans. During the
years ended June 30, 1997 and 1996 and the period from inception (February 10,
1987) through June 30, 1997, options to purchase 0, 0, and 261,289 shares of
common stock, respectively, were issued to certain directors, officers and
consultants of the Company with exercise prices below the fair market value of
the common stock on the dates of grant. The aggregate difference between the
fair market value on the date of grant and the exercise price of the options
granted has been recorded as compensation expense over the vesting period of the
options. Stock option compensation expense related to these transactions,
aggregating $0, $42,109 and $555,809 for the years ended June 30, 1997 and 1996
and the period from inception (February 10, 1987) through June 30, 1997,
respectively, has been recorded in the accompanying statements of operations.
Stock option transactions under the Company's stock option plans for each of the
two years in the period ended June 30, 1997 are summarized below:
Weighted average
Number exercise price
of shares per share
-----------------------------
Outstanding as of June 30, 1995 828,868 $ 4.03
Granted 409,101 4.80
Exercised (205,878) 3.77
Forfeited (136,160) 3.77
---------- ----------
Outstanding as of June 30, 1996 895,931 $ 4.39
Granted 143,117 3.30
Exercised (30,662) 3.06
Forfeited (39,207) 4.85
---------- ----------
Outstanding as of June 30, 1997 969,179 $ 4.25
---------- ----------
Available for future grant 787,973
----------
----------
PRO-FORMA INFORMATION -- The Company has elected to continue accounting for its
employee stock options in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25,
because the exercise price of the Company's employee stock options is equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net loss and net loss per share is required by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and has been determined as if the Company had
accounted for its employee stock plans under the fair value method. The fair
value was estimated at the date of grant using the Black-Scholes option pricing
model and the following assumptions for the years ended June 30, 1997 and 1996,
respectively: risk-free interest rates of 5.7% to 6.1% and 5.9% to 6.5%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of 100% and 94%; and a weighted average life of 0.5 to
4.2 years and 1.3 to 5.2 years. The estimated weighted average fair value of
options granted during the years ended June 30, 1997 and 1996 was $1.95 and
$2.48, respectively.
F-16
<PAGE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized as expense over the vesting period of the options, resulting in the
following pro forma information for the years ended June 30, 1997 and 1996:
June 30,
1997 1996
-------------------------------
Pro forma net loss $ 5,436,435 $ 4,413,447
Pro forma net loss per share $ (0.89) $ 0.68)
The results above are not necessarily indicative of the effects of SFAS 123 on
reported net income or loss for future periods as these amounts reflect the
related expense for only two years of stock option vesting.
Information regarding stock options outstanding at June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------
Weighted
Number average Weighted Number Weighted
Range of outstanding remaining average exercisable average
exercise prices at June 30, 1997 contractual life exercise price at June 30, 1997 exercise price
<S> <C> <C> <C> <C> <C>
$ 1.56 - 3.13 452,526 7.42 years $ 2.87 234,673 $ 2.85
3.25 - 5.63 399,319 8.63 years 4.77 196,915 4.39
5.75 - 10.94 117,334 5.12 years 7.79 97,850 7.90
-------- --------
969,179 529,438
-------- --------
-------- --------
</TABLE>
NOTE 5 -- AGREEMENT WITH ALKERMES, INC.; LEGAL PROCEEDINGS
In January 1992, the Company entered into an agreement with Alkermes, Inc.
("Alkermes") for the development, clinical testing and commercialization of the
Company's calpain inhibitor products, which was subsequently amended in October
1992 (the "Alkermes Agreement"). In connection with the Alkermes Agreement, the
Company granted Alkermes an exclusive worldwide license to commercialize calpain
inhibitor products for the prevention and treatment of acute and chronic
neurodegenerative diseases and disorders of the central and peripheral nervous
systems. The Company received an aggregate of $3,100,000 in research payments
under the Alkermes Agreement over the 18-month period ended June 30, 1993, and a
$500,000 payment in October 1992 in connection with a limited expansion of
Alkermes' commercial rights. In November 1993, Alkermes filed an action alleging
that the Company had breached the Alkermes Agreement by developing calpain
inhibitors for cerebral vasospasm. On October 5, 1995, the Company and Alkermes
agreed to a settlement of the dispute. Alkermes agreed to dismiss its action
against the Company and to relinquish all rights previously granted them by the
Company, as well as rights to related technologies developed by Alkermes. In
connection with the settlement, the Company issued to Alkermes a $1,000,000
three-year promissory note accruing interest semi-annually at the federal funds
rate. The Company also committed to pay Alkermes a graduated royalty on calpain
inhibitor development proceeds, as defined and subject to certain limitations.
F-17
<PAGE>
NOTE 6 -- COMMITMENTS
The Company leases its offices and research laboratories under an operating
lease that expires May 31, 1999, with an additional five-year option at 95% of
the then fair market rental rate. Rent expense under this lease for the years
ended June 30, 1997 and 1996 and the period from inception (February 10, 1987)
through June 30, 1997 was $215,000, $193,000 and $1,639,000, respectively.
Commitments under the lease for the years ending June 30, 1998 and 1999 are
$243,000 and $229,000, respectively.
As of June 30, 1997, the Company was obligated to two executive officers under
employment agreements expiring through May 1998 that involve annual salary
payments aggregating $341,113 and that provide for bonuses under certain
circumstances. Additionally, in the event that the Company commercializes a
compound developed by or under the supervision of one of its senior scientific
employees, the Company will be obligated, under certain circumstances, to pay
the employee a royalty based on net sales, as defined and subject to adjustment,
of products containing the compound. As of June 30, 1997, the Company was
committed under scientific consulting and external research agreements to annual
payments aggregating approximately $889,000.
The Company has entered agreements with two academic institutions that provide
the Company exclusive rights to certain of the technologies that it is
developing. Under the terms of the agreements, the Company is committed to
royalty payments, including minimum annual royalties of $95,000 for the year
ending June 30, 1998. Thereafter, minimum annual royalties are $105,000 for the
remaining life of the patents covering the subject technologies. The agreements
also commit the Company to pay up to an additional $912,500 upon achieving
certain clinical testing and regulatory approval milestones, as well as a
portion of certain remuneration received by the Company in connection with
sublicensing agreements that the Company may enter into.
NOTE 7 -- RELATED PARTY TRANSACTIONS
During the years ended June 30, 1997 and 1996, and the period from inception
(February 10, 1987) through June 30, 1997, the Company paid or accrued
scientific and other consulting fees to stockholders aggregating $88,000,
$87,160 and $1,018,557, respectively. Under certain circumstances, the Company
is obligated to make royalty payments to certain of its scientific consultants,
some of whom are stockholders, and to one employee, upon successful
commercialization of certain of its products by the Company or its licensees.
In July 1993, the Company entered into an agreement with Vector Securities
International, Inc. ("Vector"), under which Vector agreed to serve as financial
advisor to the Company in connection with corporate finance transactions and
corporate partnering of certain of the Company's programs. In connection with
the agreement, the Company paid a $50,000 retainer and issued to Vector a five-
year non-redeemable warrant to acquire 12,166 shares of common stock at an
exercise price of $6.37 per share, as adjusted and subject to further adjustment
under certain circumstances.
In connection with its services as placement agent in the 1993 private placement
of 2,750,000 shares of common stock, Vector was paid a fee of $1,096,800 and was
issued a five-year non-redeemable warrant to purchase 274,200 shares of the
Company's common stock at $9.375 per share. In connection with Vector's
assistance in reaching the settlement with Alkermes (Note 5), this warrant was
canceled and reissued as a new warrant to purchase 234,637 shares of the
Company's common stock at $5.37 per share, as adjusted and subject to further
adjustment, at any time through January 15, 2000. The value of this new warrant
was computed utilizing the Black-Scholes option pricing model, and was recorded
with the expense of the settlement with Alkermes in the accompanying statement
of operations.
As consideration for its agreement to provide financial advisory services, as
amended and extended in November 1994, Vector was paid a retainer of $50,000 and
was issued a six-year non-redeemable warrant to purchase 38,293 shares of the
Company's common stock at $4.57 per share, subject to adjustment under certain
circumstances. Warrants to purchase 5,471 shares of the Company's common stock
vested immediately, and warrants to purchase 16,411 shares of the Company's
common stock vest upon the consummation of each strategic alliance when and as
secured by Vector. In January 1995, in connection with an expansion of its
financial advisory assistance to include additional programs, the Company paid a
$20,000 retainer and issued to Vector a five-year non-redeemable warrant to
acquire 50,000 shares of the Company's
F-18
<PAGE>
common stock at $3.00 per share. This warrant was exercised in February 1997.
The Company may be required to make substantial additional payments for each
strategic alliance secured by Vector. If a sale of the Company as presented by
Vector is consummated, Vector may be entitled to receive a fee based on the
aggregate consideration received by the Company.
NOTE 8 -- INCOME TAXES
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Under the liability method, deferred taxes are determined based
on differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. As of June 30, 1997, the Company had
federal and California tax net operating loss carryforwards of approximately
$27,969,000 and $4,333,000, respectively. The difference between the federal and
California tax loss carryforwards is primarily attributable to the
capitalization of research and development expenses for California franchise tax
purposes and the fifty percent limitation on California loss carryforwards. The
California tax loss carryforwards began expiring in 1997, while the federal
carryforwards begin expiring in 2004. The Company also has federal and
California research and development tax credit carryforwards totaling $828,000
and $261,000, respectively, which begin expiring in 2004.
Utilization of the net operating loss and tax credit carryforwards from the tax
years ended on or before June 30, 1992 is subject to an annual limitation of
approximately $1,500,000, due to ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. If there should be
future changes of ownership, these annual limitations for utilization of net
operating loss and tax credit carryforwards may become more restrictive.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's net
operating loss carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within any three-year period since the last ownership
change.
Significant components of the Company's deferred tax assets as of June 30, 1997
and June 30, 1996 are shown below. The valuation allowance related to deferred
tax assets is $13,024,000 and $10,847,000 for the years ended June 30, 1997 and
1996, respectively. The increase in the valuation allowance for the year ended
June 30, 1997 of $2,177,000 is primarily due to additional reserves required for
new deferred tax assets.
Deferred tax assets:
June 30,
1997 1996
----------------------------
Net operating loss carryforwards $ 9,892,000 $ 8,285,000
Capital loss carryforwards 23,000 23,000
Research and development credits 1,089,000 817,000
Capitalized research and development costs 1,467,000 1,244,000
Settlement with Alkermes, Inc. 468,000 433,000
Depreciation 41,000 24,000
Other-net 44,000 21,000
------------ ------------
Net deferred tax assets 13,024,000 10,847,000
------------ ------------
------------ ------------
Valuation allowance for deferred tax assets (13,024,000) (10,847,000)
Total deferred tax assets $ -- $ --
------------ ------------
------------ ------------
F-19
<PAGE>
CORTEX PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-KSB
YEAR ENDED JUNE 30, 1997
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- -------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation dated April 11, 1989,
as amended by Certificate of Amendment of June 27, 1989, by
Certificate of Designation filed April 29, 1991, by
Certificate of Correction filed May 1, 1991, by Certificate
of Amendment of Certificate of Designation filed June 13,
1991, by Certificate of Amendment of Certificate of
Incorporation filed November 12, 1992, by Certificate of
Amendment of Restated Certificate of Incorporation filed
January 11, 1995, by Certificate of Designation filed
December 8, 1995, by Certificate of Designation filed
October 15, 1996, and by Certificate of Designation filed
June 4, 1997, incorporated by reference to Exhibit 3.1 of
the Company's Registration Statement on Form SB-2 filed
June 18, 1997. --
3.2 By-Laws of the Company, as adopted March 4, 1987, and
amended through October 8, 1996, incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-KSB
filed October 15, 1996. --
10.2 Consulting Agreement, dated October 30, 1987, between the
Company and Carl W. Cotman, Ph.D. * --
10.3 Consulting Agreement, dated as October 30, 1987, between the
Company and Gary S. Lynch, Ph.D. * --
10.8 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan. * --
10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan. * --
10.18 License Agreement, dated February 11, 1991 between the
Company and Georgia Tech Research Corporation, incorporated
by reference to Exhibit 10.18 of the Company's Amendment on
Form 8 filed November 27, 1991 to the Company's Annual
Report on Form 10-K filed September 30, 1991. (Portions of
this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Company's
application requesting confidential treatment under
Rule 24b-2 under the Securities Exchange Act of 1934). --
10.19 License Agreement dated March 27, 1991 between the Company
and the Regents of the University of California,
incorporated by reference to Exhibit 10.19 of the Company's
Amendment on Form 8 filed November 27, 1991 to the Company's
Annual Report on Form 10-K filed September 30, 1991.
(Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to
the Company's application requesting confidential treatment
under Rule 24b-2 under the Securities
Exchange Act of 1934). --
10.28 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted October 22, 1992,
incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K filed September 16, 1992. --
10.31 License Agreement dated June 25, 1993 between the Company
and the Regents of the University of California,
incorporated by reference to the Company's Amendment of
Annual Report on Form 10-KSB/A filed November 26, 1993.
(Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to
the Company's application requesting confidential treatment
under Rule 24b-2 of the Securities Exchange Act of 1934). --
10.34 Warrant for the Purchase of shares of common stock dated
July 23, 1993 issued to Vector Securities International,
Inc., incorporated by reference to Exhibit 10.34 of the
Company's Annual Report on Form 10-KSB filed
October 13, 1993. --
10.36 Amended and Restated Employment Agreement between the
Company and D. Scott Hagen, dated September 1, 1993,
incorporated by reference to Exhibit 10.36 of the Company's
Annual Report on Form 10-KSB filed
October 13, 1993. --
<PAGE>
Exhibit Sequentially
Number Description Numbered Page
- -------------------------------------------------------------------------------
10.36.1 Amendment No. 1, dated January 1, 1995, to the Amended and
Restated Employment Agreement between the Company and D.
Scott Hagen, dated September 1, 1993, incorporated by
reference to the same numbered Exhibit to the Company's
Quarterly Report on Form 10-QSB filed April 28, 1995. --
10.41 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.9 of the Company's
Registration Statement on Form S-8 filed January 28, 1994. --
10.42 Amendment to 1989 Special Nonqualified Stock Option and
Stock Purchase Plan adopted December 13, 1993, incorporated
by reference to Exhibit 4.8 of the Company's Registration
Statement on Form S-8 filed January 28, 1994. --
10.43 Amendment to Executive Stock Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.7 of the Company's
Registration Statement on Form S-8 filed January 28, 1994. --
10.44 Lease Agreement, dated January 31, 1994, for the Company's
facilities in Irvine, California, incorporated by reference
to Exhibit 10.44 of the Company's Quarterly Report on Form
10-QSB filed May 16, 1994. --
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted December 15, 1994,
incorporated by reference to Exhibit 4.10 of the Company's
Registration Statement on Form S-8 filed February 8, 1995. --
10.46 Amendment to 1989 Special Nonqualified Stock Option and
Stock Purchase Plan adopted December 1994, incorporated by
reference to Exhibit 4.9 of the Company's Registration
Statement on Form S-8 filed February 8, 1995. --
10.47 Amendment to Executive Stock Plan adopted September 9, 1994,
incorporated by reference to the same numbered Exhibit to
the Company's Annual Report on Form 10-KSB filed
October 13, 1995. --
10.48 Amendment to the Non-Employee Director Formula Grant Plan,
adopted December 15, 1994, incorporated by reference to the
same numbered Exhibit to the Company's Annual Report on
Form 10-KSB filed October 13, 1995 * --
10.49 Settlement Agreement between the Company and Alkermes, Inc.,
dated October 5, 1995, incorporated by reference to the same
numbered Exhibit to the Company's Annual Report on Form
10-KSB filed October 13, 1995. (Portions of this Exhibit are
omitted and were filed separately with the Secretary of the
Commission pursuant to the Company's Application requesting
confidential treatment under Rule 406 of the Securities
Act of 1933). --
10.50 Form of Subscription Agreement entered into with each
purchaser of Series C Preferred Stock, incorporated by
reference to Exhibit 4.1 of the Company's Current Report
on Form 8-K filed December 22, 1995. --
10.51 Warrant dated December 8, 1995, to purchase 106,195 shares
issued to Swartz Investments, Inc., incorporated by
reference to Exhibit 4.3 of the Company's Current Report on
Form 8-K filed December 22, 1995. --
10.52 Registration Rights Agreement dated December 8, 1995,
entered into with purchasers of Series C Preferred Stock and
Swartz Investments, Inc., incorporated by reference to
Exhibit 4.2 of the Company's Current Report on Form 8-K
filed December 22, 1995. --
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares
issued to Vector Securities International, Inc.,
incorporated by reference to the same numbered Exhibit to
the Company's Pre-Effective Amendment No. 1 to Post
Effective Amendment No. 2 to Registration Statement on Form
SB-2, No. 33-71894, filed January 26, 1996. --
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares
issued to Vector Securities International, Inc.,
incorporated by reference to the same numbered Exhibit to
the Company's Pre-Effective Amendment No. 1 to Post
Effective Amendment No. 2 to Registration Statement on Form
SB-2, No. 33-71894, filed January 26, 1996. --
10.56 Employment Agreement dated May 15, 1996, between the Company
and Vincent F. Simmon, Ph.D., incorporated by reference to
the same numbered Exhibit to the Company's Current Report
on Form 8-K filed June 4, 1996. --
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock
<PAGE>
Purchase Plan adopted December 12, 1995, incorporated by reference to
Exhibit 4.11
Exhibit Sequentially
Number Description Numbered Page
- -------------------------------------------------------------------------------
of the Company's Registration Statement on Form S-8 filed
September 13, 1996. --
10.58 Amendment to 1989 Special Nonqualified Stock Option and
Stock Purchase Plan adopted December 12, 1995, incorporated
by reference to Exhibit 4.10 of the Company's Registration
Statement on Form S-8 filed September 13, 1996. --
10.59 Securities Subscription Agreement for Series D Preferred
Stock dated October 15, 1996, between the Company and
Ashline Ltd., incorporated by reference to the same numbered
Exhibit to the Company's Quarterly Report on Form 10-QSB filed
November 12, 1996. --
10.60 1996 Stock Incentive Plan, incorporated by reference to the
same numbered Exhibit to the Company's Quarterly Report on
Form 10-QSB filed November 12, 1996. --
10.61 Form of Subscription Agreement with each purchaser of Series
A Preferred Stock, incorporated by reference to Exhibit
10.61 to the Company's Registration Statement on Form SB-2
filed June 18, 1997.
10.62 Form of Warrant issued to each purchaser of Series A
Preferred Stock, incorporated by reference to Exhibit 10.62
to the Company's Registration Statement on Form SB-2 filed
June 18, 1997.
10.63 Registration Rights Agreement with holder of Series A
Preferred Stock dated June 5, 1997, incorporated by
reference to Exhibit 10.63 to the Company's Registration
Statement on Form SB-2 filed June 18, 1997
21 Subsidiaries of the Registrant. --
23 Consent of Ernst & Young LLP, independent auditors. --
24 Power of Attorney (included on signature page). --
27 Financial Data Schedule. --
* Incorporated by reference to the same numbered exhibit of the
Company's Registration Statement on Form S-1, No. 33-28284, effective
on July 18, 1989.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NONE
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-20777) pertaining to the 1996 Stock Incentive Plan, the
1989 Incentive Stock Option, Nonqualified Stock Option and Stock Purchase
Plan, the 1989 Special Nonqualified Stock Option and Stock Purchase Plan and
the Executive Stock Plan of our report dated July 17, 1997, with respect to
the financial statements of Cortex Pharmaceuticals, Inc. included in the
Annual Report (Form 10-KSB) for the year ended June 30, 1997.
/s/ ERNST & YOUNG LLP
-----------------------------
ERNST & YOUNG LLP
San Diego, California
September 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1997, AND THE RELATED STATEMENTS OF OPERATIONS,
STOCKHOLDER'S EQUITY AND CASH FLOWS FOR THE YEAR THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 7,568,803
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,640,333
<PP&E> 1,951,896
<DEPRECIATION> 1,282,052
<TOTAL-ASSETS> 8,333,307
<CURRENT-LIABILITIES> 636,035
<BONDS> 1,092,265<F1>
3,936,720
196,810
<COMMON> 9,394
<OTHER-SE> 2,462,083
<TOTAL-LIABILITY-AND-EQUITY> 8,333,307
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,085,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,537
<INCOME-PRETAX> (4,929,980)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,929,980)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,929,980)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
<FN>
PROMISSORY NOTE PAYABLE TO ALKERMES, INC.
</FN>
</TABLE>
