<PAGE>
PROSPECTUS
[LOGO] CORTEX PHARMACEUTICALS, INC.
4,600,537 Shares of Common Stock
(Par Value $0.001 Per Share)
This Prospectus relates to the sale of up to 4,600,537 shares (the "Shares") of
the common stock, par value $0.001 per share (the "Common Stock"), of Cortex
Pharmaceuticals, Inc. ("Cortex" or the "Company") by certain stockholders of the
Company (the "Selling Stockholders"). The Shares include 1,191,291 shares of
Common Stock issuable upon exercise of warrants (the "Warrant Shares") and up to
3,409,246 shares of Common Stock that may be issuable upon conversion of Series
A Preferred Stock (including up to 1,704,623 shares of Common Stock that may be
issued upon exercise of purchase rights triggered by conversion of Series A
Preferred Stock). The Selling Stockholders may sell the Shares from time to time
in transactions in the over-the-counter market, in negotiated transactions, by
writing options on the Shares or by a combination of these methods, at fixed
prices that may be changed, at market prices prevailing at the time of the sale,
at prices related to such market prices or at negotiated prices. The Selling
Stockholders may effect these transactions by selling the Shares to or through
broker-dealers, who may receive compensation in the form of discounts or
commissions from the Selling Stockholders or from the purchasers of the Shares
for whom the broker-dealers may act as an agent or to whom they may sell as a
principal, or both. The Selling Stockholders and such brokers-dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, in
connection with such sales. See "Selling Stockholders" and "Plan of
Distribution."
The Company will not receive any part of the proceeds from the sale of the
Shares. The Company has agreed to bear all of the expenses in connection with
the registration and sale of the Shares (other than underwriting discounts and
selling commissions and the fees and expenses of counsel or other advisors to
the Selling Stockholders).
The Common Stock of the Company trades on the Nasdaq Small-Cap Market under the
symbol CORX. On June 30, 1997, the high and low sale prices of a share of Common
Stock of the Company, as reported by Nasdaq, were $3.218 and $3.00,
respectively. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING AT PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF
THE COMMON STOCK OFFERED HEREBY.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY 3, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048; 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Reports and other
information on the Company may be obtained from the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission.
This Prospectus constitutes part of a Registration Statement (the "Registration
Statement") on Form SB-2 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby. For further
information about the Company and the securities offered hereby, reference is
made to the Registration Statement and to the financial statements and exhibits
filed as a part thereof. The statements contained in this Prospectus as to the
contents of any contract or any other document are not necessarily complete, and
in each instance reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including exhibits thereto, may be inspected without charge at the public
reference facilities maintained by the Commission as provided in the preceding
paragraph, and copies of all or any part thereof may be obtained from the
Commission's Public Reference Section at prescribed rates.
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PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. ALL SHARE AND PER SHARE DATA HAVE BEEN RESTATED TO
REFLECT A ONE-FOR-FIVE REVERSE STOCK SPLIT THAT WAS EFFECTED JANUARY 11, 1995.
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS."
This Prospectus 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 is subject to the safe harbors created thereby. The
forward looking statements are based on current expectations that involve a
number of risks and uncertainties. These forward-looking statements are based on
assumptions that the Company will be able to obtain sufficient financing to
continue operations, that the Company's technology will continue to be developed
and will not be replaced by new technology, that the Company will retain key
technical and management personnel, and that there will be no material adverse
change in the Company's operations or business. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
technology, economic, competitive and market 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, there
can be no assurance that the results contemplated in the forward-looking
statements will be realized. In addition, the business and operations of the
Company are subject to substantial risks that increase the uncertainty inherent
in such 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 a representation of the Company or
any other person that the objectives or plans of the Company will be achieved.
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus.
THE COMPANY
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 product development effort at Cortex is centered on the AMPA 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. To date, these studies have been primarily
directed toward establishing the safety and tolerability of CX516. Cortex is
also investigating the potential utility of its AMPAKINEs in the treatment of
schizophrenia. The Company's primary research focus is on the AMPA receptor
program but, with the reacquisition of rights to calpain inhibitor compounds
from Alkermes in October 1995, a research effort in this area has been
reinstituted.
Cortex believes that its competitive advantage is the quality of its science and
technology, and that it can compete effectively with larger, more established,
better capitalized entities in the area of discovery of innovative
pharmaceuticals. The Company does not, however, have the resources or expertise
for later-stage clinical development, manufacturing and worldwide marketing. The
Company's commercial development plans therefore involve partnering with larger
pharmaceutical companies for Phase II and later clinical testing, manufacturing
and global marketing of its proposed products, while attempting to retain the
right to eventually co-promote in the United States. If the Company is
successful in the pursuit of this business strategy, it is intended that it will
be in a position to cover its costs over the next few years, to maintain its
focus on the research and early development of innovative pharmaceuticals, and
to eventually participate more fully in the commercial development of its
proposed products in the United States. Cortex is actively seeking collaborative
or licensing arrangements with larger pharmaceutical companies that will permit
its product candidates to be advanced into the later stages of clinical
development and that will provide access to the clinical trials management,
manufacturing and marketing expertise of such companies. There can be no
assurance, however, that the Company will secure such arrangements on favorable
terms, or at all, or that its products will be successfully developed, approved
for marketing by government regulatory agencies, or accepted by patients, health
care providers and insurers.
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Cortex was incorporated in Delaware on February 10, 1987. The Company's offices
and laboratories are located at 15241 Barranca Parkway, Irvine, California,
92618, and its telephone number is (714) 727-3157.
AMPALEX-TM- and AMPAKINE-TM- are trademarks of Cortex Pharmaceuticals, Inc. This
Prospectus also includes registered trademarks of other companies.
RISK FACTORS
An investment in the Shares offered hereby involves a high degree of risk. See
"Risk Factors."
SELECTED FINANCIAL INFORMATION
The selected financial information set forth below is derived from and should be
read in conjunction with the more detailed financial statements (including the
notes thereto) appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
STATEMENTS OF OOPERATIONS DATA:
(Unaudited)
(Unaudited) Period from Period from
Nine months ended inception Inception
March 31, (February 10, Years ended June 30, (February 10,
1987) through 1987) through
------------------------ March 31, --------------------------- June 30,
1997 1996 1997 1996 1995 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ - $ - $ 3,694,717 $ - $ - $ 3,694,717
Total operating
expenses 3,760,324 3,286,257 34,007,972 4,321,309 7,031,842 30,247,648
------------ ------------ -------------- ------------ ------------ --------------
Loss from
operations (3,760,324) (3,286,257) (30,313,255) (4,321,309) (7,031,842) (26,552,931)
Interest income,
net 106,204 116,716 1,439,511 163,062 196,310 1,333,307
------------ ------------ -------------- ------------ ------------ --------------
Net loss $ (3,654,120) $ (3,169,541) $ (28,873,744)$ (4,158,247) $ (6,835,532) $ (25,219,624)
------------ ------------ -------------- ------------ ------------ --------------
------------ ------------ -------------- ------------ ------------ --------------
Weighted
average common
shares
outstanding 7,899,585 6,260,152 6,532,884 6,075,454
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per
share $ (0.57) $ (0.51) $ (0.64) $ (1.13)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
BALANCE SHEET DATA:
June 30,
(Unaudited) --------------------------
March 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Total current assets (1) $ 4,742,833 $ 4,179,977 $ 3,931,448
Total assets (1) 5,446,539 5,013,920 4,886,372
Total current liabilities 418,406 330,328 603,660
Deficit accumulated during
the development stage (29,893,090) (25,359,298) (21,201,051)
Total stockholders'
equity (1) $ 3,950,109 $ 3,644,763 $ 3,272,696
Common shares outstanding 9,148,727 7,495,576 6,085,201
-------------------------
(1) Excludes net proceeds of approximately $4,000,000 received in June
1997 in connection with a private placement of Series A Preferred
Stock. See "Capitalization," "Description of Securities -- Preferred
Stock" and Note 11 of Notes to Financial Statements.
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RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY IS SPECULATIVE IN NATURE,
INVOLVES A HIGH DEGREE OF RISK, AND SHOULD NOT BE MADE BY ANY INVESTOR WHO
CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT. EACH PROSPECTIVE INVESTOR
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND SPECULATIVE FACTORS, AS WELL
AS OTHERS DESCRIBED ELSEWHERE IN THIS PROSPECTUS, ASSOCIATED WITH THIS OFFERING
BEFORE MAKING AN INVESTMENT.
NEED FOR ADDITIONAL FUNDS. Cortex anticipates that its existing capital
resources (including approximately $4,000,000 in net proceeds received in
June 1997 from a private placement of Series A Preferred Stock) will enable
it to maintain its 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. Cortex is a development stage
enterprise. From inception on February 10, 1987 through March 31, 1997, the
Company has generated only modest operating revenues and has incurred net losses
aggregating $28,873,744. As of March 31, 1997, the Company had an accumulated
deficit of $29,893,090. 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 and apply for
regulatory approval 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
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
five years, either directly or through its corporate partners or licensees.
There can be no assurance that the Company's proposed products will prove to be
safe or effective or receive regulatory approvals that are required for
commercial sale. See "Business."
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 such activities for most or
all of its proposed products. In connection with its efforts to secure corporate
partners, the Company will 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, health care providers and insurance companies, or that they can be
manufactured and marketed at prices that would permit the Company to operate
profitably. See "Business."
LIMITED PROPRIETARY RIGHTS; LACK OF PATENT PROTECTION. The Company has
negotiated technology rights agreements giving it exclusive rights to its
proposed cognition enhancement products and calpain inhibitor products under
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. Certain of the Company's licenses and other agreements are
terminable if the Company does not make certain minimum
5
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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.
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 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 conducted by 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."
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION. If all outstanding warrants and
options are exercised prior to their expiration, approximately 1,200,000
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 currently outstanding 9% Preferred Stock
and Series B Preferred Stock. On issuance such shares will be freely tradable.
As of June 30, 1997, 1,411,843 shares of Common Stock are issuable upon
conversion of 400 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 under the Registration
Statement of which this Prospectus is a part.
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 Common Stock that are issuable upon conversion of Series A
Preferred. See "Description of Securities -- Preferred Stock" and Note 11 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 in a number of pharmaceutical or biotechnology disciplines to develop
therapeutic products similar to those under investigation by the Company. Most
of these companies, research institutes and universities have substantially
greater financial, technical, manufacturing, marketing, distribution and/or
other resources than Cortex. In addition, many of such companies have experience
in undertaking human clinical trials of new or improved therapeutic products and
obtaining FDA and other regulatory clearances of products for use in human
health care. The Company has no experience in conducting and managing clinical
testing or in preparing applications necessary to gain regulatory clearances.
Accordingly, other companies may succeed in developing products that are safer
or more effective than those proposed to be 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."
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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" and
"Management."
DEPENDENCE ON RELATIONSHIPS WITH KEY CONSULTANTS AND THE UNIVERSITY OF
CALIFORNIA, IRVINE. The Company is dependent upon its relationships with a
number of key 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 early preclinical research in the laboratories of Dr. Lynch at UCI 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, and 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. See "Management."
GOVERNMENT REGULATION. Therapeutic 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. Even if regulatory clearances are
obtained, a marketed product is 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. In addition, the current
administration in the U.S. is proposing changes in federal regulation and
reimbursement policies intended to facilitate the delivery of cost-effective
health care. The implementation of such proposed changes may affect the
regulation and availability of, and the pricing and reimbursement for, health
care products. The Company is unable to predict the effect, if any, that these
proposed changes will have on the Company. See "Business--Government
Regulation."
PRODUCT LIABILITY AND INSURANCE. The clinical testing, manufacturing and
marketing of the Company's products may expose the Company to product liability
claims. Cortex maintains liability insurance with coverage limits of $5 million
per occurrence and $5 million in the annual aggregate. Although the Company has
never been 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.
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.
The NASD has proposed modifying the listing standards for the Nasdaq Small Cap
Market, to 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 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 the 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 life
sciences companies generally, and the trading price of the Company's Common
Stock has been subject to wide fluctuations. See "Price Range of Common Stock."
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 impact on the Company's business and on the market price of the
Company's securities.
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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 March 31, 1997, accrued and
unpaid dividends on the 9% Preferred Stock were $69,300. See "Dividend Policy."
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, under certain circumstances, 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. See "Description of Securities."
USE OF PROCEEDS
The proceeds from the sale of each Selling Stockholder's Shares will belong to
the Selling Stockholders. The Company will not receive any of the proceeds from
such sales of the Shares.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock (Nasdaq symbol: "CORX") began trading publicly in the
over-the-counter market on July 18, 1989. The following table presents quarterly
information on the high and low sale prices of the Common Stock since July 1,
1994 as reported by Nasdaq. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, may not represent actual
transactions and have been adjusted for a one-for-five reverse stock split that
became effective January 11, 1995.
High Low
---- ---
FISCAL YEAR ENDING JUNE 30, 1997
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
FISCAL YEAR ENDED JUNE 30, 1995
Fourth Quarter .............................. 3-3/4 2-1/2
Third Quarter ............................... 3-3/4 1-5/8
Second Quarter .............................. 5-5/32 3-1/8
First Quarter ............................... 5-5/16 3-3/4
As of June 30, 1997, there were 718 stockholders of record of the Company's
Common Stock, and approximately 7,400 beneficial owners. The last sale price
of the Company's Common Stock on June 30, 1997, as reported by Nasdaq, was
$3-1/8.
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DIVIDEND POLICY
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 of
$0.09 per share per annum, which accrues in equal semi-annual installments on
June 15th and December 15th of each year, which dividends must be paid in full
before any dividends can be paid on the Common Stock. As of March 31, 1997,
accrued and unpaid dividends on the 9% Preferred Stock were $69,300. 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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March 31,
1997. The figures are unaudited, and this table should be read in conjunction
with the financial statements (including the notes thereto) appearing elsewhere
in this Prospectus.
March 31, 1997(1)(3)
--------------
Note payable to Alkermes, Inc. $ 1,078,024
Stockholders' equity (2):
9% cumulative convertible preferred stock,
$0.001 par value; $1.00 per share liquidation
preference; authorized: 1,250,000 shares;
issued and outstanding: 110,000 shares 110,000
Series B convertible preferred stock, $0.001 par
value; $0.6667 per share liquidation preference;
authorized: 3,200,000 shares; issued and
outstanding: 150,000 shares 86,810
Series D convertible preferred stock, $0.001 par
value; $10,000 per share liquidation preference;
authorized: 500 shares; issued and outstanding:
50 shares (2) 467,221
Common stock, $0.001 par value; authorized
20,000,000 shares; issued and outstanding:
9,148,727 shares 9,149
Additional paid-in capital 33,170,303
Unrealized loss on available for sale
U.S. Government securities (284)
Deficit accumulated during the development stage (29,893,090)
-------------
Total stockholders' equity 3,950,109
-------------
Total capitalization $ 5,028,133
------------
------------
(1) Excludes an aggregate of 1,319,719 shares of Common Stock reserved for
issuance upon possible exercise of outstanding warrants and options
and an aggregate of 226,804 shares of Common Stock reserved for
issuance upon conversion of outstanding 9% Cumulative Convertible
Preferred Stock, Series B Convertible Preferred Stock and Series D
Convertible Preferred Stock. See "Description of Securities" and
Notes 3, 4 and 5 of Notes to Financial Statements.
(2) On February 12, 1997, pursuant to irrevocable commitments entered into
on October 15, 1996, the Company completed a private placement of 400
shares of Series D Preferred Stock ("Series D Preferred") for gross
proceeds of $4,000,000. The Series D Preferred was convertible at an
9
<PAGE>
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 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
March 31, 1997, the Series D Preferred shares from the first and
second tranches and 100 of the Series D Preferred shares from the
third tranche had been converted into 1,817,915 shares of the
Company's Common Stock at effective conversion prices ranging from
$2.87 to $3.35 per share of Common Stock. Subsequent to March 31,
1997, the balance of the Series D Preferred shares was converted into
an aggregate of 245,522 shares of Common Stock.
(3) 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 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) for $2,000,000 of additional gross proceeds on
June 30, 1997, three business days following the effectiveness of the
Registration Statement of which this Prospectus is a part. The
Registration Statement covers resales of shares of Common Stock
issuable upon conversion of the Series A Preferred and upon exercise
of the warrants. 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 per share 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 "Description of Securities" and Note 11 of Notes to Financial
Statements.
10
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data with respect to the Company presented
below for the fiscal years ended and as of June 30, 1996 and 1995 and
for the period from inception (February 10, 1987) through June 30,
1996 are derived from and should be read in conjunction with the more
detailed financial statements (including the notes thereto) of the
Company, which have been audited by Ernst & Young LLP, independent
auditors, whose report thereon is included elsewhere herein and in the
Registration Statement. The selected financial data for the years
ended and as of June 30, 1994, 1993 and 1992 is derived from audited
financial statements that are not included in this Prospectus. The
selected financial data for the nine-month periods ended March 31,
1997 and 1996 and the period from inception (February 10, 1987)
through March 31, 1997 and at March 31, 1997 are derived from
unaudited interim financial statements. The unaudited interim
financial statements include all adjustments (consisting only of
normally recurring accruals) that management considers necessary for a
fair presentation of the Company's financial position and results of
operations for the periods presented. Operating results for the
nine-month period ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the fiscal year ending
June 30, 1997.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Period from
inception
(February 10,
Years ended June 30, 1987) through
---------------------------------------------------------------------------- June 30,
1996 1995 1994 1993 1992 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Research/license revenue (1) $ -- $ -- $ -- $ 2,600,000 $ 1,000,000 $ 3,600,000
Grant revenue -- -- 39,665 10,103 -- 94,717
----------- ----------- ----------- ----------- ----------- ------------
Total operating revenues -- -- 39,665 2,610,103 1,000,000 3,694,717
----------- ----------- ----------- ----------- ----------- ------------
Operating expenses:
Research & development 2,677,577 4,138,731 3,226,858 2,316,622 2,284,283 18,969,112
General & administrative 1,643,732 1,665,134 1,780,792 1,101,134 1,164,148 10,050,559
Settlement with Alkermes, Inc. -- 1,227,977 -- -- -- 1,227,977
----------- ----------- ----------- ----------- ----------- ------------
Total operating expenses 4,321,309 7,031,842 5,007,650 3,417,756 3,448,431 30,247,648
----------- ----------- ----------- ----------- ----------- ------------
Loss from operations (4,321,309) (7,031,842) (4,967,985) (807,653) (2,448,431) (26,552,931)
Interest income, net 163,062 196,310 262,994 46,117 93,661 1,333,307
----------- ----------- ----------- ----------- ----------- ------------
Net loss $(4,158,247) $(6,835,532) $(4,704,991) $ (761,536) $(2,354,770) $(25,219,624)
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
Weighted average common
shares outstanding 6,532,884 6,075,454 4,880,338 3,147,204 2,753,754
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loss per share $ (0.64) $ (1.13) $ (0.97) $ (0.26) $ (0.88)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
<CAPTION>
Period from
inception
Nine months ended (February 10,
March 31, 1987) through
-------------------------- March 31,
1997 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
Research/license revenue (1) $ -- $ -- $ 3,600,000
Grant revenue -- -- 94,717
----------- ----------- ------------
Total operating revenues -- -- 3,694,717
----------- ----------- ------------
Operating expenses:
Research & development 2,489,584 2,033,806 21,458,696
General & administrative 1,270,740 1,252,451 11,321,299
Settlement with Alkermes, Inc. -- -- 1,227,977
----------- ----------- ------------
Total operating expenses 3,760,324 3,286,257 34,007,972
----------- ----------- ------------
Loss from operations (3,760,324) (3,286,257) (30,313,255)
Interest income, net 106,204 116,716 1,439,511
----------- ----------- ------------
Net loss $(3,654,120) $(3,169,541) $(28,873,744)
----------- ----------- ------------
----------- ----------- ------------
Weighted average common
shares outstanding 7,899,585 6,260,152
----------- -----------
----------- -----------
Net loss per share $ (0.57) $ (0.51)
----------- -----------
----------- -----------
</TABLE>
- --------------------------
(1) Received under an agreement with Alkermes, Inc.
11
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------
March 31, 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Working capital (1) $ 4,324,427 $ 3,849,649 $ 3,327,788 $ 8,982,571 $ 888,199 $ 1,245,987
Total assets (1) 5,446,539 5,013,920 4,886,372 10,441,998 1,924,856 3,095,641
Total liabilities and
redeemable preferred stock 1,496,430 1,369,157 1,613,676 1,154,117 788,392 1,560,218
Deficit accumulated during
the development stage (29,893,090) (25,359,298) (21,201,051) (14,365,519) (9,660,528) (8,882,992)
Stockholders' equity (1) $ 3,950,109 $ 3,644,763 $ 3,272,696 $ 9,287,881 $ 1,136,464 $ 1,535,423
Common shares outstanding 9,148,727 7,495,576 6,085,201 6,073,942 3,209,975 3,047,438
</TABLE>
(1) Excludes net proceeds of approximately $4,000,000 received in June 1997 in
connection with a private placement of Series A Preferred Stock. See
"Capitalization," "Description of Securities" and Note 11 of Notes to
Financial Statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT, AND
WITH "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" PRESENTED IN THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-KSB.
INTRODUCTORY NOTE
This discussion and analysis 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 relate to (i) future research plans and expenditures,
(ii) potential collaborative arrangements, and (iii) 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, there can be no assurance
that the results contemplated in forward-looking statements will be realized and
actual results may differ materially. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
RESULTS OF OPERATIONS
From inception (February 10, 1987) through March 31, 1997, the Company's revenue
has consisted of (i) $3,600,000 of license fees and research and development
funding from January 1992 through June 1993 under an earlier agreement with
Alkermes, Inc., (ii) net interest income aggregating $1,439,511, and (iii)
$94,717 of grant revenue.
From inception (February 10, 1987) through March 31, 1997, the Company has
sustained losses aggregating $28,873,744. 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 license fees, milestone payments, research support payments and/or other
revenues under planned strategic alliances that the Company is seeking with
larger pharmaceutical companies for the later stages of 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.
FISCAL YEARS ENDED JUNE 30, 1996 AND 1995
For the year ended June 30, 1996, the Company's net loss of $4,158,000 compares
with a net loss of $6,836,000 for the prior year. The net loss for the prior
year includes $1,228,000 of expenses related to the settlement of the dispute
with Alkermes (see Note 3 of Notes to Financial Statements), and higher research
and development expenditures in connection with the initiation of human clinical
studies.
General and administrative expenses of $1,644,000 for the year ended June 30,
1996 were essentially unchanged from the prior year. The very slight decrease
was the result of lower outlays for consulting expenses, partially offset by
increased recruiting fees incurred with the hiring of the new Chief Executive
Officer.
13
<PAGE>
Research and development expenses decreased to $2,678,000 or by 35%, in the year
ended June 30, 1996. Most of the decrease from the prior year was attributable
to the commencement of Phase I clinical testing of AMPALEX (for the potential
treatment of memory deficits due to Alzheimer's disease) in the prior year, as
well as lower salary and related expenses due to a temporary reduction in
scientific personnel that was effected as of June 30, 1995. Lower outlays for
scientific consulting contributed most of the remaining decrease.
NINE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
The loss for the nine-month period ended March 31, 1997 was $3,654,000, compared
to a loss of $3,170,000 for the corresponding prior year period, with higher
levels of research and development spending responsible for the increase.
General and administrative expenses for the nine months ended March 31, 1997 of
$1,271,000 were materially consistent with the $1,252,000 recorded for the prior
year period.
Research and development expenses increased from $2,034,000 to $2,490,000, or by
$456,000 (22%), during the nine-month period ended March 31, 1997 compared to
the prior year period, due mostly to additions to the complement of scientific
employees, a resultant increase in spending for laboratory supplies and costs
related to the commencement of Phase I/IIa human clinical testing.
The Company believes that inflation and changing prices have not had a material
impact on its ongoing operations to date.
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 such
issuances from inception (February 10, 1987) through March 31, 1997 aggregating
$32 million. An additional $3.6 million in research and license payments was
received from Alkermes, Inc. in 1992 and 1993 in connection with a development
and license agreement with that firm. Interest income from inception through
March 31, 1997, which approximates funds received, was $1.4 million.
As of March 31, 1997, the Company had cash, cash equivalents and short-term
investments totaling $4.7 million and working capital of $4.3 million. In
comparison, as of June 30, 1996, the Company had cash, cash equivalents and
short-term investments totaling $4.1 million and working capital of $3.8
million. The increases were attributable to net proceeds of $3.7 million
received from a private placement of Series D Preferred Stock (see Note 10 of
Notes to Financial Statements), partially offset by amounts required to fund
operating losses and to purchase capital equipment. From inception (February 10,
1987) through March 31, 1997, net expenditures for furniture, equipment and
leasehold improvements aggregated $1.9 million.
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, 1997,
1998 and 1999 are $229,000, $234,000 and $220,000, respectively.
As of March 31, 1997, Cortex had outstanding 110,000 shares of 9% cumulative
convertible preferred stock, which shares accrue cumulative dividends
semi-annually 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 from June 15, 1990. Accrued and unpaid dividends as of March 31, 1997
were $69,300.
In connection with the settlement in October 1995 of a license dispute with
Alkermes, Inc. the Company issued to Alkermes a $1,000,000 three-year promissory
note accruing interest semi-annually at the current 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.
14
<PAGE>
Over the next twelve months, the Company plans to conduct additional preclinical
and Phase I/II clinical studies on its AMPAKINE-TM- compounds. These planned
research and development activities involve a twelve-month expenditure of
approximately $4 million. Significant investments in plant or equipment or
substantial changes to staffing levels are not contemplated under current
spending plans for the next twelve months. As of March 31, 1997, Cortex had 20
full-time employees and one part-time employee.
Cortex anticipates that its existing cash, cash equivalents and short-term
investments, combined with a modest amount of anticipated interest income, will
be sufficient to satisfy its capital requirements through calendar 1998 under
current spending plans. Additional funds will be required to continue
operations beyond that time.
To provide resources for both its short and longer-term requirements, the
Company is presently seeking collaborative or other arrangements with larger
pharmaceutical companies, under which it is intended that 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, competition for such arrangements
is intense, with a large number of biopharmaceutical companies attempting to
secure alliances with more established pharmaceutical companies. Although the
Company is engaged in discussions with candidate companies, there can be no
assurance that an agreement or agreements will arise from these discussions in a
timely manner, or at all. Accordingly, the Company is likely to raise additional
capital through the sale of debt or equity securities. If the Company proceeds
with a debt or equity financing, there can be no assurance that the funds will
be available on favorable terms, or at all. If additional funds are raised by
issuing equity securities, dilution to existing stockholders is likely to
result.
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 five years, either
directly or through prospective corporate partners or licensees.
15
<PAGE>
BUSINESS
OVERVIEW
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, 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) for the potential treatment of
deficits of memory and cognition due to Alzheimer's disease. To date, these
studies have involved healthy young adult and healthy elderly volunteers as well
as patients with Alzheimer's disease. Cortex is also investigating the safety
and potential utility of its AMPAKINEs in the treatment of schizophrenia. In
fiscal 1996, the Company maintained a strong focus on the AMPA receptor program
but, with the reacquisition of rights to calpain inhibitor compounds from
Alkermes in October 1995, reinstituted a research effort in this area. In the
fiscal years ended June 30, 1996 and 1995, the Company's expenditures on
research and development were $2,677,577 and $4,138,731, respectively, with the
decrease attributable to higher costs of human clinical testing of AMPALEX in
fiscal 1995.
Each of Cortex's programs addresses a large potential market. 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, while attempting to retain the
right to eventually co-promote in the United States. If the Company is
successful in the pursuit of this 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 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 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
for the neurotransmitter glutamate. 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. It is hoped that this
selective amplification of the normal glutamate 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, both
of which represent large unmet medical needs.
DEFICITS OF MEMORY AND COGNITION -- ALZHEIMER'S DISEASE
Impairment of memory and cognition is a very serious problem that is growing 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 to alleviate deficits in memory and cognition could potentially
enable many of the elderly to remain independent longer.
16
<PAGE>
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 creates 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. In the
cerebral cortex, a great deal of the communication between neurons is mediated
by receptors for the neurotransmitter glutamate, including a subtype usually
designated as the AMPA receptor (which is involved in long-term potentiation).
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. A potential corrective approach to alleviate age-related cognitive
deficits is therefore to develop novel compounds to enhance the activity of the
AMPA receptors that are still functioning.
Alzheimer's disease is the best known destroyer of memory, afflicting some four
million Americans. With the aging of our population, unless a treatment is found
the number of Americans with Alzheimer's disease is expected to double over the
next two decades. 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.
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.
This may alleviate the memory and cognitive deficits that make up the early
symptoms. 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 continued input from other brain cells to remain alive. As
neurons die, other neurons begin to lose their inputs, hastening their own
death.
The first major results of AMPAKINE testing in animal behavioral models of
learning and memory were reported in early 1994 in the prestigious journal
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, but when they were administered an AMPAKINE
their performance 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).
17
<PAGE>
Three human clinical studies have now been completed with CX516 ("AMPALEX"). The
results of the two most recent studies were announced in the year ended June 30,
1996. 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 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 also given the same
nonsense syllable memory test that had been 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. In fact, 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.
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 very 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 will be
conducted at the National Institutes of Health located in Bethesda, Maryland.
The double-blind, placebo-controlled dose escalation study involves
administration of CX516 to 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 scales 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 with schizophrenia 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 attention 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 of conventional
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anti-psychotics is EPS or "extrapyramidal signs," which include restlessness and
tremors. EPS side effects have a strongly negative impact on quality of life and
tend to 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
also 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, either because of lack of efficacy or 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 cognitive symptoms that keeps all but a few patients with 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 in the scientific literature
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 late 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. The results have now been extended by scientists at both UCI and Cortex
to include several additional AMPAKINEs. More recently, 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
being treated with clozapine at Massachusetts General Hospital. 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
Since 1989, the Company has been involved in research and early product
development of inhibitors of the enzyme calpain. 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).
The Company's first target for calpain inhibitor therapeutics was brain damage
following stroke. A stroke is a vascular event causing localized damage to the
brain. There are two general categories of stroke: ischemic stroke, which is due
to a blockage of blood flow, and hemorrhagic stroke, in which a blood vessel
bursts in the brain. In either case, the insult to the brain is often
immediately life-threatening and initiates a cascade of molecular events that
ultimately leads to permanent brain damage. Each year more than 500,000
Americans experience a stroke. 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 limit or reverse 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
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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 homeostasis is re-established following an ischemic episode.
Ischemia-induced release of expressive glutamate appears to initiate the
cascade. Glutamate builds up in the extra-cellular space following a stroke,
allowing an excessive amount of calcium to enter nerve cells. This causes
excessive activation of certain calcium-dependent enzymes, including 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.
In calendar 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"), a larger 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 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. On November 19, 1993,
Alkermes filed an action in U.S. District Court in Massachusetts 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 subsequent to October 6, 1992. 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
presently intends to seek, with the assistance of its advisor, Vector Securities
International, Inc., 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. However, in entering into such arrangements, the Company will
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
Effective June 25, 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
Effective February 11, 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, and 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.
On December 8, 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. 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
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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. Although Cortex has
initiated Phase I (safety) testing in Europe, it has not yet filed a Notice
of Claimed Investigational Exemption for a New Drug ("IND") with the FDA for
testing in the United States. The Company is conducting Phase I/II studies in
the U.S. with CX516 in Alzheimer's disease patients and in patients with
schizophenia 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 and on average takes approximately two and
one-half years.
Therapeutic products that may be developed and sold by the Company 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 to undertake additional procedures, which may be
both costly and lengthy, and thereby furnish a competitive advantage to the
competitors of the Company or its licensees.
Cortex does not have the financial and other resources to conduct the 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 its 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.
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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, stroke and
other neurodegenerative 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, expertise and reputations 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 later
stage 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. The Company maintains liability
insurance with coverage limits of $5 million per occurrence and $5 million in
the annual aggregate. Although the Company has never been 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. Any adverse
outcome resulting from a product liability claim could have a material adverse
effect on the Company's business, financial condition and results of operations.
EMPLOYEES
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.
FACILITIES
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.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SCIENTIFIC DIRECTORS
The directors, executive officers and scientific directors of the Company are as
follows:
Name Age Position
--------------------------------------------------------------------------
Robert F. Allnutt (2) 62 Director
Carl W. Cotman, Ph.D. (1) 57 Director, Scientific Director
Michael G. Grey (1) 44 Director
D. Scott Hagen 41 Vice President and Chief Financial
Officer, Corporate Secretary
Gary S. Lynch, Ph.D. 53 Scientific Director
Harvey S. Sadow, Ph.D. (2) 74 Chairman of the Board, Director
Vincent F. Simmon, Ph.D. 53 President and Chief Executive
Officer, Director
Davis L. Temple Jr., Ph.D. (1) 53 Director
(1) Member of the Compensation/Stock Option Committee.
(2) Member of the Audit Committee.
ROBERT F. ALLNUTT was elected as a director in December 1995. Mr. Allnutt was
Executive Vice President of the Pharmaceutical Manufacturers Association from
May 1985 until February 1995 and was Vice President for Governmental Relations
of Communications Satellite Corporation from May 1984 until May 1985. Prior to
1984, Mr. Allnutt held numerous positions in the Federal Government for 25
years, including 15 years at NASA, where his positions included Associate Deputy
Administrator, the third ranking position in the agency. Mr. Allnutt is a
director of Penederm, Inc., a developer and marketer of specialized dermatology
products. He also serves as a member of the Board of Directors of the National
Health Council and the National Council on the Aging. Mr. Allnutt holds a B.S.
in Industrial Engineering from the Virginia Polytechnic Institute and J.D. and
L.L.M. degrees from George Washington University.
CARL W. COTMAN, PH.D. has been a Scientific Director of and consultant to the
Company since October 1987, served as a director of the Company from March 1989
to October 1990, and was reelected as a director in November 1991. Dr. Cotman
has been a Professor of Psychobiology, Neurology, and Psychiatry at the
University of California, Irvine since 1985. He was a Professor of Psychobiology
and Neurology at that University from 1983 to 1985, and has held various other
teaching and research positions at that University since 1968. He chaired the
Scientific Advisory Council of the American Paralysis Association and is a
member of numerous professional associations and committees, including the
Council of the American Society for Neurochemistry, the National Institute of
Aging Task Force, the American Association for the Advancement of Science and
the International Society for Neurochemistry. Dr. Cotman has served on the
editorial boards of numerous scientific journals and has authored or co-authored
seven books and over 400 articles in the fields of neurobiology, memory and
cognition, and the recovery of function after brain injury. Dr. Cotman holds a
B.A. in Chemistry from Wooster College, an M.A. in Analytical Chemistry from
Wesleyan University, and a Ph.D. in Biochemistry from Indiana University.
MICHAEL G. GREY has been a director of the Company since September 1994. Since
November 1994, Mr. Grey has been President of BioChem Therapeutic Inc., a
wholly-owned subsidiary of BioChem Pharma Inc., an international
biopharmaceutical company. From January 1994 to October 1994, Mr. Grey was
Senior Vice President, Corporate Development of Titan Pharmaceuticals, Inc. a
biopharmaceutical holding company and President and Chief Operating Officer at
Ansan, Inc., an early stage biopharmaceutical company. From 1991 until 1993, Mr.
Grey served as Vice President, Corporate Development of Glaxo, Inc., and from
1989 until 1991, Mr. Grey served as Director of International Licensing of Glaxo
Holdings p.l.c., and was responsible for the worldwide licensing activities of
Glaxo, Inc. Mr. Grey holds a B.Sc. degree in Chemistry from the University of
Notingham.
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D. SCOTT HAGEN has been Vice President and Chief Financial Officer of the
Company since January 1992, and was Vice President-Finance and Administration
from September 1988 through December 1991. He served as Acting President and
Chief Operating Officer from October 1995 to May 1996. Mr. Hagen has been
Corporate Secretary since August 1991. From 1981 to August 1988, he was employed
by Chembiomed Ltd., a Canadian biopharmaceutical company, where he served in a
progression of scientific and administrative positions. Mr. Hagen holds a B.Sc.
in Biochemistry and an M.B.A. from the University of Alberta in Edmonton,
Canada.
GARY S. LYNCH, PH.D. has been a Scientific Director of and consultant to the
Company since October 1987, and served as a director of the Company from March
1988 to March 1989 and again from December 1994 to December 1995. Dr. Lynch has
been a Professor in the Department of Psychobiology at the University of
California, Irvine since 1981, and has held various other teaching and research
positions at that University since 1969. He is a Professor at the University's
Center for the Neurobiology of Learning and Memory. Dr. Lynch is a member of the
Neuroscience Society and the International Brain Research Organization. He also
serves on the Advisory Board of the Cognitive Neuroscience Institute. Dr. Lynch
has authored and co-authored over 400 articles and a number of books in the
areas of neurobiology, cognition, and memory. Dr. Lynch holds a B.A. in
Psychology from the University of Delaware and a Ph.D. in Psychology from
Princeton University.
HARVEY S. SADOW, PH.D. has been a director of the Company since March 1988 and
Chairman of the Board of Directors since January 1991. Dr. Sadow was President
and Chief Executive Officer of Boehringer Ingelheim Corporation, a major health
care company, from 1971 until his retirement in January 1988 and was Chairman of
the Board of that company from 1988 through December 1990. Dr. Sadow was
Chairman of the University of Connecticut Foundation, the President's Council of
the American Lung Association, and the Connecticut Law Enforcement Foundation
and was a member of the Board of Directors of the Pharmaceutical Manufacturers
Association ("PMA") and Chairman of the Board of the PMA Foundation. Dr. Sadow
is also a member of several other professional committees and societies,
including the American Society for Clinical Pharmacology and Therapeutics. He
has published extensively in the field of treatment of diabetes mellitus.
Dr. Sadow is Chairman of Cholestech Corporation, a developer, manufacturer and
seller of lipid measuring diagnostic products; a director of Penederm, Inc., a
developer and marketer of specialized products in the dermatology area; and a
director of several privately-held companies in the health care field. Dr. Sadow
holds a B.S. from the Virginia Military Institute, an M.S. from the University
of Kansas, and a Ph.D. from the University of Connecticut.
VINCENT F. SIMMON, PH.D. was appointed President and Chief Executive Officer and
a director of the Company in May 1996. From November 1994 to December 1995, Dr.
Simmon served as Chairman, President and Chief Executive Officer of Prototek,
Inc., a privately-held biopharmaceutical company focusing on the development of
protease inhibitors. From March 1990 to November 1994, Dr. Simmon served as
President, Chief Executive Officer and a director at Alpha 1 Biomedicals, Inc.,
a biotechnology company. From February 1985 to March 1990, Dr. Simmon served as
Vice President for Biomedical and Biotechnology Research at W.R. Grace and Co.
From 1979 to 1985, Dr. Simmon served in varying capacities including Senior Vice
President of Research and Development for Genex Corporation, a genetic
engineering company, and from 1973 to 1979 in varying capacities including
Assistant Director, Department of Toxicology for SRI International, a consulting
company. Dr. Simmon has served as a governor of the Emerging Companies Section
of BIO (Biotechnology Industrial Organization) and a director of the Chemical
Industries Institute for Toxicology (Research Triangle Park). Dr. Simmon holds a
B.A. degree in Biology and Chemistry from Amherst College, a M.S. degree from
the University of Toledo in Plant Physiology and a Ph.D. degree in Molecular
Biology from Brown University. Dr. Simmon was a post-doctoral fellow from 1971
to 1973 at Stanford University.
DAVIS L. TEMPLE, JR., PH.D. has been a director of and consultant to the Company
since March 1994. He served as comember of the Office of the Chief Executive
of the Company from October 1995 to May 1996. In April 1997, Dr. Temple was
appointed as Chairman and Chief Executive Officer of Cognetix, a privately held
biopharmaceutical drug discovery and development company. From November 1995
until his appointment, he was a Senior Consultant for Kaufman Brothers, a New
York Investment Bank. Prior to that, from January 1994 to November 1995 he was a
Managing Director at Stover Haley Burns, Inc., a life science advisory group.
From 1990 until 1993, Dr. Temple served as Vice President, CNS Drug Discovery,
of Bristol-Myers Squibb and from 1984 to 1990 he served as Senior Vice
President, CNS Research at Bristol-Myers Company. Dr. Temple holds a B.S. degree
in Pharmacy from Louisiana State University and a Ph.D. degree in Medicinal
Chemistry and Pharmacology from the University of Mississippi.
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OTHER OFFICERS
PHILIP N. HAMILTON has been Vice President, Business Development since October
1995. From January 1995 to October 1995 he was an independent consultant to a
number of early stage biopharmaceutical companies. From 1987 to January 1995 he
was with Cambridge NeuroScience, Inc., where he served in a progression of
scientific and administrative positions, most recently as Director, Licensing
and Strategic Alliances, with responsibility for corporate partnering, new
business opportunities and licensing. Prior to joining Cambridge NeuroScience,
Mr. Hamilton was engaged in research at Harvard Medical School and St. George's
Medical School, London, U.K. Mr. Hamilton holds a B.Sc.(Hons) in Pharmacology
from the University of Edinburgh in Scotland, where he also completed four years
of graduate level research in Neurobiology. He holds an M.B.A. from Suffolk
University, Boston.
GARY A. ROGERS, PH.D. has been Vice President, Pharmaceutical Discovery since
June 1995. In February 1994, he founded Ligand Design, a private contract design
and synthesis firm located in Santa Barbara. From 1987 to 1994, Dr. Rogers
served as an associate research biochemist at the University of California,
Santa Barbara. Prior to that, he held a succession of research and faculty
positions at universities in the United States and abroad, including three years
as an assistant adjunct professor of bio-organic chemistry under Dr. Paul Boyer
at the University of California, Los Angeles and four years as an assistant
professor at the University of Texas. Dr. Rogers is a co-inventor of the
AMPAKINE family of AMPA receptor modulating compounds. He holds a B.S. degree in
organic chemistry from the University of California, Los Angeles and a Ph.D. in
bio-organic chemistry from the University of California, Santa Barbara.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation paid
or accrued by the Company for services rendered during the three fiscal years
ended June 30, 1996 to the Company's Chief Executive Officer and to the other
executive officer employed by the Company as of June 30, 1996.
26
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
------------------------------ -----------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation (3) Options(#) Compensation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Vincent F. Simmon, Ph.D. (1) 1996 $ 25,000 $20,410 $ 3,613 180,000 $ --
President and Chief
Executive Officer
D. Scott Hagen 1996 $128,751 $18,750 $14,636 11,000 $ --
Vice President, 1995 124,583 15,000 9,346 15,000 --
Chief Financial Officer 1994 114,035 25,000 9,577 -- --
and Secretary
Alan A. Steigrod (2) 1996 $ 66,667 $31,500 $53,077 -- $ --
President and Chief 1995 207,400 -- 12,559 195,600 (4) --
Executive Officer 1994 196,602 74,000 17,483 119,500 --
</TABLE>
- -------------------------
(1) Dr. Simmon was appointed President and Chief Executive Officer on May 15,
1996.
(2) Mr. Steigrod resigned as President and Chief Executive Officer on October
31, 1995.
(3) Accrued or paid-out vacation pay, sick pay and/or relocation
reimbursements, and in the case of Mr. Steigrod,
includes $50,000 in severance pay.
(4) Represents options issued to replace 195,600 canceled options.
OPTION MATTERS
OPTION GRANTS. The following table sets forth certain information concerning
grants of stock options to each of the Company's executive officers named in the
Summary Compensation Table during the fiscal year ended June 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
% of Total
Options
Granted to
Options Employees in Exercise Expiration
Name Granted Fiscal Year Price($/Sh) Date
---------------------------------------------------------------------------
Vincent F. Simmon, Ph.D. 180,000 74% $5.63 05/15/06
D. Scott Hagen 11,000 5% $7.25 02/19/06
Alan A. Steigrod -- 0% -- --
----------------------
OPTION EXERCISES. The following table sets forth certain information concerning
the exercise of options by each of the Company's executive officers named in the
Summary Compensation Table during the fiscal year ended June 30, 1996, including
the aggregate value of gains on the date of exercise. In addition, the table
includes the number of shares covered by both exercisable and unexercisable
stock options as of June 30, 1996. Also reported are the values for "in the
money"
27
<PAGE>
options which represent the positive spread between the exercise prices of any
such existing stock options and $4-3/8, the last sale price of Common Stock on
June 30, 1996 as reported by Nasdaq.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value Realized
(market price Value of Unexercised
at exercise Number of Unexercised In-the-Money
Shares Acquired less exercise Options at FY-End Options at FY-End
Name on Exercise price) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Vincent F. Simmon, Ph.D. 0 $0 4,999 175,001 $0 $0
D. Scott Hagen 0 0 26,950 23,050 30,938 14,062
Alan A. Steigrod 194,300 173,077 0 0 0 0
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
Vincent F. Simmon joined the Company as President and Chief Executive Officer in
May 1996. His employment agreement entitles Dr. Simmon to a base salary of
$200,000 per year as well as an annual bonus of from 15% to 50% of his base
salary, at the discretion of the Board of Directors of the Company. In addition,
Dr. Simmon received a one-time signing bonus of $23,500. In connection with his
employment, Dr. Simmon was granted options to purchase 180,000 shares of Common
Stock at an exercise price of $5.625 per share, representing 100% of the fair
market value as of the grant date. The options vest evenly each month over a
three-year period commencing one month from the date of grant and have a
ten-year term.
Mr. Hagen entered into an employment agreement with the Company commencing
September 1, 1988. The employment agreement has been extended and renewed for
additional terms, most recently as of January 1, 1997 for a term ending
December 31, 1997. The agreement provides for a base salary of $141,113 with an
annual bonus of between $10,000 and $30,000. In December 1993, options to
purchase a total of 14,000 shares of Common Stock at an exercise price of $2.50
per share, which were originally granted in 1989, were extended by the Stock
Option Committee for an additional three-year period, or until February 1997.
The aggregate difference between exercise price and fair market value of the
Common Stock on the date of the extension was recorded as compensation expense.
In the event that Mr. Hagen's employment is terminated other than for cause or
as a result of his voluntary resignation, death or disability, he will receive a
severance payment equal to six months' salary.
Drs. Carl W. Cotman and Gary S. Lynch (both of whom are co-founders and
Scientific Directors of the Company) have each entered into a consulting
agreement with the Company that provides for the payment of an annual
consulting fee of $30,000. In September 1994, and again in July 1995, Dr.
Lynch's consulting fee was increased to $50,000 and $75,000 per year,
respectively. Also in September 1994, Dr. Cotman's consulting fee was
increased to $33,000 per year. The term of each consulting agreement
commenced in November 1987 and will continue until terminated by the
respective parties thereto. The consulting agreements obligate the respective
consultants to make themselves available to the Company for consulting and
advisory services for an average of three days per month. In June 1995, each
of the consultants voluntarily reduced their annual consulting fees by
$10,000. On March 24, 1994, the Committee granted options to purchase 5,000
shares of Common Stock, with an exercise price equal to 100% of fair market
value of the Common Stock on the date of grant and vesting over a three-year
period, to each of Drs. Cotman and Lynch. On December 15, 1994, the Committee
granted options to purchase 20,000 shares of Common Stock with an exercise
price of $3.125 per share, the then fair market value, and vesting over a
four-year period to Dr. Cotman. On the same date, Dr. Lynch was granted
options to purchase 70,000 shares of Common Stock at the same exercise price,
and with the same vesting period. On January 4, 1996, the Stock Option
Committee granted options to Dr. Lynch to purchase 100,000 shares of Common
Stock with an exercise price of $3.50 per share, the then fair market value,
and immediate vesting. See also "Director Compensation."
28
<PAGE>
Dr. Davis L. Temple, a director of the Company, entered into a consulting
agreement with the Company that included the payment of consulting fees of
$10,000 for each six months of service over the period from July 1, 1994 to
December 31, 1996. This agreement has since expired. In February 1995, the
Stock Option Committee, in recognition of his contributions to the Company,
granted Dr. Temple an option to purchase 20,000 shares of the Company's
common stock at an exercise price of $2.125 per share, representing the fair
market value of the common stock on that date. See also "Director
Compensation."
DIRECTOR COMPENSATION
Each non-employee director (other than those who join the Board of Directors to
oversee an investment in the Company) receives $1,500 at each Board of Directors
meeting attended, and an additional $750 annual retainer for each committee on
which he or she serves.
Under the Company's 1996 Stock Incentive Plan, 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 each anniversary date of the
dates of grant, and are otherwise subject to the terms and provisions of the
1996 Stock Incentive Plan.
CERTAIN TRANSACTIONS
The Company's Restated Certificate of Incorporation provides that, pursuant to
Delaware law, directors of the Company shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Company and its
stockholders. This provision does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctions or other forms
of non-monetary relief remain available under Delaware law. In addition, each
director continues to be subject to liability for breach of the director's duty
of loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director's responsibility under any
other law, such as the Federal securities laws. The Company has entered into
Indemnification Agreements with each of the officers and directors that obligate
the Company to indemnify such officers and directors as permitted by applicable
law.
As consideration for its agreement to provide financial advisory services
related to corporate finance transactions and corporate partnering activities,
as amended and extended November 29, 1994, Vector Securities International, Inc.
("Vector") was paid an additional cash 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, as adjusted and 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 shall vest upon the consummation of each strategic
alliance when and as secured by Vector. Such strategic alliance may include, but
is not limited to, a joint venture, partnership, license or other contract for
the research, development, manufacture, distribution, sale or other activity
relating to the Company's present or future products, the sale of any of the
Company's assets or any rights to its products or technology, or a commitment to
provide funding for all or part of the Company's research and development
activities. For its financial advisory assistance related to the licensing of
the Company's calpain inhibitor technology, in January 1995 the Company paid a
$20,000 cash retainer and issued to Vector a five-year non-redeemable warrant to
acquire 50,000 shares of the Company's common stock at $3.00 per share, subject
to adjustment under certain circumstances. 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 to be received by the Company. See
"Description of Securities--Vector Warrants."
29
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, to the knowledge of the Company, certain
information regarding the beneficial ownership of the Company's Common Stock as
of June 30, 1997, by (i) each person known by the Company to be the beneficial
owner of more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors, (iii) each of the named executive officers in the Summary
Compensation Table and (iv) all of the Company's executive officers and
directors as a group. Except as indicated in the footnotes to this table, the
Company believes that the persons named in this table have sole voting and
investment power with respect to the shares of Common Stock indicated.
DIRECTORS, NOMINEES, SHARES PERCENT OF
OFFICERS, AND 5% BENEFICIALLY COMMON STOCK
STOCKHOLDERS OWNED BENEFICIALLY OWNED
---------------------------------------------------------------
Robert F. Allnutt 5,375 (1) *
Carl W. Cotman, Ph.D. 129,625 (2) 1.4
Michael G. Grey 9,375 (3) *
D. Scott Hagen 21,167 (4) *
Harvey S. Sadow, Ph.D. 50,959 (5) *
Vincent F. Simmon, Ph.D. 99,599 (6) *
Alan A. Steigrod 0 *
Davis L. Temple, Jr., Ph.D. 24,375 (7) *
Quantum Partners LDC (8) 657,400 7.0
Soros Fund Management
888 Seventh Avenue, 33rd Floor
New York, NY 10106
All officers, directors and nominees
as a group (7 persons) 340,475 3.5
- --------------------
* Less than one percent
(1) Includes 4,375 shares that may be purchased upon exercise of options
within 60 days of June 30, 1997.
(2) Includes 31,625 shares that may be purchased upon exercise of options
within 60 days of June 30, 1997.
(3) Includes 9,375 shares that may be purchased upon exercise of options
within 60 days of June 30, 1997.
(4) Includes 20,767 shares that may be purchased upon exercise of options
within 60 days of June 30, 1997.
(5) Includes 40,959 shares that may be purchased upon exercise of options
within 60 days of June 30, 1997.
(6) Includes 74,999 shares that may be purchased upon exercise of options
within 60 days of June 30, 1997.
(7) Includes 24,375 shares that may be purchased upon exercise of options
within 60 days of June 30, 1997.
(8) According to a Schedule 13D filed by George Soros (in his capacity as
sole proprietor of Soros Fund Management), these shares are held for
the account of Quantum Partners LDC, which has granted investment
discretion to Soros Fund Management. Mr. Soros may be deemed to be
beneficial owner of such shares.
The Company is not aware of any arrangements that may at a subsequent date
result in a change of control of the Company.
30
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of: 20,000,000 shares of
Common Stock, par value $0.001 per share, and 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 (the "9% Preferred
Stock"), 3,200,000 shares have been designated as Series B Convertible Preferred
Stock (the "Series B Preferred Stock"), 500 shares have been designated as
Series D Convertible Preferred Stock (the "Series D Preferred Stock") and 400
shares have been designated as Series A Convertible Preferred Stock (the "Series
A Preferred Stock").
As of June 30, 1997, there were 9,394,249 shares of Common Stock, 110,000
shares of 9% Preferred Stock, 150,000 shares of Series B Preferred Stock, no
shares of Series D Preferred Stock and 400 shares of Series A Preferred Stock
outstanding (See Note 11 of Notes to Financial Statements). As of the same date,
holders of the Series A Preferred Stock held warrants to purchase an
aggregate of 800,000 shares of Common Stock. Vector Securities International,
Inc. ("Vector") held warrants to acquire 285,096 shares of Common Stock (the
"Vector Warrants") and Swartz Investments, Inc. ("Swartz") and its transferees
held warrants to purchase 106,195 shares of Common Stock (the "Swartz
Warrants"). Also as of June 30, 1997, there were 718 record holders of Common
Stock, 4 record holders of 9% Preferred Stock, 3 record holders of Series B
Preferred Stock, eleven record holders of Series A Preferred Stock and the
related warrants, one record holder of the Vector Warrants and ten record
holders of the Swartz Warrants.
In addition, as of June 30, 1997, the Company had reserved an aggregate of
971,869 shares of Common Stock for issuance upon exercise of outstanding
stock options held by employees and officers, directors and consultants to
the Company, 14,667 shares for issuance upon conversion of the 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 and 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. As of the same date, the Company had reserved 800,000
shares for issuance upon exercise of the warrants issued to investors in the
Series A Preferred Stock private placement, 285,096 shares for issuance upon
exercise of the Vector Warrants and 106,195 shares for issuance upon exercise
of the Swartz Warrants.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share held of
record on all matters submitted to a vote of stockholders, including the
election of directors. The holders are entitled to receive dividends when, as
and if declared by the Board of Directors, in its discretion, out of funds
legally available therefor, subject to preferences that may be applicable to any
outstanding shares of Preferred Stock. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all of the assets of the Company
remaining after payment of liabilities and after payment of any preferential
amounts to which holders of shares of the 9% Preferred Stock, the Series B
Preferred Stock, the Series A Preferred Stock and any other series of Preferred
Stock that may be outstanding in the future, may be entitled. Holders of Common
Stock have no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to such
shares. All of the outstanding shares of Common Stock are, and the Shares of
Common Stock when issued will be, fully paid and nonassessable.
WARRANTS
On July 23, 1993, in connection with the appointment of Vector Securities
International, Inc. as exclusive financial advisor to the Company, Cortex issued
to Vector a non-redeemable warrant to purchase 12,166 shares of Common Stock at
a price of $6.37 per share, as adjusted and subject to further adjustment under
certain circumstances such as stock splits or stock dividends, at any time
through July 22, 1998.
On December 1, 1993, in connection with the closing of a private placement of
2,750,000 shares of Common Stock, for which Vector acted as placement agent, the
Company issued to Vector a similar warrant to purchase 274,200 shares of Common
Stock at a price of $9.375 per share at any time through November 30, 1998. As
consideration for Vector's assistance in reaching the settlement with Alkermes,
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.
31
<PAGE>
As consideration for its agreement to provide financial advisory services
related to corporate finance transactions and corporate partnering activities,
as amended and extended November 29, 1994, Vector 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 shall vest upon
the consummation of each strategic alliance, as defined, when and as secured by
Vector.
For its financial advisory assistance related to the licensing of the Company's
calpain inhibitor technology, in January 1995 the Company issued Vector a
five-year non-redeemable warrant to acquire 50,000 shares of the Company's
common stock at $3.00 per share, subject to adjustment under certain
circumstances, such as stock splits or stock dividends. This warrant was
exercised in February 1997.
On December 8, 1995, in connection with a private placement of Series C
Preferred Stock, the Company issued to Swartz Investments, Inc. a five-year
non-redeemable warrant to purchase 106,195 shares of the Company's common stock
at an exercise price of $2.825. Swartz Investments, Inc. subsequently
transferred all of such warrants.
In connection with the issuance of 400 shares of Series A Preferred Stock, in
June 1997, the Company issued four-year warrants to purchase an aggregate of
800,000 shares of the Company's common stock at an exercise price of $3.08 per
share.
PREFERRED STOCK
The holders of the 9% Preferred Stock are not entitled to vote for the election
of directors or upon any other matter presented to the stockholders, except and
to the extent provided by applicable law. The holders of the 9% Preferred Stock
are entitled to receive cumulative dividends, from and after June 15, 1989, at
the rate of $.09 per share per annum, out of funds legally available therefor,
when and as declared by the Board of Directors. Upon any liquidation,
dissolution or winding up of the Company, or any merger or consolidation of the
Company or other transaction in which more than 50% of the Company's voting
power is transferred (except for an issuance of the Company's securities), the
holders of the 9% Preferred Stock are entitled to receive an amount equal to
$1.00 per share plus accrued and unpaid dividends. The holders of the
9% Preferred Stock are not entitled to share in assets remaining after such
preference is satisfied. The Company has the right at any time to redeem the
9% Preferred Stock, in whole or in part, upon not less than 30 days' nor more
than 60 days' written notice, at a price of $1.00 per share.
Each share of 9% Preferred Stock is convertible at any time at the option of the
holder thereof into approximately 0.1333 shares of Common Stock, for an
effective conversion price of $7.50 per share, subject to adjustment under
certain circumstances. Upon conversion of 9% Preferred Stock, accrued and unpaid
dividends pertaining thereto do not convert to Common Stock, but rather are
credited to additional paid-in capital.
The holders of Series B Preferred Stock are not entitled to vote for the
election of directors or upon any other matter presented to the stockholders,
except and to the extent provided by applicable law. In the event of any
liquidation, dissolution, winding-up or other distribution of the assets of the
Company, holders of Series B Preferred Stock are entitled to receive, after
payment of the full liquidation preference to holders of 9% Preferred Stock, an
amount equal to $0.6667 per share of Series B Preferred Stock. The Company has
the right to redeem the Series B Preferred Stock for $0.6667 per share. Each
share of Series B Preferred Stock is convertible at any time at the option of
the holder thereof into approximately 0.09812 shares of Common Stock at an
effective conversion price of $6.795 per share, subject to adjustment under
certain circumstances.
Holders of the Series A Preferred Stock are not entitled to vote for the
election of directors or upon any other matter presented to the stockholders,
except to the extent provided by law. Prior to August 20, 1997, each share of
Series A Preferred is convertible into common stock at an effective conversion
price equal to the lowest of the dollar volume weighted average sales
prices of the common stock during the five trading days immediately preceding
the date of
32
<PAGE>
conversion (the "Average Stock Price"). On or after August 20, 1997, 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 applicable 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 Stock until the applicable
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 Stock may purchase up to the same number of common shares as such
holder is acquiring upon such conversion of Series A Preferred Stock, at such
effective 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 Stock, and is forfeited to the extent that it is not fully
exercised at such time. Holders of the Series A Preferred Stock have a
liquidation preference, after payment of full liquidation preference to
holders of the 9% and Series B Preferred Stock, of an amount equal to $10,000
per share, plus 6% per year or portion thereof that such share is
outstanding. The holder may elect to redeem the Series A Preferred Stock
under certain circumstances, such as the delisting of the Company's Common
Stock from Nasdaq, at prices up to 125% of the liquidation preference. Any
shares of Series A Preferred Stock that remain outstanding three years from
the date of issuance of such shares automatically convert into Common Stock
at the then applicable rate of conversion.
The Restated Certificate of Incorporation of the Company authorizes the issuance
of 5,000,000 shares of Preferred Stock, of which 549,100 shares remain
undesignated. The Board of Directors, within the limitations and restrictions
contained in the Restated Certificate of Incorporation and without further
action by the Company's stockholders, has the authority to issue this
undesignated Preferred Stock from time to time in one or more series and to fix
the number of shares and the relative rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and any other
preferences, special rights and qualifications of any such series. If shares of
Preferred Stock with voting rights are issued, such issuance could affect the
voting rights of the holders of the Company's Common Stock by increasing the
number of outstanding shares entitled to vote and by the creation of class or
series voting rights. In addition, any further issuance of Preferred Stock
could, under certain circumstances, 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. Other than the shares of 9% Preferred Stock, Series B Preferred
Stock and Series A Preferred Stock, there are no shares of Preferred Stock
currently issued and outstanding and the Company has no present plans to issue
any additional shares of Preferred Stock or to establish or designate any new
series of Preferred Stock.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer and Trust Company, 40 Wall Street, New York, New York,
10005 serves as Transfer Agent for the Common Stock, 9% Preferred Stock and
Series B Preferred Stock of the Company.
33
<PAGE>
SELLING STOCKHOLDERS
The Shares are to be offered by and for the respective accounts of the Selling
Stockholders. The number of Shares which each Selling Stockholder may offer is
as follows:
<TABLE>
<CAPTION>
Shares offered
Owned Before Offering pursuant Owned After Offering
--------------------- to this --------------------
Selling Stockholder Shares Percent Prospectus Shares Percent
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nelson Partners -- (1) -- (1) 1,052,312 (1) 0 0
Olympus Securities, Ltd. -- (1) -- (1) 1,052,311 (1) 0 0
Heracles Fund -- (1) -- (1) 526,156 (1) 0 0
Themis Partners L.P. -- (1) -- (1) 526,156 (1) 0 0
MichaelAngelo, L.P. -- (1) -- (1) 210,462 (1) 0 0
Raphael, L.P. -- (1) -- (1) 210,462 (1) 0 0
Angelo, Gordon & Co. L.P. -- (1) -- (1) 157,847 (1) 0 0
GAM Arbitrage Investments, Inc. -- (1) -- (1) 157,847 (1) 0 0
AG Super Fund, L.P. -- (1) -- (1) 105,231 (1) 0 0
AG Super Fund International
Partners, L.P. -- (1) -- (1) 105,231 (1) 0 0
AG Long Term Super Fund, L.P. -- (1) -- (1) 105,231 (1) 0 0
Bronnum, Dwight B. 1,500 (2) * 1,500 0 0
Bury, Lance T. 5,000 (2) * 5,000 0 0
Enigma Investments 3,451 (2) * 3,451 0 0
Hale, Joseph H. 13,274 (2) * 13,274 0 0
Hathorn, P. Bradford 5,000 (2) * 5,000 0 0
Hopkins, Robert L. 1,500 (2) * 1,500 0 0
Kendrick Family Partnership L.P. 32,987 (2) * 32,987 0 0
Krusen, Charles 8,496 (2) * 8,496 0 0
Peteler, David K. 2,000 (2) * 2,000 0 0
Swartz Family Partnership, L.P. 32,987 (2) * 32,987 0 0
Vector Securities International, Inc. 285,096 (3) 2.9 285,096 0 0
</TABLE>
- ----------------------------
* Less than one percent
(1) Together these investors purchased, in the aggregate, 400 shares of Series
A Preferred Stock and warrants to purchase 800,000 shares of Common Stock
in June 1997. The Series A Preferred Stock is convertible into Common Stock
at conversion prices that may vary and, at conversion prices greater than
or equal to $2.75 per share of Common Stock, gives rise to a right to
purchase additional shares of Common Stock at the effective conversion
price. See "Description of Securities -- Preferred Stock" and Note 11 of
Notes to Financial Statements. As a result, in order to provide for the
effects of possible future declines in the market value of the Company's
Common Stock, the number of shares owned before the offering is presently
indeterminable and the number of shares offered pursuant to the Prospectus
in the table above has been adjusted upward by 25% from the number of
shares that would apply were all of the shares of Series A Preferred Stock
converted into shares of Common Stock, and the additional purchase right
associated with such conversion fully exercised as of June 18, 1997, the
date of the filing of the Registration Statement of which this Prospectus
is a part. The amounts listed above therefore include shares issuable
upon (i) conversion of Series A Preferred Stock, (ii) exercise
of the right to purchase additional shares and (iii) exercise of the
warrants. See "Risk Factors -- Shares Eligible for Future Sale; Dilution;
Control" and "Description of Securities -- Preferred Stock."
(2) Represents shares of Common Stock that may be acquired upon exercise of
warrants.
34
<PAGE>
(3) Represents shares of Common Stock that may be acquired upon exercise of
warrants. Vector Securities International, Inc. acts as an advisor to the
Company on corporate partnering matters. See "Certain Transactions."
PLAN OF DISTRIBUTION
The Company has been advised by each Selling Stockholder that the Selling
Stockholder may sell its Shares from time to time in transactions on Nasdaq in
negotiated transactions, by writing options on the Shares or by a combination of
these methods, at fixed prices which may be changed, at market prices at the
time of sale, at prices related to market prices or at negotiated prices. The
Selling Stockholders may effect these transactions by selling the Shares to or
through broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders or the purchasers of
the Shares for whom the broker-dealer may act as an agent or to whom they may
sell the Shares as a principal, or both. The compensation to a particular
broker-dealer may be in excess of customary commissions.
The Selling Stockholders and broker-dealers who act in connection with the sale
of the Shares may be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions received by such broker-dealers and profits
on any resale of the Shares as a principal may be deemed to be underwriting
discounts and commissions under the Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Stradling, Yocca, Carlson & Rauth, a Professional Corporation,
Newport Beach, California.
EXPERTS
The financial statements of Cortex Pharmaceuticals, Inc. as of June 30, 1996 and
1995, for each of the two years in the period ended June 30, 1996, and for the
period from inception (February 10, 1987) through June 30, 1996, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
35
<PAGE>
[This page intentionally left blank]
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets -- As of March 31, 1997 (unaudited), June 30, 1996
and June 30, 1995. . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations -- For the nine-month periods ended
March 31, 1997 and 1996 (unaudited), the period from inception
(February 10, 1987) through March 31, 1997 (unaudited), the years
ended June 30, 1996 and 1995, and the period from inception
(February 10, 1987) through June 30, 1996. . . . . . . . . . . . . F-4
Statements of Stockholders' Equity -- For the period from
inception (February 10, 1987) through March 31, 1997 . . . . . . . F-5
Statements of Cash Flows -- For the nine-month periods ended
March 31, 1997 and 1996 (unaudited), the period from inception
(February 10, 1987) through March 31, 1997 (unaudited), the
years ended June 30, 1996 and 1995, and the period from inception
(February 10, 1987) through June 30, 1996 . . . . . . . . . . . . F-9
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . F-10
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, 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, 1996 and 1995, and the related
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended June 30, 1996 and for the period from inception
(February 10, 1987) through June 30, 1996. 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
June 30, 1996 and for the period from inception (February 10, 1987) through June
30, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
July 26, 1996,
except for Note 10, as to which the date is
October 15, 1996
F-2
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, 1997 June 30, 1996 June 30, 1995
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,670,303 $ 4,091,550 $ 149,880
U.S. Government securities -- available for sale -- -- 3,689,356
Other current assets 72,530 88,427 92,212
------------ ------------ ------------
Total current assets 4,742,833 4,179,977 3,931,448
Furniture, equipment and leasehold improvements, net 680,576 807,601 931,794
Other 23,130 26,342 23,130
------------ ------------ ------------
$ 5,446,539 $ 5,013,920 $ 4,886,372
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $289,488 $217,332 $377,589
Accrued dividends 69,300 64,350 183,150
Accrued wages, salaries and related expenses 55,916 40,145 35,223
Current obligations under capital lease 3,702 8,501 7,698
------------ ------------ ------------
Total current liabilities 418,406 330,328 603,660
Obligations under capital leases -- 1,499 10,016
Note payable to Alkermes, Inc. 1,078,024 1,037,330 1,000,000
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 (March 31, 1997 and
June 30, 1996) and 370,000 (June 30, 1995) 110,000 110,000 370,000
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 (March 31, 1997 and
June 30, 1996) and 525,000 (June 30, 1995) 86,810 86,810 303,837
Series C convertible preferred stock, $0.001 par
value; $25,000 per share liquidation preference;
shares authorized: 160; shares issued and outstanding:
35 (June 30, 1996) -- 752,476 --
Series D convertible preferred stock, $0.001 par
value; $10,000 per share liquidation preference;
shares authorized: 500; shares issued and outstanding:
50 (March 31, 1997) 467,221 -- --
Common stock, $0.001 par value; shares authorized:
20,000,000; shares issued and outstanding: 9,148,727
(March 31, 1997), 7,495,576 (June 30, 1996)
and 6,085,201 (June 30, 1995) 9,149 7,496 6,085
Additional paid-in capital 33,170,303 28,048,414 23,957,790
Deferred compensation -- -- (145,359)
Unrealized (loss) on available for sale
U.S. Government securities (284) (1,135) (18,606)
Deficit accumulated during the development stage (29,893,090) (25,359,298) (21,201,051)
------------ ------------ ------------
Total stockholders' equity 3,950,109 3,644,763 3,272,696
------------ ------------ ------------
$ 5,446,539 $ 5,013,920 $ 4,886,372
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
(Unaudited) inception inception
Nine months ended (February 10, (February 10,
March 31, 1987) through Years ended June 30, 1987) through
-------------------------- March 31, -------------------------- June 30,
1997 1996 1997 1996 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Research and license revenue under an
agreement with Alkermes, Inc. $ -- $ -- $ 3,600,000 $ -- $ -- $ 3,600,000
Grant revenue -- -- 94,717 -- -- 94,717
----------- ----------- ------------ ----------- ----------- ------------
Total revenues -- -- 3,694,717 -- -- 3,694,717
----------- ----------- ------------ ----------- ----------- ------------
Operating expenses:
Research and development 2,489,584 2,033,806 21,458,696 2,677,577 4,138,731 18,969,112
General and administrative 1,270,740 1,252,451 11,321,299 1,643,732 1,665,134 10,050,559
Settlement with Alkermes, Inc. -- -- 1,227,977 -- 1,227,977 1,227,977
----------- ----------- ------------ ----------- ----------- ------------
Total operating expenses 3,760,324 3,286,257 34,007,972 4,321,309 7,031,842 30,247,648
----------- ----------- ------------ ----------- ----------- ------------
Loss from operations (3,760,324) (3,286,257) (30,313,255) (4,321,309) (7,031,842) (26,552,931)
Interest income, net 106,204 116,716 1,439,511 163,062 196,310 1,333,307
----------- ----------- ------------ ----------- ----------- ------------
Net loss $(3,654,120) $(3,169,541) $(28,873,744) $(4,158,247) $(6,835,532) $(25,219,624)
----------- ----------- ------------ ----------- ----------- ------------
----------- ----------- ------------ ----------- ----------- ------------
Weighted average common shares outstanding 7,899,585 6,260,152 6,532,884 6,075,454
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share $ (0.57) $ (0.51) $ (0.64) $ (1.13)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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
----------- ----------- ------------ ------------ ------------
<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, 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>
CONTINUED . . .
F-5
<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, 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
----------- ----------- ------------ ------------ ------------
<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, 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>
CONTINUED . . .
F-6
<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
----------- ----------- ------------ ------------ ------------
<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 . . .
F-7
<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) -- 1,134
Adjustment of accrued dividends for conversion of
9% preferred stock -- -- -- -- --
Issuance of 205,878 shares of common stock upon
exercise of stock options -- -- -- -- 205
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
Sale of 400 shares of Series D convertible
preferred stock, $10,000 per share, net of
expenses (unaudited) -- -- -- 3,719,636 --
Conversion of 35 shares of Series C convertible
preferred stock into 384,574 shares of common
stock (unaudited) -- -- (752,476) -- 384
Conversion of 350 shares of Series D convertible
preferred stock into 1,187,915 shares of
common stock (unaudited) -- -- -- (3,252,415) 1,188
Issuance of 50,000 shares of common stock upon
exercise of warrant (unaudited) -- -- -- -- 50
Issuance of 30,652 shares of common stock upon
exercise of stock options (unaudited) -- -- -- -- 31
9% preferred stock dividends (unaudited) -- -- -- -- --
Series D preferred stock imputed dividends (unaudited) -- -- -- -- --
Decrease in unrealized loss on available for sale U.S.
Government securities (unaudited) -- -- -- -- --
Net loss (unaudited) -- -- -- -- --
----------- ----------- ------------ ------------ ------------
BALANCE, MARCH 31, 1997 (UNAUDITED) $ 110,000 $ 86,810 $ -- $ 467,221 $ 9,149
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
<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 2,686,280 -- -- -- --
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 775,185 -- -- -- 775,390
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 -- -- 17,471 -- 17,471
Net loss -- -- -- (4,158,247) (4,158,247)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1996 28,048,414 -- (1,135) (25,359,298) 3,644,763
Sale of 400 shares of Series D convertible
preferred stock, $10,000 per share, net of
expenses (unaudited) -- -- -- -- 3,719,636
Conversion of 35 shares of Series C convertible
preferred stock into 384,574 shares of common
stock (unaudited) 752,092 -- -- -- --
Conversion of 350 shares of Series D convertible
preferred stock into 1,187,915 shares of
common stock (unaudited) 3,251,227 -- -- -- --
Issuance of 50,000 shares of common stock upon
exercise of warrant (unaudited) 149,950 -- -- -- 150,000
Issuance of 30,652 shares of common stock upon
exercise of stock options (unaudited) 93,898 -- -- -- 93,929
9% preferred stock dividends (unaudited) (4,950) -- -- -- (4,950)
Series D preferred stock imputed dividends (unaudited) 879,672 -- -- (879,672) --
Decrease in unrealized loss on available for sale U.S.
Government securities (unaudited) -- -- 851 -- 851
Net loss (unaudited) -- -- -- (3,654,120) (3,654,120)
------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1997 (UNAUDITED) $ 33,170,303 $ -- $ (284) $(29,893,090) $ 3,950,109
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Period from
(Unaudited) inception
Nine months ended (February 10,
March 31, 1987) through
--------------------------------- March 31,
1997 1996 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
NET LOSS $ (3,654,120) $ (3,169,541) $ (28,873,744)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 150,090 173,055 1,259,112
Settlement with Alkermes, Inc. -- -- 1,227,977
Changes in operating assets/liabilities:
Accounts payable and accrued expenses 87,927 (175,276) 345,404
Accrued interest on U.S. Govt. securities (11,822) (64,012) (161,678)
Other current assets 15,897 (35,147) (91,804)
Realized loss on sale of U.S. Govt. securities -- 969 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
Other 40,694 25,747 86,013
------------ ------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (3,371,334) (3,202,096) (25,547,244)
------------ ------------ -------------
Cash flows from investing activities:
U.S. Government securities --
available for sale
Purchases (937,327) (13,102,660) (37,083,743)
Sales 950,000 14,887,736 37,190,820
Purchase of fixed assets (23,065) (28,038) (1,910,412)
Sale of fixed assets -- 2,777 10,236
Decrease (increase) in --
Other assets 3,212 (529) (39,870)
Note receivable from former officer -- -- (100,000)
------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (7,180) 1,759,286 (1,932,969)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 243,929 428,436 21,922,579
Proceeds from issuance of Series D
convertible preferred stock 3,719,636 -- 3,719,636
Proceeds from issuance of Series C
convertible preferred stock -- 3,576,543 3,576,543
Proceeds from issuance of Series B
convertible preferred stock -- -- 1,841,108
Proceeds from issuance of 9% preferred stock -- -- 1,076,588
Redemption of 9% preferred stock -- -- (63,750)
Principal payments on capitalized leases (6,298) (5,715) (20,271)
Proceeds from subordinated convertible note -- -- 208,333
Payment of 9% preferred stock dividends -- -- (110,250)
------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,957,267 3,999,264 32,150,516
------------ ------------ -------------
Increase (decrease) in cash and cash equivalents 578,753 2,556,454 4,670,303
Cash and cash equivalents, beginning of period 4,091,550 149,880 --
------------ ------------ -------------
Cash and cash equivalents, end of period $ 4,670,303 $ 2,706,334 $ 4,670,303
------------ ------------ -------------
------------ ------------ -------------
Period from
inception
(February 10,
Years ended June 30, 1987) through
-------------------------------- June 30,
1996 1995 1996
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
NET LOSS $ (4,158,247) $ (6,835,532) $ (25,219,624)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 230,224 208,928 1,109,022
Settlement with Alkermes, Inc. -- 1,227,977 1,227,977
Changes in operating assets/liabilities:
Accounts payable and accrued expenses (155,335) (131,886) 257,477
Accrued interest on U.S. Govt. securities (131,895) 52,014 (149,856)
Other current assets 3,785 26,677 (107,701)
Realized loss on sale of U.S. Govt. securities 1,270 53,047 54,317
Stock option compensation expense 42,109 56,092 555,809
Stock issued for services -- -- 28,750
Reduction in note receivable from former
officer -- compensation expense -- -- 22,600
Other 37,330 4,769 45,319
------------ ------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (4,130,759) (5,337,914) (22,175,910)
------------ ------------ -------------
Cash flows from investing activities:
U.S. Government securities -- available for sale
Purchases (19,298,746) (3,868,775) (36,146,416)
Sales 23,136,197 9,642,408 36,240,820
Purchase of fixed assets (108,807) (401,912) (1,887,347)
Sale of fixed assets 2,777 -- 10,236
Decrease (increase) in --
Other assets (3,212) 1,092 (43,082)
Note receivable from former -- -- (100,000)
------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,728,209 5,372,813 (1,925,789)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 775,391 24,034 21,678,650
Proceeds from issuance of Series D
convertible preferred stock -- -- --
Proceeds from issuance of Series C
convertible preferred stock 3,576,543 -- 3,576,543
Proceeds from issuance of Series B
convertible preferred stock -- -- 1,841,108
Proceeds from issuance of 9% preferred stock -- -- 1,076,588
Redemption of 9% preferred stock -- (63,750) (63,750)
Principal payments on capitalized leases (7,714) (6,259) (13,973)
Proceeds from subordinated convertible note -- -- 208,333
Payment of 9% preferred stock dividends -- -- (110,250)
------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 4,344,220 (45,975) 28,193,249
------------ ------------ -------------
Increase (decrease) in cash and cash equivalents 3,941,670 (11,076) 4,091,550
Cash and cash equivalents, beginning of period 149,880 160,956 --
------------ ------------ -------------
Cash and cash equivalents, end of period $ 4,091,550 $ 149,880 $ 4,091,550
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Period from inception (February 10, 1987) through March 31, 1997
ALL INFORMATION AS OF MARCH 31, 1997, FOR THE NINE-MONTH PERIODS ENDED MARCH 31,
1997 AND 1996, AND FOR THE PERIOD FROM INCEPTION (FEBRUARY 10, 1987) THROUGH
MARCH 31, 1997 IS UNAUDITED. IN THE OPINION OF MANAGEMENT, ALL ADJUSTMENTS
(CONSISTING ONLY OF NORMAL RECURRING ACCRUALS) CONSIDERED NECESSARY FOR A FAIR
PRESENTATION HAVE BEEN INCLUDED. OPERATING RESULTS FOR THE NINE-MONTH PERIOD
ENDED MARCH 31, 1997 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE
EXPECTED FOR THE FISCAL YEAR ENDING 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 neurodegenerative diseases and other 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
March 31, 1997, the Company has generated only modest operating revenues and
has incurred losses aggregating $28,873,744. 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. See Notes 10 and 11.
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.
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.
CASH EQUIVALENTS -- The Company considers all highly liquid short-term
investments with maturities of less than three months when acquired to be cash
equivalents.
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 results could differ from those estimates.
STOCK-BASED COMPENSATION -- In November 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("FAS 123"). The Company has elected to continue
accounting for stock options under APB No. 25 "Accounting for Stock Issued to
F-10
<PAGE>
Employees." The adoption of FAS 123 is not expected to have a material effect on
the Company's financial position or results of operations for the year ended
June 30, 1997.
LONG-LIVED ASSETS -- In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121 "Accounting for
Impairment of Long-Lived Assets to be Disposed Of" ("FAS 121") which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of the assets.
FAS 121 also addresses the accounting for long-lived assets that are expected to
be disposed of. The Company's adoption of FAS 121 in the first quarter of fiscal
1996 did not have a material effect on the Company's financial position or
results of operations.
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.
NET LOSS PER SHARE -- Net loss per share is computed based on the weighted
average number of common shares outstanding during the period, and incorporates
preferred stock dividends that accrued during the period. 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.
The computation of net loss per share includes imputed dividends for preferred
stock issued in the period with a nondetachable beneficial conversion feature at
or near the date of issuance. The imputed dividend represents the aggregate
difference between the conversion price and the fair value, as of the date of
issuance of the preferred stock, of the common stock issuable upon conversion.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, 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 all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement 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.
NOTE 2 -- FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
March 31, 1997 June 30, 1996 June 30, 1995
-------------- ------------- -------------
Laboratory equipment $ 996,108 $ 990,329 $ 963,169
Leasehold improvements 620,716 619,566 575,367
Furniture and equipment 90,689 89,773 89,773
Computers and software 208,592 193,372 158,700
----------- ----------- -----------
1,916,105 1,893,040 1,787,009
Accumulated depreciation (1,235,529) (1,085,439) (855,215)
----------- ----------- -----------
$ 680,576 $ 807,601 $ 931,794
----------- ----------- -----------
----------- ----------- -----------
NOTE 3 -- 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"); 160 shares have been designated as Series C
Convertible Preferred Stock (non-voting,
F-11
<PAGE>
"Series C Preferred"); 500 shares have been designated as Series D Convertible
Preferred Stock (non-voting, "Series D Preferred"); and 549,340 shares are
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 March 31, 1997, June 30,
1996 and June 30, 1995 consisted of 110,000, 110,000 and 370,000 shares,
respectively, 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 March 31, 1997,
June 30, 1996 and June 30, 1995 were $69,300, $64,350 and $183,150,
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 March 31, 1997, June 30, 1996 and
June 30, 1995 consisted of 150,000, 150,000 and 525,000 shares, respectively, 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. 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.
Series D Convertible Preferred Stock at March 31, 1997 consisted of 50 shares of
an original 400 shares of Series D Preferred issued in a three-tranche private
placement that was initiated in October 1996 and completed in February 1997. The
Series D Preferred may be converted into common stock at an effective per share
conversion price that is indexed to the average bid price of the Company's
common shares. Holders of the Series D Preferred have a liquidation preference,
after payment of full liquidation preference to 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. Shares of Series D Preferred
automatically convert into common stock two years from the date of issuance of
such shares.
NOTE 4 -- COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS
In July 1989, the Company completed an initial public offering of 1,100,000
Units, with each Unit consisting of 0.6 shares of common stock and two
redeemable Class A warrants, for an aggregate of 660,000 shares of common stock
and 2,200,000 Class A warrants. Each Class A warrant entitled the holder to
purchase 0.26 shares of common stock and one redeemable Class B warrant at a
price of $10.62 per share of common stock, as adjusted. During the year ended
June 30, 1992, ten Class A warrants were exercised. The balance of the Class A
warrants, and the Class B warrants issuable upon exercise of the Class A
warrants, expired on December 31, 1995.
In 1991, the Company issued 1,060,417 Class C warrants in a private placement
transaction. Each Class C warrant entitled the holder to purchase 0.26 shares of
common stock at a price of $9.185 per share, as adjusted. None of the Class C
warrants were exercised prior to their expiration on December 31, 1995.
In connection with its agreement with Alkermes, Inc. ("Alkermes"; Note 6), the
Company sold Alkermes 150,000 shares of common stock and issued non-redeemable
warrants to Alkermes to purchase an additional 400,000 shares of common stock,
for aggregate consideration of $1,500,000. The warrants have since expired.
F-12
<PAGE>
In October 1993, the Company sold 103,577 shares of common stock at a price of
$6.40 per share. The shares were acquired by four non-U.S. purchasers in a
private placement transaction pursuant to Regulation S of the Securities and
Exchange Commission.
In December 1993, the Company completed a private placement of 2,750,000 shares
of common stock at a price of $5.00 per share. The shares were acquired by 39
institutional and accredited individual purchasers in a private placement
transaction pursuant to Regulation D of the Securities and Exchange Commission.
Vector Securities International, Inc. acted as placement agent for the
transaction and was issued warrants in connection therewith (Note 8).
In connection with the December 1995 private placement of 160 shares of Series C
Preferred Stock (Note 3), the Company issued to Swartz Investments, Inc., 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.
As of March 31, 1997, 226,804 shares of common stock were reserved for issuance
upon conversion of outstanding 9% Preferred, Series B Preferred and Series D
Preferred Stock; 391,291 shares were reserved for issuance upon exercise of
warrants; and 928,428 shares were reserved for issuance upon exercise of
outstanding stock options (Note 5).
NOTE 5 -- 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. On March 23, 1995, options to purchase
100,000 shares of common stock at an exercise price of $8.75 per share
previously granted to the Company's former President and Chief Executive Officer
were canceled and reissued as options to purchase 100,000 shares of common stock
at $3.50 per share, the then fair market value of the common stock. As of March
31, 1997 and June 30, 1996, options to purchase an aggregate of 545,171 and
542,524 shares of common stock, respectively, were outstanding under this plan,
and an additional 33,545 and 53,854 shares of common stock, respectively, 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. On May 24, 1995, options to purchase an aggregate of 51,000
shares of common stock previously granted to several consultants to the Company
were repriced from a weighted average exercise price of $7.19 per share to
$3.125 per share, the then fair market of the common stock. As of March 31, 1997
and June 30, 1996, options to purchase an aggregate of 337,407 and 343,407
shares of common stock, respectively, were outstanding under this plan, and an
additional 9,026 and 16,026 shares of common stock, respectively, were reserved
for future option grants.
EXECUTIVE STOCK PLAN -- In 1991, in connection with his 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. In 1993, a
former President and Chief Executive Officer was granted an option to purchase
80,000 shares of common stock at an exercise price of $4.375 per share,
representing 50% of the then fair market value of the common stock. On March 23,
1995 options held by the former officer to purchase 95,600 shares of common
stock at an exercise price of $9.375 per
F-13
<PAGE>
share were canceled and reissued as options to purchase 65,560 shares of common
stock at $3.50 per share, the then fair market value of the common stock, and
options to purchase 30,040 shares of common stock at an exercise price of $4.50
per share. As of March 31, 1997 and June 30, 1996, 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 by the Company 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 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan, the 1989 Special Nonqualified Stock Option and
Stock Purchase Plan or the Executive Stock Plan. The exercise price of
nonqualified stock options and the purchase price of stock offered under this
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 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 March 31, 1997, options to purchase an aggregate of 35,850 shares of common
stock were outstanding under the 1996 Plan, and an additional 577,282 shares of
common stock were reserved for future option grants.
As of March 31, 1997 and June 30, 1996, options to purchase an aggregate of
489,519 and 361,552 shares of common stock, respectively, were exercisable under
the Company's stock option plans. During the years ended June 30, 1996 and 1995
and the period from inception (February 10, 1987) through June 30, 1996, 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. In February 1994, an option to
purchase 14,000 shares of common stock that was previously issued to an officer
was extended for three years. The aggregate difference between fair market value
at the time of the extension and the exercise price of the options was recorded
as compensation expense at the time of the extension. Stock option compensation
expense related to these transactions, aggregating $0, $42,109, $555,809,
$42,109, $56,092 and $555,809 for the nine-month periods ended March 31, 1997
and 1996, and the period from inception (February 10, 1987) through March 31,
1997, the years ended June 30, 1996 and 1995 and the period from inception
(February 10, 1987) through June 30, 1996, respectively, has been recorded in
the accompanying statements of operations.
F-14
<PAGE>
Stock option transactions under the Company's stock option plans for each of the
two years ended June 30, 1996 and the nine-month period ended March 31, 1997 are
summarized below:
Number Exercise price
of shares per share
-------------------------------------
Outstanding as of June 30, 1994 549,667 $ 0.94 - 10.94
Granted 556,970 1.75 - 5.00
Exercised (11,272) 1.56 - 3.13
Forfeited (266,497) 1.88 - 9.38
-------- -------------------
Outstanding as of June 30, 1995 828,868 0.94 - 10.94
Granted 409,101 2.63 - 7.25
Exercised (205,878) 0.94 - 4.53
Forfeited (136,160) 1.88 - 9.06
-------- -------------------
Outstanding as of June 30, 1996 895,931 1.56 - 10.94
Granted 85,857 2.63 - 5.06
Exercised (30,662) 2.13 - 4.53
Forfeited (22,698) 1.88 - 9.06
-------- -------------------
Outstanding as of March 31, 1997 928,428 $ 1.56 - 10.94
-------- -------------------
-------- -------------------
Available for future grant 828,724
--------
--------
NOTE 6 -- AGREEMENT WITH ALKERMES, INC.; LEGAL PROCEEDINGS
In January 1992, the Company entered into a development and license 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"). Under the
Alkermes Agreement, the Company granted to 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. Under the Alkermes Agreement, the
Company received an aggregate of $3,100,000 in research payments 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 subsequent to October 6, 1992. 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.
NOTE 7 -- 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 nine-
month periods ended March 31, 1997 and 1996, the period from inception
(February 10, 1989) through March 31, 1997, the years ended June 30, 1996 and
1995 and the period from inception (February 10, 1987) through June 30, 1996 was
$169,000, $148,000, $1,593,000, $193,000, $232,000 and $1,424,000, respectively.
Commitments under the lease for the years ending June 30, 1997, 1998 and 1999
are $229,000, $235,000 and $220,000, respectively.
As of June 30, 1996, the Company was obligated to two executive officers under
employment agreements expiring through May 1997 that involve annual salary
payments aggregating $332,500 and that provide for bonuses under certain
circumstances. Additionally, in the event that a compound developed by or under
the supervision of a senior scientific employee of the Company is commercialized
by the Company, 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. Also as of June 30, 1996, the Company was
committed under scientific consulting and external research agreements to annual
payments aggregating approximately $1,253,000.
F-15
<PAGE>
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 each of the
years ending June 30, 1997 and 1998. Thereafter, minimum annual royalties are
$105,000 for the remaining life of the patents covering the subject
technologies. One of the agreements commits the Company to pay up to an
additional $875,000 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 8 -- RELATED PARTY TRANSACTIONS
From inception (February 10, 1987) through June 30, 1991, the Company made
payments aggregating $1,319,112 to a founding stockholder for commissions and
underwriting fees for private and public offerings and for interest payments on
a note formerly held by such stockholder. No such payments have been made since
June 30, 1991.
From inception (February 10, 1987) through June 30, 1993, the Company paid or
accrued scientific and other consulting fees to stockholders aggregating
$606,993. In the years ended June 30, 1996 and 1995, such consulting fees
aggregated $87,160 and $106,583, respectively. In addition, the Company is
obligated under certain circumstances 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 1988, the Company provided to a former officer a relocation loan in the
amount of $100,000, bearing interest at 5% per annum, originally due in June
1991 and subsequently extended to December 1992. The Board of Directors reduced
the principal amount of the loan to $90,000 as of January 1, 1990 and to $77,400
as of July 1, 1991, with the reductions recorded as salary expense. The
outstanding principal and accrued interest on this loan aggregating $96,674 was
paid off by the former officer in September 1992 by surrender of 12,627 shares
of common stock at the then fair market value.
In connection with its initial public offering in July 1989, the Company entered
into an agreement granting a then related party entity a five-year right of
first refusal to act as underwriter or agent for public and private offerings.
In July 1993, the formerly related party entity agreed to surrender its right of
first refusal to act as underwriter or agent in future private and public
offerings of securities by the Company, in exchange for a cash payment of
$66,000.
On July 23, 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 the Company's cognition enhancement and Alzheimer's
disease 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
(Note 4), 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 6), 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 November 29, 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. For an expansion in January 1995 of its financial
advisory assistance to include the
F-16
<PAGE>
Company's calpain inhibitor technology, 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 common stock at $3.00 per share, subject to adjustment under
certain circumstances. 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 9 -- 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, 1996, the Company had federal and California tax net operating
loss carryforwards of approximately $23,263,000 and $4,040,000, 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 federal and California tax loss
carryforwards began expiring in 2003 and 1996, respectively. The Company also
has federal and California research and development tax credit carryforwards
totaling $665,000 and $152,000, respectively, which will begin expiring in 2003.
Utilization of the net operating losses 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 carryforwards 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, 1996
and June 30, 1995 are shown below. The valuation allowance related to deferred
tax assets is $10,847,000 and $9,079,000 for the years ended June 30, 1996 and
1995, respectively. The increase in the valuation allowance for the year ended
June 30, 1996 of $1,768,000 is primarily due to additional reserves required for
new deferred tax assets.
Deferred tax assets:
June 30,
1996 1995
-----------------------------
Net operating loss carryforwards $ 8,285,000 $ 6,836,000
Capital loss carryforwards 23,000 --
Research and development credits 817,000 817,000
Capitalized research and development costs 1,244,000 980,000
Settlement with Alkermes, Inc. 433,000 430,000
Other-net 45,000 16,000
------------ -----------
Net deferred tax assets 10,847,000 9,079,000
------------ -----------
Valuation allowance for deferred tax assets (10,847,000) (9,079,000)
------------ -----------
Total deferred tax assets $ -- $ --
------------ -----------
------------ -----------
NOTE 10 -- SERIES D CONVERTIBLE PREFERRED STOCK
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"). Each share of Series D Preferred was convertible into common stock
in accordance with a formula that was indexed to the average bid price of the
Company's common shares. Holders of the Series D Preferred had a liquidation
preference, after payment of full liquidation preference to
F-17
<PAGE>
holders of the 9% Preferred, Series B Preferred and Series C Preferred, of an
amount equal to $10,000 per share, plus $600 per share for each year that such
share was outstanding. Shares of Series D Preferred automatically convert into
common stock on that date which is two years from the date of issuance of such
shares.
On October 15, 1996, the Company completed the first tranche of a three-tranche
Regulation D private placement of Series D Preferred. The Company sold 100
shares of Series D Preferred at a price of $10,000 per share, for gross proceeds
of $1,000,000.
The Company sold a second tranche of 150 shares of Series D Preferred on January
9, 1997 and a third tranche of 150 shares on February 12, 1997. Gross proceeds
of $1,500,000 were received in each of the second and third tranches. The Series
D Preferred issued was convertible 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 April 24, 1997,
the Series D Preferred had all been converted into an aggregate of 2,063,437
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
have been recorded in connection with the three tranches, and have been included
in the computation of net loss per share. See Note 1.
NOTE 11 -- SUBSEQUENT EVENT
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"). The shares of Series A Preferred may be converted into common stock
at an effective conversion price that is indexed to the sales price of the
Company's common shares, subject to adjustment based on the length of the period
from issuance of the Series A Preferred until its conversion. Holders of the
Series A Preferred are entitled to a liquidation preference, after payment of
full liquidation preference to 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. Holders of the Series A Preferred 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.
On June 5, 1997, the Company completed the first tranche of a two-part
Regulation D private placement of Series A Preferred. The Company sold 200
shares of Series A Preferred at a price of $10,000 per share, for gross
proceeds of $2,000,000, which price included four-year warrants to purchase
400,000 common shares at an exercise price of $3.08 per share. The Company
sold 200 additional shares of Series A Preferred for another $2,000,000 of
gross proceeds on June 30, 1997, and issued additional warrants to purchase
400,000 common shares at an exercise price of $3.08 per share. The Series A
Preferred is convertible, prior to August 20, 1997, 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 (the "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 applicable
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 the applicable 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
such holder is acquiring upon such conversion at such 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.
F-18
<PAGE>
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<PAGE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
STOCKHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE ANY OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Price Range of Common Stock. . . . . . . . . . . . . . . . . . . . . . . 8
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . 30
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . 31
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-1
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F-2
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
---------------------
4,600,537 SHARES
CORTEX PHARMACEUTICALS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
July 3, 1997
