<PAGE>
As filed with the Securities and Exchange Commission on November 6, 1998
Registration No. 333-29493
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
under the Securities Act of 1933
_________________________
CORTEX PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
DELAWARE 2834 33-0303583
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
15241 Barranca Parkway, Irvine, California 92618
(949) 727-3157
(Address and telephone number of principal executive offices
and principal place of business)
Vincent F. Simmon, Ph.D., President and Chief Executive Officer
15241 Barranca Parkway, Irvine, California 92618
(949) 727-3157
(Name, address and telephone number of agent for service)
Copies to:
Nick E. Yocca, Esq.
Lawrence B. Cohn, Esq.
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
(949) 725-4000
_________________________
Approximate date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering:__________.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering:__________.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box:__________.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: X .
---------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PRICE(2) PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share 4,600,537 shares $2.937 $13,511,777 $4,095*
==================================================================================================================
</TABLE>
(1) The number of shares of Common Stock registered hereunder represents the
Company's good faith estimate of the number of shares which may be issuable upon
conversion of the Company's Series A Preferred Stock, the additional purchase
rights or upon the exercise of warrants, as the case may be. Pursuant to Rule
416, the Registration Statement also covers an indeterminate number of
additional shares of Common Stock which may become issuable upon conversion of
the Series A Preferred Stock and the additional purchase rights by reason of
reductions of the conversion price in accordance with the terms of the
Certificate of Designation of Series A Preferred Stock.
(2) The offering price is estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c), using the average of the high
and low bid price for the Common Stock as reported on the Nasdaq Small-Cap
Market on June 16, 1997, which was $2.937 per share.
* Previously paid.
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
[LETTERHEAD OF CORTEX PHARMACEUTICALS, INC. APPEARS HERE]
CORTEX PHARMACEUTICALS, INC.
3,826,704 Shares of Common Stock
(Par Value $0.001 Per Share)
The stockholders listed in this Prospectus under the section entitled
"Selling Stockholders" may offer and sell a total of 3,826,704 shares of our
company's common stock, par value $0.001 per share (the "Common Stock"), which
they own or have the right to acquire from time to time. The shares of Common
Stock included in this offering consist of 1,265,837 shares of Common Stock
issuable upon exercise of warrants and up to 2,560,867 shares of Common Stock
that may be issued upon conversion of Series A Preferred Stock.
_______________
The Selling Stockholders may sell the shares of Common Stock described in
this Prospectus in public or private transactions, on or off the Nasdaq Small-
Cap Market, at prevailing market prices, or at privately negotiated prices. The
Selling Stockholders may sell shares directly to purchasers or through brokers
or dealers. Brokers or dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders. We will not
receive any proceeds from the Selling Stockholders' sale of the shares of Common
Stock. More information is provided in the section titled "Plan of
Distribution."
_______________
Our Common Stock is currently traded on the Nasdaq Small-Cap Market under
the symbol "CORX."
_______________
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
_______________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
_______________
The date of this Prospectus is ________ __, 1998.
2
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549, 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You can also obtain copies of the documents
at prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the operation of the public reference
facilities.
We "incorporate by reference" into this Prospectus the information we file
with the SEC, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this Prospectus and information that we file subsequently
with the SEC will automatically update this Prospectus. We incorporate by
reference the documents listed below and any future filings we make with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of
1934:
- Annual Report on Form 10-K, as amended, for the year ended June 30,
1998; and
- Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
You may request a copy of these filings (other than an exhibit to a filing
unless that exhibit is specifically incorporated by reference into that filing)
at no cost, by writing to or telephoning us at the following address:
Investor Relations
Cortex Pharmaceuticals, Inc.
15241 Barranca Parkway
Irvine, California 92618
(949) 727-3157
This Prospectus constitutes part of a Registration Statement we filed with
the SEC. You should rely only on the information incorporated by reference or
provided in this Prospectus. We have not authorized anyone else to provide you
with different information. You should not assume that the information in this
Prospectus is accurate as of any date other than the date on the front of the
document.
FORWARD-LOOKING STATEMENTS
This Prospectus contains 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, including statements regarding the Company's capital
needs, drug development programs, clinical trials, receipt of regulatory
approval, intellectual property, expectations and intentions. Forward-looking
statements necessarily involve risks and uncertainties, and the Company's actual
results could differ materially from those anticipated in the forward-looking
statements due to a number of factors, including those set forth under the
section entitled "Risk Factors" and elsewhere in this Prospectus. You should
carefully read the factors set forth in the section entitled "Risk Factors" and
other cautionary statements made in this Prospectus and understand that those
factors and statements are applicable to all related forward-looking statements
wherever they appear in this Prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This
summary is not complete and may not contain all of the information that you
should consider before investing in the Common Stock. You should read the entire
prospectus carefully.
CORTEX PHARMACEUTICALS, INC.
We are a biopharmaceutical company located in Irvine, California. Our goal
is to develop proprietary drugs designed to treat neurodegenerative diseases and
other neurological and psychiatric disorders. We were formed in Delaware in 1987
and since that date, we have devoted our resources to research and development
activities relating to several products that are at various developmental
stages. We have several license agreements with various research institutions,
which own approved and pending patents covering certain drugs and therapeutic
technologies.
Since 1993, we have focused our research and development on the AMPA
receptor, a complex of proteins that is involved in most "excitatory"
communication between nerve cells in the human brain. We are developing several
chemical compounds, known as Ampakines(R), to enhance the activity of the AMPA
receptor. We believe that Ampakines may effectively treat deficiencies brought
on by a variety of diseases and disorders. In October 1994, we initiated human
safety studies with CX516 (Ampalex(R)). CX516 is a drug that has shown potential
for treating deficits of memory and cognition. These studies have involved
healthy young adult and elderly volunteers and, more recently, patients with
Alzheimer's disease and with schizophrenia. We are also investigating the use of
Ampakines to treat other disorders, such as depression.
We believe that the quality of our science and technology provides us with
an advantage over our competitors in the discovery of innovative
pharmaceuticals. We do not, however, have the resources or expertise for later-
stage clinical development, manufacturing and worldwide marketing. Our
commercial development plans therefore involve partnering with larger
pharmaceutical companies for later-stage clinical testing, manufacturing and
global marketing of our proposed products. If we are successful in the pursuit
of this business strategy, we should be able to cover our costs over the next
few years, to maintain our focus on the research and development of innovative
pharmaceuticals and to eventually participate directly in the commercial
development of our products in the United States. Currently, we are seeking
collaborative or licensing arrangements with larger pharmaceutical companies
that will permit our proprietary products to complete clinical development and
that will provide access to the clinical trials management, manufacturing and
marketing expertise of those companies.
Our offices and laboratories are located at 15241 Barranca Parkway, Irvine,
California, 92618 and our telephone number is (949) 727-3157.
We hold registered trademarks on the names Ampalex and Ampakine. This
Prospectus also includes registered trademarks of other companies.
RISK FACTORS
An investment in the shares of Common Stock being offered by the Selling
Stockholders is very risky. Information regarding the risks involved is provided
in the section titled "Risk Factors."
4
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table depicts selected financial information concerning our
business and operations 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 OPERATIONS DATA:
(Unaudited)
Period from Period from
(Unaudited) inception inception
Three months ended (February 10, Years ended June 30, February 10,
1987) through
September 30, September 30, 1987 through
--------------------------------- ------------------------------ June 30,
1998 1997 1998 1998 1997 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ -- $ -- $ 3,824,717 $ 130,000 -- $ 3,824,717
Total operating expenses 1,193,974 1,386,995 42,119,061 5,591,835 $ 5,085,604 40,925,087
----------- ---------- ------------ ----------- ---------- ------------
Loss from operations (1,193,974) (1,386,995) (38,294,344) (5,461,835) (5,085,604) (37,100,370)
Interest income, net 7,616 79,590 1,700,422 203,875 155,624 1,692,806
----------- ---------- ------------ ----------- ---------- ------------
Net loss $(1,186,358) $ (1,307,405) $(36,593,922) $(5,257,960) $ (4,929,980) $(35,407,564)
=========== ============ ============ ============ =========== ============
Weighted average common
shares outstanding 10,237,126 9,397,510 9,575,663 8,252,047
=========== ========== =========== ==========
Net loss per share $(0.12) $(0.14) $(0.55) $ (0.83)
=========== =========== ============ ===========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
(Unaudited) June 30,
----------------------------
September 30, 1998 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total current assets $ 1,128,422 $ 2,195,574 $ 7,640,333
Total assets 1,757,667 2,874,846 8,333,307
Total current liabilities 553,570 497,297 636,035
Deficit accumulated during the development stage (38,625,761) (37,439,403) (32,181,443)
Total stockholders' equity $ (2,217,512) $ (1,031,154) $ 2,668,287
Common shares outstanding 10,237,126 10,237,126 9,394,249
</TABLE>
____________________
5
<PAGE>
RISK FACTORS
Investing in the Common Stock being offered by the Selling Stockholders is
very risky. You should be able to bear a complete loss of your investment. You
should carefully consider the following factors, in addition to the other
information contained in this Prospectus before making an investment decision.
NEED FOR ADDITIONAL FUNDS.
We anticipate that we have sufficient funds to maintain our operations
through December 31, 1998. We will require additional funds to continue our
operations beyond that time. We cannot say with any amount of certainty that we
will be able to obtain the additional needed funds on reasonable terms, or at
all. If we decide to raise additional funds by issuing more of our securities,
stockholders at the time of issuance will experience a dilution to the value of
their securities.
If we are unable to obtain additional funds, we could lose our key
employees and could be required to abandon one or more of our product
development programs. In addition, we may be unable to meet our research
spending obligations under existing licensing agreements and may be unable to
continue our business operations.
We are presently seeking collaborative or other arrangements with larger
pharmaceutical companies to provide for both our immediate and longer-term
funding requirements. These agreements would potentially provide us with
additional funds in exchange for exclusive or non-exclusive license or other
rights to the technologies and products that we are currently developing.
Competition between biopharmaceutical companies for these types of arrangements
is intense. Although we have been engaged in discussions with candidate
companies for some time, we cannot give any assurance that these discussions
will result in an agreement or agreements in a timely manner, or at all.
Additionally, we cannot assure you that any resulting agreement will generate
sufficient revenues to offset our operating expenses and longer-term funding
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
CONTINUED LISTING ON THE NASDAQ SMALLCAP MARKET; PREFERRED STOCK REDEMPTION.
Our Common Stock is currently quoted on the Nasdaq SmallCap Market under
the symbol "CORX." For continued inclusion on the Nasdaq Small Cap Market, a
company must meet a net tangible asset, market capitalization or net income
test. Further, Nasdaq requires a minimum bid price of $1.00 per share for
continued listing. As of September 30, 1998, we had net tangible assets of
approximately $243,000 and did not meet the current listing standards. We
received a notice of noncompliance from Nasdaq in October 1998 and in response
we submitted a plan for achieving compliance. Our plan for achieving compliance
includes raising capital through a combination of prospective corporate partners
and investors. In the event that Nasdaq does not accept our plan for compliance
or if we fail to satisfy the listing standards on a continuous basis, our Common
Stock will be removed from listing on the Nasdaq SmallCap Market. If our Common
Stock is delisted from the Nasdaq SmallCap Market, trading of our Common Stock,
if any, would be conducted in the over-the-counter market in the so-called "pink
sheets" or, if available, the NASD's "Electronic Bulletin Board." As a result,
investors could find it more difficult to dispose of, or to obtain accurate
quotations as to the value of, our Common Stock and the trading price per share
could be reduced. In addition, in the event that our Common Stock is delisted
from the Nasdaq SmallCap Market, the holders of our Series A Convertible
Preferred Stock may require us to redeem their shares of Series A Convertible
Preferred Stock for cash. If the holders of our Series A Convertible Preferred
Stock request a redemption of their shares, it is unlikely that we would be able
to satisfy their request.
DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES.
We are considered a "development stage" company because, since our
formation on February 10, 1987 through September 30, 1998, we have generated
only modest operating revenues and we have incurred net losses aggregating
$36,593,922. As of September 30, 1998, we had an accumulated deficit of
$38,625,761. We will require substantial
6
<PAGE>
additional funds to advance our research and development programs, particularly
if we decide to independently conduct later-stage clinical testing and apply for
regulatory approval of any of our proposed products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
DEPENDENCE ON STRATEGIC ALLIANCES AND THIRD PARTIES FOR CLINICAL TESTING,
MANUFACTURING AND MARKETING.
We do not have the resources, and do not presently intend, to conduct
later-stage human clinical trials or to manufacture our proposed products. We
are therefore seeking larger pharmaceutical company partners to conduct such
activities for most or all of our proposed products. In connection with our
efforts to secure corporate partners, we will seek to retain certain co-
promotional rights to our proposed products. These co-promotional rights will
allow us to market our products to selected medical specialists while our
corporate partner markets our products to the general medical market. We cannot
assure you that we will be able to enter into any partnering arrangements on
this or any other basis. In addition, we cannot assure you that we, or our
prospective corporate partners, can successfully introduce our proposed
products. We also face the risks that our products will be rejected by patients,
health care providers or insurance companies, or that our products cannot be
manufactured and marketed at prices that would permit us to operate profitably.
See "Business."
TECHNOLOGICAL UNCERTAINTY; EARLY STAGE OF PRODUCT DEVELOPMENT; NO ASSURANCE OF
REGULATORY APPROVALS.
We cannot assure you that our research and development activities will
enable us to produce any products able to withstand competition. Our development
of each product is subject to the risks of failure commonly experienced in the
development of products based upon innovative technologies and the expense and
difficulty of obtaining approvals from regulatory agencies. All of our proposed
products are in the preclinical or early clinical stage of development and will
require significant additional funding for research, development and clinical
testing before we are able to submit them to any of the regulatory agencies for
clearances for commercial use. We cannot assure you that we will be able to
license any technologies or proposed products or to complete successfully any of
our research and development activities. Even if we do complete them, we cannot
assure you that we will be able to market successfully any of the products or
that we will be able to obtain the necessary regulatory approvals or that
customers will like our products. We also face the risk that any or all of our
products will not work as intended or that they will be toxic, or that, even if
they do work and are safe, that our products will be uneconomical to manufacture
and market on a large scale. We also face the risk that the rights of other
persons or entities will stop us from marketing any of our products or that
other persons or entities might develop and market a superior or equivalent
product. Due to the extended testing and regulatory review process required
before we can obtain marketing clearance, we do not expect to be able to
commercialize any therapeutic drug for at least five years, either directly or
through our corporate partners or licensees. See "Business."
LIMITED PROPRIETARY RIGHTS; UNCERTAINTY ASSOCIATED WITH PATENT PROTECTION.
Pursuant to certain technology rights agreements, we have exclusive rights
to our Ampakine compounds and calpain inhibitor compounds for specified
applications. These rights are secured by patents or patent applications owned
wholly by others or by others as co-owners with us. We also have options to
obtain exclusive licenses under patent applications relating to some of our
potential products. Some of our existing agreements require us to make certain
minimum annual payments, meet certain milestones or diligently seek to
commercialize the underlying technology. Our failure to meet any of these
requirements could allow the other party to terminate that particular agreement.
In addition, our related collaborative and consulting agreements may generally
be terminated upon 30 to 60 days' written notice.
Our success will depend, in part, on our ability to get patent protection
for our products and processes in the United States and elsewhere. We have filed
and intend to continue to file patent applications as we need them. We cannot
assure you, however, that any additional patents will issue from any of these
applications or, if patents do issue, that the claims allowed will be
sufficiently broad to protect our technology. Also, we cannot assure you that
any patents issued to us or licensed by us can withstand challenges made by
others or that we will be able to protect our rights.
If we are unable to obtain sufficient protection of our proprietary rights
in our products or processes prior to or after obtaining regulatory clearances,
our competitors may be able to obtain regulatory clearance and market competing
7
<PAGE>
products by demonstrating the equivalency of their products to our products. If
they are successful at demonstrating the equivalency between the products, our
competitors would not have to conduct the same lengthy clinical tests that we
have conducted.
We also rely on trade secrets and confidential information that we try to
protect by entering into confidentiality agreements with other parties. We
cannot assure you that any of the confidentiality agreements will be honored,
or, if breached, that we would have enough remedies to protect the confidential
information. Further, we cannot assure you that our competitors will not
independently learn our trade secrets or develop similar or superior
technologies. To the extent that our consultants, key employees or others apply
technological information independently developed by them or by others to our
projects, disputes may arise regarding the proprietary rights to such
information. We cannot assure you that such disputes will 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 2.4 million additional shares of Common Stock could
become freely tradable without restriction. An aggregate of 18,384 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 September 30, 1998, up to 2.2 million shares of Common Stock
were issuable upon conversion of outstanding shares of Series A Convertible
Preferred Stock. If conversions of Series A Convertible Preferred Stock occur at
an "effective conversion price" of $2.75 or higher (which would occur if the
market price per share of our Common Stock exceeds $3.44 per share), the holder
of the shares of Series A Convertible Preferred Stock 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 that the holder
may purchase equals the number of shares of Common Stock issuable upon
conversion of the shares of Series A Convertible Preferred Stock that the holder
is converting. The holder forfeits this right if it is not exercised at the time
of conversion. Depending on the date of conversion, the sales price of the
Common Stock at that time and whether any additional purchase rights are
exercised, the exact number of shares of Common Stock issued upon conversion of
Series A Convertible Preferred Stock may fluctuate substantially. All shares of
Common Stock issuable upon conversion of Series A Convertible Preferred Stock,
the exercise of related rights of additional purchase and the exercise of the
related warrants will be freely tradable under the Registration Statement of
which this Prospectus is part. Sales of substantial amounts of Common Stock in
the public market could adversely affect the prevailing market price of the
Common Stock. See "Description of Securities."
INTENSE COMPETITION.
Our business is characterized by intensive research efforts. Our
competitors include many companies, research institutes and universities that
are working in a number of pharmaceutical or biotechnology disciplines to
develop therapeutic products similar to those we are currently investigating.
Most of these competitors have substantially greater financial, technical,
manufacturing, marketing, distribution and/or other resources than us. In
addition, many of our competitors have experience in performing human clinical
trials of new or improved therapeutic products and obtaining approvals from the
FDA and other regulatory agencies. We have no experience in conducting and
managing later-stage clinical testing or in preparing applications necessary to
obtain regulatory approvals. Accordingly, it is possible that our competitors
may succeed in developing products that are safer or more effective than those
that we are developing and may obtain FDA approvals for their products faster
than we can. We expect that competition in this field will continue to
intensify. See "Business--Competition."
DEPENDENCE UPON KEY PERSONNEL.
We are highly dependent upon key management and technical personnel.
Competition for qualified employees among pharmaceutical and biotechnology
companies is intense. The loss of any of our key management or technical
personnel, or our inability to attract, retain and motivate the additional
highly-skilled employees and consultants that our business requires, could
substantially hurt our business and prospects. We cannot assure you that we will
be able to retain our existing personnel or attract additional qualified
employees when we need them. See "Business" and "Management."
DEPENDENCE ON RELATIONSHIPS WITH CONSULTANTS AND THE UNIVERSITY OF CALIFORNIA,
IRVINE.
8
<PAGE>
We depend upon our relationships with a number of academic consultants,
particularly Drs. Carl W. Cotman and Gary S. Lynch of the University of
California, Irvine ("UCI"). Drs. Cotman and Lynch play an important role in
guiding our internal research. In addition, we sponsor preclinical research in
Dr Lynch's laboratories at UCI that is part of our product development and
corporate partnering profile. If our relationships with Dr. Lynch or UCI are
disrupted, our AMPA receptor research program could be adversely affected. We
cannot assure you that we would be able to conduct the sponsored research
internally at reasonable cost, or at all. Our agreements with our consultants,
including those with Drs. Cotman and Lynch, are generally terminable by the
consultant on short notice. See "Management."
GOVERNMENT REGULATION.
The FDA and other similar agencies in foreign countries have substantial
requirements for therapeutic products. Such requirements often involve lengthy
and detailed laboratory, clinical and post-clinical testing procedures. It often
takes companies many years to satisfy these requirements, depending on the
complexity and novelty of the product. The review process is also extensive
which may delay the approval process even more. As yet, we have not obtained any
approvals to market our products. Further, we cannot assure you that the FDA or
other regulatory agency will grant us approval for any of our products on a
timely basis, if at all. 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. See "Business--Government Regulation."
PRODUCT LIABILITY AND INSURANCE.
Clinical testing, manufacturing and marketing of our products may expose us
to product liability claims. Although we have never been subject to a product
liability claim, we cannot assure you that there will not be any claims brought
against us in the future. Further, we cannot assure you that the coverage limits
of our insurance policies will be adequate or that one or more successful claims
brought against us would not have a material adverse effect upon our business,
financial condition and results of operations.
LIMITED PUBLIC MARKET; VOLATILITY OF STOCK PRICE.
Our Common Stock has been traded on the Nasdaq SmallCap Market since 1989.
Although approximately 20 firms make a market in Cortex Common Stock, we cannot
assure you that the market for our Common Stock will continue to be active or
that our Common Stock will continue to be traded on the Nasdaq SmallCap Market.
We are in the biopharmaceutical industry and the market price of securities
of life sciences companies in general has been very unpredictable. See "Price
Range of Common Stock." Announcements by us or our competitors concerning
technological innovations, new products, proposed governmental regulations or
actions, developments or disputes relating to patents or proprietary rights,
public concern over the safety of therapeutic products and other factors that
affect the market generally could significantly impact our business and the
market price of our securities.
DIVIDENDS.
Since our formation in 1987, we have not paid cash dividends on our Common
Stock. We do not anticipate paying any dividends on our Common Stock in the
future. Furthermore, the terms of the 9% Preferred Stock do not allow for the
payment of cash dividends unless we have paid the accrued and unpaid dividends
on the 9% Preferred Stock in full. As of September 30, 1998, accrued and unpaid
dividends on the 9% Preferred Stock were $26,775. See "Dividend Policy."
ANTI-TAKEOVER PROVISIONS.
Certain provisions of our Certificate of Incorporation could make it more
difficult for a third party to acquire control of our business, even if such
change in control would be beneficial to our stockholders. Our Certificate of
Incorporation allows our Board of Directors to issue up to 549,100 shares of
preferred stock without stockholder approval. Any such issuance could make it
more difficult for a third party to acquire our business and may adversely
affect the rights of our stockholders. See "Description of Securities."
9
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds from the Selling Stockholder's sale of
their shares of Common Stock.
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, 1996 as reported by Nasdaq. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30, 1999 High Low
---- ---
<S> <C> <C>
Second Quarter (through November 4, 1998).. $ 1-3/8 $ 1/2
First Quarter.............................. 2-1/8 1
FISCAL YEAR ENDED JUNE 30, 1998
Fourth Quarter............................. 3-1/2 1-11/16
Third Quarter.............................. 1-29/32 1-3/8
Second Quarter............................. 3-1/8 1-3/8
First Quarter.............................. 3-1/4 2-5/8
FISCAL YEAR ENDED 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
</TABLE>
As of September 30, 1998, there were 675 stockholders of record of the
Company's Common Stock, and approximately 9,500 beneficial owners. The last sale
price of the Company's Common Stock on November 4, 1998, as reported by Nasdaq,
was $ 19/32.
10
<PAGE>
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 September 30, 1998,
accrued and unpaid dividends on the 9% Preferred Stock were $26,775. 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
September 30, 1998. 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.
<TABLE>
September 30, 1998 (1)
----------------------
<S> <C>
Note payable to Alkermes, Inc. (non-current portion) $ 961,159
Redeemable preferred stock:
Series A convertible preferred stock,
$0.001 par value; $10,000 per share liquidation
preference; authorized: 400 shares; issued and
outstanding: 250 shares 2,460,450
Stockholders' equity:
9% cumulative convertible preferred stock,
$0.001 par value; $1.00 per share liquidation
preference; authorized: 1,250,000 shares;
issued and outstanding: 35,000 shares 35,000
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
Common stock, $0.001 par value; authorized
20,000,000 shares; issued and outstanding:
10,237,126 shares 10,237
Additional paid-in capital 36,276,202
Deficit accumulated during the development stage (38,625,761)
------------
Total stockholders' equity (2,217.512)
------------
Total capitalization $ (1,204,097)
============
</TABLE>
________________
(1) Excludes an aggregate of approximately 2.4 million shares of Common
Stock reserved for issuance upon possible exercise of outstanding
warrants and options and an aggregate of up to 2.2 million shares of
Common Stock reserved for issuance upon conversion of outstanding
Series A Convertible Preferred Stock, 9% Cumulative Convertible
Preferred Stock and Series B Convertible Preferred Stock. See
"Description of Securities" and Notes 3, 4 and 5 of Notes to
Financial Statements.
11
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended and
as of June 30, 1998 and 1997 and for the period from inception (February
10, 1987) through June 30, 1998 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, 1996, 1995 and 1994 are derived from
audited financial statements that are not included in this Prospectus. The
selected financial data for the three-month periods ended September 30,
1998 and 1997, for the period from inception (February 10, 1987) through
September 30, 1998 and at September 30, 1998 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 three-month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 1999.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA:
Period from
inception
(February 10,
Years ended June 30, 1987) through
-------------------------------------------------------------------------
June 30,
1998 1997 1996 1995 1994 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Research/license revenue (1) $ 130,000 $ -- $ -- $ -- $ -- $ 3,730,000
Grant revenue -- -- -- -- 39,665 94,717
----------- ----------- ----------- ------------ ------------ ------------
Total operating revenues 130,000 -- -- -- 39,665 3,824,717
----------- ----------- ----------- ------------ ------------ ------------
Operating expenses:
Research & development 4,007,466 3,376,284 2,677,577 4,138,731 3,226,858 26,352,862
General & administrative 1,584,369 1,709,320 1,643,732 1,665,134 1,780,792 13,344,248
Settlement with Alkermes, Inc. -- -- -- 1,227,977 -- 1,227,977
----------- ----------- ------------- ------------ ------------ ------------
Total operating expenses 5,591,835 5,085,604 4,321,309 7,031,842 5,007,650 40,925,087
----------- ----------- ------------- ------------ ------------ ------------
Loss from operations (5,461,835) (5,085,604) (4,321,309) (7,031,842) (4,967,985) (37,100,370)
Interest income, net 203,875 155,624 163,062 196,310 262,994 1,692,806
----------- ----------- ------------- ------------ ------------ ------------
Net loss $(5,257,960) $(4,929,980) $ (4,158,247) $ (6,835,532) $ (4,704,991) $(35,407,564)
=========== =========== ============= ============ ============ ============
Weighted average common
shares outstanding 9,575,663 8,252,047 6,532,884 6,075,454 4,880,338
=========== =========== ============= ============ ============
Net loss per share $ (0.55) $ (0.83) $ (0.64) $ (1.13) $ (0.97)
=========== =========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
Period from
(Unaudited) inception
Three months ended (February 10,
September 30, 1987) through
---------------------------
September 30,
1998 1997 1998
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
Research/license revenue (1) $ -- $ -- $ 3,730,000
Grant revenue -- -- 94,717
----------- ----------- ------------
Total operating revenues -- -- 3,824,717
----------- ----------- ------------
Operating expenses:
Research & development 839,281 947,737 27,192,143
General & administrative 354,693 439,258 13,698,941
Settlement with Alkermes, Inc. -- -- 1,227,977
----------- ----------- ------------
Total operating expenses 1,193,974 1,386,995 42,119,061
----------- ----------- ------------
Loss from operations (1,193,974) (1,386,995) (38,294,344)
Interest income, net 7,616 79,590 1,700,422
----------- ----------- ------------
Net loss $(1,186,358) $(1,307,405) $(36,593,922)
=========== =========== ============
Weighted average common
shares outstanding 10,237,126 9,397,510
=========== ===========
Net loss per share $(0.12) $(0.14)
=========== ===========
</TABLE>
________________
(1) Includes $3.6 million received under an agreement with Alkermes, Inc.
12
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
June 30,
(Unaudited)
------------------------------------------------------------------------
September 30, 1998 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Working capital $ 574,852 $ 1,698,277 $ 7,004,298 $ 3,849,649 $ 3,327,788 $ 8,982,571
Total assets 1,757,667 2,874,846 8,333,307 5,013,920 4,886,372 10,441,998
Total liabilities 1,514,729 1,445,550 1,728,300 1,369,157 1,613,676 720,367
Redeemable preferred stock 2,460,450 2,460,450 3,936,720 -- -- 433,750
Deficit accumulated during
the development stage (38,625,761) (37,439,403) (32,181,443) (25,359,298) (21,201,051) (14,365,519)
Stockholders' equity $ (2,217,512) $ (1,031,154) $ 2,668,287 $ 3,644,763 $ 3,272,696 $ 9,287,881
Common shares outstanding 10,237,126 10,237,126 9,394,249 7,495,576 6,085,201 6,073,942
</TABLE>
13
<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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1998 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 is 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 September 30, 1998, the
Company's revenue has consisted of (i) $3,730,000 of license fees and research
and development funding, (ii) net interest income aggregating $1,700,000, and
(iii) $95,000 of grant revenue.
From inception (February 10, 1987) through September 30, 1998, the Company
has sustained losses aggregating $36,594,000. Continuing losses are anticipated
over the next several years, as the Company's ongoing operating expenses for
preclinical research and early clinical development will only be offset, if at
all, by 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.
The Company believes that inflation and changing prices have not had a
material impact on its ongoing operations to date.
Fiscal Years ended June 30, 1998 and 1997
For the year ended June 30, 1998, the Company's loss from operations was
$5,258,000 compared to a loss from operations of $4,930,000 for the prior year,
with the increase attributable to higher levels of research and development
spending.
14
<PAGE>
Research and development expenses increased to $4,007,000, or by 19%,
during the year ended June 30, 1998 compared to the prior year. Most of the
increase related to technology access payments and costs of Phase I/IIa human
clinical testing. The Company's lead compound, Ampalex, is currently being
tested in one study involving patients with Alzheimer's disease and two studies
in patients suffering from schizophrenia. Salary expenses resulting from
scientific personnel additions contributed most of the remaining current year
increase.
General and administrative expenses were $1,584,000 for the year ended June
30, 1998, decreasing 7% from the prior year. Most of this decrease represents
lower salary expenses due to a decrease in administrative employees.
Three-month periods ended September 30, 1998 and 1997
The loss for the three-month period ended September 30, 1998 was
$1,194,000, compared to a loss of $1,387,000 for the corresponding prior year
period.
Research and development expenses decreased from $948,000 to $839,000, or
by $109,000 (11%), during the three-month period ended September 30, 1998
compared to the prior year period. The decrease was principally due to timing of
clinical trials expenses and reduced salary expenses (resulting from a decrease
in scientific employees), partially offset by increased spending for sponsored
research and technology access payments.
General and administrative expenses decreased from $439,000 to $355,000, or
by $84,000 (19%) for the three-month period ended September 30, 1998 compared to
the corresponding prior year period. The decrease includes savings from a
reduction in administrative employees, lower spending for outside consulting and
decreased expenses related to required communications with shareholders.
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 September 30,
1998 aggregating $36 million. An additional $3.6 million in research and license
payments was received from Alkermes, Inc. ("Alkermes") in 1992 and 1993 in
connection with a development and license agreement with that firm. See Note 5
of Notes to Financial Statements. Net interest income from inception through
September 30, 1998 was $1.7 million.
As of September 30, 1998, the Company had cash, cash equivalents and short-
term investments totaling $1.1 million and working capital of $575,000. In
comparison, as of June 30, 1998, the Company had cash, cash equivalents and
short-term investments totaling $2.1 million and working capital of $1.7
million. The decreases represent amounts required to fund operating losses.
Cortex anticipates that its existing cash, cash equivalents and short-term
investments will be sufficient to satisfy its capital requirements through
calendar 1998, assuming modest levels of operational restraint. Additional funds
will be required to continue operations beyond that time. See "Risk Factors --
Need for Additional Capital."
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 year ending June 30, 1999
total $222,000. From inception (February 10, 1987) through September 30, 1998,
net expenditures for furniture, equipment and leasehold improvements aggregated
$2.1 million.
In connection with the settlement in October 1995 of a license dispute with
Alkermes (See Note 5 of Notes to Financial Statements), the Company issued to
Alkermes a $1,000,000 three-year promissory note accruing interest semi-annually
at the then federal funds rate. The Company also agreed to pay Alkermes a
graduated royalty on calpain inhibitor development proceeds, as defined and
subject to certain limitations. In February 1998, the terms of the note were
restructured to include a principal payment of $200,000 upon signing of the
restructuring agreement. The balance
15
<PAGE>
of the note and accrued interest are payable in October 1999 or upon
consummation of a corporate partnership between Cortex and a larger
pharmaceutical company, whichever is earlier.
As of September 30, 1998, Cortex had outstanding 35,000 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 since 1989. Accrued and unpaid dividends as of September 30, 1998 were
$26,775.
In the event that the Company is able to obtain sufficient financing, over
the next twelve months, the Company plans to complete current Phase I/IIa
clinical studies on its Ampakine compounds. Commitments for external preclinical
and Phase I/IIa clinical studies involve a twelve-month expenditure of
approximately $325,000. The Company is also committed to an additional $700,000
of funding for sponsored research in academic laboratories. Neither significant
investments in plant or equipment nor increases to staffing levels are
contemplated under current spending plans for the next twelve months. As of
September 30, 1998, Cortex had 18 full-time employees.
The Company's common stock has traded on the Nasdaq Small Cap Market since
1989. Listing standards for the Nasdaq Small Cap Market include a net tangible
asset, market capitalization or net income test. As of September 30, 1998, the
Company had net tangible assets of approximately $243,000, which does not meet
the current listing standards. If the Company does not satisfy the listing
standards on a continuous basis, its common stock will no longer be eligible for
listing on the Nasdaq Small Cap Market. In such event, the liquidity of the
Company's common stock is likely to be impaired and its trading price reduced.
In addition, in such event, the holders of the Company's Series A Preferred
Stock may require the Company to redeem their shares for cash. It is unlikely
that the Company would be able to satisfy such a redemption request.
The Company may raise additional capital through the sale of debt or equity
securities. Given the current adverse market conditions for biopharmaceutical
companies, if the Company proceeds with a debt or equity financing, there is no
assurance that funds will be available on favorable terms, or at all. If equity
securities are issued to raise additional funds, substantial dilution to
existing shareholders is likely to result.
In order to provide resources for both its immediate and longer-term
requirements, the Company is presently seeking collaborative or other
arrangements with larger pharmaceutical companies. Under these agreements, 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 has for some time been engaged in discussions
with candidate companies, there is no assurance that an agreement or agreements
will arise from these discussions in a timely manner, or at all, or that
revenues that may be generated thereby will offset operating expenses
sufficiently to reduce the Company's immediate or longer-term funding
requirements.
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 market superior or equivalent products. 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 prospective 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 "Risk Factors."
16
<PAGE>
YEAR 2000 COMPLIANCE
The Company has completed a preliminary assessment of the impact of the
year 2000 as it relates to the Company's computers and operating systems. Some
of the Company's computer programs were written using two digits rather than
four to define the applicable year. As a result, those computer programs
recognize a date using "00" as the year as 1900 rather than as the year 2000.
This may cause a system failure or otherwise disrupt operations. The Company
will be required to update some of its software so that its computer systems
will continue to function properly. Completion of the upgrade is expected by
June 1999, prior to any anticipated impact on its operating systems. The
associated cost is anticipated to be less than $25,000.
The Company has not yet completed its assessment of its laboratory
equipment for Year 2000 compliance. However, the Company has initiated contact
with the manufacturers and vendors of such equipment regarding Year 2000
compliance. The Company anticipates that any necessary replacements or upgrades
would be completed by June 1999. The Company does not expect that its Year 2000-
related expenditures with respect to its laboratory equipment will be
significant.
The Company is unable to control whether its suppliers and service
providers will be Year 2000 compliant. However, the Company has initiated
communications with its significant vendors to determine the extent to which the
Company's operations may be vulnerable to a failure by those third parties to
properly address Year 2000 issues. The Company's operations may be affected to
the extent that its vendors are unable to provide services or ship products. As
of yet, the Company has not received responses from all of its significant
vendors and cannot complete its assessment of their compliance.
Although the Company expects its internal systems to be Year 2000 compliant
as described above, the Company intends to prepare a contingency plan that will
specify what it plans to do if it or its significant vendors are not Year 2000
compliant in a timely manner. The Company expects to prepare its contingency
plan in calendar year 1999 following the anticipated completion of its internal
remediation and the assessment of the compliance of the Company's significant
vendors. Management does not believe that the Year 2000 changes affecting it and
its significant vendors will have a material impact on its business, financial
condition or results of operations.
Notwithstanding the foregoing, there can be no assurances (a) that the
representations provided by its third party vendors with respect to Year 2000
compliance will be accurate, or (b) that the Company will have any recourse
against such vendors if the representations prove to be inaccurate. Furthermore,
there can be no assurances that Year 2000-related failure caused by third
parties, such as utility providers, transportation companies or others, will not
have a material adverse effect on the Company.
17
<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. Since 1993, the primary effort at Cortex has been 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, that 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 the fiscal years ended June 30, 1998 and 1997, the Company's expenditures on
research and development were $4,007,466 and $3,376,284, respectively, with the
increase attributable to the costs of Phase I/IIa human clinical testing of
CX516 (Ampalex) in patients with Alzheimer's disease and in patients with
schizophrenia.
The Ampakine program addresses large potential markets. Accordingly, the
Company's commercial development plans involve partnering with larger
pharmaceutical companies for research, development, clinical testing,
manufacturing and global marketing of its proposed products. The Company may
retain the right to eventually co-promote Ampakines for selected indications in
the United States. If the Company is successful in the pursuit of this strategy,
it may be in a position to contain its costs over the next few years, to
maintain its focus on the research and early development of novel
pharmaceuticals (where it believes that it has the ability to compete) and
eventually to participate more fully in the commercial development of its
proposed products in the United States. Cortex continues to seek collaborative
or licensing arrangements with larger pharmaceutical companies that will permit
Ampalex and/or other Ampakines to be advanced into later stages of clinical
development and provide access to the extensive clinical trials management,
manufacturing and marketing expertise of such companies. The Company may not be
able to secure such arrangements on favorable terms, or at all, and its products
may not 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 activity of the AMPA receptor,
which binds the neurotransmitter glutamate. These compounds interact in a highly
specific manner with the AMPA receptor in the brain, lowering the amount of
neurotransmitter 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. The Company and
its collaborators have also obtained encouraging preliminary results in animal
models of depression, sexual dysfunction and depressed endocrine function.
DEFICITS OF MEMORY AND COGNITION _ ALZHEIMER'S DISEASE
Impairment of memory and cognition is a serious health care 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 these elderly to remain independent longer.
18
<PAGE>
Substantial scientific evidence points to a long-lasting change known as
"long-term potentiation," or LTP--in synapses (junctions between brain cells --
"neurons") as the basis of many types of memory. Long-term potentiation involves
chemical changes that create a more stable information transfer point between
neurons.
Although disease and physiological malfunctions are thought to be the
fundamental cause of severe mental decline, age itself is a contributory factor,
with the human brain losing 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
known as the AMPA receptor (which is involved in long-term potentiation). AMPA
receptors and synapses decline in number with aging, on average by 25-30%
between the ages of 25 and 65, making it more difficult for information to pass
through and between areas of the cerebral cortex. Therefore a potential
corrective approach to alleviate age-related cognitive deficits is to enhance
the activity of the remaining functional AMPA receptors.
Alzheimer's disease is the best known destroyer of memory, currently
afflicting some four million Americans. With the aging of our population, the
number of people in the U.S. with Alzheimer's disease is expected to double over
the next two decades unless a treatment is found. According to the Alzheimer's
Association, Alzheimer's disease is already 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 help to 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. Ampakines may slow the rate at which functional levels of input from
other neurons are lost.
The first major results of Ampakine testing in animal behavioral models of
learning and memory were reported in early 1994 in Proceedings of the National
Academy of Sciences. In these studies, Ampakine-treated rats performed
significantly better than untreated control animals on tests of both short- and
long-term memory.
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 a study published in Synapse, the authors conducted
research involving a maze task with middle-aged and young adult rats. The
middle-aged rats showed striking deficits in performance when compared with
young adult animals. When given an Ampakine, the performance of the middle-aged
rats improved to levels equivalent to those found in young animals.
Three human clinical safety studies have now been completed with CX516
("Ampalex"). In all three studies, CX516 was safe and well-tolerated on acute
oral administration and, importantly, statistically-significant positive effects
on memory performance were seen in healthy volunteers.
The initial study, conducted by AFB Parexel in Berlin, involved single
administrations of drug or placebo to a total of 48 healthy young adult
volunteers, ranging in age from 18 to 35. The trial was double-blinded and
placebo-
19
<PAGE>
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,
a statistically significant positive effect on memory performance was observed.
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. This 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 noted in the group
that received CX516.
On the basis of these encouraging results, Cortex initiated a Phase I/IIa
study in patients experiencing deficits of memory and cognition due to
Alzheimer's disease. The double-blind, placebo-controlled dose escalation, which
is being conducted at the National Institutes of Health in Bethesda, Maryland,
involves administration of CX516 to an eventual total of 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.
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 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 initially studied in the 1970s, but clinical trials
were halted due to the risk of a fatal blood disorder known as agranulocytosis
and a dose-dependent risk of seizures. Clozapine was reintroduced in the 1980s,
with approval by the FDA for use in patients who cannot be adequately
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treated with typical neuroleptics, either because of lack of efficacy or side
effects. Risperidone and olanzapine are other recent clozapine-like anti-
psychotics.
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 greatly improved by any available
agent. The persistence of cognitive symptoms prevents 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 an area of the brain called
the striatum. More recently, a developing body of evidence suggests that
schizophrenia also involves an underactivity of glutamate pathways projecting
into the same area. 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, at the time a
University of California, Irvine neuroscientist and Cortex consultant,
discovered that an Ampakine reduced stereotypic behavior (mechanical repetition
of posture or movement) in rats that had been injected with methamphetamine.
Reduction of methamphetamine-induced stereotypic behavior is widely used for
initial screening of anti-psychotic drugs. This finding has since been extended
by scientists at both UCI and Cortex to include additional Ampakines. Further,
Cortex scientists have demonstrated that Ampakines in combination with either
conventional or atypical anti-psychotic drugs have additive or synergistic
effects in this model system.
The Company has initiated a study at Massachusetts General Hospital with
CX516 in patients with schizophrenia being treated with clozapine. This Phase
I/IIa study is primarily designed as a safety study, but psychological testing
is also being conducted in an attempt to obtain a preliminary indication that
CX516 has an effect on psychological parameters that likely contribute to
symptoms of the disease, particularly the cognitive symptoms that have thus far
been resistant to treatment. Preliminary results from the first tested patients
indicate that CX516 is reasonably safe in combination with clozapine and also
improves performance on several tests of verbal learning, memory and problem
solving. A second similar study to assess the affect of CX516 as a `mono'
therapy in patients with schizophrenia was recently initiated at the National
Institutes of Health in Bethesda, Maryland.
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, which involves a
blood vessel bursting in the brain. In either case, the insult to the brain is
often immediately life-threatening and initiates a cascade of molecular events
that may ultimately lead 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.
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 can follow. 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. This crucial period of time between a stroke and the actual
death of brain cells provides a "window of opportunity" during which a
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therapy might be administered to prevent or limit damage to nerve cells and
thereby maintain their viability until homeostasis is re-established following
an ischemic episode.
Ischemia-induced release of excessive 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 in turn
causes activation of certain calcium-dependent enzymes, including calpain. At
higher levels of activity, calpain can degrade the neuron's cytoskeleton and
cause progressively greater damage until eventually the cell is no longer able
to recover.
In 1990 and 1991, Cortex established laboratory models of ischemia and used
them to identify a range of calpain inhibitor compounds that appeared to have
the potential to block brain damage due to stroke and other ischemic events. In
January 1992, Cortex entered into a Development and License Agreement, 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 the Company's calpain
inhibitor technology for the prevention or treatment of acute and chronic
neurodegenerative diseases and disorders of the nervous system.
Subsequently, Cortex shifted its emphasis to calpain inhibitor research
outside the nervous system. The Company was particularly active in investigating
a potential role of calpain inhibitors in the treatment of vasospasm and
restenosis, two serious vascular disorders. The Company established preclinical
research collaborations and began screening compounds for these purposes, and
reported on its progress in its 1993 annual report. This report of progress
included a discussion of the Company's research in cerebral vasospasm, which
involved reversal of an existing spasm of blood vessels in the brain. In October
1993, Alkermes notified the Company that Alkermes believed that it had rights to
this indication under the Alkermes Agreement. In November 1993, Alkermes filed
an action in U.S. District Court in Massachusetts alleging that the Company had
breached the Alkermes Agreement by developing calpain inhibitors for cerebral
vasospasm.
In October 1995, the Company and Alkermes agreed to a settlement of the
dispute. Alkermes agreed to dismiss its action against the Company and to
relinquish all rights previously granted them by the Company, as well as rights
to related technologies developed by Alkermes. In connection with the
settlement, the Company issued to Alkermes a $1,000,000 non-transferable, three-
year promissory note accruing interest semi-annually at the federal funds rate.
The Company also committed to pay Alkermes a graduated royalty on calpain
inhibitor development proceeds, as defined and subject to certain limitations.
In February 1998, the terms of the note were restructured to include a principal
payment of $200,000 upon signing of the new agreement. The balance of the note
and accrued interest are payable in October 1999 or upon consummation of a
corporate partnership between Cortex and a larger pharmaceutical company,
whichever is earlier. The Company has confirmed in an animal model the earlier
finding that calpain inhibitors are capable of blocking vasospasm. Cortex
presently intends to seek a larger pharmaceutical company partner for the
further development of the calpain inhibitor technology.
MANUFACTURING
Cortex has no experience in manufacturing pharmaceutical products and
relies, and presently intends to rely, on the manufacturing and quality control
expertise of contract manufacturing organizations or prospective corporate
partners. There is no assurance that the Company will be able to enter into
arrangements for manufacturing of its proposed products on favorable terms.
MARKETING
The Company has no experience in the marketing of pharmaceutical products
and does not anticipate having the resources to distribute and broadly market
any products that it may develop. The Company will therefore continue to seek
commercial development arrangements with other pharmaceutical companies for its
proposed products. In entering into such arrangements, the Company may seek to
retain the right to co-promote certain products in North
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America. There is no assurance that the Company will be able to enter into co-
promotional arrangements in connection with its licensing activities, or that
co-promotional rights will lead to greater revenues for the Company.
TECHNOLOGY RIGHTS AND COLLABORATIVE AGREEMENTS
AMPA RECEPTOR MODULATING COMPOUNDS
In 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. The agreement has subsequently been amended to include
additional indications. The Company paid an initial license fee and is obligated
to make additional payments, including license maintenance fees and patent
expenses reimbursements 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 pay
royalties on net sales.
CALPAIN INHIBITORS
Beginning in 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 the agreements, 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.
In connection with the agreements, 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 pay 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
approximately 15 issued or allowed U.S. patents and a number of additional U.S.
patent applications and their international counterparts.
There is no assurance that 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 is also
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 is no assurance
that others will not obtain patents that the Company would then need to license
or design around in order to practice its patented technologies, or that the
Company would be able to obtain licenses that might be required to practice
these technologies due to patents of others on reasonable terms. Additionally,
any unpatented manufacture, use or sale of the Company's technology, processes
or products may 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 is 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.
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.
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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 is 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/IIa studies in the U.S. with
CX516 in Alzheimer's disease patients and in patients with schizophrenia under
INDs filed by its clinical collaborators. It is the Company's intent that a
larger pharmaceutical company partner or partners, which the Company is seeking,
will pursue the required regulatory approvals to conduct later-stage 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 up 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 can also be lengthy.
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 is no assurance that any required FDA or other governmental approval
will be granted or, if granted, will not be withdrawn. Governmental regulation
may substantially delay or prevent 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 partnerships or
other collaborative arrangements with third parties with the required resources
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 seek FDA approval for most or all
of its proposed products. There is 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, schizophrenia, depression and other
neurological and psychiatric diseases and disorders are on the market or in the
later stages of clinical testing. For example, over 25 drugs are under clinical
investigation in the U.S. for the treatment of Alzheimer's disease. The
Company's competitors have substantially greater financial and other resources
and larger research and development staffs. Larger pharmaceutical company
competitors also have significant experience in preclinical testing, human
clinical trials and regulatory approval procedures.
In addition, colleges, universities, governmental agencies and other public
and private research organizations will continue to conduct research and are
becoming more active in seeking patent protection and licensing arrangements to
collect license fees, milestone payments and royalties in exchange for license
rights to technology that they have developed, some of which may be directly
competitive with that of the Company. These institutions also compete with
companies such as Cortex in recruiting highly qualified scientific personnel.
The Company expects technological developments in the neuropharmacology
field to continue to occur at a rapid rate and expects that competition will
remain intense as advances continue to be made. Although the Company believes,
based on the technical qualifications, 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 and psychiatric disorders, the Company does not have the resources,
and does not presently intend, to compete with major pharmaceutical companies in
clinical testing, manufacturing and marketing.
PRODUCT LIABILITY INSURANCE
The clinical testing, manufacturing and marketing of the Company's products
may expose the Company to product liability claims, against which the Company
maintains liability insurance. Although the Company has never been subject to a
product liability claim, there is no assurance that such claims will not be
brought in the future, 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.
EMPLOYEES
As of September 30, 1998, Cortex had 18 full-time employees and had engaged
9 part-time Ph.D.-level scientific consultants. Of the 18 full-time employees,
12 are engaged in research and development and 6 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:
<TABLE>
<CAPTION>
Name Age Position
----------------------------------------------------------------------
<S> <C> <C>
Robert F. Allnutt (2) 63 Director
Charles J. Casamento (2) 53 Director
Carl W. Cotman, Ph.D. (1) 58 Director, Scientific Director
Michael G. Grey (1) 45 Director
Gary S. Lynch, Ph.D. 55 Scientific Director
Harvey S. Sadow, Ph.D. (2) 76 Chairman of the Board, Director
Vincent F. Simmon, Ph.D. 55 President and Chief Executive Officer, Director
Davis L. Temple Jr., Ph.D. (1) 55 Director
</TABLE>
(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. Since February
1995, Mr. Allnutt has been a Senior Counselor for APCO Associates, Inc., a
public affairs and strategic communications company. 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 Cypros Pharmaceuticals, Inc., a developer and marketer of
prescription pharmaceuticals. Mr. Allnutt also serves as a member of the Board
of Directors of the National Health Council. 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.
Charles J. Casamento was elected to the Board of Directors of the Company in
July 1997. Since June 1993, Mr. Casamento has been Chairman, President and Chief
Executive Officer of RiboGene, Inc., a biopharmaceutical company based in
Hayward, California. Prior to that, he was President and Chief Executive Officer
of Interneuon Pharmaceuticals, a neuropharmaceutical company, from its founding
in March 1989 until May 1993. From January 1986 to March 1989, he was Senior
Vice President and General Manager, Pharmaceuticals & Biochemicals at Genzyme
Corp., a biotechnology company. From 1970 through 1985, Mr. Casamento held
senior management positions in marketing, finance and business development at
Sandoz, Johnson & Johnson and American Hospital Supply Corp., where he was Vice
President, Business Development and Strategic Planning for the Critical Care
Division. He holds a B.S. in Pharmacy and an M.B.A. from Fordham University and
is a licensed pharmacist.
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.
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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. From
November 1994 until August 1998, Mr. Grey served as President of BioChem
Therapeutic Inc., a wholly-owned subsidiary of BioChem Pharma, 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. in Chemistry from the University of
Notingham.
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 dermatologic products; and a director of
several privately-held companies in the health care field, including Trega
Biosciences, Inc., a drug development company. 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 and has been the acting Chief Financial
Officer and Secretary of the Company since October 13, 1998. 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. in Biology and Chemistry from Amherst College, an
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 and served as co-member of the Office of the Chief Executive of
the Company from October 1995 to May 1996. In April 1997, Dr.
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Temple was appointed as Chairman and Chief Executive Officer of Cognetix, Inc, a
privately held biopharmaceutical drug discovery and development company. From
November 1995 until April 1997, 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 for 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.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Company's Board of Directors.
There are no family relationships among any of the directors or officers of the
Company.
OTHER OFFICER
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, 1998 to the Company's Chief Executive Officer and to the
other executive officer employed by the Company as of June 30, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------------- ------------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation (2) Options(#) Compensation
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Vincent F. Simmon, Ph.D. (1) 1998 $203,178 $ -- $14,996 -- $ --
President, Chief 1997 200,000 53,138 50,005 -- --
Executive Officer 1996 25,000 20,410 3,613 180,000 --
and Acting Chief
Financial Officer
and Secretary
D. Scott Hagen (3) 1998 $149,900 $ -- $ 8,939 -- $ --
Vice President, 1997 139,677 11,024 10,282 40,000 --
Chief Financial Officer 1996 128,751 18,750 14,663 11,000 --
and Secretary
</TABLE>
_________________
(1) Dr. Simmon was appointed President and Chief Executive Officer on May 15,
1996 and became the acting Chief Financial Officer and Secretary of the
Company on October 13, 1998.
(2) Represents accrued or paid-out vacation pay, sick pay and/or relocation
reimbursements.
28
<PAGE>
(3) Mr. Hagen resigned as Vice President, Chief Financial Officer and Secretary
of the Company on October 13, 1998.
OPTION MATTERS
There were no grants of stock options to the Company's executive officers
named in the Summary Compensation Table during the fiscal year ended June 30,
1998. 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, 1998, 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, 1998. Also reported are the values for "in the
money" options which represent the positive spread between the exercise prices
of any such existing stock options and $1-7/8, the last sale price of Common
Stock on June 30, 1998 as reported by Nasdaq.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Valued 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 $ 0 124,999 55,001 $ 0 $ 0
D. Scott Hagen 0 0 36,918 34,028 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 provides for a base salary of
$200,000 per year with an annual bonus, at the discretion of the Board of
Directors of the Company, in cash and/or equity equal to between 15% and 50% of
his base salary, subject to annual review by the Compensation Committee. 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 date of grant. The options
vest monthly over a three-year period commencing one month from the date of
grant and have a ten-year term.
D. Scott Hagen entered into a three-year employment agreement with the
Company commencing September 1, 1988. The employment agreement was extended for
additional terms, most recently as of January 1, 1998 for a term ending December
31, 1998; however, Mr. Hagen resigned from the Company on October 13, 1998. The
agreement provided for a base salary of $150,000 with an annual bonus of between
$10,000 and $30,000. Because Mr. Hagen's employment was terminated as a result
of his voluntary resignation, he is not entitled to receive any severance
payment under the employment agreement.
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. Dr. Lynch receives a consulting fee of $30,000 per
year and Dr. Cotman receives a consulting fee of $23,000 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
addition to his consulting fee, Dr. Lynch will be entitled to
29
<PAGE>
option grants in connection with the Company's success in corporate partnering
its Ampakine(R) technology. See also "Director Compensation."
DIRECTOR COMPENSATION
Each non-employee director (other than the Chairman of the Board or 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. The Chairman
of the Board receives $2,500 at each Board of Directors meeting attended and an
additional $750 annual retainer for each committee on which he or she serves.
Effective October 5, 1998, the Board of Directors has elected to defer all
future cash payments of director compensation until the Company's financial
condition improves.
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.
30
<PAGE>
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 them as permitted by applicable law.
See "Employment and Consulting Agreements" for a description of certain
arrangements and transactions with executive officers and directors.
31
<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 October 31, 1998, 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.
<TABLE>
<CAPTION>
DIRECTORS, NOMINEES, SHARES PERCENT OF
OFFICERS, AND 5% BENEFICIALLY COMMON STOCK
STOCKHOLDERS OWNED BENEFICIALLY OWNED
--------------------------------------------------------------------------------------------
<S> <C> <C>
Robert F. Allnutt 30,125 (1) *
Charles J. Casamento 22,000 (2) *
Carl W. Cotman, Ph.D. 151,000 (3) 1.2
Michael G. Grey 22,500 (4) *
D. Scott Hagen 40,651 (5) *
Harvey S. Sadow, Ph.D. 67,000 (6) *
Vincent F. Simmon, Ph.D. 209,600 (7) 1.7
Davis L. Temple, Jr., Ph.D. 41,625 (8) *
Quantum Partners LDC 657,400 (9) 5.4
Soros Fund Management
888 Seventh Avenue, 33rd Floor
New York, NY 10106
All officers, directors and nominees
as a group (8 persons) 584,501 4.6
</TABLE>
__________________
* Less than one percent
(1) Includes 19,125 shares that may be purchased upon exercise of options
within 60 days of October 31, 1998.
(2) Includes 7,000 shares that may be purchased upon exercise of options within
60 days of October 31, 1998.
(3) Includes 53,000 shares that may be purchased upon exercise of options
within 60 days of October 31, 1998.
(4) Includes 22,500 shares that may be purchased upon exercise of options
within 60 days of October 31, 1998.
(5) Includes 40,251 shares that may be purchased upon exercise of options
within 60 days of October 31, 1998.
(6) Includes 57,000 shares that may be purchased upon exercise of options
within 60 days of October 31, 1998.
(7) Includes 155,000 shares that may be purchased upon exercise of options
within 60 days of October 31, 1998.
(8) Includes 41,625 shares that may be purchased upon exercise of options
within 60 days of October 31, 1998.
(9) According to Schedule 13G filed by George Soros (in his capacity as sole
proprietor of Soros Fund Management on March 6, 1998), 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.
32
<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 September 30, 1998, there were 10,237,126 shares of Common Stock,
35,000 shares of 9% Preferred Stock, 150,000 shares of Series B Preferred Stock,
no shares of Series D Preferred Stock and 250 shares of Series A Preferred Stock
outstanding. As of the same date, investors in the Series A Preferred Stock
private placement held warrants to purchase 800,000 shares of Common Stock (the
"Series A Warrants"), Vector Securities International, Inc. ("Vector") held
warrants to acquire 292,604 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
September 30, 1998, there were 675 record holders of Common Stock, three record
holders of 9% Preferred Stock, three record holders of Series B Preferred Stock,
seven record holders of Series A Preferred Stock, twelve record holders of the
Series A Warrants, one record holder of the Vector Warrants and ten record
holders of the Swartz Warrants.
In addition, as of September 30, 1998 the Company had reserved an aggregate
of 1,078,126 shares of Common Stock for issuance upon exercise of outstanding
stock options held by employees and officers, directors and consultants to the
Company, 4,667 shares for issuance upon conversion of the 9% Preferred Stock,
14,717 shares for issuance upon conversion of the Series B Preferred Stock,
2,225,297 shares for issuance upon conversion of the Series A Preferred Stock,
800,000 shares for issuance upon exercise of the Series A Warrants, 292,604
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
In July 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 12,895 shares of Common Stock at
a price of $6.01 per share, as adjusted and subject to further adjustment under
certain circumstances such as stock splits or stock dividends. This warrant
expired unexercised on July 22, 1998.
33
<PAGE>
In December 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 310,345
shares of the Company's Common Stock at $4.06 per share, as adjusted and subject
to further adjustment, at any time through January 15, 2000.
As consideration for its agreement to provide financial advisory services
related to corporate finance transactions and corporate partnering activities,
as amended and extended in November 1994, Vector was issued a six-year non-
redeemable warrant to purchase 49,297 shares of the Company's Common Stock at
$3.55 per share, subject to adjustment under certain circumstances. Warrants to
purchase 7,041 shares of the Company's Common Stock vested immediately, and
warrants to purchase 21,128 shares of the Company's Common Stock will vest upon
the consummation of each strategic alliance, as defined, when and as secured by
Vector.
In connection with the December 1995 private placement of 160 shares of
Series C Preferred Stock, the Company issued to the placement agent for the
transaction a five-year non-redeemable warrant to purchase 106,195 shares of
Common Stock at a price of $2.825 per share subject to adjustment under certain
circumstances. The warrants contain cashless exercise provisions and include
piggyback registration rights.
In connection with the June 1997 private placement of 400 shares of Series
A Preferred Stock, the Company issued to the eleven participating institutional
investors four-year non-redeemable warrants to purchase an aggregate of 800,000
shares of Common Stock at a price of $3.08 per share, subject to adjustment
under certain circumstances.
In connection with the restructuring of the note payable to Alkermes, Inc.,
in February 1998 the Company issued to Alkermes a five-year warrant to purchase
75,000 shares of Common Stock at an exercise price of $1.55 per share,
representing the average of the high and low sale prices of Cortex Common Stock
as reported on the Nasdaq SmallCap Market on the date of the restructuring.
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 as 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, at 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 as 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
34
<PAGE>
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 as to the extent provided by law. Each share of Series A Preferred is
convertible into Common Stock at an effective conversion price based on the
lowest of the dollar volume weighted average sales prices of the common stock
during the five trading days immediately preceding the date of conversion (the
"Average Stock Price"). 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 shares of Common Stock
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% Preferred
Stock and Series B Preferred Stock, of an amount equal to $10,000 per share plus
six percent per annum 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
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.
35
<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
pursuant
Owned Before Offering (1) to this Owned After Offering
--------------------- --------------------
Selling Stockholder Shares Percent Prospectus Shares Percent
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nelson Partners 150,000 1.2 1,316,109 (2) 0 0
Olympus Securities, Ltd. 150,000 1.2 1,316,109 (2) 0 0
Heracles Fund 100,000 * 100,000 (2) 0 0
Themis Partners L.P. 100,000 * 100,000 (2) 0 0
MichaelAngelo, L.P. 30,000 * 30,000 (2) 0 0
Raphael, L.P. 30,000 * 30,000 (2) 0 0
Angelo, Gordon & Co. L.P. 22,500 * 251,149 (2) 0 0
GAM Arbitrage Investments, Inc. 22,500 * 22,500 (2) 0 0
AG Super Fund, L.P. 15,000 * 15,000 (2) 0 0
AG Super Fund International
Partners, L.P. 15,000 * 15,000 (2) 0 0
AG Long Term Super Fund, L.P. 15,000 * 15,000 (2) 0 0
Bronnum, Dwight B. 1,500 * 1,500 0 0
Bury, Lance T. 5,000 * 5,000 0 0
Enigma Investments 3,451 * 3,451 0 0
Hale, Joseph H. 13,274 * 13,274 0 0
Hathorn, P. Bradford 5,000 * 5,000 0 0
Hopkins, Robert L. 1,500 * 1,500 0 0
Kendrick Family Partnership L.P. 32,987 * 32,987 0 0
Krusen, Charles 8,496 * 8,496 0 0
Peteler, David K. 2,000 * 2,000 0 0
Swartz Family Partnership, L.P. 32,987 * 32,987 0 0
Vector Securities International, Inc. 359,642 (3) 2.8 359,642 0 0
Promethean Investment Group, L.L.C. 150,000 (4) 1.2 150,000 0 0
</TABLE>
________________________
* Less than one percent
(1) Represents shares of Common Stock that may be acquired upon exercise of
warrants.
(2) Together these investors hold, in the aggregate, 112 shares of Series A
Preferred Stock and warrants to purchase 650,000 shares of Common Stock.
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." 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 and the number
of shares offered pursuant to the Prospectus in the table above have been
adjusted upward by approximately 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 as of November 4, 1998. The amounts listed above
include shares issuable upon conversion of Series A Preferred Stock and
exercise of the warrants, but do not include any shares issuable upon
exercise of the right to purchase additional shares. 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 may increase or decrease from the
amounts listed above. See "Risk Factors - Shares Eligible for Future Sale;
Dilution; Control" and "Description of Securities - Preferred Stock."
(3) Vector Securities International, Inc. acts as an advisor to the Company on
corporate partnering matters. See "Description of Securities --
Warrants."
36
<PAGE>
(4) Acquired upon transfer of warrants originally issued to holders of the
Series A Preferred Stock.
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 that 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. at June 30, 1998
and 1997, for each of the two years in the period ended June 30, 1998, and for
the period from inception (February 10, 1987) through June 30, 1998, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon, which contain
an explanatory paragraph describing conditions that raise substantial doubt
about the Company's ability to continue as a going concern as described in Note
1 to the Financial Statements appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
37
<PAGE>
[This page intentionally left blank]
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Auditors.................................................................. F-2
Balance Sheets -- As of September 30, 1998 (unaudited), June 30, 1998 and
June 30, 1997................................................................................. F-3
Statements of Operations -- For the three-month periods ended September 30, 1998 and
1997 (unaudited), the period from inception (February 10, 1987) through September 30,
1998 (unaudited), the years ended June 30, 1998 and 1997, and the period from inception
(February 10, 1987) through June 30, 1998..................................................... F-4
Statements of Stockholders' Equity -- For the period from
inception (February 10, 1987) through September 30, 1998 (unaudited as to the three-month
period ended September 30, 1998).............................................................. F-5
Statements of Cash Flows -- For the three-month periods ended September 30, 1998 and
1997 (unaudited), the period from inception (February 10, 1987) through September 30,
1998 (unaudited), the years ended June 30, 1998 and 1997, and the period from inception
(February 10, 1987) through June 30, 1998..................................................... F-10
Notes to Financial Statements................................................................... F-11
</TABLE>
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, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended June 30, 1998 and for the period from inception
(February 10, 1987) through June 30, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the two years in the period ended June
30, 1998 and for the period from inception (February 10, 1987) through June 30,
1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Cortex
Pharmaceuticals, Inc. will continue as a going concern. As discussed in Note 1,
the Company is in the development stage and realization of the Company's assets
is dependent upon future events, the outcome of which is indeterminable.
Additionally, successful completion of the Company's development program and its
transition, ultimately, to attaining profitable operations is dependent upon
obtaining additional financing adequate to support the Company's cost structure.
Accordingly, these conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
San Diego, California
July 17, 1998
F-2
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1998 June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,099,420 $ 2,124,008 $ 7,568,803
Other current assets 29,002 71,566 71,530
------------ ------------ ------------
Total current assets 1,128,422 2,195,574 7,640,333
Furniture, equipment and leasehold improvements, net 605,392 655,419 669,844
Other 23,853 23,853 23,130
------------ ------------ ------------
$ 1,757,667 $ 2,874,846 $ 8,333,307
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 465,942 $ 408,047 $ 501,603
Accrued dividends 26,775 26,775 74,250
Accrued wages, salaries and related expenses 60,853 62,475 58,683
Current obligations under capital lease -- -- 1,499
------------ ------------ ------------
Total current liabilities 553,570 497,297 636,035
Note payable to Alkermes, Inc. 961,159 948,253 1,092,265
Redeemable preferred stock:
Series A convertible preferred stock, $0.001
par value; $10,000 per share liquidation
preference; shares authorized: 400; shares
issued and outstanding: 250 (September 30,
1998 and June 30, 1998) and 400 (June 30, 1997) 2,460,450 2,460,450 3,936,720
Stockholders' equity:
9% cumulative convertible preferred stock, $0.001
par value; $1.00 per share liquidation preference;
shares authorized: 1,250,000; shares issued and
outstanding: 35,000 (September 30, 1998 and
June 30, 1998) and 110,000 (June 30, 1997) 35,000 35,000 110,000
Series B convertible preferred stock, $0.001 par
value; $0.6667 per share liquidation preference;
shares authorized: 3,200,000; shares issued and
outstanding: 150,000 86,810 86,810 86,810
Common stock, $0.001 par value; shares authorized:
20,000,000; shares issued and outstanding: 10,237,126
(September 30, 1998 and June 30, 1998) and
9,394,249 (June 30, 1997) 10,237 10,237 9,394
Additional paid-in capital 36,276,202 36,276,202 34,643,526
Deficit accumulated during the development stage (38,625,761) (37,439,403) (32,181,443)
------------ ------------ ------------
Total stockholders' equity (2,217,512) (1,031,154) 2,668,287
------------ ------------ ------------
$ 1,757,667 $ 2,874,846 $ 8,333,307
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
inception inception
(Unaudited) (February 10, (February 10,
Three months ended 1987) through 1987) through
September 30, September 30, Years ended through June 30, June 30,
------------------------- ----------------------------
1998 1997 1998 1998 1997 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Research and license revenue $ -- $ -- $ 3,730,000 $ 130,000 $ -- $ 3,730,000
Grant revenue -- -- 94,717 -- -- 94,717
----------- ----------- ------------ ----------- ----------- ------------
Total revenues -- -- 3,824,717 130,000 -- 3,824,717
----------- ----------- ------------ ----------- ----------- ------------
Operating expenses:
Research and development 839,281 947,737 27,192,143 4,007,466 3,376,284 26,352,862
General and administrative 354,693 439,258 13,698,941 1,584,369 1,709,320 13,344,248
Settlement with Alkermes, Inc. -- -- 1,227,977 -- -- 1,227,977
----------- ----------- ------------ ----------- ----------- ------------
Total operating expenses 1,193,974 1,386,995 42,119,061 5,591,835 5,085,604 40,925,087
----------- ----------- ------------ ----------- ----------- ------------
Loss from operations (1,193,974) (1,386,995) (38,294,344) (5,461,835) (5,085,604) (37,100,370)
Interest income, net 7,616 79,590 1,700,422 203,875 155,624 1,692,806
----------- ----------- ------------ ----------- ----------- ------------
Net loss before preferred
stock accretion
and dividends $(1,186,358) $(1,307,405) $(36,593,922) $(5,257,960) $(4,929,980) $(35,407,564)
----------- ----------- ------------ ----------- ----------- ------------
Preferred stock accretion
and dividends:
Accretion of and
dividends on 9%
Cumulative
Convertible Preferred Stock -- -- 607,924 3,150 9,900 607,924
Imputed dividends for
Series D Convertible
Preferred Stock -- -- 879,672 -- 879,672 879,672
Imputed dividends for
Series A Convertible
Preferred Stock -- -- 1,012,493 -- 1,012,493 1,012,493
----------- ----------- ------------ ----------- ----------- ------------
Net loss applicable to common stock $(1,186,358) $(1,307,405) $(39,094,011) $(5,261,110) $(6,832,045) $(37,907,653)
=========== =========== ============ =========== =========== ============
Weighted average common shares
outstanding 10,237,126 9,397,510 9,575,663 8,252,047
=========== =========== =========== ===========
Net loss per share $ (0.12) $ (0.14) $ (0.55) $ (0.83)
=========== =========== =========== ===========
</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 Additional
preferred preferred preferred preferred Common paid-in
stock stock stock stock stock capital
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 5,680
Sale of 500,000 shares of common stock,
$2.50 per share, net of expenses -- -- -- -- 500 1,076,089
Issuance of 11,000 shares of common stock
for services, $2.50 per share -- -- -- -- 11 27,489
9% preferred stock accretion -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ------------ ----------- --------- ------------
BALANCE, JUNE 30, 1988 -- -- -- -- 1,931 1,109,258
Conversion of subordinated convertible note
and interest payable into 83,868 shares of
common stock, $2.50 per share -- -- -- -- 84 209,586
Issuance of 500 shares of common stock for
services, $2.50 per share -- -- -- -- 1 1,249
Conversion of 5,000 shares of 9% preferred
stock into 3,333 shares of common stock -- -- -- -- 3 22,903
9% preferred stock dividends -- -- -- -- -- (55,125)
9% preferred stock accretion -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ------------ ----------- --------- ------------
BALANCE, JUNE 30, 1989 -- -- -- -- 2,019 1,287,871
Initial public offering of 660,000 shares of
common stock, $10.00 per share,
net of expenses -- -- -- -- 660 5,244,230
Redemption of 70,000 shares of common
stock, $0.005 per share -- -- -- -- (70) (280)
9% preferred stock dividends -- -- -- -- -- (110,250)
9% preferred stock accretion -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ------------ ----------- --------- ------------
BALANCE, JUNE 30, 1990 -- -- -- -- 2,609 6,421,571
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 -- -- -- -- 24 170,039
Issuance of compensatory stock options -- -- -- -- -- 330,084
Amortization of deferred compensation -- -- -- -- -- --
9% preferred stock dividends -- -- -- -- -- (85,653)
9% preferred stock accretion -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ------------ ----------- --------- ------------
BALANCE, JUNE 30, 1991 $ -- $ 1,841,108 $ -- $ -- $ 2,633 $ 6,836,041
----------- ----------- ------------ ----------- --------- ------------
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Deferred Government development
compensation securities stage Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 10, 1987
(date of inception) $ -- $ -- $ -- $ --
Sale of 1,420,000 shares of common stock,
$0.005 per share -- -- -- 7,100
Sale of 500,000 shares of common stock,
$2.50 per share, net of expenses -- -- -- 1,076,589
Issuance of 11,000 shares of common stock
for services, $2.50 per share -- -- -- 27,500
9% preferred stock accretion -- -- (2,560) (2,560)
Net loss -- -- (400,193) (400,193)
----------- ----------- ------------ -----------
BALANCE, JUNE 30, 1988 -- -- (402,753) 708,436
Conversion of subordinated convertible note
and interest payable into 83,868 shares of
common stock, $2.50 per share -- -- -- 209,670
Issuance of 500 shares of common stock for
services, $2.50 per share -- -- -- 1,250
Conversion of 5,000 shares of 9% preferred
stock into 3,333 shares of common stock -- -- -- 22,906
9% preferred stock dividends -- -- -- (55,125)
9% preferred stock accretion -- -- (32,733) (32,733)
Net loss -- -- (1,222,517) (1,222,517)
----------- ----------- ------------ -----------
BALANCE, JUNE 30, 1989 -- -- (1,658,003) (368,113)
Initial public offering of 660,000 shares of
common stock, $10.00 per share,
net of expenses -- -- -- 5,244,890
Redemption of 70,000 shares of common
stock, $0.005 per share -- -- -- (350)
9% preferred stock dividends -- -- -- (110,250)
9% preferred stock accretion -- -- (33,064) (33,064)
Net loss -- -- (2,187,870) (2,187,870)
----------- ----------- ------------ -----------
BALANCE, JUNE 30, 1990 -- -- (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 -- -- -- 170,063
Issuance of compensatory stock options (291,938) -- -- 38,146
Amortization of deferred compensation 90,016 -- -- 90,016
9% preferred stock dividends -- -- -- (85,653)
9% preferred stock accretion -- -- (32,075) (32,075)
Net loss -- -- (2,593,968) (2,593,968)
----------- ----------- ------------ -----------
BALANCE, JUNE 30, 1991 $(201,922) $ -- $ (6,504,980) $ 1,972,880
----------- ----------- ------------ -----------
</TABLE>
Continued...
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible
preferred preferred preferred preferred Common
stock stock stock stock stock
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 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............
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 Additional
preferred preferred preferred preferred Common paid-in
stock stock stock stock stock capital
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 $ -- $ 332,774 $ -- $ -- $ 3,210 $10,720,659
Sale of 2,750,000 shares
of common stock, $5.00 per
share, net of expenses -- -- -- -- 2,750 12,359,611
Sale of 103,577 shares of common
stock, $6.40 per share, net of
expenses -- -- -- -- 104 510,707
Conversion of 15,625 shares of
9% preferred stock into 2,083
shares of common stock -- -- -- -- 2 20,545
Conversion of 50,000 shares of Series
B preferred stock into 4,906 shares
of common stock -- (28,937) -- -- 5 28,932
Issuance of compensatory stock options -- -- -- -- -- 100,625
Amortization of deferred compensation -- -- -- -- -- --
Issuance of 3,401 shares of common
stock upon exercise of stock
options -- -- -- -- 3 6,461
9% preferred stock dividends -- -- -- -- -- (39,038)
Unrealized loss on available for
sale U.S. Government securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ----------- ------------ ----------- -------- -----------
BALANCE, JUNE 30, 1994 -- 303,837 -- -- 6,074 23,708,502
Reclassification of
unredeemed 9% preferred stock 370,000 -- -- -- -- --
Issuance of warrants to purchase
265,000 shares of common stock -- -- -- -- -- 232,746
Adjustment of accrued dividends for
redemption of 9% preferred stock -- -- -- -- -- 25,819
Issuance of 11,272 shares of common stock
upon exercise of stock options -- -- -- -- 11 24,023
Amortization of deferred compensation -- -- -- -- -- --
9% preferred stock dividends -- -- -- -- -- (33,300)
Decrease in unrealized loss on available
for sale U.S. Government securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ----------- ------------ ----------- -------- -----------
BALANCE, JUNE 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $ 6,085 $23,957,790
---------- ----------- ------------ ----------- -------- -----------
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Deferred Government development
compensation securities stage Total
-------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 $(259,651) $ -- $ (9,660,528) $ 1,136,464
Sale of 2,750,000 shares
of common stock, $5.00 per share,
net of expenses -- -- -- 12,362,361
Sale of 103,577 shares of common
stock, $6.40 per share, net
of expenses -- -- -- 510,811
Conversion of 15,625 shares of 9%
preferred stock into 2,083 shares
of common stock -- -- -- 20,547
Conversion of 50,000 shares of Series B
preferred stock into 4,906 shares of
common stock -- -- -- --
Issuance of compensatory stock options -- -- -- 100,625
Amortization of deferred compensation 58,200 -- -- 58,200
Issuance of 3,401 shares of common
stock upon exercise of stock options -- -- -- 6,464
9% preferred stock dividends -- -- -- (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 (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
Adjustment of accrued dividends for
redemption of 9% preferred stock -- -- -- 25,819
Issuance of 11,272 shares of common stock
upon exercise of stock options -- -- -- 24,034
Amortization of deferred compensation 56,092 -- -- 56,092
9% preferred stock dividends -- -- -- (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 $(145,359) $ (18,606) $(21,201,051) $ 3,272,696
----------- ----------- ------------ -----------
</TABLE>
Continued............
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible
preferred preferred preferred preferred Common
stock stock stock stock stock
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $ 6,085
Sale of 160 shares of Series C convertible
preferred stock, $25,000 per share,
net of expenses -- -- 3,576,544 -- --
Issuance of warrants to purchase 106,195 shares
of common stock -- -- (136,654) -- --
Conversion of 260,000 shares of 9% preferred
stock into 34,667 shares of common stock (260,000) -- -- -- 35
Conversion of 375,000 shares of Series B
preferred stock into 36,793 shares of common
stock -- (217,027) -- -- 37
Conversion of 125 shares of Series C preferred
stock into 1,133,037 shares of common stock -- -- (2,687,414) -- 1,133
Adjustment of accrued dividends for conversion of
9% preferred stock -- -- -- -- --
Issuance of 205,878 shares of common stock
upon exercise of stock options -- -- -- -- 206
Amortization of deferred compensation -- -- -- -- --
Reversal of unamortized deferred compensation
upon resignation of Chief Executive Officer -- -- -- -- --
9% preferred stock dividends -- -- -- -- --
Decrease in unrealized loss on available for
sale U.S. Government securities -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ------------ ----------- -----------
BALANCE, JUNE 30, 1996 110,000 86,810 752,476 -- 7,496
Series A preferred stock imputed dividends -- -- -- -- --
Sale of 400 shares of Series D convertible
preferred stock, $10,000 per share, net of
expenses -- -- -- 3,719,636 --
Series D preferred stock imputed dividends -- -- -- -- --
Conversion of 35 shares of Series C convertible
preferred stock into 384,574 shares of common
stock -- -- (752,476) -- 384
Conversion of 400 shares of Series D convertible
preferred stock into 1,433,437 shares of
common stock -- -- -- (3,719,636) 1,433
Issuance of 50,000 shares of common stock upon
exercise of warrant -- -- -- -- 50
Issuance of 30,662 shares of common stock
upon exercise of stock options -- -- -- -- 31
9% preferred stock dividends -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ------------ ----------- -----------
BALANCE, JUNE 30, 1997 $ 110,000 $ 86,810 $ -- $ -- $ 9,394
=========== =========== ============ =========== ===========
<CAPTION>
Unrealized loss Deficit
on available accumulated
Additional for sale U.S. during the
paid-in Deferred Government development
capital compensation securities stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 $ 23,957,790 $ (145,359) $ (18,606) $ (21,201,051) $ 3,272,696
Sale of 160 shares of Series C convertible
preferred stock, $25,000 per share, net of
expenses -- -- -- -- 3,576,544
Issuance of warrants to purchase 106,195 shares
of common stock 136,654 -- -- -- --
Conversion of 260,000 shares of 9% preferred
stock into 34,667 shares of common stock 259,965 -- -- -- --
Conversion of 375,000 shares of Series B
preferred stock into 36,793 shares of common
stock 216,990 -- -- -- --
Conversion of 125 shares of Series C preferred
stock into 1,133,037 shares of common stock 2,686,281 -- -- -- --
Adjustment of accrued dividends for conversion of
9% preferred stock 128,700 -- -- -- 128,700
Issuance of 205,878 shares of common stock upon
exercise of stock options 774,049 -- -- -- 774,255
Amortization of deferred compensation -- 42,109 -- -- 42,109
Reversal of unamortized deferred compensation
upon resignation of Chief Executive Officer (103,250) 103,250 -- -- --
9% preferred stock dividends (9,900) -- -- -- (9,900)
Decrease in unrealized loss on available for
sale U.S. Government securities -- -- 18,606 -- 18,606
Net loss -- -- -- (4,158,247) (4,158,247)
----------- ----------- ------------ ------------ -------------
BALANCE, JUNE 30, 1996 28,047,279 -- -- (25,359,298) 3,644,763
Series A preferred stock imputed dividends 1,012,493 -- -- (1,012,493) --
Sale of 400 shares of Series D convertible
preferred stock, $10,000 per share,
net of expenses -- -- -- -- 3,719,636
Series D preferred stock imputed dividends 879,672 -- -- (879,672) --
Conversion of 35 shares of Series C convertible
preferred stock into 384,574 shares of
common stock 752,092 -- -- -- --
Conversion of 400 shares of Series D convertible
preferred stock into 1,433,437 shares of
common stock 3,718,203 -- -- -- --
Issuance of 50,000 shares of common stock
upon exercise of warrant 149,950 -- -- -- 150,000
Issuance of 30,662 shares of common stock
upon exercise of stock options 93,737 -- -- -- 93,768
9% preferred stock dividends (9,900) -- -- -- (9,900)
Net loss -- -- -- (4,929,980) (4,929,980)
------------ ----------- ------------ ------------ -----------
BALANCE, JUNE 30, 1997 $ 34,643,526 $ -- $ -- $(32,181,443) $ 2,668,287
============ =========== ============ ============ ===========
</TABLE>
Continued...
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in
stock stock stock stock stock capital
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 $ 110,000 $ 86,810 $ -- $ -- $ 9,394 $ 34,643,526
Issuance of warrants to
purchase 75,000 shares
of common stock -- -- -- -- -- 34,774
Conversion of 75,000
shares of 9% preferred
stock into 9,999
shares of common
stock (75,000) -- -- -- 10 74,990
Conversion of 150 shares
of Series A preferred
stock into 832,878 shares
of common stock -- -- -- -- 833 1,475,437
Adjustment of accrued dividends
for conversion of 9% preferred stock -- -- -- -- -- 50,625
9% preferred stock dividends -- -- -- -- -- (3,150)
Net loss -- -- -- -- -- --
----------- ----------- ------------ ----------- ----------- ------------
BALANCE, JUNE 30, 1998 35,000 86,810 -- -- 10,237 36,276,202
Net loss -- -- -- -- -- --
----------- ----------- ------------ ----------- ----------- ------------
BALANCE, SEPTEMBER 30, 1998 $ 35,000 $ 86,810 $ -- $ -- $ 10,237 $ 36,276,202
=========== =========== ============ =========== =========== ============
<CAPTION>
unrealized gain Deficit
on available accumulated
for sale U.S. during the
Deferred Government development
compensation securities stage Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 $ -- $ -- $(32,181,443) $ 2,668,287
Issuance of warrants to
purchase 75,000 shares
of common stock -- -- -- 34,774
Conversion of 75,000
shares of 9% preferred
stock into 9,999
shares of common
stock -- -- -- --
Conversion of 150 shares
of Series A preferred
stock into 832,878 shares
of common stock -- -- -- 1,476,270
Adjustment of accrued dividends
for conversion of 9% preferred stock -- -- -- 50,625
9% preferred stock dividends -- -- -- (3,150)
Net loss -- -- (5,257,960) (5,257,960)
----------- ----------- ------------ -----------
BALANCE, JUNE 30, 1998 -- -- (37,439,403) (1,031,154)
Net loss -- -- (1,186,358) (1,186,358)
----------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1998 $ -- $ -- $(38,625,761) $(2,217,512)
=========== =========== ============ ===========
</TABLE>
See accompanying notes.
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
(Unaudited) inception inception
Three months ended (February 10, (February 10,
September 30, 1987) through Years ended June 30, 1987) through
------------------------ ------------------------
September 30, June 30,
1998 1997 1998 1998 1997 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
NET LOSS $(1,186,358) $(1,307,405) $(36,593,922) $(5,257,960) $(4,929,980) $(35,407,564)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 52,607 48,103 1,561,348 201,660 198,059 1,508,741
Settlement with Alkermes, Inc. -- -- 1,227,977 -- -- 1,227,977
Changes in operating
assets/liabilities:
Accounts payable and accrued
expenses 56,273 (259,052) 526,795 (89,764) 302,809 470,522
Accrued interest on U.S. Govt.
securities -- (1,499) (171,238) (8,709) (12,673) (171,238)
Other current assets 42,564 (8,758) (29,002) (36) 16,897 (71,566)
Interest receivable from former
officer -- -- (19,274) -- -- (19,274)
Realized loss on sale of U.S. Govt.
securities -- -- 54,317 -- -- 54,317
Stock option compensation expense -- -- 555,809 -- -- 555,809
Stock issued for services -- -- 28,750 -- -- 28,750
Reduction in note
receivable from
former
officer - compensation expense -- -- 22,600 -- -- 22,600
Other 12,906 14,443 201,903 88,743 54,935 188,997
------------ ----------- ----------- ----------- ----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (1,022,008) (1,514,168) (32,633,937) (5,066,066) (4,369,953) (31,611,929)
----------- ----------- ------------ ----------- ----------- ------------
Cash flows from investing activities:
U.S. Government
securities - available for sale
Purchases -- (1,000,056) (38,823,738) (1,739,995) (937,327) (38,823,738)
Sales -- -- 38,940,820 1,750,000 950,000 38,940,820
Purchase of fixed assets (2,580) (18,525) (2,138,216) (187,235) (61,054) (2,135,636)
Sale of fixed assets -- -- 10,988 -- 752 10,988
Decrease (increase) in -
Other assets -- -- (39,870) -- 3,212 (39,870)
Note receivable from former officer -- -- (100,000) -- -- (100,000)
----------- ----------- ------------ ----------- ----------- ------------
NET CASH PROVIDED BY
(USED IN)
INVESTING ACTIVITIES (2,580) (1,018,581) (2,150,016) (177,230) (44,417) (2,147,436)
----------- ----------- ------------ ----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from issuance of 9% preferred
stock -- -- 1,076,588 -- -- 1,076,588
Redemption of 9% preferred stock -- -- (63,750) -- -- (63,750)
Payment of 9% preferred stock dividends -- -- (110,250) -- -- (110,250)
Proceeds from issuance of
Series B
convertible preferred stock -- -- 1,841,108 -- -- 1,841,108
Proceeds from issuance of
Series C
convertible preferred stock -- -- 3,576,543 -- -- 3,576,543
Proceeds from issuance of
Series D
convertible preferred stock -- -- 3,719,636 -- 3,719,636 3,719,636
Proceeds from issuance of
Series A
convertible preferred stock -- -- 3,936,720 -- 3,936,720 3,936,720
Proceeds from issuance of common stock -- 21,922,418 -- 243,768 21,922,418
Proceeds from subordinated convertible
note -- -- 208,333 -- -- 208,333
Principal payments on note payable to
Alkermes, Inc. -- -- (200,000) (200,000) -- (200,000)
Principal payments on capitalized leases -- (1,499) (23,973) (1,499) (8,501) (23,973)
----------- ----------- ------------ ----------- ----------- ------------
NET CASH PROVIDED BY
(USED IN)
FINANCING ACTIVITIES -- (1,499) 35,883,373 (201,499) 7,891,623 35,883,373
----------- ----------- ------------ ----------- ----------- ------------
Increase (decrease) in cash and cash
equivalents (1,024,588) (2,534,248) 1,099,420 (5,444,795) 3,477,253 2,124,008
Cash and cash equivalents, beginning of
period 2,124,008 7,568,803 -- 7,568,803 4,091,550 --
----------- ----------- ------------ ----------- ----------- ------------
Cash and cash equivalents, end of period $ 1,099,420 $ 5,034,555 $ 1,099,420 $ 2,124,008 $ 7,568,803 $ 2,124,008
=========== =========== ============ =========== =========== ============
</TABLE>
See accompanying notes.
F-10
<PAGE>
CORTEX PHARMACEUTICALS, INC.
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Period from inception (February 10, 1987) through September 30, 1998
All information as of September 30, 1998, for the three-month periods ended
September 30, 1998 and 1997, and for the period from inception (February 10,
1987) through September 30, 1998 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 three-
month period ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 1999.
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
September 30, 1998, the Company has generated only modest operating revenues and
has incurred losses aggregating $36,593,922. 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 is 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 is no assurance that such funds will be available on
favorable terms, or at all and if additional funds are raised by issuing equity
securities, dilution to existing stockholders is likely to result.
The Company is seeking collaborative or other arrangements with larger
pharmaceutical companies, under which such companies would provide additional
capital to the Company in exchange for exclusive or non-exclusive license or
other rights to certain of the technologies and products the Company is
developing. Competition for corporate partnering arrangements with major
pharmaceutical companies is intense, with a large number of biopharmaceutical
companies attempting to arrive at such arrangements. Accordingly, although the
Company is presently engaged in discussions with a number of candidate
companies, there is no assurance that an agreement will arise from these
discussions in a timely manner, or at all, or that any agreement that may arise
from these discussions will successfully reduce the Company's short-term or
long-term funding requirements.
Cash Equivalents -- The Company considers all highly liquid short-term
investments with maturities of less than three months when acquired to be cash
equivalents.
Furniture, Equipment and Leasehold Improvements -- Furniture, equipment and
leasehold improvements are recorded at cost and are being depreciated on a
straight-line basis over the lesser of their estimated useful lives, ranging
from five to ten years, or the life of the lease, as appropriate.
Reverse Stock Split; Authorized Shares -- On January 11, 1995, the Company
effected a one-for-five reverse stock split of its common stock and revised the
authorized number of shares of common stock from 50,000,000 to 20,000,000, with
no change in the par value of $0.001 per share. The accompanying financial
statements and all references to the number of shares and per share amounts have
been adjusted to reflect the reverse split.
Net Loss per Share -- Net loss per share is computed based on the weighted
average number of common shares outstanding and includes preferred stock
dividends. Shares issuable upon conversion of preferred stock and upon exercise
of outstanding stock options and warrants are not included since the effects
would be anti-dilutive. For purposes of computing net loss per share, preferred
stock dividends include dividends that actually accrued and
F-11
<PAGE>
`imputed dividends' for preferred stock issued with a nondetachable beneficial
conversion feature near the date of issuance. Imputed dividend represents the
aggregate difference between the conversion price and the fair market value of
the common stock as of the date of issuance of the preferred stock, without
regard to the actual date upon which the preferred stock may be converted.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128, "Earnings per Share." Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All net loss per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
Stock-Based Compensation -- The Company has elected to follow Accounting
Principles Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25),
in accounting for its employee stock options because the alternative fair value
accounting provided under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. According to APB 25, no compensation expense is recognized since the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant.
Research and Development Costs -- All costs related to research and development
activities are treated as expenses in the period incurred.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications -- Certain previously reported amounts have been reclassified
to conform with the June 30, 1998 presentation.
NOTE 2 -- FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1998 June 30, 1998 June 30, 1997
------------------------------------------------
<S> <C> <C> <C>
Laboratory equipment $ 1,168,958 $ 1,168,958 $ 1,017,461
Leasehold improvements 622,036 622,036 620,716
Furniture and equipment 112,129 112,129 90,689
Computers and software 238,588 236,008 223,030
----------- ----------- -----------
2,141,711 2,139,131 1,951,896
Accumulated depreciation (1,536,319) (1,483,712) (1,282,052)
----------- ----------- -----------
$ 605,392 $ 655,419 $ 669,844
=========== =========== ===========
</TABLE>
NOTE 3 -- REDEEMABLE PREFERRED STOCK
In May 1997, the Board of Directors designated 400 shares of a newly created
series of preferred stock, the Series A Convertible Preferred Stock ("Series A
Preferred"). Series A Preferred at September 30, 1998 and June 30, 1998
consisted of 250 shares of 400 shares issued in a two-tranche private placement
during June 1997. The Series A Preferred is convertible at an effective
conversion price derived from the lowest of the dollar volume weighted average
trading prices of the Company's common stock for each of the five trading days
immediately preceding the conversion date ("Average Stock Price"). The effective
conversion price will be equal to 80% of the Average
F-12
<PAGE>
Stock Price if the Average Stock Price is greater than $2.50 per share; $2.00
per share if the Average Stock Price is less than $2.50 but greater than $2.10
per share; or 95% of the Average Stock Price if the Average Stock Price is less
than or equal to $2.10 per share. The conversion rate is subject to adjustment
at the rate of six percent per annum based on the length of the period from
issuance of the Series A Preferred until its conversion. Provided the effective
conversion price for a given conversion is equal to or greater than $2.75 per
share, the holder of the Series A Preferred may purchase up to the same number
of common shares as the holder is acquiring upon such conversion at the
effective conversion price. Any election to exercise this right to purchase
additional shares must be made at the time of conversion of the related Series A
Preferred, and the right is forfeited to the extent that it is not fully
exercised at such time. Holders of the Series A Preferred are entitled to a
liquidation preference, after payment of full liquidation preference to holders
of the 9% Preferred and Series B Preferred, of an amount equal to $10,000 per
share, plus $600 per share for each year that such share is outstanding. The
Series A Preferred holders may elect to redeem their shares under certain
circumstances, such as the delisting of the Company's common stock from Nasdaq,
at prices up to 125% of the liquidation preference. The Series A Preferred
automatically converts into common stock on the third anniversary from the date
of issuance of such shares. Imputed dividends of $1,012,493 related to the
private placement have been recorded and included in the computation of net loss
per share (Note 1).
NOTE 4 -- STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized a total of 5,000,000 shares of preferred stock, par
value $0.001 per share, of which 1,250,000 shares have been designated as 9%
Cumulative Convertible Preferred Stock (non-voting, "9% Preferred"); 3,200,000
shares have been designated as Series B Convertible Preferred Stock (non-voting,
"Series B Preferred"); 500 shares have been designated as Series D Convertible
Preferred Stock (non-voting, "Series D Preferred"); 400 shares have been
designated as Series A Convertible Preferred Stock (non-voting, "Series A
Preferred"); and 549,100 shares are presently undesignated and may be issued
with such rights and powers as the Board of Directors may designate.
The 9% Cumulative Convertible Preferred Stock as of September 30, 1998, June 30,
1998 and June 30, 1997 consisted of 35,000, 35,000 and 110,000 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 September 30,
1998, June 30, 1998 and June 30, 1997 were $26,775, $24,775, and $74,250,
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 September 30, 1998, June 30, 1998 and
June 30, 1997 consisted of 150,000 shares of Series B Preferred issued in a May
1991 private placement. Each share of Series B Preferred is convertible into
approximately 0.09812 shares of common stock at an effective conversion price of
$6.795 per share of common stock, subject to adjustment under certain
circumstances such as stock splits or stock dividends. The Series B Preferred
may be redeemed by the Company at a price of $0.6667 per share, an amount equal
to its liquidation preference, at any time upon 30 days' notice. The liquidation
preference of the Series B Preferred is subordinate to that of the 9%
Preferred.
Series C Convertible Preferred Stock originally consisted of 160 shares issued
in a private placement in December 1995. As of June 30, 1997, all outstanding
shares of Series C Preferred had been converted into 1,517,611 shares of common
stock. The relative effective conversion prices ranged from $2.33 to $2.83, as
computed in accordance with a formula that was indexed to the average bid price
of the Company's common shares.
F-13
<PAGE>
In October 1996, the Board of Directors designated 500 shares of a new series of
preferred stock, the Series D Convertible Preferred Stock ("Series D
Preferred"). An aggregate of 400 shares of Series D Preferred were issued in a
three-tranche private placement initiated in October 1996 and completed in
February 1997. Each share of Series D Preferred was convertible into common
stock at an effective per share conversion price that was the lower of (i) 110%
of the average closing bid price for the five trading days immediately preceding
the closing date ($2.9425, $4.52375 and $4.63375 for the first, second and third
tranches, respectively) or (ii) that price that was 18% below the average
closing bid price for the five trading days immediately preceding the conversion
date, in each case subject to adjustment at the rate of six percent per annum
based on the length of the period from issuance of the Series D Preferred until
its conversion. As of June 30, 1997, the Series D Preferred had all been
converted into an aggregate of 1,433,437 shares of the Company's common stock at
effective conversion prices ranging from $2.06 to $3.35 per share of common
stock. Imputed dividends aggregating $879,672 were recorded in connection with
the three tranches, and have been included in the computation of net loss per
share (Note 1).
COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS
In connection with the December 1995 private placement of 160 shares of Series C
Preferred Stock, the Company issued the placement agent for the transaction a
five-year non-redeemable warrant to purchase 106,195 shares of common stock at a
price of $2.825 per share, subject to adjustment under certain circumstances.
The warrants contain cashless exercise provisions and include piggyback
registration rights.
In connection with the June 1997 private placement of 400 shares of Series A
Preferred Stock, the Company issued to the eleven participating institutional
investors four-year non-redeemable warrants to purchase an aggregate of 800,000
shares of common stock at a price of $3.08 per share, subject to adjustment
under certain circumstances.
In connection with the restructuring of the note payable to Alkermes, Inc. (Note
5) in February 1998, the Company issued to Alkermes a five-year warrant to
purchase 75,000 share of common stock at an exercise price of $1.547 per share,
representing the average of the high and low sale prices of Cortex common stock
as of the date of the restructuring.
As of September 30, 1998, the Company had reserved an aggregate of 4,667 shares
of common stock for issuance upon conversion of the outstanding 9% Preferred
Stock; 14,717 shares for issuance upon conversion of the Series B Preferred
Stock; 2,225,297 shares for issuance upon conversion of the Series A Preferred
Stock; 1,273,799 shares for issuance upon exercise of warrants; and 1,078,126
shares for issuance upon exercise of outstanding stock options.
STOCK OPTION AND STOCK PURCHASE PLANS
Employee/Director Option Plan -- The Company's 1989 Incentive Stock Option,
Nonqualified Stock Option and Stock Purchase Plan provides for the granting by
the Company of options and rights to purchase up to an aggregate of 700,000
shares of the Company's authorized but unissued common stock (subject to
adjustment under certain circumstances, such as stock splits, recapitalizations
and reorganizations) to directors, officers and other employees of the Company.
The exercise price of nonqualified stock options and the purchase price of stock
offered under this plan, which terminates February 2, 1999, must be at least 85%
of the fair market value of the common stock on the date of grant. The exercise
price of incentive stock options must be at least equal to the fair market value
of the common stock on the date of grant. As of September 30, 1998 and June 30,
1998, options to purchase an aggregate of 477,279 shares of common stock were
outstanding under this plan.
Consultant Plan -- The Company's 1989 Special Nonqualified Stock Option and
Stock Purchase Plan provides for the granting by the Company of options and
rights to purchase up to an aggregate of 400,000 shares of the Company's
authorized but unissued common stock (subject to adjustment under certain
circumstances, such as stock splits, recapitalizations and reorganizations) to
consultants to the Company. The exercise price of nonqualified stock options and
the purchase price of stock offered under this plan, which terminates February
2, 1999, must be at least 50% of the fair market value of the common stock on
the date of grant. As of September 30,
F-14
<PAGE>
1998 and June 30, 1998, options to purchase an aggregate of 296,414 and 302,554
shares of common stock, respectively, were outstanding under this plan.
Executive Stock Plan -- In connection with his 1991 election as Chairman of the
Board, Harvey S. Sadow, Ph.D. was granted an option to purchase 10,000 shares of
common stock at an exercise price of $2.19 per share, representing 50% of the
fair market value of the common stock on the date of grant. As of September 30,
1998, this was the only option outstanding under the Executive Stock Plan.
1996 Stock Incentive Plan -- The Company's 1996 Stock Incentive Plan ("1996
Plan") provides for the granting of options and rights to purchase up to an
aggregate of 1,107,887 shares of the Company's authorized but unissued common
stock (subject to adjustment under certain circumstances, such as stock splits,
recapitalizations and reorganizations) to qualified employees, officers,
directors, consultants and other service providers. No further options will be
granted under the Company's earlier stock option and stock purchase plans. The
exercise price of nonqualified stock options and the purchase price of stock
offered under the 1996 Plan, which terminates October 25, 2006, must be at least
85% of the fair market value of the common stock of the date of grant. The
exercise price of incentive stock options 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 September 30, 1998 and June 30,
1998, options to purchase an aggregate of 293,933 and 221,813 shares of common
stock, respectively, were outstanding under the 1996 Plan, and an additional
1,173,781 and 1,071,686 shares of common stock, respectively, were reserved for
future option grants.
As of September 30, 1998 and June 30, 1998, options to purchase an aggregate of
709,046 and 685,549 shares of common stock, respectively, were exercisable under
the Company's stock option plans. During the years ended June 30, 1998 and 1997
and the period from inception (February 10, 1987) through June 30, 1998, options
to purchase 0, 0, and 261,289 shares of common stock, respectively, were issued
to certain directors and officers of the Company with exercise prices below the
fair market value of the common stock on the dates of grant. The aggregate
difference between the fair market value on the date of grant and the exercise
price of the options granted has been recorded as compensation expense over the
vesting period of the options. Stock option compensation expense related to
these transactions, aggregating $0, $0, $555,809, $0, $0 and $555,809 for the
three-month periods ended September 30, 1998 and 1997, and the period from
inception (February 10, 1987) through September 30, 1998, the years ended June
30, 1998 and 1997 and the period from inception (February 10, 1987) through June
30, 1998, respectively, has been recorded in the accompanying statements of
operations.
F-15
<PAGE>
Stock option transactions under the Company's stock option plans for each of the
two years in the period ended June 30, 1998 are summarized below:
<TABLE>
<CAPTION>
Weighted average
Number exercise price
of shares per share
-------------------------------
<S> <C> <C>
Outstanding as of June 30, 1996 895,931 $ 4.39
Granted 143,117 3.30
Exercised (30,662) 3.06
Forfeited (39,207) 4.85
--------- --------
Outstanding as of June 30, 1997 969,179 $ 4.25
Granted 142,029 2.42
Exercised 0 --
Forfeited (99,562) 5.38
--------- --------
Outstanding as of June 30, 1998 1,011,646 $ 3.88
========= ========
Available for future grant 1,071,686
=========
</TABLE>
Pro-Forma Information -- The Company has elected to continue accounting for its
employee stock options in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25,
because the exercise price of the Company's employee stock options is equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net loss and net loss per share is required by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and has been determined as if the Company had
accounted for its employee stock plans under the fair value method. The fair
value was estimated at the date of grant using the Black-Scholes option pricing
model and the following assumptions for the years ended June 30, 1998 and 1997,
respectively: risk-free interest rates of 5.3% to 5.5% and 5.7% to 6.1%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of 90% and 100%; and a weighted average life of 1.2 to
4.6 years and 0.5 to 4.2 years. The estimated weighted average fair value of
options granted during the years ended June 30, 1998 and 1997 was $1.48 and
$1.95, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized as expense over the vesting period of the options, resulting in the
following pro forma information for the years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
June 30,
1998 1997
--------------------------
<S> <C> <C>
Pro forma net loss before preferred
stock accretion and dividends $5,567,617 $5,436,435
Pro forma net loss applicable to
common stock 5,570,767 7,338,500
Pro forma net loss per share $ (0.58) $ (0.89)
</TABLE>
F-16
<PAGE>
The results above are not necessarily indicative of the effects of SFAS 123 on
reported net income or loss for future periods as these amounts reflect the
related expense for only two years of stock option vesting.
Information regarding stock options outstanding at June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Weighted
Number average Weighted Number Weighted
Range of outstanding remaining average exercisable average
exercise prices at June 30, 1998 contractual life exercise price at June 30, 1998 exercise price
- --------------- ---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.50 - 3.00 363,488 7.8 years $2.56 171,568 $2.53
3.13 - 3.75 338,332 6.6 years 3.29 287,961 3.30
4.13 - 9.38 309,826 7.1 years 6.08 226,020 6.34
--------- -------
1,011,646 685,549
========= =======
</TABLE>
NOTE 5 -- NOTE PAYABLE TO ALKERMES, INC.
In January 1992, the Company entered into an agreement with Alkermes, Inc.
("Alkermes") for the development, clinical testing and commercialization of the
Company's calpain inhibitor products, which was subsequently amended in October
1992 (the "Alkermes Agreement"). In connection with the Alkermes Agreement, the
Company granted Alkermes an exclusive worldwide license to commercialize calpain
inhibitor products for the prevention and treatment of acute and chronic
neurodegenerative diseases and disorders of the central and peripheral nervous
systems. The Company received an aggregate of $3,100,000 in research payments
under the Alkermes Agreement over the 18-month period ended June 30, 1993, and a
$500,000 payment in October 1992 in connection with a limited expansion of
Alkermes' commercial rights. In November 1993, Alkermes filed an action alleging
that the Company had breached the Alkermes Agreement by developing calpain
inhibitors for cerebral vasospasm. In October 1995, the Company and Alkermes
agreed to a settlement of the dispute. Alkermes agreed to dismiss its action
against the Company and to relinquish all rights previously granted them by the
Company, as well as rights to related technologies developed by Alkermes. In
connection with the settlement, the Company issued to Alkermes a $1,000,000
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.
In February 1998, the terms of the note were restructured. The new terms include
a principal payment of $200,000 upon signing of the restructuring agreement,
with the balance of the note and accrued interest due October 5, 1999 or upon
consummation of a corporate partnership between Cortex and a larger
pharmaceutical company, whichever is earlier. In connection with the
restructuring, the Company issued to Alkermes a five-year warrant to purchase
75,000 shares of common stock at an exercise price of $1.547 per share,
representing the average of the high and low sale prices of Cortex common stock
as of the date of the restructuring.
NOTE 6 -- COMMITMENTS
The Company leases its offices and research laboratories under an operating
lease that expires May 31, 1999, with an additional five-year option at 95% of
the then fair market rental rate. Rent expense under this lease for the three-
month periods ended September 30, 1998 and 1997, the period from inception
(February 10, 1987) through September 30, 1998, the years ended June 30, 1998
and 1997 and the period from inception (February 10, 1987) through June 30, 1998
was $55,000, $53,000, $1,928,000, $234,000, $215,000 and $1,873,000,
respectively. Commitments under the lease for the year ending June 30, 1999
total $222,000.
As of June 30, 1998, the Company was obligated to two executive officers under
employment agreements expiring through May 1999 that involve annual salary
payments aggregating $354,882 and that provide for bonuses under certain
circumstances. Additionally, in the event that the Company commercializes a
compound developed by or under the supervision of one of its senior scientific
employees, the Company will be obligated, under certain
F-17
<PAGE>
circumstances, to pay the employee a royalty based on net sales, as defined and
subject to adjustment, of products containing the compound. As of June 30, 1998,
the Company was committed under scientific consulting and external research
agreements to annual payments aggregating approximately $930,000.
The Company has entered agreements with two academic institutions that provide
the Company exclusive rights to certain of the technologies that it is
developing. Under the terms of the agreements, the Company is committed to
royalty payments, including minimum annual royalties of $105,000 for the year
ending June 30, 1999. Thereafter, minimum annual royalties are $145,000 for the
remaining life of the patents covering the subject technologies. The agreements
also commit the Company to pay up to an additional $912,500 upon achieving
certain clinical testing and regulatory approval milestones, as well as a
portion of certain remuneration received by the Company in connection with
sublicensing agreements that the Company may enter into.
NOTE 7 -- RELATED PARTY TRANSACTIONS
During the years ended June 30, 1998 and 1997, and the period from inception
(February 10, 1987) through June 30, 1998, the Company paid or accrued
scientific and other consulting fees to stockholders aggregating $88,000,
$88,000 and $1,106,557, respectively. Under certain circumstances, the Company
is obligated to make royalty payments to certain of its scientific consultants,
some of whom are stockholders, and to one employee, upon successful
commercialization of certain of its products by the Company or its
licensees.
In July 1993, the Company entered into an agreement with Vector Securities
International, Inc. ("Vector"), under which Vector agreed to serve as financial
advisor to the Company in connection with corporate finance transactions and
corporate partnering of certain of the Company's programs. In connection with
the agreement, the Company paid a $50,000 retainer and issued to Vector a five-
year non-redeemable warrant to acquire 12,895 shares of common stock at an
exercise price of $6.01 per share, as adjusted and subject to further adjustment
under certain circumstances. This warrant expired unexercised in July 1998.
In connection with its services as placement agent in the 1993 private placement
of 2,750,000 shares of common stock, Vector was paid a fee of $1,096,800 and was
issued a five-year non-redeemable warrant to purchase 274,200 shares of the
Company's common stock at $9.375 per share. In connection with Vector's
assistance in reaching the settlement with Alkermes (Note 5), this warrant was
canceled and reissued as a new warrant to purchase 310,345 shares of the
Company's common stock at $4.06 per share, as adjusted and subject to further
adjustment, at any time through January 15, 2000. The value of this new warrant
was computed utilizing the Black-Scholes option pricing model, and was recorded
with the expense of the settlement with Alkermes in the accompanying statement
of operations.
As consideration for its agreement to provide financial advisory services, as
amended and extended in November 1994, Vector was paid a retainer of $50,000 and
was issued a six-year non-redeemable warrant to purchase 49,297 shares of the
Company's common stock at $3.55 per share, subject to adjustment under certain
circumstances. Warrants to purchase 7,041 shares of the Company's common stock
vested immediately, and warrants to purchase 21,128 shares of the Company's
common stock vest upon the consummation of each strategic alliance when and as
secured by Vector. In January 1995, in connection with an expansion of its
financial advisory assistance to include additional programs, the Company paid a
$20,000 retainer and issued to Vector a five-year non-redeemable warrant to
acquire 50,000 shares of the Company's common stock at $3.00 per share. This
warrant was exercised in February 1997. The Company may be required to make
substantial additional payments for each strategic alliance secured by Vector.
If a sale of the Company as presented by Vector is consummated, Vector may be
entitled to receive a fee based on the aggregate consideration received by the
Company.
NOTE 8 -- INCOME TAXES
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Under the liability method, deferred taxes are determined based
on differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. As of June 30, 1998, the Company had
federal and California tax net operating loss carryforwards of approximately
$33,104,000 and $5,331,000, respectively. The difference between the federal
and
F-18
<PAGE>
California tax loss carryforwards is primarily attributable to the
capitalization of research and development expenses for California franchise tax
purposes and the fifty percent limitation on California loss carryforwards. The
California tax loss carryforwards began expiring in 1997, while the federal
carryforwards begin expiring in 2004. The Company also has federal and
California research and development tax credit carryforwards totaling $1,004,000
and $331,000, respectively, which begin expiring in 2004.
Utilization of the net operating loss and tax credit carryforwards from the tax
years ended on or before June 30, 1992 is subject to an annual limitation of
approximately $1,500,000, due to ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. If there should be
future changes of ownership, these annual limitations for utilization of net
operating loss and tax credit carryforwards may become more restrictive.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's net
operating loss carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within any three-year period since the last ownership
change.
Significant components of the Company's deferred tax assets as of June 30, 1998
and June 30, 1997 are shown below. The valuation allowance related to deferred
tax assets is $15,413,000 and $13,024,000 for the years ended June 30, 1998 and
1997, respectively. The increase in the valuation allowance for the year ended
June 30, 1998 of $2,389,000 is primarily due to additional reserves required for
new deferred tax assets.
Deferred tax assets:
<TABLE>
<CAPTION>
June 30,
1998 1997
---------------------------
<S> <C> <C>
Net operating loss carryforwards $ 11,727,000 $ 9,892,000
Capital loss carryforwards 23,000 23,000
Research and development credits 1,336,000 1,089,000
Capitalized research and development costs 1,801,000 1,467,000
Settlement with Alkermes, Inc. 406,000 468,000
Depreciation 83,000 41,000
Other-net 37,000 44,000
------------ ------------
Net deferred tax assets 15,413,000 13,024,000
------------ ------------
Valuation allowance for deferred tax assets (15,413,000) (13,024,000)
------------ ------------
Total deferred tax assets $ -- $ --
============ ============
</TABLE>
F-19
<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
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 9
Price Range of Common Stock............................................... 10
Dividend Policy........................................................... 11
Capitalization............................................................ 11
Selected Financial Data................................................... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................ 14
Business.................................................................. 18
Management................................................................ 26
Certain Transactions...................................................... 31
Principal Stockholders.................................................... 32
Description of Securities................................................. 33
Selling Stockholders...................................................... 36
Plan of Distribution...................................................... 37
Legal Matters............................................................. 37
Experts................................................................... 37
Index to Financial Statements............................................. F-1
Report of Independent Auditors............................................ F-2
Financial Statements...................................................... F-3
</TABLE>
.........................
3,826,704 SHARES
CORTEX PHARMACEUTICALS,
INC.
COMMON STOCK
....................
PROSPECTUS
....................
__, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law makes provision for the
indemnification of officers and directors in terms sufficiently broad as to
include indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Act"). The Restated Certificate of Incorporation of the Company
provides that the Company shall indemnify officers and directors to the fullest
extent permitted by statute.
In addition, as permitted by Section 102(b)(7) of the Delaware Corporation
Law, the Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be liable to the Company or its stockholders
for monetary damages for breach of the director's fiduciary duty of care.
However, as provided by Delaware law, such limitation of liability will not act
to limit liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for any acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) arising
under the provision of the Delaware General Corporation Law relating to unlawful
distributions, or (iv) for any transaction from which the director derived an
improper benefit.
The Company has entered into indemnification agreements with each of its
directors and its officer, which provide for the indemnification of directors
and the officer of the Company against any and all expenses, judgements, fines,
penalties and amounts paid in settlement, to the fullest extent permitted by
law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses of this offering
(excluding commissions), none of which expenses are being paid by the security
holders. All of the amounts shown are estimates except the Securities and
Exchange Commission registration fee.
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
SEC Registration Fee $ 4,095
Accounting Fees and Expenses 15,000
Legal Fees and Expenses 20,000
Miscellaneous 25,000
-------
$64,095
=======
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following consists of information relating to unregistered securities
sold by the Company during the past three years.
1. On December 8, 1995, the Company sold an aggregate of 160 shares of Series
C Preferred Stock to 12 overseas investors for gross proceeds of
$4,000,000.
2. On December 8, 1995, the Company issued a warrant to purchase 106,195
shares of Common Stock to Swartz Investments, Inc. in connection with their
assistance with the foregoing placement.
3. On October 15, 1996, the Company sold 100 shares of Series D Preferred
Stock to one accredited investor for gross proceeds of $1,000,000.
4. On January 9, 1997, the Company sold 150 shares of Series D Preferred Stock
to one accredited investor for gross proceeds of $1,500,000.
II-1
<PAGE>
5. On February 12, 1997, the Company sold 150 shares of Series D Preferred
Stock to one accredited investor for gross proceeds of $1,500,000.
6. On June 5, 1997, the Company sold 200 shares of Series A Preferred Stock
and issued warrants to purchase 400,000 shares of Common Stock to eleven
accredited investors for gross proceeds of $2,000,000.
7. On June 30, 1997, the Company sold 200 shares of Series A Preferred Stock
and issued warrants to purchase 400,000 shares of Common Stock to eleven
accredited investors for gross proceeds of $2,000,000.
8. In February 1998, the Company issued a warrant to purchase 75,000 shares of
Common Stock to Alkermes, Inc. in connection with the restructuring of a
promissory note.
The foregoing sales of securities described in paragraphs 2 through 8 above
were made in reliance upon the exemption from the registration provisions of the
Securities Act of 1933 set forth in Section 4(2) thereof as transactions by an
issuer not involving any public offering. The Company has reason to believe that
all of the foregoing purchasers were familiar with or had access to information
concerning the operations and financial condition of the Company, and each of
the purchasers acquiring securities in exchange for cash consideration
represented that it was acquiring the shares for investment and not with a view
to the distribution thereof. At the time of issuance, all of the foregoing
shares of Common Stock were deemed to be restricted securities for purposes of
the Securities Act of 1933 and the certificates representing such securities
bear legends to that effect. The foregoing sale of securities described in
paragraph 1 above was made pursuant to Regulation S under the Securities Act of
1933.
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation dated April 11, 1989, as amended
by Certificate of Amendment on June 27, 1989, by Certificate of
Designation filed April 29, 1991, by Certificate of Correction filed
May 1, 1991, by Certificate of Amendment of Certificate of Designation
filed June 13, 1991, by Certificate of Amendment of Certificate of
Incorporation filed November 12, 1992, by Certificate of Amendment of
Restated Certificate of Incorporation filed January 11, 1995, by
Certificate of Designation filed December 8, 1995, by Certificate of
Designation filed October 15, 1996, and by Certificate of Designation
filed June 4, 1997, incorporated by reference to the same numbered
Exhibit to the Company's Registration Statement on Form SB-2, No. 333-
29493, filed June 18, 1997.
3.2 By-Laws of the Company, as adopted March 4, 1987, and amended through
October 8, 1996, incorporated by reference to the Company's Annual
Report on Form 10-KSB filed October 15, 1996.
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation, Counsel to the Registrant, incorporated by reference to
the same numbered Exhibit to the Company's Registration Statement on
Form SB-2, No. 333-29493, filed June 18, 1997.
10.2 Consulting Agreement, dated October 30, 1987, between the Company and
Carl W. Cotman, Ph.D.*
10.3 Consulting Agreement, dated as October 30, 1987, between the Company
and Gary S. Lynch, Ph.D.*
10.8 1989 Incentive Stock Option, Nonqualified Stock Option and Stock
Purchase Plan.*
10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan.*
10.18 License Agreement, dated February 11, 1991 between the Company and
Georgia Tech Research Corporation, incorporated by reference to
Exhibit 10.18 of the Company's Amendment on Form 8 filed November 27,
1991 to the Company's Annual Report on Form 10-K filed September 30,
1991. (Portions of this Exhibit are omitted and were filed separately
with the Secretary of the Commission pursuant to the Company's
application requesting confidential treatment under Rule 24b-2 under
the Securities Exchange Act of 1934).
II-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.19 License Agreement dated March 27, 1991 between the Company and the
Regents of the University of California, incorporated by reference to
Exhibit 10.19 of the Company's Amendment on Form 8 filed November 27,
1991 to the Company's Annual Report on Form 10-K filed September 30,
1991. (Portions of this Exhibit are omitted and were filed separately
with the Secretary of the Commission pursuant to the Company's
application requesting confidential treatment under Rule 24b-2 under
the Securities Exchange Act of 1934).
10.28 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted October 22, 1992, incorporated by
reference to Exhibit 10.28 of the Company's Annual Report on Form 10-K
filed September 16, 1992.
10.31 License Agreement dated June 25, 1993 between the Company and the
Regents of the University of California, incorporated by reference to
the Company's Amendment of Annual Report on Form 10-KSB/A filed
November 26, 1993. (Portions of this Exhibit are omitted and were
filed separately with the Secretary of the Commission pursuant to the
Company's application requesting confidential treatment under Rule
24b-2 of the Securities Exchange Act of 1934).
10.41 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted December 13, 1993, incorporated by
reference to Exhibit 4.9 of the Company's Registration Statement on
Form S-8 filed January 28, 1994.
10.42 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 13, 1993, incorporated by reference to Exhibit
4.8 of the Company's Registration Statement on Form S-8 filed January
28, 1994.
10.43 Amendment to Executive Stock Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.7 of the Company's Registration
Statement on Form S-8 filed January 28, 1994.
10.44 Lease Agreement, dated January 31, 1994, for the Company's facilities
in Irvine, California, incorporated by reference to Exhibit 10.44 of
the Company's Quarterly Report on Form 10-QSB filed May 16, 1994.
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted December 15, 1994, incorporated by
reference to Exhibit 4.10 of the Company's Registration Statement on
Form S-8 filed February 8, 1995.
10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 15, 1994, incorporated by reference to Exhibit
4.9 of the Company's Registration Statement on Form S-8 filed February
8, 1995.
10.47 Amendment to Executive Stock Plan adopted September 9, 1994,
incorporated by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-KSB filed October 13, 1995.
10.48 Amendment to the Non-Employee Director Formula Grant Plan, adopted
December 15, 1994, incorporated by reference to the same numbered
Exhibit to the Company's Annual Report on Form 10-KSB filed October
13, 1995.*
10.49 Settlement Agreement between the Company and Alkermes, Inc., dated
October 5, 1995, incorporated by reference to the same numbered
Exhibit to the Company's Annual Report on Form 10-KSB filed October
13, 1995. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to the
Company's Application requesting confidential treatment under Rule 406
of the Securities Act of 1933).
10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued to
Swartz Investments, Inc., incorporated by reference to Exhibit 4.3 of
the Company's Current Report on Form 8-K filed December 22, 1995.
10.52 Registration Rights Agreement dated December 8, 1995, entered into
with purchasers of Series C Preferred Stock and Swartz Investments,
Inc., incorporated by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K filed December 22, 1995.
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued to
Vector Securities International, Inc., incorporated by reference to
the same numbered Exhibit to the Company's Pre- Effective Amendment
No. 1 to Post Effective Amendment No. 2 to Registration Statement on
Form SB-2, No. 33-71894, filed January 26, 1996.
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares issued to
Vector Securities International, Inc., incorporated by reference to
the same numbered Exhibit to the Company's Pre- Effective Amendment
No. 1 to Post Effective Amendment No. 2 to Registration Statement on
Form SB-2, No. 33-71894, filed January 26, 1996.
10.56 Employment Agreement dated May 15, 1996, between the Company and
Vincent F. Simmon, Ph.D., incorporated by reference to the same
numbered Exhibit to the Company's Current Report on Form 8-K filed
June 4, 1996.
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted December 12, 1995, incorporated by
reference to Exhibit 4.11 of the Company's Registration Statement on
Form S-8 filed September 13, 1996.
10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 12, 1995, incorporated by reference to Exhibit
4.10 of the Company's Registration Statement on Form S-8 filed
September 13, 1996 .
10.59 Securities Subscription Agreement for Series D Preferred Stock dated
October 15, 1996, between the Company and Ashline Ltd., incorporated
by reference to the same numbered Exhibit to the Company's Quarterly
Report on Form 10-QSB filed November 12, 1996.
10.60 1996 Stock Incentive Plan, incorporated by reference to the same
numbered Exhibit to the Company's Quarterly Report on Form 10-QSB
filed November 12, 1996.
10.61 Form of Subscription Agreement with each purchaser of Series A
Preferred Stock, incorporated by reference to the same numbered
Exhibit to the Company's Registration Statement on Form SB-2, No. 333-
29493, filed June 18, 1997.
10.62 Form of Warrant issued to each purchaser of Series A Preferred Stock,
incorporated by reference to the same numbered Exhibit to the
Company's Registration Statement on Form SB-2, No. 333-29493, filed
June 18, 1997.
10.63 Registration Rights Agreement with holders of Series A Preferred
Stock, incorporated by reference to the same numbered Exhibit to the
Company's Registration Statement on Form SB-2, No. 333-29493, filed
June 18, 1997.
21 Subsidiaries of the Registrant, incorporated by reference to the same
numbered Exhibit to the Company's Registration Statement on Form SB-2,
No. 333-29493, filed June 18, 1997.
23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation (included in the Opinion filed as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, independent auditors.
24 Power of Attorney (included on Signature page).
27 Financial Data Schedule.
- ---------------------
* Incorporated by reference to the same numbered exhibit of the
Company's Registration Statement on Form S-1, No. 33-28284, effective
on July 18, 1989.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act, the
Registrant will treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective; and will treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irvine, State of California, on the 6th day of
November, 1998.
CORTEX PHARMACEUTICALS, INC.
By: /s/ Vincent F. Simmon, Ph.D.
----------------------------
Vincent F. Simmon, Ph.D.
President and Chief Executive Officer
We, the undersigned directors of Cortex Pharmaceuticals, Inc., do hereby
constitute and appoint Vincent F. Simmon, Ph.D. as our true and lawful attorney
and agent, to do any and all acts and things in our name and behalf in our
capacities as directors and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorney and agent may deem
necessary or advisable to enable said corporation to comply with the Securities
Act of 1933, as amended, and any rules, regulations, and requirements of the
Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but without limitation, power and attorney to
sign for us or any of us in our names and in the capacities indicated below, any
and all amendments (including post-effective amendments) hereto or any related
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended; and we do hereby ratify and
confirm all that the said attorney and agent shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director November 6, 1998
- ----------------------------
Robert F. Allnutt
* Director November 6, 1998
- ----------------------------
Charles J. Casamento
* Director November 6, 1998
- ----------------------------
Carl W. Cotman, Ph.D.
* Director November 6, 1998
- ----------------------------
Michael G. Grey
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C> <C>
* Chairman of the Board November 6, 1998
- ----------------------------
Harvey S. Sadow, Ph.D. and Director
/s/ Vincent F. Simmon, Ph.D. President and Chief November 6, 1998
- ----------------------------------
Vincent F. Simmon, Ph.D. Executive Officer,
Director
(Principal Executive Officer and
Principal Financial Officer)
* Director November 6, 1998
- ------------------------------------
Davis L. Temple, Jr., Ph.D.
/s/ Vincent F. Simmon, Ph.D.
-----------------------------------
* Vincent F. Simmon, Ph.D.,
Attorney-in-fact
</TABLE>
S-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation dated April 11, 1989, as
amended by Certificate of Amendment on June 27, 1989, by
Certificate of Designation filed April 29, 1991, by Certificate
of Correction filed May 1, 1991, by Certificate of Amendment of
Certificate of Designation filed June 13, 1991, by Certificate of
Amendment of Certificate of Incorporation filed November 12,
1992, by Certificate of Amendment of Restated Certificate of
Incorporation filed January 11, 1995, by Certificate of
Designation filed December 8, 1995, by Certificate of Designation
filed October 15, 1996, and by Certificate of Designation filed
June 4, 1997, incorporated by reference to the same numbered
Exhibit to the Company's Registration Statement on Form SB-2, No.
333-29493, filed June 18, 1997.
3.2 By-Laws of the Company, as adopted March 4, 1987, and amended
through October 8, 1996, incorporated by reference to the
Company's Annual Report on Form 10-KSB filed October 15, 1996.
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation, Counsel to the Registrant, incorporated by reference
to the same numbered Exhibit to the Company's Registration
Statement on Form SB-2, No. 333-29493, filed June 18, 1997.
10.2 Consulting Agreement, dated October 30, 1987, between the Company
and Carl W. Cotman, Ph.D. *
10.3 Consulting Agreement, dated as October 30, 1987, between the
Company and Gary S. Lynch, Ph.D. *
10.8 1989 Incentive Stock Option, Nonqualified Stock Option and Stock
Purchase Plan. *
10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan. *
10.18 License Agreement, dated February 11, 1991 between the Company
and Georgia Tech Research Corporation, incorporated by reference
to Exhibit 10.18 of the Company's Amendment on Form 8 filed
November 27, 1991 to the Company's Annual Report on Form 10-K
filed September 30, 1991. (Portions of this Exhibit are omitted
and were filed separately with the Secretary of the Commission
pursuant to the Company's application requesting confidential
treatment under Rule 24b-2 under the Securities Exchange Act of
1934).
10.19 License Agreement dated March 27, 1991 between the Company and
the Regents of the University of California, incorporated by
reference to Exhibit 10.19 of the Company's Amendment on Form 8
filed November 27, 1991 to the Company's Annual Report on Form
10-K filed September 30, 1991. (Portions of this Exhibit are
omitted and were filed separately with the Secretary of the
Commission pursuant to the Company's application requesting
confidential treatment under Rule 24b-2 under the Securities
Exchange Act of 1934).
10.28 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted October 22, 1992,
incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K filed September 16, 1992.
10.31 License Agreement dated June 25, 1993 between the Company and the
Regents of the University of California, incorporated by
reference to the Company's Amendment of Annual Report on Form 10-
KSB/A filed November 26, 1993. (Portions of this Exhibit are
omitted and
EXH-1
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
were filed separately with the Secretary of the Commission
pursuant to the Company's application requesting confidential
treatment under Rule 24b-2 of the Securities Exchange Act of
1934).
10.41 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.9 of the Company's
Registration Statement on Form S-8 filed January 28, 1994.
10.42 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 13, 1993, incorporated by
reference to Exhibit 4.8 of the Company's Registration Statement
on Form S-8 filed January 28, 1994.
10.43 Amendment to Executive Stock Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.7 of the Company's
Registration Statement on Form S-8 filed January 28, 1994.
10.44 Lease Agreement, dated January 31, 1994, for the Company's
facilities in Irvine, California, incorporated by reference to
Exhibit 10.44 of the Company's Quarterly Report on Form 10-QSB
filed May 16, 1994.
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted December 15, 1994,
incorporated by reference to Exhibit 4.10 of the Company's
Registration Statement on Form S-8 filed February 8, 1995.
10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 15, 1994, incorporated by
reference to Exhibit 4.9 of the Company's Registration Statement
on Form S-8 filed February 8, 1995.
10.47 Amendment to Executive Stock Plan adopted September 9, 1994,
incorporated by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-KSB filed October 13, 1995.
10.48 Amendment to the Non-Employee Director Formula Grant Plan,
adopted December 15, 1994, incorporated by reference to the same
numbered Exhibit to the Company's Annual Report on Form 10-KSB
filed October 13, 1995.*
10.49 Settlement Agreement between the Company and Alkermes, Inc.,
dated October 5, 1995, incorporated by reference to the same
numbered Exhibit to the Company's Annual Report on Form 10-KSB
filed October 13, 1995. (Portions of this Exhibit are omitted and
were filed separately with the Secretary of the Commission
pursuant to the Company's Application requesting confidential
treatment under Rule 406 of the Securities Act of 1933).
10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued
to Swartz Investments, Inc., incorporated by reference to Exhibit
4.3 of the Company's Current Report on Form 8-K filed December
22, 1995.
10.52 Registration Rights Agreement dated December 8, 1995, entered
into with purchasers of Series C Preferred Stock and Swartz
Investments, Inc., incorporated by reference to Exhibit 4.2 of
the Company's Current Report on Form 8-K filed December 22, 1995.
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued
to Vector Securities International, Inc., incorporated by
reference to the same numbered Exhibit to the Company's Pre-
Effective Amendment No. 1 to Post Effective Amendment No. 2 to
Registration Statement on Form SB-2, No. 33-71894, filed January
26, 1996.
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares
issued to Vector Securities International, Inc., incorporated by
reference to the same numbered Exhibit to the Company's Pre-
Effective Amendment No. 1 to Post Effective Amendment No. 2 to
Registration Statement on Form SB-2, No. 33-71894, filed January
26, 1996.
EXH-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.56 Employment Agreement dated May 15, 1996, between the Company and
Vincent F. Simmon, Ph.D., incorporated by reference to the same
numbered Exhibit to the Company's Current Report on Form 8-K
filed June 4, 1996.
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified Stock
Option and Stock Purchase Plan adopted December 12, 1995,
incorporated by reference to Exhibit 4.11 of the Company's
Registration Statement on Form S-8 filed September 13, 1996.
10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 12, 1995, incorporated by
reference to Exhibit 4.10 of the Company's Registration Statement
on Form S-8 filed September 13, 1996.
10.59 Securities Subscription Agreement for Series D Preferred Stock
dated October 15, 1996, between the Company and Ashline Ltd.,
incorporated by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-QSB filed November 12,
1996.
10.60 1996 Stock Incentive Plan, incorporated by reference to the same
numbered Exhibit to the Company's Quarterly Report on Form 10-QSB
filed November 12, 1996.
10.61 Form of Subscription Agreement with each purchaser of Series A
Preferred Stock, incorporated by reference to the same numbered
Exhibit to the Company's Registration Statement on Form SB-2, No.
333-29493, filed June 18, 1997.
10.62 Form of Warrant issued to each purchaser of Series A Preferred
Stock, incorporated by reference to the same numbered Exhibit to
the Company's Registration Statement on Form SB-2, No. 333-29493,
filed June 18, 1997.
10.63 Registration Rights Agreement with holders of Series A Preferred
Stock, incorporated by reference to the same numbered Exhibit to
the Company's Registration Statement on Form SB-2, No. 333-29493,
filed June 18, 1997.
21 Subsidiaries of the Registrant, incorporated by reference to the
same numbered Exhibit to the Company's Registration Statement on
Form SB-2, No. 333-29493, filed June 18, 1997.
23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation (included in the Opinion filed as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, independent auditors.
24 Power of Attorney (included on Signature page).
27 Financial Data Schedule.
_________________________
* Incorporated by reference to the same numbered exhibit of the
Company's Registration Statement on Form S-1, No. 33-28284, effective
on July 18, 1989.
EXH-3
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated July 17, 1998 in the
Post-Effective Amendment No. 2 to the Registration Statement on Form SB-2 and
related Prospectus of Cortex Pharmaceuticals, Inc. for the Registration of
shares of its common stock.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
November 2, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1998, AND THE RELATED STATEMENTS OF OPERATIONS AND
CASH FLOWS FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,099,420
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,128,422
<PP&E> 2,141,711
<DEPRECIATION> (1,536,319)
<TOTAL-ASSETS> 1,757,667
<CURRENT-LIABILITIES> 553,570
<BONDS> 961,159<F1>
2,460,450
121,810
<COMMON> 10,237
<OTHER-SE> (2,349,559)
<TOTAL-LIABILITY-AND-EQUITY> 1,757,667
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,193,974
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,906
<INCOME-PRETAX> (1,186,358)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,186,358)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,186,358)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1>PROMISSORY NOTE PAYABLE TO ALKERMES, INC.
</FN>
</TABLE>
