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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 1998
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OR
[_] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________________ to ____________
Commission file number 0-17951
Cortex Pharmaceuticals, Inc.
(Name of small business issuer in its charter)
Delaware 33-0303583
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
15241 Barranca Parkway, Irvine, California, 92618
(Address of principal executive offices, including zip code)
(949) 727-3157
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
(Titles of Classes)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days. YES [X]
NO [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Revenues for the issuer's most recent fiscal year were $130,000. The aggregate
market value of the voting stock held by non-affiliates as of June 24, 1998 was
$21,405,605 (based on the last sale price of the common stock as reported by
Nasdaq).
As of September 25, 1998, there were 10,237,126 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
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DOCUMENTS INCORPORATED BY REFERENCE
PART III: Portions of the registrant's definitive proxy statement for the
Annual Meeting of Stockholders to be held on December 15, 1998.
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business.................................... 3
Item 2. Description of Property.................................... 14
Item 3. Legal Proceedings.......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........ 15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters... 15
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 16
Item 7. Financial Statements....................................... 18
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act......... 19
Item 10. Executive Compensation..................................... 19
Item 11. Security Ownership of Certain Beneficial Owners
and Management............................................ 19
Item 12. Certain Relationships and Related Transactions............. 19
Item 13. Exhibits and Reports on Form 8-K........................... 20
Signatures.............................................................. S-1
Financial Statements.................................................... F-1
Exhibit Index and Exhibits............(Attached to this Report on Form 10-KSB)
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INTRODUCTORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include statements regarding (i) future research
plans, expenditures and results, (ii) potential collaborative arrangements,
(iii) the potential utility of the Company's proposed products and (iv) the need
for, and availability of, additional financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, actual
results may differ materially from those set forth in the forward-looking
statements. In light of the significant uncertainties inherent in the forward-
looking information included herein, the inclusion of such information should
not be regarded as representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
PART I
Item 1. Description of Business
Cortex Pharmaceuticals, Inc. ("Cortex" or the "Company") is a development stage
enterprise that was organized in 1987 to engage in the discovery, development
and commercialization of innovative pharmaceuticals for the treatment of
neurodegenerative diseases and other neurological and psychiatric disorders.
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(R), 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(R)) in patients with Alzheimer's disease and in patients with
schizophrenia.
The AMPAKINE program addresses large potential markets. Accordingly, the
Company's commercial development plan involves 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
partnering 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 that will 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.
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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 individuals to remain independent longer.
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.
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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 the 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-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 study, 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.
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While preliminary indications of desired effects on memory and cognition may be
obtained from this study, psychological testing of patients with Alzheimer's
disease is subject to 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 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 known as
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.
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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 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 may provide a "window of opportunity" during which a
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
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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 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 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
expense 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
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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.
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 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
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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.
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 large 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
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<PAGE>
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 June 30, 1998, Cortex had 18 full-time employees and had engaged nine
part-time Ph.D.-level scientific consultants. Of the 18 full-time employees, 12
are engaged in research and development and six are engaged in management and
administrative support. The Company also sponsors a substantial amount of
research in academic laboratories.
Risk Factors
In addition to the other matters set forth in this Report, the Company's
continuing operations and the price of the Company's common stock are subject to
the following risks:
Need for Additional Funds. Cortex anticipates that its existing capital
resources will enable it to maintain its current and planned operations through
calendar 1998. The Company will require additional funds to continue its
operations beyond that time. The Company may be unable to obtain the additional
needed funds on reasonable terms, or at all. If additional funds are raised by
issuing equity securities, substantial dilution to existing stockholders is
likely to result.
If the Company is unable to obtain additional funds, it may no longer be able to
retain its key employees and may be required to significantly curtail one or
more of its product development programs. In addition, in such event, the
Company may be unable to meet its research spending obligations under existing
licensing agreements and may be unable to continue its business operations.
The Company is presently seeking collaborative or other arrangements with larger
pharmaceutical companies to provide for both its immediate and longer-term
funding requirements. These agreements would potentially 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 such arrangements is intense, however, with a large
number of biopharmaceutical companies attempting to secure alliances with more
established pharmaceutical companies. Although the Company has been engaged in
discussions with candidate companies for some time, 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 meet the Company's immediate and longer-term funding
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Continued Listing on Nasdaq; Preferred Stock Redemption. The listing standards
for the Nasdaq Small Cap Market include 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 June 30, 1998, the Company had
net tangible assets of approximately $1.4 million, which does not meet the
current listing standards. In the event the Company fails to satisfy the listing
standards on a continuous basis, the Company's Common Stock will be removed from
listing on the Nasdaq Small Cap Market. In such an event, the liquidity of the
Company's Common Stock is likely to be impaired and the trading price reduced.
In addition, in such
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<PAGE>
event, the holders of the Company's Series A Preferred Stock may require the
Company to redeem such shares for cash. It is unlikely that the Company would be
able to satisfy such a redemption request.
Development Stage Company; History of Losses. Cortex is a development stage
enterprise. From inception on February 10, 1987 through June 30, 1998, the
Company has generated only modest operating revenues and has incurred net losses
aggregating $35,407,564. As of June 30, 1998, the Company had an accumulated
deficit of $36,276,202. The Company will require substantial additional funds to
advance its research and development programs, particularly should the Company
decide to independently conduct later-stage clinical testing and apply for
regulatory approval of any of its proposed products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of Business."
Dependence on Strategic Alliances and Third Parties for Clinical Testing,
Manufacturing and Marketing. The Company does not have the resources, and does
not presently intend, to conduct later-stage human clinical trials or to
manufacture its proposed products. The Company is therefore seeking larger
pharmaceutical company partners to conduct such activities for most or all of
its proposed products. In connection with its efforts to secure corporate
partners, the Company may seek to retain co-promotional rights to its proposed
products in the United States, so that it may promote such products to selected
medical specialists while its corporate partner promotes to the general medical
market. The Company may not be able to enter into partnering arrangements on
this or any other basis. In addition, it is uncertain whether the Company or its
prospective corporate partners can successfully introduce its proposed products,
whether they will achieve acceptance by patients, health care providers and
insurance companies, or whether they can be manufactured and marketed at prices
that would permit the Company to operate profitably. See "Description of
Business."
Technological Uncertainty; Early Stage of Product Development; No Assurance of
Regulatory Approvals. The Company's proposed products are in the preclinical or
early clinical stage of development and will require significant further
research, development and clinical testing and, eventually, regulatory
clearances. They are subject to the risks of failure inherent in the development
of products based on innovative technologies. These include the risks that any
or all of the proposed products will be found to be ineffective or toxic, or
otherwise fail to receive necessary regulatory clearances, that the proposed
products, although effective, will be uneconomical to market, that third parties
may now or in the future hold proprietary rights that preclude the Company from
marketing them, or that third parties will develop and market an equivalent or
superior product. Accordingly, the Company cannot predict whether its research
and development activities will result in commercially viable products or
applications. Further, due to the extended testing and regulatory review process
required before marketing clearance can be obtained, the Company does not expect
to be able to commercialize any therapeutic drug for at least five years, either
directly or through its corporate partners or licensees. See "Description of
Business."
Limited Proprietary Rights; Uncertainty Associated with Patent Protection. The
Company has negotiated technology rights agreements that provide for exclusive
rights to its Ampakine compounds and calpain inhibitor compounds for selected
indications under patents or patent applications owned wholly by other parties
or by other parties as co-owners with the Company. The Company also holds
options or other rights to obtain exclusive licenses under patent applications
relating to certain of its potential products. Certain of the Company's licenses
and other agreements are terminable if the Company does not make certain minimum
annual payments, meet certain milestones or diligently seek to commercialize the
underlying technology. In addition, the Company's related collaborative and
consulting agreements are generally terminable upon 30 to 60 days' written
notice.
Current or future patent applications in which Cortex has an interest, either as
sole owner or as a current or prospective licensee, may or may not result in
further patents being issued. Further, current patents or patents issuing in the
future in connection with current or future patent applications may not afford
effective protection against competitors with similar technology and patents
issued or licensed to Cortex may be infringed upon or designed around by others.
If Cortex is unable to obtain sufficient protection of its proprietary rights in
its products or processes prior to or after obtaining regulatory clearances,
whether through patents, trade secrets or otherwise,
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<PAGE>
competitors may be able to market competing products by obtaining regulatory
clearance through demonstration of equivalency to the Company's products,
without being required to conduct the same lengthy clinical tests conducted by
the Company.
In some cases, Cortex may rely on trade secrets to protect its innovations.
Secrecy obligations may not be honored and others may independently develop
similar or superior technologies. To the extent that consultants, key employees
or other third parties apply technological information independently developed
by them or by others to the Company's projects, disputes may arise as to the
proprietary rights to such information that may not be resolved in favor of the
Company. See "Description of Business -- Patents and Proprietary Rights."
Shares Eligible for Future Sale; Dilution. If all outstanding warrants and
options are exercised prior to their expiration, approximately 2.3 million
additional shares of Common Stock could become freely tradable without
restriction under the Securities Act. An aggregate of 19,384 shares of Common
Stock are issuable upon conversion of currently outstanding 9% Preferred Stock
and Series B Preferred Stock. Such shares will be freely tradable upon issuance.
As of June 30, 1998, up to 1.5 million shares of Common Stock were issuable upon
conversion of outstanding shares of Series A Convertible Preferred Stock (the
"Series A Preferred"). If conversions of Series A Preferred occur at an
effective conversion price of $2.75 or higher (which would occur at Common Stock
prices above $3.44 per share), the holder of the shares of Series A Preferred
being converted may exercise, at the time of conversion, rights to purchase
additional shares of Common Stock. The number of additional shares of Common
Stock subject to this additional purchase right is equal to the number of shares
of Common Stock issuable upon conversion of the shares of Series A Preferred
then being converted. Any election to exercise the foregoing right to purchase
additional shares shall be exercised with respect to any given Series A
Preferred at the time of conversion of such shares and is forfeited to the
extent it is not fully exercised at the time of such conversion. Depending on
the date of conversion, the then current sales price of the Common Stock and
whether any Series A Preferred Stock additional purchase rights are exercised,
the exact number of shares of Common Stock issuable upon conversion of the
Series A Preferred may increase or decrease substantially from the number of
shares of Common Stock issuable as set forth above. All shares of Common Stock
issuable upon conversion of Series A Preferred, exercise of related rights of
additional purchase and exercise of the related warrants will be freely
tradable. Sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market price of the Common Stock. See
"Item 5 -- Market for Common Equity and Related Stockholder Matters" and Notes 3
and 4 of Notes to Financial Statements.
Intense Competition. The Company's business is characterized by intensive
research efforts. Many companies, research institutes and universities are
working in a number of pharmaceutical or biotechnology disciplines to develop
therapeutic products similar to those under investigation by the Company. Most
of these companies, research institutes and universities have substantially
greater financial, technical, manufacturing, marketing, distribution and/or
other resources than Cortex. In addition, many of them have experience in
undertaking human clinical trials of new or improved therapeutic products and
obtaining FDA and other regulatory clearances of products for use in human
health care. The Company has no experience in conducting and managing later-
stage clinical trials or in preparing applications necessary to gain regulatory
clearances. Accordingly, other companies may succeed in developing products that
are safer or more effective than those being developed by the Company and in
obtaining FDA clearances for such products more rapidly than the Company.
Further, it is expected that competition in this field will continue to
intensify. See "Description of Business -- Competition."
Dependence Upon Key Personnel. Cortex is highly dependent upon key management
and technical personnel. Competition for qualified employees among
pharmaceutical and biotechnology companies is intense and the loss of any of
such persons, or an inability to attract, retain and motivate the additional
highly-skilled employees and consultants required for the Company's activities,
could materially adversely affect its business and prospects. Cortex may not be
able to retain its existing personnel or attract additional qualified employees
when they are needed. See "Description of Business -- Human Resources."
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<PAGE>
Dependence on Relationships with Consultants and the University of California,
Irvine. The Company is dependent upon its relationships with a number of
academic consultants, particularly Drs. Carl W. Cotman and Gary S. Lynch of the
University of California, Irvine ("UCI"). Drs. Cotman and Lynch play a role in
guiding the internal research of the Company. In addition, Cortex sponsors
preclinical research in the laboratories of Dr. Lynch at UCI that is a component
of the Company's product development and corporate partnering profile. Were
Cortex's relationships with Dr. Lynch or UCI to be disrupted, it is possible
that the Company's AMPA receptor research program would be adversely affected,
and the Company may be unable to conduct the sponsored research internally at
reasonable cost, or at all. The Company's agreements with its consultants,
including those with Drs. Cotman and Lynch, are generally terminable by the
consultant on short notice.
Government Regulation. Therapeutic products such as those that Cortex is
attempting to develop are subject to an extensive and lengthy regulatory review
and approval process by the FDA and comparable agencies in other countries.
Prior to commercialization, the Company's products will require governmental
approvals that have not yet been obtained and that are not expected to be
obtained for at least several years, if at all. The testing and regulatory
approval process, which includes preclinical, clinical and post-clinical testing
of the Company's products to establish their safety and efficacy, will take many
years and require the expenditure of substantial resources. Even after such time
and expenditures, regulatory clearances will not necessarily be obtained for any
of the Company's products. Even if regulatory clearances are obtained, a
marketed product is subject to continual review, and later discovery of
previously unknown problems may result in restrictions on marketing or
withdrawal of the product from the market. See "Description of Business --
Government Regulation."
Limited Public Market; Volatility of Stock Price. The Company's Common Stock
has been traded on the Nasdaq Small Cap Market since 1989. Although
approximately 20 firms make a market in Cortex Common Stock, there is no
assurance that an active or established trading market will be maintained or
that the Company's Common Stock will continue to be traded on the Nasdaq Small
Cap Market.
There is significant volatility in the market price of securities of life
sciences companies generally, and the trading price of the Company's Common
Stock has been subject to wide fluctuations. See "Price Range of Common Stock."
Various factors and events, including announcements by the Company or its
competitors concerning technological innovations, new products, proposed
governmental regulations or actions, developments or disputes relating to
patents or proprietary rights and public concern over the safety of therapeutic
products or other factors that affect the market generally, may have a
significant impact on the Company's business and on the market price of the
Company's securities.
Dividends. The Company has not paid cash dividends on its Common Stock and does
not anticipate doing so in the foreseeable future. The Company may not pay any
dividends on its Common Stock until accrued and unpaid dividends on the 9%
Preferred Stock have been paid in full. As of June 30, 1998, accrued and unpaid
dividends on the 9% Preferred Stock were $26,775.
Anti-Takeover Provisions. The Board of Directors has the authority, without
further approval of the Company's stockholders, to issue up to 549,100 shares of
preferred stock having such rights, preferences and privileges as the Board of
Directors may determine. Any such issuance of additional shares of preferred
stock could, under certain circumstances, have the effect of delaying or
preventing a change in control of the Company and may adversely affect the
rights of holders of Common Stock.
Item 2. Description of Property
The Company leases approximately 30,000 square feet of office, research
laboratory and expansion space in Irvine, California 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.
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<PAGE>
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1998, through the solicitation
of proxies or otherwise.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock (Nasdaq symbol: CORX) began trading publicly in the
over-the-counter market on July 18, 1989 and is currently traded on the Nasdaq
Small-Cap Market. The following table presents quarterly information on the high
and low sale prices of the common stock for the fiscal years ended June 30, 1998
and 1997, as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
------- ---
<S> <C> <C>
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 June 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 September 25, 1998, as reported by Nasdaq, was
$1.50.
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 semiannual installments on
June 15 and December 15 of each year and which must be paid in full before any
dividends can be paid on the common stock. The Company paid the semiannual
dividends on the 9% Preferred Stock that accrued in 1989, but elected not to
distribute subsequent dividends in order to conserve capital for operations. At
June 30, 1998, accrued and unpaid dividends on the 9% Preferred Stock totaled
$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.
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<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations; Plan of Operation
The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere herein.
Results of Operations
From inception (February 10, 1987) through June 30, 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 $1,693,000 and (iii) $95,000 of
grant revenue.
From inception (February 10, 1987) through June 30, 1998, the Company sustained
losses aggregating $35,408,000. Continuing losses are anticipated over the next
several years, as the Company's ongoing operating expenses for preclinical
research and early clinical development will only be offset, if at all, by
licensing revenues under planned strategic alliances with larger pharmaceutical
companies that the Company is seeking for the later-stage clinical development,
manufacturing and marketing of its products. The nature and timing of payments
to Cortex under these planned strategic alliances, if and as entered into, is
likely to significantly affect the Company's operations and to produce
substantial period-to-period fluctuations in reported financial results. Over
the longer term, the Company will be dependent upon successful commercial
development of its products by its prospective partners to attain profitable
operations from product royalties or other revenues based on product sales.
The Company believes that inflation and changing prices have not had a material
impact on its ongoing operations to date.
Fiscal Years ended June 30, 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.
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.
Plan of Operation; Liquidity and Capital Resources
CORTEX has funded its organizational and research and development activities to
date primarily from the issuance of equity securities, with net proceeds from
inception (February 10, 1987) through June 30, 1998 aggregating $36 million. An
additional $3.6 million in research and license payments was received from
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 June 30, 1998 was $1.7 million.
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. As of
June 30, 1997, the Company had cash, cash
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<PAGE>
equivalents and short-term investments of $7.6 million and working capital of
$7.0 million. The decreases represent amounts required to fund operating losses
and to purchase capital equipment. From inception (February 10, 1987) through
June 30, 1998, net expenditures for furniture, equipment and leasehold
improvements aggregated $2.1 million.
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.
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 of the note and accrued interest are
payable in October 1999 or upon the consummation of a corporate partnership
between Cortex and a larger pharmaceutical company, whichever is earlier.
As of June 30, 1998, Cortex had 35,000 outstanding shares of 9% cumulative
convertible preferred stock, which accrue cumulative semi-annual dividends at an
annual rate of $0.09 per share. To conserve capital for operations, the Company
has elected not to distribute the dividends that have accrued since 1989.
Accrued and unpaid dividends as of June 30, 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 upcoming fiscal year. As of June 30, 1998, Cortex
had 18 full-time employees.
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 is unable to control whether its suppliers and service providers
will be Year 2000 compliant. 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. Management does not
believe that Year 2000 changes will have a material impact on its business,
financial condition or results of operations.
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
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<PAGE>
of June 30, 1998, the Company had net tangible assets of approximately $1.4
million, 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 for both its immediate and longer-term spending
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. Competition for such
arrangements is intense, however, 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 and 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 "Risks Factors."
Item 7. Financial Statements
The financial statements of the Company and other information required by this
item are set forth herein in a separate section beginning with the Index to
Financial Statements on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The sections entitled "Nominees for Director," "Executive Officers" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" included
in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders are
incorporated herein by reference.
Item 10. Executive Compensation
The sections entitled "Executive Compensation," "Option Matters," "Employment
and Consulting Agreements" and "Director Compensation" included in the Company's
Proxy Statement for its 1998 Annual Meeting of Stockholders are incorporated
herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The section entitled "Principal Stockholders" included in the Company's Proxy
Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions
The section entitled "Certain Transactions" included in the Company's Proxy
Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by
reference.
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<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Item 601 Exhibits
Exhibit
Number Description
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation dated April 11, 1989, as amended
by Certificate of Amendment on June 27, 1989, by Certificate of
Designation filed April 29, 1991, by Certificate of Correction filed May
1, 1991, by Certificate of Amendment of Certificate of Designation filed
June 13, 1991, by Certificate of Amendment of Certificate of
Incorporation filed November 12, 1992, by Certificate of Amendment of
Restated Certificate of Incorporation filed January 11, 1995, by
Certificate of Designation filed December 8, 1995, by Certificate of
Designation filed October 15, 1996, and by Certificate of Designation
filed June 4, 1997, incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form SB-2 filed June 18, 1997.
3.2 By-Laws of the Company, as adopted March 4, 1987, and amended through
October 8, 1996, incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-KSB filed October 15, 1996.
10.2 Consulting Agreement, dated October 30, 1987, between the Company and
Carl W. Cotman, Ph.D. *
10.3 Consulting Agreement, dated as October 30, 1987, between the Company and
Gary S. Lynch, Ph.D. *
10.8 1989 Incentive Stock Option, Nonqualified Stock Option and Stock
Purchase Plan. *
10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan. *
10.18 License Agreement, dated February 11, 1991 between the Company and
Georgia Tech Research Corporation, incorporated by reference to Exhibit
10.18 of the Company's Amendment on Form 8 filed November 27, 1991 to
the Company's Annual Report on Form 10-K filed September 30, 1991.
(Portions of this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Company's application
requesting confidential treatment under Rule 24b-2 under the Securities
Exchange Act of 1934).
10.19 License Agreement dated March 27, 1991 between the Company and the
Regents of the University of California, incorporated by reference to
Exhibit 10.19 of the Company's Amendment on Form 8 filed November 27,
1991 to the Company's Annual Report on Form 10-K filed September 30,
1991. (Portions of this Exhibit are omitted and were filed separately
with the Secretary of the Commission pursuant to the Company's
application requesting confidential treatment under Rule 24b-2 under the
Securities Exchange Act of 1934).
10.28 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted October 22, 1992, incorporated by reference
to Exhibit 10.28 of the Company's Annual Report on Form 10-K filed
September 16, 1992.
10.31 License Agreement dated June 25, 1993 between the Company and the
Regents of the University of California, incorporated by reference to
the Company's Amendment of Annual Report on Form 10-KSB/A filed November
26, 1993. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to the
Company's application requesting confidential treatment under Rule 24b-2
of the Securities Exchange Act of 1934).
10.36 Amended and Restated Employment Agreement between the Company and D.
Scott Hagen, dated September 1, 1993, incorporated by reference to
Exhibit 10.36 of the Company's Annual Report on Form 10-KSB filed
October 13, 1993.
10.36.1 Amendment No. 1, dated January 1, 1995, to the Amended and Restated
Employment Agreement between the Company and D. Scott Hagen, dated
September 1, 1993, incorporated by reference to the same numbered
Exhibit to the Company's Quarterly Report on Form 10-QSB filed April 28,
1995.
10.41 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted December 13, 1993, incorporated by reference
to Exhibit 4.9 of the Company's Registration Statement on Form S-8 filed
January 28, 1994.
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.
- 20 -
<PAGE>
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.43 Amendment to Executive Stock Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.7 of the Company's Registration
Statement on Form S-8 filed January 28, 1994.
10.44 Lease Agreement, dated January 31, 1994, for the Company's facilities in
Irvine, California, incorporated by reference to Exhibit 10.44 of the
Company's Quarterly Report on Form 10-QSB filed May 16, 1994.
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted December 15, 1994, incorporated by reference
to Exhibit 4.10 of the Company's Registration Statement on Form S-8
filed February 8, 1995.
10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 1994, incorporated by reference to Exhibit 4.9 of
the Company's Registration Statement on Form S-8 filed February 8, 1995.
10.47 Amendment to Executive Stock Plan adopted September 9, 1994,
incorporated by reference to the same numbered Exhibit to the Company's
Annual Report on Form 10-KSB filed October 13, 1995.
10.48 Amendment to the Non-Employee Director Formula Grant Plan, adopted
December 15, 1994, incorporated by reference to the same numbered
Exhibit to the Company's Annual Report on Form 10-KSB filed October 13,
1995.*
10.49 Settlement Agreement between the Company and Alkermes, Inc., dated
October 5, 1995, incorporated by reference to the same numbered Exhibit
to the Company's Annual Report on Form 10-KSB filed October 13, 1995.
(Portions of this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Company's Application
requesting confidential treatment under Rule 406 of the Securities Act
of 1933).
10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued to
Swartz Investments, Inc., incorporated by reference to Exhibit 4.3 of
the Company's Current Report on Form 8-K filed December 22, 1995.
10.52 Registration Rights Agreement dated December 8, 1995, entered into with
purchasers of Series C Preferred Stock and Swartz Investments, Inc.,
incorporated by reference to Exhibit 4.2 of the Company's Current Report
on Form 8-K filed December 22, 1995.
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued to
Vector Securities International, Inc., incorporated by reference to the
same numbered Exhibit to the Company's Pre- Effective Amendment No. 1 to
Post Effective Amendment No. 2 to Registration Statement on Form SB-2,
No. 33-71894, filed January 26, 1996.
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares issued to
Vector Securities International, Inc., incorporated by reference to the
same numbered Exhibit to the Company's Pre- Effective Amendment No. 1 to
Post Effective Amendment No. 2 to Registration Statement on Form SB-2,
No. 33-71894, filed January 26, 1996.
10.56 Employment Agreement dated May 15, 1996, between the Company and Vincent
F. Simmon, Ph.D., incorporated by reference to the same numbered Exhibit
to the Company's Current Report on Form 8-K filed June 4, 1996.
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option and
Stock Purchase Plan adopted December 12, 1995, incorporated by reference
to Exhibit 4.11 of the Company's Registration Statement on Form S-8
filed September 13, 1996.
10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase
Plan adopted December 12, 1995, incorporated by reference to Exhibit
4.10 of the Company's Registration Statement on Form S-8 filed September
13, 1996.
10.59 Securities Subscription Agreement for Series D Preferred Stock dated
October 15, 1996, between the Company and Ashline Ltd., incorporated by
reference to the same numbered Exhibit to the Company's Quarterly Report
on Form 10-QSB filed November 12, 1996.
10.60 1996 Stock Incentive Plan, incorporated by reference to the same
numbered Exhibit to the Company's Quarterly Report on Form 10-QSB filed
November 12, 1996.
10.61 Form of Subscription Agreement with each purchaser of Series A Preferred
Stock, incorporated by reference to Exhibit 10.61 to the Company's
Registration Statement on Form SB-2 filed June 18, 1997.
10.62 Form of Warrant issued to each purchaser of Series A Preferred Stock,
incorporated by reference to Exhibit 10.62 to the Company's Registration
Statement on Form SB-2 filed June 18, 1997.
- 21 -
<PAGE>
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.63 Registration Rights Agreement with holder of Series A Preferred Stock
dated June 5, 1997, incorporated by reference to Exhibit 10.63 to the
Company's Registration Statement on Form SB-2 filed June 18, 1997.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, independent auditors.
24 Power of Attorney (included on Signature page).
27 Financial Data Schedule.
- -------------------
* Incorporated by reference to the same numbered exhibit of the Company's
Registration Statement on Form S-1, No. 33-28284, effective on July 18,
1989.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1998.
- 22 -
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CORTEX PHARMACEUTICALS, INC.
By: /s/ Vincent F. Simmon, Ph.D.
----------------------------
Vincent F. Simmon, Ph.D.
President and Chief Executive Officer
Know all men by these presents, that each person whose signature appears below
constitutes and appoints each of Vincent F. Simmon, Ph.D. and D. Scott Hagen,
acting singly, as his true and lawful attorney-in-fact and agent, with full
power of substitution, and for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments to this report, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto each of said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Vincent F. Simmon, Ph.D. President and Chief September 28, 1998
- ---------------------------- Executive Officer, Director
Vincent F. Simmon, Ph.D.
(Principal Executive Officer)
/s/ D. Scott Hagen Vice President, September 28, 1998
- ---------------------------- Chief Financial Officer
D. Scott Hagen and Secretary
(Principal Financial and
Accounting Officer)
/s/ Harvey S. Sadow, Ph.D. Chairman of the Board September 28, 1998
- ---------------------------- and Director
Harvey S. Sadow, Ph.D.
/s/ Robert F. Allnutt Director September 28, 1998
- ----------------------------
Robert F. Allnutt
/s/ Charles J. Casamento Director September 28, 1998
- ----------------------------
Charles J. Casamento
S - 1
<PAGE>
/s/ Carl W. Cotman, Ph.D. Director September 28, 1998
- -------------------------------
Carl W. Cotman, Ph.D.
/s/ Michael G. Grey Director September 28, 1998
- -------------------------------
Michael G. Grey
/s/ Davis L. Temple, Jr., Ph.D. Director September 28, 1998
- -------------------------------
Davis L. Temple, Jr., Ph.D.
S - 2
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors...................................... F-2
Balance Sheets - As of June 30, 1998 and 1997....................... F-3
Statements of Operations - For 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 June 30, 1998................ F-5
Statements of Cash Flows - For 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 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>
June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,124,008 $ 7,568,803
Other current assets 71,566 71,530
------------ ------------
Total current assets 2,195,574 7,640,333
Furniture, equipment and leasehold improvements, net 655,419 669,844
Other 23,853 23,130
------------ ------------
$ 2,874,846 $ 8,333,307
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 408,047 $ 501,603
Accrued dividends 26,775 74,250
Accrued wages, salaries and related expenses 62,475 58,683
Current obligations under capital lease -- 1,499
------------ ------------
Total current liabilities 497,297 636,035
Note payable to Alkermes, Inc. 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 (1998)
and 400 (1997) 2,460,450 3,936,720
Stockholders' equity (deficit):
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 (1998)
and 110,000 (1997) 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
Common stock, $0.001 par value; shares
authorized: 20,000,000; shares issued and
outstanding: 10,237,126 (1998) and
9,394,249 (1997) 10,237 9,394
Additional paid-in capital 36,276,202 34,643,526
Deficit accumulated during the development stage (37,439,403) (32,181,443)
------------ ------------
Total stockholders' equity (deficit) (1,031,154) 2,668,287
------------ ------------
$ 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>
Period from
inception
(February 10,
Years ended June 30, 1987)through
-------------------- June 30,
1998 1997 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Research and license revenue $ 130,000 $ -- $ 3,730,000
Grant revenue -- -- 94,717
----------- ----------- ------------
Total revenues 130,000 -- 3,824,717
----------- ----------- ------------
Operating expenses:
Research and development 4,007,466 3,376,284 26,352,862
General and administrative 1,584,369 1,709,320 13,344,248
Settlement with Alkermes, Inc. -- -- 1,227,977
----------- ----------- ------------
Total operating expenses 5,591,835 5,085,604 40,925,087
----------- ----------- ------------
Loss from operations (5,461,835) (5,085,604) (37,100,370)
Interest income, net 203,875 155,624 1,692,806
----------- ----------- ------------
Net loss before preferred stock
accretion and dividends $(5,257,960) $(4,929,980) $(35,407,564)
----------- ----------- ------------
Preferred stock accretion and dividends:
Accretion of and dividends on 9% Cumulative
Convertible Preferred Stock 3,150 9,900 607,924
Imputed dividends for Series D Convertible
Preferred Stock -- 879,672 879,672
Imputed dividends for Series A Convertible
Preferred Stock -- 1,012,493 1,012,493
----------- ----------- ------------
Net loss applicable to common stock $(5,261,110) $(6,832,045) $(37,907,653)
=========== =========== ============
Shares used in basic and diluted calculation 9,575,663 8,252,047
=========== ===========
Basic and diluted net loss per share $ (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 Additional
preferred preferred preferred preferred Common paid-in
stock stock stock stock stock capital
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1991 $ -- $1,841,108 $ -- $ -- $2,633 $ 6,836,041
Sale of 150,000 shares of common stock to
Alkermes, Inc., $10.00 per share -- -- -- -- 150 1,499,850
Conversion of 306,275 shares of 9% preferred
stock into 40,835 shares of common stock -- -- -- -- 40 335,283
Conversion of 1,525,003 shares of Series B
preferred stock into 149,629 shares of
common stock -- (882,576) -- -- 150 882,426
Issuance of 73,979 shares of common stock
upon exercise of stock options -- -- -- -- 74 110,313
Issuance of two shares of common stock upon
exercise of warrants -- -- -- -- -- 27
Issuance of compensatory stock options -- -- -- -- 24,532
Forfeiture of compensatory stock options -- -- -- -- -- (146,182)
Amortization of deferred compensation -- -- -- -- -- --
9% preferred stock dividends -- -- -- -- -- (68,906)
9% preferred stock accretion -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ---------- ----------- ----------- ------ -----------
Balance, June 30, 1992 -- 958,532 -- -- 3,047 9,473,384
Conversion of 287,150 shares of 9%
preferred stock into 38,287 shares of
common stock -- -- -- -- 38 360,398
Conversion of 1,081,250 shares of Series B
preferred stock into 106,088 shares of
common stock -- (625,758) -- -- 106 625,652
Redemption of 12,627 shares of common
stock, $7.65 per share -- -- -- -- (12) (96,662)
Issuance of 30,789 shares of common stock
upon exercise of stock options -- -- -- -- 31 60,915
Issuance of compensatory stock options -- -- -- -- -- 350,000
Amortization of deferred compensation -- -- -- -- -- --
9% preferred stock dividends -- -- -- -- -- (53,028)
9% preferred stock accretion -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ---------- ----------- ----------- ------ -----------
Balance, June 30, 1993 $ -- $ 332,774 $ -- $ -- $3,210 $10,720,659
----------- ---------- ----------- ----------- ------ -----------
<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, 1991 $(201,922) $ -- $(6,504,980) $ 1,972,880
Sale of 150,000 shares of common stock to
Alkermes, Inc., $10.00 per share -- -- -- 1,500,000
Conversion of 306,275 shares of 9% preferred
stock into 40,835 shares of common stock -- -- -- 335,323
Conversion of 1,525,003 shares of Series B
preferred stock into 149,629 shares of
common stock -- -- -- --
Issuance of 73,979 shares of common stock
upon exercise of stock options -- -- -- 110,387
Issuance of two shares of common stock upon
exercise of warrants -- -- -- 27
Issuance of compensatory stock options (19,375) -- -- 5,157
Forfeiture of compensatory stock options 146,182 -- -- --
Amortization of deferred compensation 58,567 -- -- 58,567
9% preferred stock dividends -- -- -- (68,906)
9% preferred stock accretion -- -- (23,242) (23,242)
Net loss -- -- (2,354,770) (2,354,770)
--------- ----------- ----------- -----------
Balance, June 30, 1992 (16,548) -- (8,882,992) 1,535,423
Conversion of 287,150 shares of 9%
preferred stock into 38,287 shares of
common stock -- -- -- 360,436
Conversion of 1,081,250 shares of Series B
preferred stock into 106,088 shares of
common stock -- -- -- --
Redemption of 12,627 shares of common
stock, $7.65 per share -- -- -- (96,674)
Issuance of 30,789 shares of common stock
upon exercise of stock options -- -- -- 60,946
Issuance of compensatory stock options (280,000) -- -- 70,000
Amortization of deferred compensation 36,897 -- -- 36,897
9% preferred stock dividends -- -- -- (53,028)
9% preferred stock accretion -- -- (16,000) (16,000)
Net loss -- -- (761,536) (761,536)
--------- ----------- ----------- -----------
Balance, June 30, 1993 $(259,651) $ -- $(9,660,528) $ 1,136,464
--------- ----------- ----------- -----------
</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, 1993 $ -- $332,774 $ -- $ -- $ 3,210
Sale of 2,750,000 shares of
common stock,
$5.00 per share, net of
expenses -- -- -- -- 2,750
Sale of 103,577 shares of
common stock,
$6.40 per share, net of
expenses -- -- -- -- 104
Conversion of 15,625 shares
of 9% preferred stock
into 2,083 shares of
common stock -- -- -- -- 2
Conversion of 50,000 shares
of Series B preferred
stock into 4,906 shares of
common stock -- (28,937) -- -- 5
Issuance of compensatory
stock options -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- --
Issuance of 3,401 shares of
common stock upon
exercise of stock options -- -- -- -- 3
9% preferred stock dividends -- -- -- -- --
Unrealized loss on
available for sale
U.S. Government securities -- -- -- -- --
Net loss -- -- -- -- --
-------- -------- ----------- ---------- ----------
Balance, June 30, 1994 -- 303,837 -- -- 6,074
Reclassification of
unredeemed 9%
preferred stock 370,000 -- -- -- --
Issuance of warrants to
purchase
265,000 shares of common
stock -- -- -- -- --
Adjustment of accrued
dividends for
redemption of 9% preferred
stock -- -- -- -- --
Issuance of 11,272 shares
of common stock
upon exercise of stock
options -- -- -- -- 11
Amortization of deferred
compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- --
Decrease in unrealized loss
on available for
sale U.S. Government
securities -- -- -- -- --
Net loss -- -- -- -- --
-------- -------- ----------- ---------- ----------
Balance, June 30, 1995 $370,000 $303,837 $ -- $ -- $ 6,085
-------- -------- ----------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
Additional for sale U.S. during the
paid-in Deferred Government development
capital compensation securities stage Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993 $10,720,659 $(259,651) $ -- $ (9,660,528) $ 1,136,464
Sale of 2,750,000 shares of
common stock,
$5.00 per share, net of
expenses 12,359,611 -- -- -- 12,362,361
Sale of 103,577 shares of
common stock,
$6.40 per share, net of
expenses 510,707 -- -- -- 510,811
Conversion of 15,625 shares
of 9% preferred stock
into 2,083 shares of
common stock 20,545 -- -- -- 20,547
Conversion of 50,000 shares
of Series B preferred
stock into 4,906 shares of
common stock 28,932 -- -- -- --
Issuance of compensatory
stock options 100,625 -- -- -- 100,625
Amortization of deferred
compensation -- 58,200 -- -- 58,200
Issuance of 3,401 shares of
common stock upon
exercise of stock options 6,461 -- -- -- 6,464
9% preferred stock dividends (39,038) -- -- -- (39,038)
Unrealized loss on
available for sale
U.S. Government securities -- -- (163,562) -- (163,562)
Net loss -- -- -- (4,704,991) (4,704,991)
----------- ------------ ----------- ------------ -----------
Balance, June 30, 1994 23,708,502 (201,451) (163,562) (14,365,519) 9,287,881
Reclassification of
unredeemed 9%
preferred stock -- -- -- -- 370,000
Issuance of warrants to
purchase
265,000 shares of common
stock 232,746 -- -- -- 232,746
Adjustment of accrued
dividends for
redemption of 9% preferred
stock 25,819 -- -- -- 25,819
Issuance of 11,272 shares
of common stock
upon exercise of stock
options 24,023 -- -- -- 24,034
Amortization of deferred
compensation -- 56,092 -- -- 56,092
9% preferred stock dividends (33,300) -- -- -- (33,300)
Decrease in unrealized loss
on available for
sale U.S. Government
securities -- -- 144,956 -- 144,956
Net loss -- -- -- (6,835,532) (6,835,532)
----------- ------------ ----------- ------------ -----------
Balance, June 30, 1995 $23,957,790 $ (145,359) $ (18,606) $(21,201,051) $ 3,272,696
----------- ------------ ----------- ------------ -----------
</TABLE>
Continued...
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in
stock stock stock stock stock capital
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $ 6,085 $23,957,790
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) -- -- 136,654
Conversion of 260,000
shares of 9% preferred
stock into 34,667 shares
of common stock (260,000) -- -- -- 35 259,965
Conversion of 375,000
shares of Series B
preferred
stock into 36,793 shares
of common stock -- (217,027) -- -- 37 216,990
Conversion of 125 shares of
Series C preferred stock
into 1,133,037 shares of
common stock -- -- (2,687,414) -- 1,133 2,686,281
Adjustment of accrued
dividends for conversion of
9% preferred stock -- -- -- -- -- 128,700
Issuance of 205,878 shares
of common stock upon
exercise of stock options -- -- -- -- 206 774,049
Amortization of deferred
compensation -- -- -- -- -- --
Reversal of unamortized
deferred compensation upon
resignation of Chief
Executive Officer -- -- -- -- -- (103,250)
9% preferred stock dividends -- -- -- -- -- (9,900)
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 28,047,279
Series A preferred stock
imputed dividends -- -- -- -- -- 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
Conversion of 35 shares of
Series C convertible
preferred stock into
384,574 shares of common
stock -- -- (752,476) -- 384 752,092
Conversion of 400 shares of
Series D convertible
preferred stock into
1,433,437 shares of
common stock -- -- -- (3,719,636) 1,433 3,718,203
Issuance of 50,000 shares
of common stock upon
exercise of warrant -- -- -- -- 50 149,950
Issuance of 30,662 shares
of common stock upon
exercise of stock options -- -- -- -- 31 93,737
9% preferred stock dividends -- -- -- -- -- (9,900)
Net loss -- -- -- -- -- --
----------- ----------- ----------- ---------- ----------- -----------
Balance, June 30, 1997 $ 110,000 $ 86,810 $ -- $ -- $ 9,394 $34,643,526
----------- ----------- ----------- ---------- ----------- -----------
</TABLE>
<TABLE>
<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, 1995 $(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 -- -- -- --
Conversion of 260,000
shares of 9% preferred
stock into 34,667 shares
of common stock -- -- -- --
Conversion of 375,000
shares of Series B
preferred
stock into 36,793 shares
of common stock -- -- -- --
Conversion of 125 shares of
Series C preferred stock
into 1,133,037 shares of
common stock -- -- -- --
Adjustment of accrued
dividends for conversion of
9% preferred stock -- -- -- 128,700
Issuance of 205,878 shares
of common stock upon
exercise of stock options -- -- -- 774,255
Amortization of deferred
compensation 42,109 -- -- 42,109
Reversal of unamortized
deferred compensation upon
resignation of Chief
Executive Officer 103,250 -- -- --
9% preferred stock dividends -- -- -- (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 -- -- (25,359,298) 3,644,763
Series A preferred stock
imputed dividends -- -- (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) --
Conversion of 35 shares of
Series C convertible
preferred stock into
384,574 shares of common
stock -- -- -- --
Conversion of 400 shares of
Series D convertible
preferred stock into
1,433,437 shares of
common stock -- -- -- --
Issuance of 50,000 shares
of common stock upon
exercise of warrant -- -- -- 150,000
Issuance of 30,662 shares
of common stock upon
exercise of stock options -- -- -- 93,768
9% preferred stock dividends -- -- -- (9,900)
Net loss -- -- (4,929,980) (4,929,980)
------------ ----------- ------------ -----------
Balance, June 30, 1997 $ -- $ -- $(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 redeemable
convertible 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
=========== =========== =========== ========== =========== ===========
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Deferred Government development
compensation securities stage Total
- ---------------------------------------------------------------------------------------------
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 redeemable
convertible 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)
============ =========== ============ ===========
</TABLE>
See accompanying notes.
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
inception
(February 10,
Years ended June 30, 1987) through
-------------------------- June 30,
1998 1997 1998
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(5,257,960) $(4,929,980) $(35,407,564)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 201,660 198,059 1,508,741
Settlement with Alkermes, Inc. -- -- 1,227,977
Changes in operating assets/liabilities:
Accounts payable and accrued expenses (89,764) 302,809 470,522
Accrued interest on U.S. Government securities (8,709) (12,673) (171,238)
Other current assets (36) 16,897 (71,566)
Interest receivable from former officer -- -- (19,274)
Realized loss on sale of U.S. Government securities -- -- 54,317
Stock option compensation expense -- -- 555,809
Stock issued for services -- -- 28,750
Reduction in note receivable from former
officer -- compensation expense -- -- 22,600
Changes in other assets and other liabilities 88,743 54,935 188,997
----------- ----------- ------------
Net cash used in operating activities (5,066,066) (4,369,953) (31,611,929)
----------- ----------- ------------
Cash flows from investing activities:
U.S. Government securities -- available for sale
Purchases (1,739,995) (937,327) (38,823,738)
Sales 1,750,000 950,000 38,940,820
Purchase of fixed assets (187,235) (61,054) (2,135,636)
Sale of fixed assets -- 752 10,988
Decrease (increase) in --
Other assets -- 3,212 (39,870)
Note receivable from former officer -- -- (100,000)
----------- ----------- ------------
Net cash used in investing activities (177,230) (44,417) (2,147,436)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of 9% preferred stock -- -- 1,076,588
Redemption of 9% preferred stock -- -- (63,750)
Payment of 9% preferred stock dividends -- -- (110,250)
Proceeds from issuance of Series B
convertible preferred stock -- -- 1,841,108
Proceeds from issuance of Series C
convertible preferred stock -- -- 3,576,543
Proceeds from issuance of Series D
convertible preferred stock -- 3,719,636 3,719,636
Proceeds from issuance of Series A
convertible preferred stock -- 3,936,720 3,936,720
Proceeds from issuance of common stock -- 243,768 21,922,418
Proceeds from subordinated convertible note -- -- 208,333
Principal payments on note payable to Alkermes, Inc. (200,000) -- (200,000)
Principal payments on capitalized leases (1,499) (8,501) (23,973)
----------- ----------- ------------
Net cash provided by (used in) financing activities (201,499) 7,891,623 35,883,373
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents (5,444,795) 3,477,253 2,124,008
Cash and cash equivalents, beginning of period 7,568,803 4,091,550 --
----------- ----------- ------------
Cash and cash equivalents, end of period $ 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 June 30, 1998
Note 1 -- Business and Summary of Significant Accounting Policies
Business -- Cortex Pharmaceuticals, Inc. (the "Company") was formed to engage in
the discovery, development and commercialization of innovative pharmaceuticals
for the treatment of neurological and psychiatric disorders. Since its formation
in 1987, the Company has been engaged in research and early clinical development
activities.
Basis of Presentation; Development Stage Enterprise -- From inception through
June 30, 1998, the Company has generated only modest operating revenues and has
incurred losses aggregating $35,407,564. Successful completion of the Company's
development program and its transition, ultimately, to attaining profitable
operations is dependent upon obtaining additional financing adequate to fulfill
its research and development activities, and achieving a level of revenue
adequate to support the Company's cost structure. There can be no assurance that
the Company will be successful in these areas. To supplement its existing
resources, the Company is likely to raise additional capital through the sale of
debt or equity. There can be no assurance that such capital will be available on
favorable terms, or at all, and if additional funds are raised by issuing equity
securities, dilution to existing stockholders is likely to result.
The Company is seeking collaborative or other arrangements with larger
pharmaceutical companies, under which such companies would provide additional
capital to the Company in exchange for exclusive or non-exclusive license or
other rights to certain of the technologies and products the Company is
developing. Competition for corporate partnering arrangements with major
pharmaceutical companies is intense, with a large number of biopharmaceutical
companies attempting to arrive at such arrangements. Accordingly, although the
Company is presently engaged in discussions with a number of candidate
companies, there can be no assurance that an agreement will arise from these
discussions in a timely manner, or at all, or that any agreement that may arise
from these discussions will successfully reduce the Company's short-term or
long-term funding requirements.
The accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result from the
possible inability of the Company to continue as a going concern.
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.
Net Loss per Share -- Net loss per share is computed based on the weighted
average number of common shares outstanding and includes preferred stock
dividends. Shares issuable upon conversion of preferred stock and upon exercise
of outstanding stock options and warrants are not included since the effects
would be anti-dilutive. For purposes of computing net loss per share, preferred
stock dividends include dividends that actually accrued and `imputed dividends'
for preferred stock issued with a nondetachable beneficial conversion feature
near the date of issuance. Imputed dividends represent the aggregate difference
between conversion price and the fair market value of the common stock as of the
date of issuance of the preferred stock, without regard to the actual date upon
which the preferred stock may be converted.
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 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
F-11
<PAGE>
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 SFAS 128 requirements.
Employee Stock Options -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), in accounting for its employee stock options because the alternative fair
value accounting provided for under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), requires use of
option valuation models that were not developed for use in valuing employee
stock options. According to APB 25, no compensation expense is recognized since
the exercise price of the Company's stock options generally equals the market
price of the underlying stock on the date of grant.
Research and Development Costs -- All costs related to research and development
activities are treated as expenses in the period incurred.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts may differ from those estimates.
Reclassifications -- Certain previously reported amounts have been reclassified
to conform with the June 30, 1998 presentation.
Note 2 -- Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Laboratory equipment $ 1,168,958 $ 1,017,461
Leasehold improvements 622,036 620,716
Furniture and equipment 112,129 90,689
Computers and software 236,008 223,030
----------- -----------
2,139,131 1,951,896
Accumulated depreciation (1,483,712) (1,282,052)
----------- -----------
$ 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 June 30, 1998 and June 30, 1997 consisted of
250 and 400 shares, respectively, of 400 shares issued in a two-tranche private
placement in 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 is equal to 80% of the Average Stock Price if the Average Stock
Price is greater than $2.50 per share at the time of conversion; $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
F-12
<PAGE>
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 were recorded and included in the computation of net loss
per share for the year ended June 30, 1997 (Note 1).
Note 4 -- Stockholders' Equity
Preferred Stock
The Company has authorized a total of 5,000,000 shares of preferred stock, par
value $0.001 per share, of which 1,250,000 shares have been designated as 9%
Cumulative Convertible Preferred Stock (non-voting, "9% Preferred"); 3,200,000
shares have been designated as Series B Convertible Preferred Stock (non-voting,
"Series B Preferred"); 500 shares have been designated as Series D Convertible
Preferred Stock (non-voting, "Series D Preferred"); 400 shares have been
designated as Series A Convertible Preferred Stock (non-voting, "Series A
Preferred"); and 549,100 shares are presently undesignated and may be issued
with such rights and powers as the Board of Directors may designate.
The 9% Cumulative Convertible Preferred Stock as of June 30, 1998 and June 30,
1997 consisted of 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 June 30, 1998 and June 30, 1997 were $26,775 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 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.
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, all outstanding shares of Series D
Preferred had 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
F-13
<PAGE>
dividends aggregating $879,672 were recorded in connection with the three
tranches, and were included in the computation of net loss per share for the
fiscal year ended June 30, 1997 (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 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. (Note
5), 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 of the date of the restructuring.
As of June 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;
1,483,983 shares for issuance upon conversion of the Series A Preferred Stock;
1,286,694 shares for issuance upon exercise of warrants; and 1,011,446 shares
for issuance upon exercise of outstanding stock options.
Stock Option and Stock Purchase Plans
Employee/Director Option Plan -- The Company's 1989 Incentive Stock Option,
Nonqualified Stock Option and Stock Purchase Plan provides for the granting by
the Company of options and rights to purchase up to an aggregate of 700,000
shares of the Company's authorized but unissued common stock (subject to
adjustment under certain circumstances, such as stock splits, recapitalizations
and reorganizations) to directors, officers and other employees of the Company.
The exercise price of nonqualified stock options and the purchase price of stock
offered under this plan, which terminates February 2, 1999, must be at least 85%
of the fair market value of the common stock on the date of grant. The exercise
price of incentive stock options must be at least equal to the fair market value
of the common stock on the date of grant. As of June 30, 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 June 30, 1998, options to purchase an aggregate of
302,554 shares of common stock 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 June 30, 1998,
this was the only option outstanding under the Executive Stock Plan.
1996 Stock Incentive Plan -- The 1996 Plan provides for the granting of options
and rights to purchase up to an aggregate of 1,293,499 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
F-14
<PAGE>
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 June 30, 1998, options to
purchase an aggregate of 221,813 shares of common stock were outstanding under
the 1996 Plan, and an additional 1,071,686 shares of common stock were reserved
for future option grants.
As of June 30, 1998, options to purchase an aggregate of 685,549 shares of
common stock 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
and $555,809 for 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.
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 -- --
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.
F-15
<PAGE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not 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>
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
F-16
<PAGE>
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 the
consummation of a corporate partnership between Cortex and a larger
pharmaceutical company, whichever is earlier. In connection with the new
agreement, 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 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 years
ended June 30, 1998 and 1997 and the period from inception (February 10, 1987)
through June 30, 1998 was $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 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 the Company 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 option 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 252,000 shares of the
Company's common stock at $5.00 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.
F-17
<PAGE>
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 40,604 shares of the
Company's common stock at $4.31 per share, subject to adjustment under certain
circumstances. Warrants to purchase 5,800 shares of the Company's common stock
vested immediately, and warrants to purchase 17,402 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
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-18
<PAGE>
Cortex Pharmaceuticals, Inc.
Annual Report on Form 10-KSB
Year ended June 30, 1998
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ---------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation dated April 11, 1989, as
amended by Certificate of Amendment of June 27, 1989, by
Certificate of Designation filed April 29, 1991, by Certificate of
Correction filed May 1, 1991, by Certificate of Amendment of
Certificate of Designation filed June 13, 1991, by Certificate of
Amendment of Certificate of Incorporation filed November 12, 1992,
by Certificate of Amendment of Restated Certificate of
Incorporation filed January 11, 1995, by Certificate of Designation
filed December 8, 1995, by Certificate of Designation filed October
15, 1996, and by Certificate of Designation filed June 4, 1997,
incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form SB-2 filed June 18, 1997. - -
3.2 By-Laws of the Company, as adopted March 4, 1987, and amended
through October 8, 1996, incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-KSB filed October 15,
1996. - -
10.2 Consulting Agreement, dated October 30, 1987, between the Company
and Carl W. Cotman, Ph.D. * - -
10.3 Consulting Agreement, dated as October 30, 1987, between the
Company and Gary S. Lynch, Ph.D. * - -
10.8 1989 Incentive Stock Option, Nonqualified Stock Option and Stock
Purchase Plan. * - -
10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan. *
10.18 License Agreement, dated February 11, 1991 between the Company and
Georgia Tech Research Corporation, incorporated by reference to
Exhibit 10.18 of the Company's Amendment on Form 8 filed November
27, 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, 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 of the Securities Exchange Act of 1934). - -
10.36 Amended and Restated Employment Agreement between the Company and
D. Scott Hagen, dated September 1, 1993, incorporated by reference
to Exhibit 10.36 of the Company's Annual Report on Form 10-KSB
filed October 13, 1993. - -
</TABLE>
EXH-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------------------------------------------------------------------------------------------
<S> <C> <C>
10.36.1 Amendment No. 1, dated January 1, 1995, to the Amended and Restated
Employment Agreement between the Company and D. Scott Hagen, dated
September 1, 1993, incorporated by reference to the same numbered
Exhibit to the Company's Quarterly Report on Form 10-QSB filed
April 28, 1995. - -
10.41 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted December 13, 1993, incorporated by
reference to Exhibit 4.9 of the Company's Registration Statement on
Form S-8 filed January 28, 1994. - -
10.42 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 13, 1993, incorporated by reference
to Exhibit 4.8 of the Company's Registration Statement on Form S-8
filed January 28, 1994. - -
10.43 Amendment to Executive Stock Plan adopted December 13, 1993,
incorporated by reference to Exhibit 4.7 of the Company's
Registration Statement on Form S-8 filed January 28, 1994. - -
10.44 Lease Agreement, dated January 31, 1994, for the Company's
facilities in Irvine, California, incorporated by reference to
Exhibit 10.44 of the Company's Quarterly Report on Form 10-QSB
filed May 16, 1994. - -
10.45 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted December 15, 1994, incorporated by
reference to Exhibit 4.10 of the Company's Registration Statement
on Form S-8 filed February 8, 1995. - -
10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 1994, incorporated by reference to
Exhibit 4.9 of the Company's Registration Statement on Form S-8
filed February 8, 1995. - -
10.47 Amendment to Executive Stock Plan adopted September 9, 1994,
incorporated by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-KSB filed October 13, 1995. - -
10.48 Amendment to the Non-Employee Director Formula Grant Plan, adopted
December 15, 1994, incorporated by reference to the same numbered
Exhibit to the Company's Annual Report on Form 10-KSB filed October
13, 1995 * - -
10.49 Settlement Agreement between the Company and Alkermes, Inc., dated
October 5, 1995, incorporated by reference to the same numbered
Exhibit to the Company's Annual Report on Form 10-KSB filed October
13, 1995. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to the
Company's Application requesting confidential treatment under Rule
406 of the Securities Act of 1933). - -
10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued
to Swartz Investments, Inc., incorporated by reference to Exhibit
4.3 of the Company's Current Report on Form 8-K filed December 22,
1995. - -
10.52 Registration Rights Agreement dated December 8, 1995, entered into
with purchasers of Series C Preferred Stock and Swartz Investments,
Inc., incorporated by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K filed December 22, 1995. - -
10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued
to Vector Securities International, Inc., incorporated by reference
to the same numbered Exhibit to the Company's Pre-Effective
Amendment No. 1 to Post Effective Amendment No. 2 to Registration
Statement on Form SB-2, No. 33-71894, filed January 26, 1996. - -
10.55 Warrant dated November 30, 1995, to purchase 210,000 shares issued
to Vector Securities International, Inc., incorporated by reference
to the same numbered Exhibit to the Company's Pre-Effective
Amendment No. 1 to Post Effective Amendment No. 2 to Registration
Statement on Form SB-2, No. 33-71894, filed January 26, 1996. - -
10.56 Employment Agreement dated May 15, 1996, between the Company and
Vincent F. Simmon, Ph.D., incorporated by reference to the same
numbered Exhibit to the Company's Current Report on Form 8-K filed
June 4, 1996. - -
10.57 Amendment to 1989 Incentive Stock Option, Nonqualified Stock Option
and Stock Purchase Plan adopted December 12, 1995, incorporated by
reference to Exhibit 4.11
</TABLE>
EXH-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- -----------------------------------------------------------------------------------------
<S> <C> <C>
of the Company's Registration Statement on Form S-8 filed September
13, 1996. - -
10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock
Purchase Plan adopted December 12, 1995, incorporated by reference
to Exhibit 4.10 of the Company's Registration Statement on Form S-8
filed September 13, 1996. - -
10.59 Securities Subscription Agreement for Series D Preferred Stock
dated October 15, 1996, between the Company and Ashline Ltd.,
incorporated by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-QSB filed November 12, 1996. - -
10.60 1996 Stock Incentive Plan, incorporated by reference to the same
numbered Exhibit to the Company's Quarterly Report on Form 10-QSB
filed November 12, 1996. - -
10.61 Form of Subscription Agreement with each purchaser of Series A
Preferred Stock, incorporated by reference to Exhibit 10.61 to the
Company's Registration Statement on Form SB-2 filed June 18, 1997.
10.62 Form of Warrant issued to each purchaser of Series A Preferred
Stock, incorporated by reference to Exhibit 10.62 to the Company's
Registration Statement on Form SB-2 filed June 18, 1997.
10.63 Registration Rights Agreement with holder of Series A Preferred
Stock dated June 5, 1997, incorporated by reference to Exhibit
10.63 to the Company's Registration Statement on Form SB-2 filed
June 18, 1997
21 Subsidiaries of the Registrant. - -
23 Consent of Ernst & Young LLP, independent auditors. - -
24 Power of Attorney (included on signature page). - -
27 Financial Data Schedule. - -
</TABLE>
- --------------------------
* 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 21
SUBSIDIARIES OF THE REGISTRANT
None.
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1996 Stock Incentive Plan, the 1989 Incentive Stock
Option, Nonqualified Stock Option and Stock Purchase Plan, the 1989 Special
Nonqualified Stock Option and Stock Purchase Plan and the Executive Stock Plan
of our report dated July 17, 1998, with respect to the financial statements of
Cortex Pharmaceutical, Inc. included in the Annual Report (Form 10-KSB) for the
year ended June 30, 1998.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
September 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1998 AND THE RELATED STATEMENTS OF OPERATIONS AND CASH
FLOWS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,124,008
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,195,574
<PP&E> 2,139,131
<DEPRECIATION> 1,483,712
<TOTAL-ASSETS> 2,874,846
<CURRENT-LIABILITIES> 497,297
<BONDS> 948,253<F1>
2,460,450
121,810
<COMMON> 10,237
<OTHER-SE> (1,163,201)
<TOTAL-LIABILITY-AND-EQUITY> 2,874,846
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,591,835
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,006
<INCOME-PRETAX> (5,257,960)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,257,960)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,257,960)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
<FN>
<F1>PROMISSORY NOTE PAYABLE TO ALKERMES, INC.
</FN>
</TABLE>
