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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB/A
X Annual Report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the fiscal year ended June 30, 1999
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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
(Title of Class)
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
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NO
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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
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Revenues for the issuer's most recent fiscal year were $3,151,000. The aggregate
market value of the voting stock held by non-affiliates as of August 13, 1999
was $15,211,035 (based on the last sale price of the common stock as reported by
the Over-the-Counter Bulletin Board).
As of September 23, 1999, there were 15,528,182 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 17, 1999.
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business............................. 3
PART II
Item 7. Financial Statements................................ 16
PART III
Item 13. Exhibits and Reports on Form 8-K.................... 16
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.
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. In January 1999, the Company entered a
research collaboration and exclusive worldwide license agreement with NV Organon
("Organon"), a subsidiary of Akzo Nobel (The Netherlands). The agreement will
enable Organon to develop and commercialize the Company's Ampakine technology
for the treatment of schizophrenia and, upon Organon's election, for the
treatment of depression. Cortex continues to seek collaborative or licensing
arrangements with other pharmaceutical companies. These arrangements may permit
other applications of the Ampakines to be advanced into later stages of clinical
development and may provide access to the extensive clinical trials management,
manufacturing and marketing expertise of
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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.
In the fiscal years ended June 30, 1999 and 1998, the Company's expenditures on
research and development were $3,379,732 and $4,007,466, respectively, with the
decrease attributable to the timing of Phase I/IIa human clinical testing of
CX516 (Ampalex/(R)/) in patients with schizophrenia and in patients with
Alzheimer's disease.
AMPA Receptor Program
In June 1993, Cortex licensed a new class of compounds -- the Ampakines --
from the University of California. Ampakines facilitate the activity of the AMPA
receptor, which binds the neurotransmitter glutamate. The Ampakines interact
in a highly specific manner with the AMPA receptor in the brain, lowering the
amount of neurotransmitter required to generate a response and increasing the
magnitude of the response to any given amount of glutamate. 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.
It is well known that synaptic connections, including those that utilize
glutamate, decline with age. Thus, disorders such as mild cognitive impairment
associated with aging may be amenable to treatment with Ampakines. Two prominent
diseases that may benefit from AMPA receptor-directed therapeutics are
schizophrenia and Alzheimer's disease. The Company and its collaborators have
also obtained encouraging preliminary results in animal models of depression,
sexual dysfunction and depressed endocrine function.
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. One
of the most common side effects 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
without agranulocytosis side effects.
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 many 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
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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 the discovery 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. Scientists at both the University of California, Irvine and Cortex have
since extended this finding 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.
In January 1999, the Company entered into an exclusive worldwide license
agreement with Organon. The agreement will enable Organon to develop and
commercialize Cortex's proprietary Ampakine technology for the treatment of
schizophrenia and to explore it in the area of depression. The agreement
includes an upfront payment of $2,000,000, research and development payments of
up to $3,000,000 per year for two years, and milestone payments, plus royalty
payments on worldwide sales. The Company hopes that the agreement with Organon
will provide an accelerated program to bring the Ampakines to market for
schizophrenia and possibly depression, if proven safe and effective in clinical
trials.
Shortly thereafter, in April 1999 the Company reported preliminary results
from a study with CX516 in patients with schizophrenia being treated with
clozapine. This Phase I/IIa clinical trial, conducted at Massachusetts General
Hospital, was designed primarily as a safety study. Clinical and psychological
testing was also included in an attempt to obtain a preliminary indication that
CX516 may effect the psychological parameters that likely contribute to symptoms
of the disease, particularly the cognitive symptoms that have thus far been
resistant to treatment. Preliminary results indicate that CX516 is reasonably
safe in combination with clozapine and improves performance on several tests of
verbal learning, memory, problem solving and distractability. The improvements
noted in CX516-treated patients appeared to persist for a period of time after
cessation of treatment.
A second similar study to assess the affect of CX516 as a 'mono' therapy in
patients with schizophrenia was initiated at the National Institutes of Health
in Bethesda, Maryland. Because of slow patient enrollment, the Company has since
elected to discontinue this study. The Company intends that further clinical
testing of the Ampakines in patients with schizophrenia will be conducted by its
corporate partner, Organon. Data obtained from the testing performed at
Massachusetts General Hospital should be very helpful in the design of such
trials. Cortex is pleased with the progress of the Organon research
collaboration and anticipates receiving its first milestone payment from the
agreement before the end of 1999.
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 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. Pharmaceuticals to alleviate
deficits in memory and cognition could potentially enable these elderly
individuals to remain independent longer.
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. 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
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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.
It is in the early stages of Alzheimer's disease -- the first few years --
that Cortex believes Ampakines may 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. Research also suggests that Ampakines may increase the
production of neurotrophic factors that are known to be protective for nerve
cells.
One of the most compelling of the animal studies conducted to date with the
Ampakines involved an assessment of the effects 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 been completed with CX516
("Ampalex") in healthy volunteers. 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 and at all dosage
levels, 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
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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.
After 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. To date, 15 patients have been enrolled in this
study, with enrollment of an additional five patients anticipated.
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. Cortex is seeking a larger pharmaceutical
company partner for further development of Ampakines for the potential
treatment of Alzheimer's disease and age-related declines in brain function.
Several companies have expressed a strong interest in this program.
Calpain Inhibitor Program
Calpain is a protease, a protein that digests other proteins. It is
involved in a variety of biological processes throughout the body and has been
implicated in the pathology of several diseases and disorders.
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.
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 Cortex 1993 annual report included a discussion
of the Company's research in cerebral vasospasm, which involved reversal of an
existing spasm of blood vessels in the brain. In October 1993, Alkermes notified
the Company that Alkermes believed that it had rights to this indication under
the Alkermes Agreement. In November 1993, Alkermes filed an action in U.S.
District Court in Massachusetts alleging that the Company had breached the
Alkermes Agreement by developing calpain inhibitors for cerebral vasospasm.
In October 1995, the Company and Alkermes agreed to a settlement of the
dispute. Alkermes agreed to dismiss its action against Cortex 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
was payable in October
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1999 or upon consummation of a corporate partnership between Cortex and a larger
pharmaceutical company, whichever was earlier. In connection with the
restructuring 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.
With the signing of the license agreement with Organon (see Note 5 of Notes to
Financial Statements), the note became due and payable. In July 1999, the terms
of the note were restructured to include a principal and interest payment of
$250,000 and monthly payments of $50,000 from August 1999 to January 2000. The
balance of the note and accrued interest are due and payable by February 28,
2000. In connection with this restructuring agreement, the Company agreed to
issue to Alkermes a five-year warrant to purchase 100,000 shares of Common Stock
at an exercise price derived from the fair market value of the Company's Common
Stock.
Cortex has subsequently shifted more of its resources from its calpain
inhibitor program to its Ampakine technology platform. As part of the Company's
emphasis on its Ampakine program, Cortex canceled its licensing agreement with
Georgia Tech Research Corporation related to the Company's calpain inhibitor
technology during the year ended June 30, 1999.
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
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 products for certain indications in North
America. The Company's worldwide licensing agreement with Organon (see Note 5 of
Notes to Financial Statements) does not provide Cortex with co-promotional
rights. There is no assurance that the Company will be able to enter into co-
promotional arrangements in connection with its other 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 was subsequently 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.
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.
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In April 1999, Cortex received a patent that covers the Company's Ampakines
- -- as well as compounds made by others -- for the treatment of memory and
cognition. It allows Cortex and its licensees to exclude others in the United
States from making and selling AMPA-receptor modulating compounds for the
treatment of memory or dementia, including Alzheimer's disease. The coverage
also extends to psychiatric conditions including depression, obsessive
compulsive disorder, attention deficit disorder, and phobic disorders. In 1998,
Cortex received a United States patent that contained a similarly broad claim
for any AMPA-modulating compound to treat schizophrenia.
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 Cortex
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
Organon, or other pharmaceutical company partner or partners that 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 safety of the drug, involve fewer than 100 subjects,
and may take from six months to over a year. Phase II trials normally involve a
few hundred patients and are designed primarily to demonstrate effectiveness in
treating or diagnosing the disease or condition for which the drug is intended,
although short-term side effects and risks in people whose health is impaired
may also be examined. Phase III trials may involve up to several thousand
patients who have the disease or condition for which the drug is intended, to
approximate more closely the conditions of ordinary medical practice. Phase III
trials are also designed to clarify the drug's benefit-risk relationship, to
uncover less common side effects and adverse reactions, and to generate
information for proper labeling of the drug. The FDA receives reports on the
progress of each
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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. Accordingly, the Company will be dependent upon entering into
partnerships or other collaborative arrangements with third parties with the
required resources to obtain the needed approvals. Along with its agreement with
Organon, Cortex intends to enter into license or other arrangements with other
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, approximately 15 drugs are in
development in the U.S. for schizophrenia. In addition, over 25 drugs are under
clinical investigation in the U.S. for the treatment of Alzheimer's disease. The
Company's competitors have substantially greater financial and other resources
and larger research and development staffs. Larger pharmaceutical company
competitors also have significant experience in preclinical testing, human
clinical trials and regulatory approval procedures.
In addition, colleges, universities, governmental agencies and other public
and private research organizations will continue to conduct research and are
becoming more active in seeking patent protection and licensing arrangements to
collect license fees, milestone payments and royalties in exchange for license
rights to technology that they have developed, some of which may be directly
competitive with that of the Company. These institutions also compete with
companies such as Cortex in recruiting highly qualified scientific personnel.
The Company expects technological developments in the neuropharmacology
field to continue to occur at a rapid rate and expects that competition will
remain intense as advances continue to be made. Although the Company believes,
based on the technical qualifications, expertise and reputations of its
Scientific Directors, consultants and other key scientists, that it will be able
to compete in the discovery and early clinical development of therapeutics for
neurological and psychiatric disorders, the Company does not have the resources,
and does not presently intend, to compete with major pharmaceutical companies in
clinical testing, manufacturing and marketing.
-10-
<PAGE>
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, 1999, Cortex had 21 full-time employees and had engaged four
part-time Ph.D.-level scientific consultants. Of the 21 full-time employees, 16
are engaged in research and development and five 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
Without further injections of capital, we anticipate that we have
sufficient funds to maintain our operations into early calendar year 2000. We
will require additional funds to continue our operations beyond that time. We
cannot say with any amount of certainty that we will be able to obtain the
additional needed funds on reasonable terms, or at all. If we decide to raise
additional funds by issuing more of our securities, stockholders at the time of
issuance will experience a dilution to the value of their securities.
We anticipate receiving the first milestone from our agreement with Organon
during calendar year 1999. If we receive this milestone payment in or before
January 2000, we expect that we may sustain operations through the end of
calendar 2000. We cannot give any assurance that the Company will receive the
milestone during this timeframe, or at all.
If we are unable to obtain additional funds, we could lose our key
employees and could be required to abandon one or more of our product
development programs. In addition, we may be unable to meet our research
spending obligations under existing licensing agreements and may be unable to
continue our business operations.
We are presently seeking collaborative or other arrangements with larger
pharmaceutical companies to provide for both our immediate and longer-term
funding requirements. These agreements would potentially provide us with
additional funds in exchange for exclusive or non-exclusive license or other
rights to the technologies and products that we are currently developing.
Competition between biopharmaceutical companies for these types of arrangements
is intense. Although we have been engaged in discussions with candidate
companies for some time, we cannot give any assurance that these discussions
will result in an agreement or agreements in a timely manner, or at all.
Additionally, we cannot assure you that any resulting agreement will generate
sufficient revenues to offset our operating expenses and longer-term funding
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
-11-
<PAGE>
Reliance on N.V. Organon
We are dependent on future payments from Organon to continue the
development and commercialization of our Ampakine technology. Under the
agreement with Organon that we entered into in January 1999, we share the
research efforts. Organon has primary responsibility for developing and
commercializing Ampakines for use in the treatment of schizophrenia, with an
option to extend the rights to the treatment of depression. The agreement
provides for an up-front payment by Organon of $2,000,000 and research support
payments of up to $3,000,000 per year for two years (subject to us providing
agreed-upon levels of research). The agreement also includes milestone payments,
plus royalty payments on a worldwide basis. Under the terms of the agreement,
Organon has the right at any time to terminate the agreement upon four months'
prior notice. In addition, Organon has the right to terminate the research and
development related to the agreement upon 30 days' prior notice in the event
that we materially breach the agreement and do not cure the breach within 60
days of receipt of a notice of breach from Organon. If Organon were to
discontinue its financial support, we might not be able to continue the
development of our Ampakine technology, and our financial condition would be
seriously impaired. See "Description of Business;" "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Development Stage Company; History of Losses
We are considered a "development stage" company because, since our
formation on February 10, 1987 through June 30, 1999, we have generated only
modest operating revenues and we have incurred net losses aggregating
$37,029,014. As of June 30, 1999, we had an accumulated deficit of $39,060,853.
We will require substantial additional funds to advance our research and
development programs, particularly if we decide to independently conduct later-
stage clinical testing and apply for regulatory approval of any of our proposed
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Description of Business."
Dependence on Strategic Alliances and Third Parties for Clinical Testing,
Manufacturing and Marketing
We do not have the resources, and do not presently intend, to conduct
later-stage human clinical trials or to manufacture our proposed products.
Therefore, in addition to our agreement with Organon, we are seeking other
pharmaceutical company partners to conduct such activities for most or all of
our proposed products. In connection with our efforts to secure corporate
partners, we will seek to retain certain co-promotional rights to our proposed
products. These co-promotional rights will allow us to market our products to
selected medical specialists while our corporate partner markets our products to
the general medical market. We cannot assure you that we will be able to enter
into any partnering arrangements on this or any other basis. In addition, we
cannot assure you that we, Organon, or our prospective corporate partners, can
successfully introduce our proposed products. We also face the risks that our
products will be rejected by patients, health care providers or insurance
companies, or that our products cannot be manufactured and marketed at prices
that would permit us to operate profitably. See "Description of Business."
Technological Uncertainty; Early Stage of Product Development; No Assurance of
Regulatory Approvals
We cannot assure you that our research and development activities will
enable us to produce any products able to withstand competition. Our development
of each product is subject to the risks of failure commonly experienced in the
development of products based upon innovative technologies and the expense and
difficulty of obtaining approvals from regulatory agencies. All of our proposed
products are in the preclinical or early clinical stage of development and will
require significant additional funding for research, development and clinical
testing before we are able to submit them to any of the regulatory agencies for
clearances for commercial use. We cannot assure you that we will be able to
license any technologies or proposed products, other than those licensed to
Organon. We cannot assure you that we will be able to complete successfully any
of our research and development activities. Even if we do complete them, we
cannot assure you that we will be able to market successfully any of the
products or
-12-
<PAGE>
that we will be able to obtain the necessary regulatory approvals or that
customers will like our products. We also face the risk that any or all of our
products will not work as intended or that they will be toxic, or that, even if
they do work and are safe, that our products will be uneconomical to manufacture
and market on a large scale. We also face the risk that the rights of other
persons or entities will stop us from marketing any of our products or that
other persons or entities might develop and market a superior or equivalent
product. Due to the extended testing and regulatory review process required
before we can obtain marketing clearance, we do not expect to be able to
commercialize any therapeutic drug for at least five years, either directly or
through our corporate partners or licensees. See "Description of Business."
Limited Proprietary Rights; Uncertainty Associated With Patent Protection
Under our agreements with the Regents of the University of California, we
have exclusive rights to our Ampakine compounds for all applications. These
rights are secured by patents or patent applications owned wholly by others or
by others as co-owners with us. Our existing agreements require us to make
certain minimum annual payments, meet certain milestones or diligently seek to
commercialize the underlying technology. Our failure to meet any of these
requirements could allow the other party to terminate that particular agreement.
Our success will depend, in part, on our ability to get patent protection
for our products and processes in the United States and elsewhere. We have filed
and intend to continue to file patent applications as we need them. We cannot
assure you, however, that any additional patents will issue from any of these
applications or, if patents do issue, that the claims allowed will be
sufficiently broad to protect our technology. Also, we cannot assure you that
any patents issued to us or licensed by us can withstand challenges made by
others or that we will be able to protect our rights.
If we are unable to obtain sufficient protection of our proprietary rights
in our products or processes prior to or after obtaining regulatory clearances,
our competitors may be able to obtain regulatory clearance and market competing
products by demonstrating the equivalency of their products to our products. If
they are successful at demonstrating the equivalency between the products, our
competitors would not have to conduct the same lengthy clinical tests that we
have conducted.
We also rely on trade secrets and confidential information that we try to
protect by entering into confidentiality agreements with other parties. We
cannot assure you that any of the confidentiality agreements will be honored,
or, if breached, that we would have enough remedies to protect the confidential
information. Further, we cannot assure you that our competitors will not
independently learn our trade secrets or develop similar or superior
technologies. To the extent that our consultants, key employees or others apply
technological information independently developed by them or by others to our
projects, disputes may arise regarding the proprietary rights to such
information. We cannot assure you that such disputes will be resolved in favor
of the Company. See "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 2.8 million additional shares of Common Stock could
become freely tradable without restriction. A total of 11,026 shares of Common
Stock are issuable upon conversion of currently outstanding 9% Preferred Stock
and Series B Preferred Stock. On issuance such shares will be freely tradable.
Sales of substantial amounts of Common Stock in the public market could
adversely affect the prevailing market price of the Common Stock. See "Market
for Common Equity and Related Stockholder Matters" and Note 4 of Notes to
Financial Statements.
Intense Competition
Our business is characterized by intensive research efforts. Our
competitors include many companies, research institutes and universities that
are working in a number of pharmaceutical or biotechnology disciplines to
develop therapeutic products similar to those we are currently investigating.
Most of these competitors have substantially greater financial, technical,
manufacturing, marketing,
-13-
<PAGE>
distribution and/or other resources than us. In addition, many of our
competitors have experience in performing human clinical trials of new or
improved therapeutic products and obtaining approvals from the FDA and other
regulatory agencies. We have no experience in conducting and managing later-
stage clinical testing or in preparing applications necessary to obtain
regulatory approvals. Accordingly, it is possible that our competitors may
succeed in developing products that are safer or more effective than those that
we are developing and may obtain FDA approvals for their products faster than we
can. We expect that competition in this field will continue to intensify. See
"Description of Business--Competition."
Dependence Upon Key Personnel
We are highly dependent upon key management and technical personnel.
Competition for qualified employees among pharmaceutical and biotechnology
companies is intense. The loss of any of our key management or technical
personnel, or our inability to attract, retain and motivate the additional
highly-skilled employees and consultants that our business requires, could
substantially hurt our business and prospects. We cannot assure you that we will
be able to retain our existing personnel or attract additional qualified
employees when we need them. See "Description of Business -- Employees."
Dependence on Relationships with Consultants and the University of California,
Irvine
We depend upon our relationships with academic consultants, particularly
Dr. Gary S. Lynch of the University of California, Irvine ("UCI"). Dr. Lynch
plays an important role in guiding our research. In addition, we sponsor
preclinical research in Dr Lynch's laboratories at UCI that is part of our
product development and corporate partnering profile. If our relationship with
Dr. Lynch or UCI was disrupted, our AMPA receptor research program could be
adversely affected. Our agreements with Dr. Lynch and our other consultants are
generally terminable by the consultant on short notice.
Government Regulation
The FDA and other similar agencies in foreign countries have substantial
requirements for therapeutic products. Such requirements often involve lengthy
and detailed laboratory, clinical and post-clinical testing procedures. It often
takes companies many years to satisfy these requirements, depending on the
complexity and novelty of the product. The review process is also extensive
which may delay the approval process even more. As of yet, we have not obtained
any approvals to market our products. Further, we cannot assure you that the FDA
or other regulatory agency will grant us approval for any of our products on a
timely basis, if at all. Even if regulatory clearances are obtained, a marketed
product is subject to continual review, and later discovery of previously
unknown problems may result in restrictions on marketing or withdrawal of the
product from the market. See "Description of Business--Government Regulation."
Lack of Listing on an Exchange or on the Nasdaq System; Restrictions on Our
Stock
Our Common Stock is not listed on any exchange or on the Nasdaq System.
Our Common Stock is reported on the OTC Bulletin Board. Because our shares are
not listed on any exchange or on the Nasdaq System, they are subject to the
regulations regarding trading in "penny stocks," which are those securities
trading for less than $5.00 per share. The following is a list of the
restrictions on the sale of penny stocks:
-14-
<PAGE>
. Prior to the sale of penny stock by a broker-dealer to a new
purchaser, the broker-dealer must determine whether the purchaser is
suitable to invest in penny stocks. To make that determination, a
broker-dealer must obtain, from a prospective investor, information
regarding the purchaser's financial condition and investment
experience and objectives. Subsequently, the broker-dealer must
deliver to the purchaser a written statement setting forth the basis
of the suitability finding.
. A broker-dealer must obtain from the purchaser a written agreement to
purchase the securities. This agreement must be obtained for every
purchase until the purchaser becomes an "established customer."
. The Exchange Act requires that prior to effecting any transaction in
any penny stock, a broker-dealer must provide the purchaser with a
"risk disclosure document" that contains, among other things, a
description of the penny stock market and how it functions and the
risks associated with such investment. These disclosure rules are
applicable to both purchases and sales by investors.
. A dealer that sells penny stock must send to the purchaser, within ten
days after the end of each calendar month, a written account statement
including prescribed information relating to the security.
As a result of our securities not being listed on an exchange or the Nasdaq
System and the rules regarding penny stock transactions, your ability to sell to
a third party may be limited. We make no guarantee that our current market-
makers will continue to make a market in our securities, or that any market for
our securities will continue.
Volatility of Stock Price
We are in the biopharmaceutical industry and the market price of securities
of life sciences companies in general has been very unpredictable. See "Market
for Common Equity and Related Stockholder Matters." Announcements by us or our
competitors concerning technological innovations, new products, proposed
governmental regulations or actions, developments or disputes relating to
patents or proprietary rights, public concern over the safety of therapeutic
products and other factors that affect the market generally could significantly
impact our business and the market price of our securities.
Dividends
Since our formation in 1987, we have not paid cash dividends on our Common
Stock. We do not anticipate paying any dividends on our Common Stock in the
future. Furthermore, the terms of the 9% Preferred Stock do not allow for the
payment of cash dividends unless we have paid the accrued and unpaid dividends
on the 9% Preferred Stock in full. As of June 30, 1999, accrued and unpaid
dividends on the 9% Preferred Stock were $23,513.
Anti-Takeover Provisions
Certain provisions of our Certificate of Incorporation could make it more
difficult for a third party to acquire control of our business, even if such
change in control would be beneficial to our stockholders. Our Certificate of
Incorporation allows our Board of Directors to issue up to 549,100 shares of
preferred stock without stockholder approval. Any such issuance could make it
more difficult for a third party to acquire our business and may adversely
affect the rights of our stockholders.
-15-
<PAGE>
PART II
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.
PART III
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.*
10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan.*
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).
10.31 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).
10.42 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.
10.44 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.
10.46 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.
10.48 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).
-16-
<PAGE>
Exhibit
Number Description
- --------------------------------------------------------------------------------
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.
10.58 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.
10.60 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.
10.64 Research and Collaboration and License Agreement between the Company
and N.V. Organon, dated January 13, 1999, incorporated by reference to
Exhibit 10.64 of the Company's quarterly report on Form 10-QSB as
filed on February 16, 1999. (Portions of this Exhibit were omitted and
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.)
10.65 Amendment No. 1 to the Lease Agreement for the Company's facilities in
Irvine, California, dated February 1, 1999.**
21 Subsidiaries of the Registrant.**
23.1 Consent of Ernst & Young LLP, independent auditors.
24 Power of Attorney (included on Signature page).**
27.1 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.
** Previously filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
-17-
<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
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 October 26, 1999
- --------------------------------- Executive Officer,
Vincent F. Simmon, Ph.D. Director
(Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
* Chairman of the Board October 26, 1999
- ---------------------------------- and Director
Robert F. Allnutt
* Director October 26, 1999
- -----------------------------------
Charles J. Casamento
* Director October 26, 1999
- -----------------------------------
Carl W. Cotman, Ph.D.
* Director October 26, 1999
- -----------------------------------
Michael G. Grey
S-1
<PAGE>
* Director October 26, 1999
- -----------------------------------
Davis L. Temple, Jr., Ph.D.
/s/ Vincent F. Simmon, Ph.D.
- -----------------------------------
* Vincent F. Simmon, Ph.D.,
Attorney-in-fact
S-2
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Report of Independent Auditors...................................... F-2
Balance Sheets -- As of June 30, 1999 and 1998...................... F-3
Statements of Operations -- For the years ended June 30, 1999 and
1998 and the period from inception (February 10, 1987)
through June 30, 1999............................................. F-4
Statements of Stockholders' Equity -- For the period from
inception (February 10, 1987) through June 30, 1999............... F-5
Statements of Cash Flows -- For the years ended June 30, 1999 and
1998 and the period from inception (February 10, 1987)
through June 30, 1999............................................. 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, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended June 30, 1999 and for the period from inception
(February 10, 1987) through June 30, 1999. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the two years in the period ended June
30, 1999 and for the period from inception (February 10, 1987) through June 30,
1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company 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 22, 1999
F-2
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
Balance Sheets
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 909,337 $ 2,124,008
Other current assets 60,977 71,566
------------ ------------
Total current assets 970,314 2,195,574
Furniture, equipment and leasehold improvements, net 531,970 655,419
Other 46,737 23,853
------------ ------------
$ 1,549,021 $ 2,874,846
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 523,474 $ 408,047
Accrued dividends 23,513 26,775
Accrued wages, salaries and related expenses 67,497 62,475
Unearned revenue 98,584 --
Current portion of note payable to Alkermes, Inc. 999,282 --
------------ ------------
Total current liabilities 1,712,350 497,297
Note payable to Alkermes, Inc., less current portion -- 948,253
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: 0 (1999)
and 250 (1998) -- 2,460,450
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: 27,500 (1999)
and 35,000 (1998) 27,500 35,000
Series B convertible preferred stock, $0.001
par value; $0.6667 per share liquidation
preference; shares authorized: 3,200,000;
shares issued and outstanding: 75,000 (1999)
and 150,000 (1998) 43,405 86,810
Common stock, $0.001 par value; shares
authorized: 30,000,000; shares issued and
outstanding: 15,519,382 (1999) and
10,237,126 (1998) 15,519 10,237
Additional paid-in capital 38,811,100 36,276,202
Deficit accumulated during the development stage (39,060,853) (37,439,403)
------------ ------------
Total stockholders' equity (deficit) (163,329) (1,031,154)
------------ ------------
$ 1,549,021 $ 2,874,846
============ ============
</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,
1999 1998 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Research and license revenue $ 3,051,406 $ 130,000 $ 6,781,406
Grant revenue 100,001 -- 194,718
----------- ----------- ------------
Total revenues 3,151,407 130,000 6,976,124
----------- ----------- ------------
Operating expenses:
Research and development 3,379,732 4,007,466 29,732,594
General and administrative 1,401,602 1,584,369 14,745,850
Settlement with Alkermes, Inc. -- -- 1,227,977
----------- ----------- ------------
Total operating expenses 4,781,334 5,591,835 45,706,421
----------- ----------- ------------
Loss from operations (1,629,927) (5,461,835) (38,730,297)
Interest income, net 8,477 203,875 1,701,283
----------- ----------- ------------
Net loss before preferred stock
accretion and dividends (1,621,450) (5,257,960) (37,029,014)
----------- ----------- ------------
Preferred stock accretion and dividends:
Accretion of and dividends on 9% Cumulative
Convertible Preferred Stock 2,475 3,150 610,399
Imputed dividends for Series D Convertible
Preferred Stock -- -- 879,672
Imputed dividends for Series A Convertible
Preferred Stock -- -- 1,012,493
----------- ----------- ------------
Net loss applicable to common stock $(1,623,925) $(5,261,110) $(39,531,578)
=========== =========== ============
Shares used in basic and diluted calculation 13,407,945 9,575,663
=========== ===========
Basic and diluted net loss per share $(0.12) $(0.55)
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
9% Series B Series C Series D
convertible convertible convertible convertible
preferred preferred preferred preferred Common
stock stock stock stock stock
----------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance, February 10, 1987
(date of inception) -- $ -- $ -- $ -- $ --
Sale of 1,420,000 shares of common stock,
$0.005 per share -- -- -- -- 1,420
Sale of 500,000 shares of common stock,
$2.50 per share, net of expenses -- -- -- -- 500
Issuance of 11,000 shares of common stock
for services, $2.50 per share -- -- -- -- 11
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- ------
Balance, June 30, 1988 -- -- -- -- 1,931
Conversion of subordinated convertible note
and interest payable into 83,868 shares of
common stock, $2.50 per share -- -- -- -- 84
Issuance of 500 shares of common stock for
services, $2.50 per share -- -- -- -- 1
Conversion of 5,000 shares of 9% preferred
stock into 3,333 shares of common stock -- -- -- -- 3
9% preferred stock dividends -- -- -- -- --
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- ------
Balance, June 30, 1989 -- -- -- -- 2,019
Initial public offering of 660,000 shares of
common stock, $10.00 per share, net of expenses -- -- -- -- 660
Redemption of 70,000 shares of common
stock, $0.005 per share -- -- -- -- (70)
9% preferred stock dividends -- -- -- -- --
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- ------
Balance, June 30, 1990 -- -- -- -- 2,609
Sale of 3,181,253 shares of Series B
convertible preferred stock, $0.6667
per share, net of expenses -- 1,841,108 -- -- --
Conversion of 182,200
shares of 9% preferred
stock into 24,293 shares of common stock -- -- -- -- 24
Issuance of compensatory stock options -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
9% preferred stock dividends -- -- -- -- --
9% preferred stock accretion -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- ------
Balance, June 30, 1991 -- $1,841,108 $ -- $ -- $2,633
----------- ----------- ----------- ----------- ------
Continued................
</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, February 10, 1987
(date of inception) -- $ -- $ -- $ -- $ --
Sale of 1,420,000 shares of common stock,
$0.005 per share 5,680 -- -- -- 7,100
Sale of 500,000 shares of common stock,
$2.50 per share, net of expenses 1,076,089 -- -- -- 1,076,589
Issuance of 11,000 shares of common stock
for services, $2.50 per share 27,489 -- -- -- 27,500
9% preferred stock accretion -- -- -- (2,560) (2,560)
Net loss -- -- -- (400,193) (400,193)
----------- ------------ ---------- ----------- -----------
Balance, June 30, 1988 1,109,258 -- -- (402,753) 708,436
Conversion of subordinated convertible note
and interest payable into 83,868 shares of
common stock, $2.50 per share 209,586 -- -- -- 209,670
Issuance of 500 shares of common stock for
services, $2.50 per share 1,249 -- -- -- 1,250
Conversion of 5,000 shares of 9% preferred
stock into 3,333 shares of common stock 22,903 -- -- -- 22,906
9% preferred stock dividends (55,125) -- -- -- (55,125)
9% preferred stock accretion -- -- -- (32,733) (32,733)
Net loss -- -- -- (1,222,517) (1,222,517)
----------- ------------ ---------- ----------- -----------
Balance, June 30, 1989 1,287,871 -- -- (1,658,003) (368,113)
Initial public offering of 660,000 shares of
common stock, $10.00 per share,
net of expenses 5,244,230 -- -- -- 5,244,890
Redemption of 70,000 shares of common
stock, $0.005 per share (280) -- -- -- (350)
9% preferred stock dividends (110,250) -- -- -- (110,250)
9% preferred stock accretion -- -- -- (33,064) (33,064)
Net loss -- -- -- (2,187,870) (2,187,870)
----------- ------------ ---------- ----------- -----------
Balance, June 30, 1990 6,421,571 -- -- (3,878,937) 2,545,243
Sale of 3,181,253 shares of Series B
convertible preferred stock, $0.6667
per share, net of expenses -- -- -- -- 1,841,108
Conversion of 182,200 shares of 9% preferred
stock into 24,293 shares of common stock 170,039 -- -- -- 170,063
Issuance of compensatory stock options 330,084 (291,938) -- -- 38,146
Amortization of deferred compensation -- 90,016 -- -- 90,016
9% preferred stock dividends (85,653) -- -- -- (85,653)
9% preferred stock accretion -- -- -- (32,075) (32,075)
Net loss -- -- -- (2,593,968) (2,593,968)
----------- ------------ ---------- ----------- -----------
Balance, June 30, 1991 $ 6,836,041 $ (201,922) $ -- $(6,504,980) $ 1,972,880
----------- ------------ ---------- ----------- -----------
Continued................
</TABLE>
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in Deferred
stock stock stock stock stock capital compensation
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1991 $ -- $ 1,841,108 $ -- $ -- $ 2,633 $ 6,836,041 $ (201,922)
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 (19,375)
Forfeiture of compensatory
stock options -- -- -- -- -- (146,182) 146,182
Amortization of deferred
compensation -- -- -- -- -- -- 58,567
9% preferred stock dividends -- -- -- -- -- (68,906) --
9% preferred stock accretion -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
-------- ----------- -------- -------- -------- ----------- -----------
Balance, June 30, 1992 -- 958,532 -- -- 3,047 9,473,384 (16,548)
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 (280,000)
Amortization of deferred
compensation -- -- -- -- -- -- 36,897
9% preferred stock dividends -- -- -- -- -- (53,028) --
9% preferred stock accretion -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
-------- ----------- -------- -------- -------- ----------- -----------
Balance, June 30, 1993 $ -- $ 332,774 $ -- $ -- $ 3,210 $10,720,659 $ (259,651)
-------- ----------- -------- -------- -------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Government development
securities stage Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1991 $ -- $ (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 -- -- 5,157
Forfeiture of compensatory stock
options -- -- --
Amortization of deferred compensation -- -- 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 -- (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 -- -- 70,000
Amortization of deferred compensation -- -- 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 $ -- $ (9,660,528) $ 1,136,464
---------- ------------ ------------
</TABLE>
Continued . . .
F-6
<PAGE>
<TABLE>
<CAPTION>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
9% Series B Series C Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in
stock stock stock stock stock capital
----------- ----------- ----------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 $ -- $ 332,774 $ -- $ -- $ 3,210 $10,720,659
Sale of 2,750,000 shares of
common stock,
$5.00 per share, net of
expenses -- -- -- -- 2,750 12,359,611
Sale of 103,577 shares of
common stock,
$6.40 per share, net of
expenses -- -- -- -- 104 510,707
Conversion of 15,625 shares
of 9% preferred stock
into 2,083 shares of
common stock -- -- -- -- 2 20,545
Conversion of 50,000 shares
of Series B preferred
stock into 4,906 shares of
common stock -- (28,937) -- -- 5 28,932
Issuance of compensatory
stock options -- -- -- -- -- 100,625
Amortization of deferred
compensation -- -- -- -- -- --
Issuance of 3,401 shares of
common stock upon
exercise of stock options -- -- -- -- 3 6,461
9% preferred stock dividends -- -- -- -- -- (39,038)
Unrealized loss on
available for sale
U.S. Government securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ------- -----------
Balance, June 30, 1994 -- 303,837 -- -- 6,074 23,708,502
Reclassification of unredeemed 9%
preferred stock 370,000 -- -- -- -- --
Issuance of warrants to purchase
265,000 shares of common stock -- -- -- -- -- 232,746
Adjustment of accrued
dividends for
redemption of 9% preferred stock -- -- -- -- -- 25,819
Issuance of 11,272 shares
of common stock
upon exercise of stock options -- -- -- -- 11 24,023
Amortization of deferred
compensation -- -- -- -- -- --
9% preferred stock dividends -- -- -- -- -- (33,300)
Decrease in unrealized loss
on available for
sale U.S. Government securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ------- -----------
Balance, June 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $ 6,085 $23,957,790
----------- ----------- ----------- ----------- ------- -----------
Continued................
</TABLE>
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Deferred Government development
ompensation securities stage Total
----------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, June 30, 1993 $(259,651) $ -- $ (9,660,528) $ 1,136,464
Sale of 2,750,000 shares of
common stock,
$5.00 per share, net of
expenses -- -- -- 12,362,361
Sale of 103,577 shares of
common stock,
$6.40 per share, net of
expenses -- -- -- 510,811
Conversion of 15,625 shares
of 9% preferred stock
into 2,083 shares of
common stock -- -- -- 20,547
Conversion of 50,000 shares
of Series B preferred
stock into 4,906 shares of
common stock -- -- -- --
Issuance of compensatory
stock options -- -- -- 100,625
Amortization of deferred
compensation 58,200 -- -- 58,200
Issuance of 3,401 shares of
common stock upon
exercise of stock options -- -- -- 6,464
9% preferred stock dividends -- -- -- (39,038)
Unrealized loss on
available for sale
U.S. Government securities -- (163,562) -- (163,562)
Net loss -- -- (4,704,991) (4,704,991)
----------- ---------- ------------ -----------
Balance, June 30, 1994 (201,451) (163,562) (14,365,519) 9,287,881
Reclassification of unredeemed 9%
preferred stock -- -- -- 370,000
Issuance of warrants to purchase
265,000 shares of common stock -- -- -- 232,746
Adjustment of accrued
dividends for
redemption of 9% preferred stock -- -- -- 25,819
Issuance of 11,272 shares
of common stock
upon exercise of stock options -- -- -- 24,034
Amortization of deferred
compensation 56,092 -- -- 56,092
9% preferred stock dividends -- -- -- (33,300)
Decrease in unrealized loss
on available for
sale U.S. Government securities -- 144,956 -- 144,956
Net loss -- -- (6,835,532) (6,835,532)
----------- ---------- ------------ -----------
Balance, June 30, 1995 $(145,359) (18,606) $(21,201,051) $ 3,272,696
----------- ---------- ------------ -----------
Continued................
</TABLE>
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
9% Series B Series C Series D
convertible convertible convertible convertible Additional
preferred preferred preferred preferred Common paid-in Deferred
stock stock stock stock stock capital compensation
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $ 6,085 $23,957,790 $ (145,359)
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 -- -- -- -- -- -- 42,109
Reversal of unamortized
deferred compensation upon
resignation of Chief
Executive Officer -- -- -- -- -- (103,250) 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>
Continued...............
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Government development
securities stage Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1995 $ (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
Reversal of unamortized
deferred compensation upon
resignation of Chief
Executive Officer -- -- --
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 Deferred
stock stock stock stock stock capital compensation
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 --
Conversion of 7,500 shares
of 9% preferred
stock into 999 shares of
common stock (7,500) -- -- -- -- 7,500 --
Conversion of 75,000 shares
of Series B preferred
stock into 7,359 shares of
common stock -- (43,405) -- -- 7 43,398 --
Conversion of 250 shares of
Series A preferred
stock into 5,272,398
shares of common stock -- -- -- -- 5,273 2,455,177 --
Adjustment of accrued
dividends for conversion of
9% preferred stock -- -- -- -- -- 5,737 --
9% preferred stock dividends -- -- -- -- -- (2,475) --
Issuance of compensatory
stock options -- -- -- -- -- 25,000 --
Issuance of 1,500 shares of
common stock upon
exercise of stock options -- -- -- -- 2 561 --
Net loss -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ------- ------------ ---------
Balance, June 30, 1999 $ 27,500 $ 43,405 $ -- $ -- $15,519 $ 38,811,100 $ --
=========== =========== =========== =========== ======= ============ =========
</TABLE>
<TABLE>
<CAPTION>
Unrealized loss Deficit
on available accumulated
for sale U.S. during the
Government development
securities stage Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1997 $ -- $ (32,181,443) $ 2,668,287
Issuance of warrants to
purchase 75,000 shares
of common stock -- -- 34,774
Conversion of 75,000 shares
of 9% preferred
stock into 9,999 shares of
common stock -- -- --
Conversion of 150 shares of
Series A 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)
Conversion of 7,500 shares
of 9% preferred
stock into 999 shares of
common stock -- -- --
Conversion of 75,000 shares
of Series B preferred
stock into 7,359 shares of
common stock -- -- --
Conversion of 250 shares of
Series A preferred
stock into 5,272,398
shares of common stock -- -- 2,460,450
Adjustment of accrued
dividends for conversion of
9% preferred stock -- -- 5,737
9% preferred stock dividends -- -- (2,475)
Issuance of compensatory
stock options -- -- 25,000
Issuance of 1,500 shares of
common stock upon
exercise of stock options -- -- 563
Net loss -- (1,621,450) (1,621,450)
---------- ------------ ------------
Balance, June 30, 1999 $ -- $ (39,060,853) $ (163,329)
========== ============= ============
</TABLE>
See accompanying notes.
F-9
<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,
1999 1998 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,621,450) $(5,257,960) $(37,029,014)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 197,662 201,660 1,706,403
Settlement with Alkermes, Inc. -- -- 1,227,977
Changes in operating assets/liabilities:
Accounts payable and accrued expenses 219,033 (89,764) 689,555
Accrued interest on U.S. Government securities -- (8,709) (171,238)
Other current assets 10,589 (36) (60,977)
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 53,145 88,743 242,142
----------- ----------- ------------
Net cash used in operating activities (1,141,021) (5,066,066) (32,752,950)
----------- ----------- ------------
Cash flows from investing activities:
U.S. Government securities -- available for sale
Purchases -- (1,739,995) (38,823,738)
Sales -- 1,750,000 38,940,820
Purchase of fixed assets (74,213) (187,235) (2,209,849)
Sale of fixed assets -- -- 10,988
Decrease (increase) in --
Other assets -- -- (39,870)
Note receivable from former officer -- -- (100,000)
----------- ----------- ------------
Net cash used in investing activities (74,213) (177,230) (2,221,649)
----------- ----------- ------------
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 convertible
preferred stock -- -- 13,074,007
Proceeds from issuance of common stock 563 -- 21,922,981
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) (23,973)
----------- ----------- ------------
Net cash provided by (used in) financing activities 563 (201,499) 35,883,936
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents (1,214,671) (5,444,795) 909,337
Cash and cash equivalents, beginning of period 2,124,008 7,568,803 --
----------- ----------- ------------
Cash and cash equivalents, end of period $ 909,337 $ 2,124,008 $ 909,337
=========== =========== ============
Supplemental schedule of non-cash investing
and financing activities:
Accretion of 9% preferred stock $ -- $-- $ 139,674
Conversion of preferred stock to common stock 2,517,093 470,087 14,481,126
Capital lease obligation incurred to lease equipment -- -- 23,973
See accompanying notes.
</TABLE>
F-10
<PAGE>
Cortex Pharmaceuticals, Inc.
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Period from inception (February 10, 1987) through June 30, 1999
Note 1 -- Business and Summary of Significant Accounting Policies
Business -- Cortex Pharmaceuticals, Inc. (the "Company") was formed to engage in
the discovery, development and commercialization of innovative pharmaceuticals
for the treatment of neurological and psychiatric disorders. Since its formation
in 1987, the Company has been engaged in research and early clinical development
activities.
Basis of Presentation -- The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. This basis
of accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of business. As of June 30,
1999, the Company had an accumulated deficit of $39,060,853, net capital
deficiency of $163,329 and negative working capital of $742,036. Due to the
Company's recurring losses and net capital deficiency, there can be no assurance
that the Company will be able to obtain additional operating capital, which may
impact the Company's ability to continue as a going concern. 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 classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
From inception through June 30, 1999, the Company has generated only modest
operating revenues and has incurred losses aggregating $37,029,014 before
preferred stock accretion and dividends. Successful completion of the Company's
development program and its transition, ultimately, to attaining profitable
operations is dependent upon obtaining additional financing adequate to fulfill
its research and development activities, and achieving a level of revenue
adequate to support the Company's cost structure. There is no assurance that the
Company will be successful in these areas.
In January 1999, the Company entered into a research collaboration and exclusive
worldwide license agreement with NV Organon ("Organon"), a subsidiary of Akzo
Nobel (Note 5). The agreement will enable Organon to develop or commercialize
the Company's Ampakine/(R)/ technology for the treatment of schizophrenia and,
at Organon's election, for the treatment of depression. The Company is seeking
collaborative arrangements with other pharmaceutical companies for other
applications of the Ampakine compounds, 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 that 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 in discussions with candidate companies,
there is no assurance that an agreement will arise from these discussions in a
timely manner, or at all, or that any agreement that may arise from these
discussions will successfully reduce the Company's short or longer-term funding
requirements.
To supplement its existing resources, the Company may need to raise additional
capital through the sale of debt or equity. There is no assurance that such
capital will be available on favorable terms, or at all. If additional funds are
raised by issuing equity securities, dilution to existing shareholders is likely
to result.
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
F-11
<PAGE>
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.
New Accounting Standard -- In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income," effective for
fiscal years beginning after December 15, 1997. SFAS No. 130 requires the
reporting of all components of comprehensive income, including net income, in
the financial statements in the period in which the components are recognized.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Net
income and other comprehensive income, including foreign currency translation
adjustments and unrealized gains and losses on investments, shall be reported
net of their related tax effect to arrive at comprehensive income. Because
comprehensive loss was not different than net loss, adoption of SFAS No. 130 did
not have an impact on the Company's financial statements.
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. These estimates and assumptions affect the reported amounts of
assets and liabilities, 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, 1999 presentation.
Note 2 -- Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Laboratory equipment $ 1,216,266 $ 1,168,958
Leasehold improvements 622,036 622,036
Furniture and equipment 112,129 112,129
Computers and software 262,913 236,008
----------- -----------
2,213,344 2,139,131
Accumulated depreciation (1,681,374) (1,483,712)
----------- -----------
$ 531,970 $ 655,419
=========== ===========
</TABLE>
Note 3 -- Redeemable Preferred Stock
Series A Convertible Preferred Stock ("Series A Preferred") at June 30, 1998
consisted of 250 shares of 400 shares originally issued in a two-tranche private
placement in June 1997. The Series A Preferred was
F-12
<PAGE>
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 was equal to 80% of the
Average Stock Price if the Average Stock Price was greater than $2.50 per share
at the time of conversion; $2.00 per share if the Average Stock Price was less
than $2.50 but greater than $2.10 per share; or 95% of the Average Stock Price
if the Average Stock Price was less than or equal to $2.10 per share. The
conversion rate was 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. As of June 30, 1999, all outstanding shares of Series A
Preferred had been converted into an aggregate of 6,105,276 shares of the
Company's common stock at effective conversion prices ranging from $0.30 to
$2.17 per share of common stock. Imputed dividends of $1,012,493 related to the
private placement were recorded for the year ended June 30, 1997.
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, 1999 and June 30,
1998 consisted of 27,500 and 35,000 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, 1999 and June 30, 1998 were $23,513 and $26,775,
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, 1999 and June 30, 1998
consisted of 75,000 and 150,000 shares, respectively, of Series B Preferred
issued in a May 1991 private placement. Each share of Series B Preferred is
convertible into approximately 0.09812 shares of common stock at an effective
conversion price of $6.795 per share of common stock, subject to adjustment
under certain circumstances such as stock splits or stock dividends. The Series
B Preferred may be redeemed by the Company at a price of $0.6667 per share, an
amount equal to its liquidation preference, at any time upon 30 days' notice.
The liquidation preference of the Series B Preferred is subordinate to that of
the 9% Preferred.
Series C Convertible Preferred Stock 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 per
share, as computed in accordance with a formula that was indexed to the average
bid price of the Company's common shares.
Series D Convertible Preferred Stock originally consisted of 400 shares issued
in a three-tranche private placement initiated in October 1996 and completed in
February 1997. 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. The effective conversion prices ranged from $2.06 to $3.35 per share, as
computed in accordance with a formula that was indexed to the average bid price
of the Company's common shares. During the year ended June 30, 1997, imputed
dividends aggregating $879,672 were recorded in connection with the three
tranches.
F-13
<PAGE>
Common Stock and Common Stock Purchase Warrants
In connection with the December 1995 private placement of 160 shares of Series C
Preferred Stock, the Company issued 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 February 1998 restructuring of the note payable to
Alkermes, Inc. (Note 6), 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.
In connection with the July 1999 restructuring of the note payable to Alkermes,
Inc. (Note 6), the Company agreed to issue to Alkermes a five-year warrant to
purchase 100,000 shares of common stock at an exercise price derived from the
fair market value of the Company's common stock.
As of June 30, 1999, the Company had reserved an aggregate of 3,667 shares of
common stock for issuance upon conversion of the outstanding 9% Preferred Stock;
7,359 shares for issuance upon conversion of the Series B Preferred Stock;
1,401,501 shares for issuance upon exercise of warrants; 1,442,796 shares for
issuance upon exercise of outstanding stock options; and 807,611 shares for
issuance upon exercise of stock options available for future grant.
Stock Option and Stock Purchase Plans
Employee/Director Option Plan -- The Company's 1989 Incentive Stock Option,
Nonqualified Stock Option and Stock Purchase Plan provided 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 terminated February 2, 1999, was at least 85% of
the fair market value of the common stock on the date of grant. The exercise
price of incentive stock options was at least equal to the fair market value of
the common stock on the date of grant. As of June 30, 1999, there were no
options outstanding under this plan.
Consultant Plan -- The Company's 1989 Special Nonqualified Stock Option and
Stock Purchase Plan provided 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 terminated February
2, 1999, was at least 50% of the fair market value of the common stock on the
date of grant. As of June 30, 1999, options to purchase an aggregate of 2,000
shares of common stock were outstanding under this plan.
1996 Stock Incentive Plan -- The 1996 Plan provides for the granting of options
and rights to purchase up to an aggregate of 2,250,407 shares of the Company's
authorized but unissued common stock (subject to adjustment under certain
circumstances, such as stock splits, recapitalizations and reorganizations) to
qualified employees, officers, directors, consultants and other service
providers. No further options will be granted under the Company's earlier stock
option and stock purchase plans. The exercise price of nonqualified stock
options and the purchase price of stock offered under the 1996 Plan, which
terminates October 25, 2006, must be at least 85% of the fair market value of
the common stock of the date of grant. The exercise price of incentive stock
options must be at least equal to the fair market value of the common stock on
the date of grant. Each non-employee director (other than those who serve on the
Board of Directors to oversee an investment in the
F-14
<PAGE>
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, 1999, options to purchase an aggregate of
1,440,796 shares of common stock were outstanding under the 1996 Plan, and an
additional 807,611 shares of common stock were reserved for future option
grants.
During the year ended June 30, 1999, the Company restated the exercise price of
stock options previously granted to employees, directors and some consultants to
the Company. Options to purchase a total of 892,456 shares of the Company's
common stock were repriced from a weighted average of $3.88 per share to $0.375
per share, representing the fair market value of the Company's common stock as
of the date of the repricing. In accordance with APB 25, no expense was recorded
as a result of this repricing. The Financial Accounting Standards Board is
currently deliberating the accounting for stock option repricings, and is
expected to issue new guidance for such transactions. If new guidance is issued,
it may require the Company to record additional expense related to the repricing
in prospective financial statements.
As of June 30, 1999, options to purchase an aggregate of 797,417 shares of
common stock were exercisable under the Company's stock option plans. During the
years ended June 30, 1999 and 1998 and the period from inception (February 10,
1987) through June 30, 1999, 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, 1999 and 1998 and the period from
inception (February 10, 1987) through June 30, 1999, 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, 1999 are summarized below:
<TABLE>
<CAPTION>
Weighted average
Number exercise price
of shares per share
----------------------------
<S> <C> <C>
Outstanding as of June 30, 1997 969,179 $ 4.25
Granted 142,029 2.42
Exercised -- --
Forfeited (116,562) 5.00
---------- ---------
Outstanding as of June 30, 1998 994,646 $ 3.90
Granted 1,545,896 0.45
Exercised (1,500) 0.38
Forfeited (1,096,246) 3.63
---------- ---------
Outstanding as of June 30, 1999 1,442,796 $ 0.42
========== =========
Available for future grant 807,611
==========
</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
F-15
<PAGE>
assumptions for the years ended June 30, 1999 and 1998, respectively: weighted
average risk-free interest rates of 5.5% and 5.4%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common stock of
186% and 90%; and a weighted average life of 3.0 years and 3.3 years. The
estimated weighted average fair value of options granted during the years ended
June 30, 1999 and 1998 was $0.40 and $1.48, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not 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, 1999 and 1998:
<TABLE>
<CAPTION>
June 30,
1999 1998
------------------------
<S> <C> <C>
Pro forma net loss before preferred
stock accretion and dividends $1,945,558 $5,567,617
Pro forma net loss applicable to
common stock 1,948,033 5,570,767
Pro forma net loss per share $ (0.15) $ (0.58)
</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, 1999 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, 1999 contractual life exercise price at June 30, 1999 exercise price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.34 - 0.38 984,600 7.3 years $0.37 640,417 $ 0.38
0.47 - 4.50 458,196 9.6 years 0.58 157,000 0.58
------------ ------------
1,442,796 797,417
============ ============
</TABLE>
Note 5 -- Research and License Agreement with NV Organon
In January 1999, the Company entered into a research collaboration and exclusive
worldwide license agreement with NV Organon, a pharmaceutical business unit of
Akzo Nobel (The Netherlands). The agreement will enable Organon to develop and
commercialize the Company's proprietary Ampakine technology for the treatment of
schizophrenia and, upon Organon's election, for the treatment of depression.
In connection with the agreement with Organon, during the year ended June 30,
1999, the Company received an up-front payment of $2,000,000 and research
support payments of $1,150,000. In July 1999, the Company received further
research support of $762,500. The agreement includes research support payments
of up to $3,000,000 per year for two years (subject to Cortex providing agreed-
upon levels of research), milestone payments, plus royalty payments on worldwide
sales.
F-16
<PAGE>
Note 6 -- 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 (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
$3,600,000 in research payments under the Alkermes Agreement during the fiscal
years ended June 30, 1992 and 1993.
In November 1993, Alkermes filed an action alleging that the Company had
breached the Alkermes Agreement by developing calpain inhibitors for cerebral
vasospasm. In October 1995, the Company and Alkermes agreed to a settlement of
the dispute. Alkermes agreed to dismiss its action against the Company and to
relinquish all rights previously granted them by the Company, as well as rights
to related technologies developed by Alkermes. In connection with the
settlement, the Company issued to Alkermes a $1,000,000 three-year promissory
note accruing interest semi-annually at the federal funds rate. The Company also
committed to pay Alkermes a graduated royalty on calpain inhibitor development
proceeds, as defined and subject to certain limitations.
In February 1998, the terms of the note were restructured to include a principal
payment of $200,000 upon signing of the new agreement. The balance of the note
and accrued interest was payable in October 1999 or upon the consummation of a
corporate partnership between Cortex and a larger pharmaceutical company,
whichever was earlier. In connection with the restructuring 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. With the signing of the license agreement with NV Organon (Note
5), the note and accrued interest became due and payable.
In July 1999, Alkermes agreed to restructure the terms of the note to include a
principal and interest payment of $250,000 and monthly payments of $50,000 from
August 1999 through January 2000. The balance of the note and accrued interest
are due and payable on or before February 28, 2000. Interest on the unpaid
balance accrues at a 1% to 3% premium to the prime lending rate, based upon the
date of payment. In connection with this restructuring agreement, the Company
agreed to issue to Alkermes a five-year warrant to purchase 100,000 shares of
common stock at an exercise price derived from the fair market value of the
Company's common stock. If the balance of principal and accrued interest is not
paid by December 31, 1999, Cortex has agreed to issue to Alkermes another five-
year warrant to purchase 50,000 shares of common stock at a price per share of
$0.875 or the then fair market value of Cortex common stock, whichever is lower.
Note 7 -- Commitments
The Company leases its offices and research laboratories under an operating
lease that expires May 31, 2004. Rent expense under this lease for the years
ended June 30, 1999 and 1998 and the period from inception (February 10, 1987)
through June 30, 1999 was $260,000, $234,000 and $2,133,000, respectively.
Commitments under the lease for the years ending June 30, 2000, 2001, 2002, 2003
and 2004 are $255,000, $310,000, $353,000, $368,000 and $356,000, respectively.
As of June 30, 1999, the Company was obligated to an executive officer under an
employment agreement expiring in May 2000. The agreement involves annual salary
payments aggregating $220,000 and provides 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 may be obligated 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, 1999, the Company was committed under scientific
consulting and external research agreements to annual payments aggregating
approximately $672,000.
The Company has entered agreements with an academic institution 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. These payments include minimum annual royalties of $90,000 for
F-17
<PAGE>
the year ending June 30, 2000 and for each year thereafter for the remaining
life of the patents covering the subject technologies. The agreements also
commit the Company to pay up to an additional $875,000 upon achieving certain
clinical testing and regulatory approval milestones, as well as a portion of
certain remuneration received by the Company in connection with sublicensing
agreements that the Company may enter into.
Note 8 -- Related Party Transactions
During the years ended June 30, 1999 and 1998, and the period from inception
(February 10, 1987) through June 30, 1999, the Company paid or accrued
scientific and other consulting fees to stockholders aggregating $78,417,
$88,000 and $1,184,974, 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 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 6), this warrant was
canceled and reissued as a new warrant to purchase 363,113 shares of the
Company's common stock at $3.47 per share, as adjusted and subject to further
adjustment, at any time through January 15, 2000. The value of this new warrant
was computed utilizing the Black-Scholes option pricing model, and was recorded
with the expense of the settlement with Alkermes in the accompanying statement
of operations.
As consideration for its agreement to provide financial advisory services, as
amended and extended in November 1994, Vector was paid a retainer of $50,000 and
was issued a six-year non-redeemable warrant to purchase 57,193 shares of the
Company's common stock at $3.06 per share, subject to adjustment under certain
circumstances. Warrants to purchase 8,169 shares of the Company's common stock
vested immediately, and warrants to purchase 24,512 shares of the Company's
common stock vest upon the consummation of each strategic alliance when and as
secured by Vector.
Note 9 -- Income Taxes
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under the liability method, deferred taxes are determined based
on differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. As of June 30, 1999, the Company had
federal and California tax net operating loss carryforwards of approximately
$34,459,000 and $4,131,000, 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 will continue to expire in 1999 (approximately
$701,000 expired in 1998), while the federal carryforwards begin expiring in
2004. The Company also has federal and California research and development tax
credit carryforwards totaling $1,154,000 and $440,000, respectively, which will
begin to expire 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, 1999
and June 30, 1998 are shown below. The valuation allowance related to deferred
tax assets is $15,629,000 and $15,413,000 for the years ended June 30, 1999 and
1998, respectively. The increase in the valuation allowance for the year ended
June 30, 1999 of $216,000 is primarily due to additional reserves required for
new deferred tax assets.
F-18
<PAGE>
Deferred tax assets:
<TABLE>
<CAPTION>
June 30,
1999 1998
----------------------------
<S> <C> <C>
Net operating loss carryforwards $ 12,299,000 $ 11,727,000
Capital loss carryforwards 22,000 23,000
Research and development credits 1,436,000 1,336,000
Capitalized research and development costs 1,309,000 1,801,000
Settlement with Alkermes, Inc. 407,000 406,000
Depreciation 88,000 83,000
Other-net 68,000 37,000
------------ ------------
Net deferred tax assets 15,629,000 15,413,000
------------ ------------
Valuation allowance for deferred tax assets (15,629,000) (15,413,000)
------------ ------------
Total deferred tax assets $ -- $ --
============ ============
</TABLE>
F-19
<PAGE>
Cortex Pharmaceuticals, Inc.
Annual Report on Form 10-KSB
Year ended June 30, 1999
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. * --
10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan. * --
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). --
10.31 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). --
10.42 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. --
10.44 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. --
10.46 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. --
10.48 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). --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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. --
10.58 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. --
10.60 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. --
10.64 Research and Collaboration and License Agreement between the Company and N.V. Organon,
dated January 13, 1999, incorporated by reference to Exhibit 10.64 of the Company's
quarterly report on Form 10-QSB as filed on February 16, 1999. (Portions of this
Exhibit were omitted and filed separately with the Secretary of the Commission pursuant
to the Company's application requesting confidential treatment under Rule 24-b2 of the
Securities Exchange Act of 1934.) --
10.65 Amendment No. 1 to the Lease Agreement for the Company's facilities in Irvine, California,
dated February 1, 1999.** --
21 Subsidiaries of the Registrant.** --
23.1 Consent of Ernst & Young LLP, independent auditors. 40
24 Power of Attorney.** --
27.1 Financial Data Schedule. 41
</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.
** Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated July 22, 1999, included in the Annual
Report on Form 10-KSB of Cortex Pharmaceuticals, Inc. for the year ended June
30, 1999, with respect to the financial statements, as amended, included in this
Form 10-KSB/A and 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.
ERNST & YOUNG LLP
San Diego, California
October 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1999 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 909,337
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 970,314
<PP&E> 2,213,344
<DEPRECIATION> 1,681,374
<TOTAL-ASSETS> 1,549,021
<CURRENT-LIABILITIES> 1,712,350
<BONDS> 999,282<F1>
0
70,905
<COMMON> 15,519
<OTHER-SE> (249,753)
<TOTAL-LIABILITY-AND-EQUITY> 1,549,021
<SALES> 0
<TOTAL-REVENUES> 3,151,407
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,781,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,029
<INCOME-PRETAX> 1,621,450
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,621,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,621,450
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1>PROMISSORY NOTE PAYABLE TO ALKERMES, INC. THIS AMOUNT IS INCLUDED IN CURRENT
LIABILITIES.
</FN>
</TABLE>
