RespireRx Pharmaceuticals Inc. - Annual Report: 2002 (Form 10-K)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2002
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.
(Exact name of registrant as specified in its charter)
| Delaware (State or other
jurisdiction of incorporation or organization) |
33-0303583 (I.R.S.
Employer Identification Number) |
15241 Barranca Parkway, Irvine, California, 92618
(Address of principal executive offices, including zip code)
(949) 727-3157
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
| Common Stock, $0.001 par value (Title of Class) |
The American Stock Exchange (Name
of Exchange on which Registered) |
Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title
of Class)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K. x
The aggregate market value of the voting stock held by non-affiliates as of October 8, 2002 was $13,229,396 (based on the closing sale price of the common stock as reported by The
American Stock Exchange on such date). As of October 8, 2002, there were 16,853,659 shares of the registrant’s common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held on December 16, 2002 (to be
filed with the Commission on or before October 28, 2002) are incorporated by reference into Part III, except for Item 14.
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| PART II |
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| PART III |
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| PART IV |
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| F-1 | ||||
| EXH-1 | ||||
(Attached to this Report on Form
10-K)
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INTRODUCTORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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, which may be identified by words including
“anticipates,” “believes,” “intends,” “estimates,” “expects,” and similar expressions include, but are not limited to, 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
Cortex Pharmaceuticals, Inc. (“Cortex” or the
“Company”) 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 to develop products that affect the AMPA-type glutamate receptor, a complex of proteins that is involved in communication between nerve cells in the human brain. Cortex is developing a family of chemical compounds,
known as AMPAKINE® compounds, that enhance the activity of this receptor. Cortex believes that
AMPAKINE compounds 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. The Company’s commercial development plan involves partnering with
larger pharmaceutical companies for research, development, clinical testing, manufacturing and global marketing of many of its proposed products. The Company may retain the right to eventually market or co-promote AMPAKINE compounds 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 agreement grants Organon worldwide rights to develop and commercialize the Company’s AMPAKINE technology for the treatment of schizophrenia and depression. In October 2000, the Company entered a research collaboration and license agreement
with Les Laboratoires Servier (“Servier”). The agreement, as amended in October 2002, will allow Servier to develop and commercialize the Company’s AMPAKINE technology in defined territories of Europe, Asia, the Middle East and
certain South American countries as a treatment for memory impairment associated with aging and neurodegenerative diseases. The indications covered include, but are not limited to,
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Alzheimer’s disease, Mild Cognitive Impairment, sexual dysfunction, anxiety disorders and the
dementia associated with multiple sclerosis and Lou Gehrig’s disease.
Cortex continues to seek collaborative
or licensing arrangements with other pharmaceutical companies. These arrangements may permit other applications of the AMPAKINE compounds to be advanced into later stages of clinical development and may provide access to the extensive clinical
trials management, manufacturing and marketing expertise of such companies. The Company may not be able to secure such arrangements on favorable terms, or at all, and its products may not be successfully developed and approved for marketing by
government regulatory agencies.
In the fiscal years ended June 30, 2002 and 2001, the Company’s expenditures
on research and development were $5,043,000 and $4,410,000, respectively. The increase in fiscal year 2002 includes expenses for a Phase II clinical study of the AMPAKINE CX516 in patients with Mild Cognitive Impairment. The Company’s
collaborating partner, Servier, will pay nearly all of the remaining costs for this study. The increase in research expenditures in fiscal year 2002 also includes technology access payments related to the Company’s license of the AMPAKINE
technology from the University of California.
AMPA Receptor Program
In June 1993, Cortex licensed a new class of molecules and technology—the AMPAKINE technology—from the University of California. Cortex has subsequently been
working to develop and patent new AMPAKINE molecules and to demonstrate efficacy and safety in a number of potential indications.
AMPAKINE compounds facilitate the activity of the AMPA receptor, which binds the neurotransmitter glutamate. The AMPAKINE compounds 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 associated with aging may be amenable to treatment with AMPAKINE compounds. Two
such disorders include Mild Cognitive Impairment and Alzheimer’s disease. Schizophrenia and other disorders that may involve neurotransmitter imbalances, including reduced levels of glutamate transmission, may also benefit from AMPA-receptor
directed therapeutics. A recently completed study with AMPAKINE compounds in patients with schizophrenia indicated improvement in a number of symptoms also common to patients with Attention Deficit Hyperactivity Disorder (“ADHD”). The
Company and its collaborators have obtained other encouraging preliminary results in animal models of depression, sexual dysfunction and stroke.
Mild Cognitive Impairment and Alzheimer’s Disease
Impairment of memory and cognition is a significant 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, resulting in improved quality of life and substantial savings in health care costs. Cognitive deficit is also associated with a number of other
neurological and neurodegenerative diseases, including autism, fragile X syndrome, multiple sclerosis, Amyotrophic Lateral Sclerosis and Huntington disease.
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Although disease and physiological malfunctions may 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 cerebral cortex. Therefore a potential corrective approach to alleviate age-related cognitive
deficits is to enhance the activity of the remaining functional AMPA receptors. AMPAKINE compounds amplify glutamate currents and have been shown to alleviate memory deficits in experiments in both elderly animals and humans.
Patients with Mild Cognitive Impairment (“MCI”) do not meet the clinical criteria for Alzheimer’s disease, but
these patients represent the earliest clinically-defined group with memory impairment beyond that expected for individuals of the same age and education. It is estimated that there are between 3 and 4 million people with MCI, and that each year
approximately 15% to 20% of MCI patients will progress to Alzheimer’s disease. However, not all patients with MCI progress to Alzheimer’s disease.
Alzheimer’s disease is the best known destroyer of memory, currently afflicting some 4 million Americans and 12 million people worldwide. With the aging of our population, unless a treatment is
found, the number of people in the U.S. with the disease is expected to reach 14 million by the middle of this century. 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. Neither Medicare nor most private health insurance covers the long-term care more patients need. The impact of an
effective treatment, even a symptomatic one, would be enormous.
It’s in the early stages of Alzheimer’s
disease that Cortex believes AMPAKINE molecules may play a valuable role, enhancing the effectiveness of the brain cells that have not yet succumbed to the disease. This enhancement may help to alleviate the memory and cognitive deficits that make
up the early symptoms.
There is also a possibility that treatment with AMPAKINE compounds may slow the
progression of Alzheimer’s disease. 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. AMPAKINE compounds may slow the
rate at which functional levels of input from other neurons are lost.
One of the most compelling animal studies
conducted to date with the AMPAKINE compounds 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 compound, 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 the AMPAKINE CX516 (“AMPALEX”) in healthy
volunteers. In all three studies, CX516 was safe and well-tolerated on acute oral
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administration and, importantly, indicated statistically-significant positive effects on memory
performance.
The initial study, conducted by AFB Parexel in Berlin, Germany 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 included 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 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, CX516 was again found to be safe and well-tolerated. The elderly volunteers were also given the same nonsense syllable
memory test that had been given to the young volunteers in the first study. In the absence of drug, the elderly volunteers’ memory was substantially worse than that of the young volunteers. In the presence of drug, a statistically significant
positive effect on memory performance was observed. Several of the elderly volunteers receiving the highest dosage of AMPALEX scored at or above the average score achieved by the young volunteers in the earlier study.
The third study, at the Karolinska Hospital in Stockholm, Sweden, involved administration of CX516 to healthy young adults under
double-blind, placebo-controlled conditions. This five-day study involved administration of placebo on days 1, 4 and 5 and drug on days 2 and 3, with psychological testing conducted on each day. AMPALEX was safe and well-tolerated by all volunteers
receiving drug, with no adverse events reported. Statistically significant improvements in performance on several measures of learning and memory were noted in the group that received CX516.
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 was conducted at the National Institutes of Health in Bethesda, Maryland, involved administration of CX516 to an eventual total of 14 patients for up to 28 days. A preliminary analysis of
the data indicates improvement in ADAS-cog and CIBIC plus, two measures used to detect changes in Alzheimer’s disease patients.
While the clinical testing of the AMPAKINE technology initiated by Cortex provided preliminary indications of desired effects on memory and cognition, 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 intends that further clinical studies of AMPAKINE compounds as a
treatment for Alzheimer’s disease will be conducted in collaboration with its corporate partner, Servier.
In
June 2000, Cortex received $247,000 from the Institute for the Study of Aging (the “Institute”), a non-profit foundation based in New York City dedicated to the improvement in quality of life for the elderly. The funds will provide support
for the clinical trial being conducted with Servier in patients with MCI, as explained more fully below. Data from this study may support the concept of AMPA modulation as a treatment for MCI and would justify additional, larger trials. In the event
that Cortex enters an AMPAKINE into Phase III clinical studies as a treatment for Alzheimer’s disease, Cortex has agreed to repay the funds to the Institute to allow them to financially assist other biotechnology companies.
In October 2000, the Company entered a research collaboration and an exclusive license agreement with Servier. The agreements
will enable Servier to develop and commercialize Cortex’s proprietary AMPAKINE technology for the treatment of declines in cognitive performance associated with aging and of neurodegenerative diseases. The indications covered include, but are
not limited to, Alzheimer’s disease, MCI, sexual dysfunction, and the dementia associated with multiple sclerosis and
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Lou Gehrig’s disease. The territory covered by the exclusive license excludes North America,
allowing Cortex to retain commercialization rights in its domestic market. The territory covered by the agreement also excludes South America (except Argentina, Brazil and Venezuela), Australia and New Zealand. The agreement includes an up-front
payment by Servier of $5,000,000, research support payments of roughly $2,025,000 per year for three years (subject to annual increases) and milestone payments, plus royalty payments on sales in licensed territories. In October 2002, Servier agreed
to provide Cortex an additional $4,000,000 of research support over a two-year period, in exchange for rights to the Cortex AMPAKINE compounds for the potential treatment of anxiety disorders in Serviers’ licensed territories.
In March 2001, a Food and Drug Association (“FDA”) advisory panel concluded that MCI is a distinct condition separate
from Alzheimer’s disease and a valid target for new therapies—regardless of whether a new drug slows progression to dementia. The FDA indicated its willingness to approve a drug that can be shown to be safe and effective in improving
memory. This decision represents a marked departure from the FDA’s prior reluctance to approve such medications, encouraging Cortex in its pursuit of developing a drug that may treat memory disorders. Cortex has rights to issued patents in the
United States, Mexico and Australia covering the use of any AMPA receptor modulating compounds to improve memory and cognition.
Together with Servier, Cortex is conducting a cross-national study of the AMPAKINE technology as a potential treatment for MCI. Enrollment in the study began in March 2002, and is projected to reach 160 patients. Testing will be
conducted in an estimated nine clinical centers in the U.S. and 22 clinical centers in Europe (France, Belgium, Great Britain, Sweden and the Netherlands). Servier has agreed to pay nearly all of the costs associated with this trial. Preliminary
results from the study are expected in the second calendar quarter of 2003.
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 involves a 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 conventional anti-psychotics for schizophrenia 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 conventional anti-psychotics, either because of lack
of efficacy or side effects. Risperidone and olanzapine are other recent atypical 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, clinicians agree that
there are still substantial side effects and that the cognitive symptoms of
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schizophrenia are not greatly improved by any available agent. The persistence of cognitive symptoms
prevents many patients 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 reduced activity of glutamate pathways
projecting into the same area. Cortex began studying whether AMPAKINE compounds, 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 compound 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 AMPAKINE molecules. Further, Cortex scientists have demonstrated that AMPAKINE compounds 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 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. Under the agreement, Organon has rights to intellectual property that includes
broad medical use patents covering the use of any AMPA receptor modulating compound to treat schizophrenia as a mono-therapy, or in combination with other anti-psychotic medications.
The agreement also included an option for Organon to expand its rights to the technology as a potential treatment for depression. Organon exercised that option in January
2001, thereby committing to specified spending on research in the field using AMPAKINE compounds.
The agreement
with Organon provided an up-front payment of $2,000,000 and research support payments of roughly $3,000,000 per year for two years. The agreement also includes milestone payments and royalty payments on worldwide sales. The Company believes that the
agreement with Organon will provide an accelerated program to bring the AMPAKINE technology to market for schizophrenia and depression, if proven safe and effective in clinical trials.
Shortly after signing the agreement with Organon, 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. Extensive 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 a number of tests of verbal learning, memory, problem solving and distractability. Interestingly, the improvements noted in CX516-treated patients appeared to persist for a period after cessation of treatment.
Further clinical testing of the AMPAKINE compounds in patients with schizophrenia is being conducted by the
Company’s corporate partner, Organon. In May 2000, Cortex achieved its first milestone under the related agreement when Organon selected a licensed compound to pursue in Phase I clinical testing, triggering a $2,000,000 payment to Cortex. In
September 2001, Organon informed Cortex of its intent to continue development of the selected compound by entering Phase II clinical testing, triggering a second $2,000,000 milestone payment. Additional payments from the Organon agreement for
schizophrenia will depend upon the results of the Phase II study.
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In September 2001, Cortex received notice of a Phase II Small Business Innovative
Research (“SBIR”) award for roughly $770,000 from the National Institutes of Health to investigate the therapeutic potential of the AMPAKINE technology in schizophrenia. The goals of the related research plan include determining whether an
AMPAKINE compound will improve negative symptoms, attention and memory. The research plan also hopes to assess the effects of an AMPAKINE compound on positive systems, anxiety and depressive symptoms. As of June 30, 2002, Cortex had received
$298,000 from this two-year grant award.
Attention Deficit Hyperactivity Disorder
Attention Deficit Hyperactivity Disorder is the most commonly diagnosed disorder of children. The National
Institute of Mental Health (“NIMH”) estimates that ADHD affects three to five percent of school-age children, with about one child in every classroom in the U.S. in need of help for this disorder. According to the NIMH, national public
school spending on behalf of students with ADHD may have exceeded $3 billion in 1995.
Symptoms of ADHD include an
inability to sustain attention and concentration, along with developmentally inappropriate levels of activity, distractability and impulsivity. Children with the disorder may have functional impairment across multiple settings including home, school
and peer relationships. ADHD has also been linked to long-term adverse effects on academic performance, vocational success and social and emotional development. These effects not only impact the individual patients, but also their families, schools
and communities. For many, the symptoms and impact of the disorder extend into adulthood.
Psychostimulants,
including amphetamine, methylphenidate and pemoline, represent the most widely researched and commonly prescribed treatments for the disorder. One theory suggests that ADHD results from difficulties in inhibiting responses to internal and external
stimuli. Evidence suggests that those areas of the brain thought to be involved in planning, foresight, and consideration of alternative responses may be under-stimulated in patients with ADHD. Stimulant medication may work on these areas of the
brain to increase neural activity to more normal levels.
Because psychostimulants are more readily available and
more frequently prescribed, concerns over their potential overuse and abuse have intensified. Along with the abuse potential, treatments with psychostimulants may result in side effects. According to the National Institutes of Health, some children
on these medications may lose weight, have less appetite and temporarily grow more slowly. Others may experience problems falling asleep. Given the lack of consistent improvement beyond the disorder’s core symptoms and the deficit of long-term
studies, the need remains for additional testing with medications and behavioral treatments.
In April 1999, the
Company reported preliminary results from a study with the AMPAKINE CX516 in patients with schizophrenia being treated with clozapine. The results noted in CX516-treated patients included improved performance on several tests of memory, problem
solving and distractability, as well as a clinical improvement in attention—symptoms that are also common to patients with ADHD. Based upon these results, the Company believes that AMPAKINE compounds may represent a novel, non-controlled (not
regulated by the Drug Enforcement Agency) approach for treating ADHD patients.
In April 2000, the Company entered
an option agreement with Shire Pharmaceuticals Group, plc (“Shire”), under which Shire initiated a Phase II double-blind, placebo-controlled study of Cortex’s AMPAKINE CX516 for the treatment of ADHD. Enrollment in the study began in
the summer of 2001, with Shire responsible for all of the costs of the trial. In exchange for the option, Cortex received $130,000; Shire also purchased 254,353 shares of Cortex common stock for $870,000.
Shire had the right to convert its option into an exclusive worldwide license for the AMPAKINE technology for ADHD. Upon exercise, Cortex
would have received a license fee, milestone payments
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based on successful clinical and commercial development, research support for additional
AMPAKINE compounds and royalties on sales.
In May 2002, Shire made a business decision to abruptly
terminate the Phase II study of CX516 in adult patients with ADHD. At the time of the decision to immediately stop all treatments, 72 patients out of a planned 110 patient study target had been enrolled. Only 45 patients had completed the 28-day
course of treatment required by the study design. Because the study design was broken by the sudden cessation of all treatments and only 40% of the patients completed the full treatment plan, it resulted in a study that could not be properly
analyzed. In June 2002, Shire elected not to exercise its option for use of the AMPAKINE technology in ADHD. Currently, Cortex is assessing the information and determining whether to conduct a new trial in ADHD with CX516, while we are pursuing new
partners for this therapy.
Following Shire’s decision to forgo its option, Servier immediately declared
CX516 its lead AMPAKINE compound in the field of MCI, Alzheimer’s disease and other neurodegenerative diseases in its territory, primarily Europe and Asia. Shire had previously held the first right of refusal to keep CX516 in ADHD.
Stroke
A stroke occurs when a blood clot blocks a blood vessel or artery, or when a blood vessel breaks and interrupts blood flow to the brain. When a stroke occurs, brain cells within the immediate area of
damage usually die within minutes to a few hours. When brain cells die, control of functions such as speech, movement and memory may be lost.
A stroke can happen to anyone, although the risk increases significantly with age. According to the National Stroke Association, two-thirds of all strokes happen to people over the age of 65, with the
risk doubling each decade past age 55.
Treatment of stroke victims represents a critical unmet need. The National
Stroke Association estimates that there are nearly four million people in the U.S. who have survived a stroke and are living with the after-effects.
General recovery guidelines indicate that 35% of stroke survivors recover nearly completely, or with minor impairments. Of the remaining 65% of survivors, 40% suffer moderate to severe impairments, 10%
require specialized care in a nursing home or other long-term care facility and 15% die shortly following the stroke.
Preclinical experiments conducted by Kevin Lee, Ph.D. at the University of Virginia and by two pharmaceutical companies have demonstrated that the AMPAKINE CX516 can be safely administered to animals under mimicked stroke-like
conditions. Additionally, research at Cortex suggests that AMPAKINE compounds may be neuroprotective—AMPAKINE treatment may provide protection to at-risk neurons adjacent to the area of damage following a stroke.
AMPAKINE compounds also may improve post-stroke recovery. Nerve cells depend upon active stimulation or communication to maintain
function. After a stroke, many neurons lose connections with other cells. Patients must try to recover function by engaging new pathways of nerve cell communication. AMPAKINE compounds, which enhance communication between nerve cells, may be ideal
for the stroke recovery process.
In May 1999, Cortex received notice of a Phase I Small Business Innovative
Research (“SBIR”) award of $100,000 from the National Institutes of Health to investigate the AMPAKINE technology as a potential new stroke therapy. Subsequently, in October 2000, Cortex received notice of a Phase II SBIR award of up to
$1,074,000 to continue its research.
The goals of the research plan include determining if an AMPAKINE compound
administered in advance can reduce damage to neurons in an animal model of stroke; and to determine if the compound reduces damage to the memory of the animals. An AMPAKINE compound will also be administered after
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the stroke to determine if there is an improved recovery of memory function. As of June 30, 2002, Cortex
had received approximately $400,000 from this three-year grant award. Research of the AMPAKINE technology as a treatment for stroke, beyond that funded by the SBIR grant, will depend upon the Company’s financial resources.
Other Potential Indications—Fragile X and Autism
Fragile X is an inherited disorder that is the most common cause of inherited mental retardation. The disorder affects 1 in 2,000 males
and 1 in 4,000 females. Symptoms of fragile X syndrome include mental impairment ranging from learning disabilities to mental retardation, attention deficit and hyperactivity, anxiety and unstable mood and autistic-like behaviors.
Males are typically more severely affected by fragile X syndrome than females. Although most males have mental retardation,
only one-third to one-half of females have significant intellectual impairment; the rest have either normal intelligence or learning disabilities. Emotional and behavioral problems are common in both sexes. There are no current therapeutic
treatments for the disorder, although medications are used to treat some symptoms.
Autism is a complex
developmental disability that typically appears during the first three years of life. The result of a neurological disorder that affects the functioning of the brain, autism and its associated behaviors have been estimated to occur in as many as 2
to 6 in 1,000 individuals. The disability is four times more prevalent in males than in females.
Autism impacts
the normal development of the brain in the areas of social interaction and communication skills. Children and adults with autism typically have difficulties in verbal and nonverbal communication, social interactions, and leisure or play activities.
Persons with autism may exhibit repeated body movements, unusual responses to people or attachments to objects, and resistance to changes in routines. Individuals may also experience heightened sensitivities of sight, hearing, touch, smell and
taste. There are currently no approved therapeutic treatments for autism, although early behavioral intervention dramatically improves outcome.
Recent scientific research has led to an improved understanding of fragile X syndrome and autism. A number of scientists have suggested that the use of a drug to enhance glutamate transmission may be
beneficial. AMPAKINE compounds, which have demonstrated enhanced glutamate transmission, may therefore serve as potential new therapeutics.
Imaging studies demonstrate that areas of the brain that are extremely rich in glutamate transmission are less active in autistic patients. Molecular studies suggest that although genes involved in the
AMPA-type glutamate receptor are more active in autistic patients, the density of AMPA-type glutamate receptors is decreased. Taken together, these facts suggest that enhancing AMPA receptor activity may be beneficial in autistic patients.
The scientific logic for using an AMPA receptor modulator in fragile X is more complex but equally compelling.
The fragile X genetic defect results in the reduction or absence of an important protein, FMRP. FMRP is thought to play an important role in allowing normal levels of AMPA receptor proteins to be made. Increasing the activity of AMPA receptors with
an AMPAKINE may overcome the reduced number of AMPA receptors produced by the reduced level of FMRP protein.
In
April 2002, Cortex announced that it is collaborating with several research organizations to conduct a Phase II clinical study to evaluate the AMPAKINE CX516 as a potential treatment for fragile X syndrome and autism. The study design is a
randomized double-blind, placebo controlled trial with four weeks of treatment. Outcome measures will include testing in attention and executive function, spatial and verbal/auditory memory, language domain and behavior domain. Patient enrollment
began in May 2002 and is anticipated to continue over a two-year period.
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The FRAXA Research Foundation will provide funding for the trial at
Rush-Presbyterian-St. Luke’s Medical Center in Chicago, and Cortex will provide study medication (CX516 or placebo capsules). The Child and Adolescent Psychiatry Department at the University of Chicago will also participate in the study.
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, including brain damage due to stroke. The Company has certain rights to calpain inhibitor technology, but has allocated its resources to its AMPAKINE technology platform.
Manufacturing
Cortex has no experience or capability to
either manufacture bulk quantities of the new compounds that it develops, or to produce finished dosage forms of the compounds, such as tablets or capsules. Cortex relies, and presently intends to rely, on the manufacturing and quality control
expertise of contract manufacturing organizations or current and prospective corporate partners. There is no assurance that the Company will be able to enter into manufacturing arrangements to produce bulk quantities of its compounds on favorable
financial terms. There is however, substantial availability of dosage form manufacturing capability in the U.S. pharmaceutical industry that the Company believes that it can readily access.
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 such arrangements, the Company may seek to retain the right to promote or co-promote products for certain indications in North America. The Company’s worldwide licensing agreement
with Organon (see Note 4 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 marketing arrangements in connection with its other licensing activities, or
that marketing rights will lead to greater revenues for the Company.
Technology Rights
In 1993, Cortex entered an agreement with the Regents of the University of California, under which Cortex secured exclusive commercial
rights to AMPA-receptor modulating technology and compounds (the AMPAKINE technology) for the treatment of deficits of memory and cognition. The relationship later was expanded to include additional agreements for other 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 30 issued or allowed U.S. and foreign patents and has a number of additional U.S. patent applications and their international counterparts pending.
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In 1998, Cortex received a United States patent that contained a broad claim for
any AMPA-modulating compound to treat schizophrenia. Under the agreements with the Regents of the University of California (the “University”), Cortex has exclusive rights to AMPAKINE compounds for all applications, other than endocrine
modulation, stimulation of neurotrophin production and the treatment of sexual dysfunction in North and South America. The University may not license rights to the stimulation of neurotrophin production in areas of neurological diseases and
disorders, psychiatric disorders, cerebral vascular disorders, ischemic conditions and age related declines in cogntion, memory or performance associated with aging.
In April 1999, Cortex received a patent that covers the Company’s AMPAKINE compounds—as well as compounds made by others—for the treatment of memory and
cognition. This patent 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 Company
believes that the coverage also extends to psychiatric conditions with cognitive disturbances including depression, obsessive compulsive disorder, attention deficit disorder, and phobic disorders. A similar patent recently issued to Cortex in
Mexico.
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 FDA must be satisfied. Obtaining FDA approval is a costly and time-consuming process. Cortex has initiated Phase I (safety) testing in Europe. In the U.S., the Company has conducted or is now
conducting Phase I/IIa studies with CX516 in patients with schizophrenia and Alzheimer’s disease. Clinical trials in the U.S. were and are performed under Notices of Claimed Investigational Exemption for a New Drug (“IND”) filed with
the FDA by the Company’s clinical collaborators. Cortex filed an IND for CX516 in the name of the Company in the fall of 2000. It is the Company’s intent that Organon, Servier or another pharmaceutical company partner or partners that the
Company is seeking, will pursue other required regulatory approvals to conduct further clinical testing.
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.
Phase II trials are designed primarily to demonstrate effectiveness and to determine optimal dosing in treating or diagnosing the disease or condition for which
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the drug is intended. Short-term side effects and risks in people whose health is impaired may also be
examined. Phase III trials may involve up to several thousand patients who have the disease or condition for which the drug is intended, to approximate more closely the conditions of ordinary medical practice. Phase III trials are also designed to
clarify the drug’s benefit-risk relationship, to uncover less common side effects and adverse reactions, and to generate information for proper labeling of the drug. The FDA receives reports on the progress of each phase of clinical testing,
and may require the modification, suspension, or termination of clinical trials if an unwarranted risk is presented to patients. The FDA estimates that the clinical trial period of drug development can take up to ten years, and averages five years.
With certain exceptions, once clinical testing is completed, the sponsor can submit a New Drug Application (“NDA”) for approval to market a drug. The FDA’s review of an NDA can also be lengthy.
Therapeutic products that may be developed and sold by the Company outside the United States will be subject to regulation by the various
countries in which they are to be distributed. In addition, products manufactured in the United States that have not yet been cleared for domestic distribution will require FDA approval in order to be exported to foreign countries for distribution
there.
There is no assurance that any required FDA or other governmental approval will be granted or, if granted,
will not be withdrawn. Governmental regulation may substantially delay or prevent the marketing of the Company’s proposed products, or cause the Company to undertake additional procedures, which may be both costly and lengthy, and thereby
furnish a competitive advantage to the competitors of the Company or its licensees.
Cortex does not have the
financial and other resources to conduct the clinical testing and other procedures required to obtain approval to market its products. 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 licensing agreements with Organon and Servier, 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,
ADHD 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. These institutions 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 those advances continue. Based
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on the technical qualifications, expertise and reputations of its Scientific Directors, consultants and
other key scientists, the Company believes that it will be able to compete in the discovery and early clinical development of therapeutics for neurological and psychiatric disorders. However, the Company does not have the resources, and does not
presently intend to compete with major pharmaceutical companies in clinical testing, manufacturing and marketing.
Product Liability
Insurance
The clinical testing, manufacturing and marketing of the Company’s products may expose the
Company to product liability claims, against which the Company maintains liability insurance. Although the Company has never been subject to a product liability claim, there is no assurance that such claims will not be brought in the future, that
the coverage limits of the Company’s insurance policies will be adequate or that one or more successful claims brought against the Company would not have a material adverse effect upon the Company’s business, financial condition and
results of operations.
Employees
As of June 30, 2002, Cortex had 26 full-time and three part-time employees and had engaged one part-time DVM-level and five part-time Ph.D.-level scientific consultants. Of the 26 full-time employees,
18 were engaged in research and development, of which ten were Ph.D.-level or equivalent, and eight were engaged in management and administrative support. The Company also sponsors a substantial amount of research in academic laboratories, primarily
at the University of California, Irvine. As of October 1, 2002, Cortex had 20 full-time and four part-time employees, with no change in its scientific consultants relative to June 30, 2002.
Risk Factors
In addition to the other matters
set forth in this Annual Report on Form 10-K, our continuing operations and the price of our common stock are subject to the following risks:
If we cannot raise capital on acceptable terms, we may need to significantly curtail our operations.
Continuation of our operations is dependent upon us receiving the committed funding from Servier under the existing contracts, which funding will total approximately
$3,580,000 during the fiscal year ending June 30, 2003. Should Servier not fund its obligation under the agreements, given our current lack of working capital, we would have to take immediate action to curtail our spending in order to continue as a
going concern.
Without further infusions of capital, we anticipate that we have sufficient funds and committed
sources of funding from Servier to maintain our operations into early fiscal year 2004. 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.
Additional funds may result from milestone payments related to our agreements with Organon and Servier, although there is no
assurance that we will receive milestone payments from Organon or Servier within the desired time frame, 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.
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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.
Along with seeking additional corporate alliances, we may raise capital through
the sale of debt or equity securities. There is no assurance that funds will be available on favorable terms, or at all. If we issue equity securities to raise additional capital, our existing stockholders will likely suffer dilution of their
percentage ownership.
A significant percentage of our revenues come from our agreements with
Organon and Servier, and if either or both agreements were terminated, our financial condition could be seriously impaired.
We are dependent on future payments from Organon and Servier to continue the development and commercialization of our Ampakine technology. Under the agreement with Organon that we entered in January
1999, we share the research efforts. Organon has primary responsibility for developing and commercializing AMPAKINE compounds for use in the treatment of schizophrenia and depression. The agreement provided an up-front payment by Organon of
$2,000,000 and research support payments of roughly $3,000,000 per year for two years. The agreement also includes milestone payments, plus royalty payments on a worldwide basis. We achieved the first milestone from the agreement in May 2000, which
triggered a $2,000,000 payment to us from Organon. In September 2001, we achieved the second milestone from the agreement, triggering Organon’s payment to us of another $2,000,000. We remain eligible for additional milestone payments based upon
the progress of further clinical development. Although it is conceivable that we may receive additional milestone payments during the fiscal year ending June 30, 2003, we do not anticipate that any such payments will occur within that timeframe.
Under the terms of the agreement, Organon has the right to terminate the agreement upon four-months’ prior notice. If Organon were to discontinue its financial support, we might not be able to continue the development of our AMPAKINE technology
as a potential treatment for patients with schizophrenia and depression.
Under the agreement with Servier that we
entered into in October 2000, we also share the research efforts. Servier has primary responsibility for developing and commercializing AMPAKINE compounds for use in the treatment of memory impairment associated with aging, and of neurodegenerative
diseases such as Alzheimer’s disease. The agreement includes an up-front payment of $5,000,000 and research support payments of roughly $2,025,000 per year for three years (subject to us providing agreed-upon levels of research). The agreement
also includes milestone payments, plus royalty payments on sales in licensed territories. We do not anticipate that any milestone payments from Servier will occur during the fiscal year ending June 30, 2003. Under the terms of the agreement, Servier
has the right to terminate the agreement in the case of a merger or acquisition involving us and a third party. Servier also has the right to terminate the agreement upon six-months’ prior notice at any time after the research phase of the
collaboration. The agreement defines the research phase as a minimum of three years. In addition, Servier has the right to terminate the related research and development in the event that we materially breach the agreement. In October 2002, Servier
agreed to provide us $4,000,000 of additional research support over a two-year period, in exchange for rights to our AMPAKINE compounds for the potential treatment of anxiety disorders, in Servier’s licensed territories. If Servier were to
discontinue its financial support, we might not be able to continue the development of our AMPAKINE technology for the applications licensed to Servier and our financial condition could be seriously impaired.
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We have a history of net losses; we expect to continue to incur
net losses and we may never achieve or maintain profitability.
Since our formation on February 10, 1987
through June 30, 2002, we have generated only modest operating revenues and we have incurred net losses approximating $40,882,000. As of June 30, 2002, we had an accumulated deficit of approximately $42,914,000. We have not generated any revenue
from product sales to date, and it is possible that we will never generate revenues from product sales in the future. Even if we do achieve significant revenues from product sales, we expect to incur significant operating losses over the next
several years. It is possible that we will never achieve profitable operations. 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.
We may not be able to
enter into the strategic alliances necessary to fully develop and commercialize our products and technologies, and we will be dependent on our corporate partners if we do.
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 agreements with Organon and Servier, 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, Servier 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.
We are at an early stage of development and we may not be able to successfully develop and
commercialize our products and technologies.
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
or Servier. 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 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 unsafe, 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.
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Our products rely on licenses from the Regents of the University of
California, and if we lose access to these technologies, our business would be substantially impaired.
Under
our agreements with the Regents of the University of California (the “University”), we have exclusive rights to AMPAKINE compounds for all applications, other than endocrine modulation, stimulation of neurotrophin production and the
treatment of sexual dysfunction in North and South America. The University may not license rights to the stimulation of neurotrophin production in areas of neurological diseases and disorders, psychiatric disorders, cerebral vascular disorders,
ischemic conditions and age related declines in cognition, memory or performance associated with aging.
Our
rights to the AMPAKINE compounds are secured by patents or patent applications owned wholly by the University or by the University as a co-owner 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 University terminate that particular agreement.
If we fail to secure adequate intellectual property protection, it could significantly harm our financial results and ability to compete.
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 our favor.
There is a large number of shares of common stock that may be sold upon exercise or conversion
of outstanding securities, which may depress the market price of our stock.
If all outstanding warrants and
options are exercised prior to their expiration, approximately 2.9 million additional shares of common stock could become freely tradable without restriction. A total of 3,679 shares of common stock are issuable upon conversion of currently
outstanding 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 our common stock.
We face intense competition that could result in products that are superior to the products that we are developing.
Our business is characterized by intensive research efforts. Our competitors include many companies,
research institutes and universities that are working in a number of pharmaceutical or biotechnology disciplines to develop therapeutic products similar to those we are currently investigating. Most of these competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and/or other resources than we do. 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
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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.
We may be unable to recruit and
retain our senior management and other key technical personnel on whom we are dependent.
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.
If we are unable to maintain our relationships with academic
consultants and the University of California, Irvine, our business could suffer.
We depend upon our
relationships with academic consultants, particularly Dr. Gary S. Lynch of the University of California, Irvine. Dr. Lynch plays a role in guiding our research. In addition, we sponsor preclinical research in Dr. Lynch’s laboratories at the
University of California, Irvine, that is part of our product development and corporate partnering profile. If our relationship with Dr. Lynch or the University of California, Irvine, is 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.
The regulatory approval process is expensive, time consuming, uncertain and may prevent us from obtaining required approvals for the commercialization of some of our products.
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 and are expensive to complete. 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.
Our stock price may be volatile and our common stock could decline in value.
We are in the biopharmaceutical industry and the market price of securities of life sciences companies in
general has been very unpredictable. The following factors, in addition to factors that affect that market generally, could significantly impact our business, and the market price of our common stock could fall:
• |
competitors announcing technological innovations or new commercial products |
• |
competitors’ publicity regarding actual or potential products under development |
• |
regulatory developments in the United States and foreign countries |
• |
developments concerning proprietary rights, including patent litigation |
• |
public concern over the safety of therapeutic products |
Our charter document and shareholder rights plan may discourage companies from acquiring us and offering our stockholders a premium for their shares, and could adversely
affect the market price of our common stock.
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 549,500 shares of
preferred stock without stockholder approval. Pursuant to this authority, in February 2002 our Board of Directors
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adopted a shareholder rights plan and declared a dividend of a right to purchase one one-thousandth of a share of preferred stock for each
outstanding share of our common stock. The shareholder rights plan may have the effect of delaying, deferring or preventing a change in control of our business. This may discourage bids for our common stock at a premium over the market price of the
common stock and may adversely affect the market price of our common stock.
We may fail to continue to meet
the listing standards for the American Stock Exchange and, in the event that our common stock is delisted from such exchange, the liquidity of our common stock is likely to be impaired and the market price of our shares could be adversely affected.
The listing standards for the American Stock Exchange (the “Exchange”) include a stockholders’
equity and market capitalization test. The Exchange also monitors the financial condition and stability of listed companies. As of June 30, 2002, we had a stockholders’ deficit of approximately $592,000, which does not meet the current listing
standards. In the event that we fail to satisfy the listing standards on a continuous basis, the Exchange will contact us regarding our status. Within 30 days of such contact, we can provide the Exchange with our plan of action to bring us into
compliance with the listing standards within 18 months of the contact by the Exchange. If we do not provide a plan or if the Exchange does not accept our plan, delisting procedures will commence. If our plan is accepted, the Exchange will review our
compliance with the plan on a quarterly basis. If we do not show progress consistent with our plan, delisting procedures may begin. If our common stock is removed from listing on the Exchange, the liquidity of our common stock is likely to be
impaired and the trading price reduced.
The Company leases approximately 32,000 square feet of office,
research laboratory and expansion space in Irvine, California, under an operating lease that expires May 31, 2004. Current monthly rent on these facilities is approximately $25,000. The Company believes that this facility will be adequate for its
research and development activities for at least the remainder of the lease term.
The Company is not a party to any material legal
proceedings.
The Company did not
submit any matter to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2002, through the solicitation of proxies or otherwise.
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PART II
The Company’s common stock (AMEX symbol: COR) began trading on The American Stock Exchange on May 9, 2001. From March 17, 1999 to May 8, 2001, the Company’s common stock was listed on the OTC Bulletin Board. Prior to March
17, 1999, the Company’s common stock was listed on the Nasdaq SmallCap Market. The following table presents quarterly information on the high and low sales prices of the common stock for the fiscal years ended June 30, 2002 and 2001.
| High |
Low | |||||
| Fiscal Year ended June 30, 2002 |
||||||
| Fourth Quarter |
$ |
2.85 |
$ |
1.50 | ||
| Third Quarter |
|
3.44 |
|
2.36 | ||
| Second Quarter |
|
3.08 |
|
1.99 | ||
| First Quarter |
|
2.75 |
|
1.80 | ||
| Fiscal Year ended June 30, 2001 |
||||||
| Fourth Quarter |
$ |
3.30 |
$ |
1.50 | ||
| Third Quarter |
|
2.75 |
|
1.44 | ||
| Second Quarter |
|
3.63 |
|
1.41 | ||
| First Quarter |
|
4.50 |
|
2.47 | ||
Information for the periods referenced above has been furnished by
The American Stock Exchange and the OTC Bulletin Board. The quotations furnished by the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
As of June 30, 2002, there were 502 stockholders of record of the Company’s common stock, and approximately 7,200
beneficial owners. The high and low sales prices for the Company’s common stock on October 8, 2002, as reported by The American Stock Exchange, were $0.80 and $0.65, respectively.
The Company has never paid cash dividends on its common stock and does not anticipate paying such dividends in the foreseeable future. The payment of dividends, if any,
will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors
deemed relevant by the Board of Directors.
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We have derived the selected financial statement
presented below from our audited financial statements and notes related thereto. The information set forth below is not necessarily indicative of the results of future operations. You should read the selected financial data together with the audited
financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
| Years ended June 30, |
||||||||||||||||||||
| 2002 |
2001 |
2000 |
1999 |
1998 |
||||||||||||||||
| (In thousands, except per share data) |
||||||||||||||||||||
| INCOME STATEMENT DATA |
||||||||||||||||||||
| Revenues: |
||||||||||||||||||||
| Research and license revenue |
$ |
5,777 |
|
$ |
4,264 |
|
$ |
5,369 |
|
$ |
3,051 |
|
$ |
130 |
| |||||
| Grant revenue |
|
655 |
|
|
179 |
|
|
139 |
|
|
100 |
|
|
— |
| |||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Total revenues |
|
6,432 |
|
|
4,443 |
|
|
5,508 |
|
|
3,151 |
|
|
130 |
| |||||
| Operating expenses: |
||||||||||||||||||||
| Research and development |
|
5,043 |
|
|
4,410 |
|
|
3,896 |
|
|
3,379 |
|
|
4,008 |
| |||||
| General and administrative |
|
2,444 |
|
|
2,431 |
|
|
1,815 |
|
|
1,402 |
|
|
1,584 |
| |||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Total costs and expenses |
|
7,487 |
|
|
6,841 |
|
|
5,711 |
|
|
4,781 |
|
|
5,592 |
| |||||
| Loss from operations |
|
(1,055 |
) |
|
(2,398 |
) |
|
(203 |
) |
|
(1,630 |
) |
|
(5,462 |
) | |||||
| Loss before cumulative effect of change in accounting principle |
|
(983 |
) |
|
(2,143 |
) |
|
(197 |
) |
|
(1,621 |
) |
|
(5,258 |
) | |||||
| Cumulative effect of change in accounting principle(1) |
|
— |
|
|
(530 |
) |
|
— |
|
|
— |
|
|
— |
| |||||
| Net loss before preferred stock dividends |
|
(983 |
) |
|
(2,673 |
) |
|
(197 |
) |
|
(1,621 |
) |
|
(5,258 |
) | |||||
| Net loss applicable to common stock |
|
(983 |
) |
|
(2,663 |
) |
|
(200 |
) |
|
(1,624 |
) |
|
(5,261 |
) | |||||
| Basic and diluted net loss per share |
|
(0.06 |
) |
|
(0.16 |
) |
|
(0.01 |
) |
|
(0.12 |
) |
|
(0.55 |
) | |||||
| Shares used in basic and diluted calculation |
|
16,712 |
|
|
16,603 |
|
|
15,796 |
|
|
13,408 |
|
|
9,576 |
| |||||
| BALANCE SHEET DATA |
||||||||||||||||||||
| Cash and cash equivalents |
$ |
1,849 |
|
$ |
4,558 |
|
$ |
2,705 |
|
$ |
909 |
|
$ |
2,124 |
| |||||
| Working capital |
|
(349 |
) |
|
1,984 |
|
|
1,921 |
|
|
(742 |
) |
|
1,698 |
| |||||
| Total assets |
|
2,981 |
|
|
5,540 |
|
|
3,488 |
|
|
1,549 |
|
|
2,875 |
| |||||
| Unearned revenue, net of current portion |
|
727 |
|
|
2,394 |
|
|
— |
|
|
— |
|
|
— |
| |||||
| Note payable to Alkermes, Inc., net of current portion |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
948 |
| |||||
| Total stockholders’ (deficit) equity |
|
(592 |
) |
|
120 |
|
|
2,353 |
|
|
(163 |
) |
|
(1,031 |
) | |||||
(1) |
During the fourth quarter of the fiscal year ended June 30, 2001, we adopted, as required, the SEC’s Staff Accounting Bulletin No. 101, “Revenue
Recognition in Financial Statements,” effective July 1, 2000 (see Note 1 in the notes to the financial statements). |
22
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The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere herein.
Critical Accounting Policies and Management Estimates
The
Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the company’s financial condition and results of operations and most demanding of their
judgment. Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances. This process forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
Revenue Recognition
Our revenue recognition policies are in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition”
(“SAB 101”). SAB 101 provides guidance in applying accounting principles generally accepted in the United States to revenue recognition issues, and specifically addresses revenue recognition for up-front, nonrefundable fees received in
connection with research collaboration arrangements.
In accordance with SAB 101, revenues from up-front fees from
our collaborators are deferred and recorded over the term that we provide ongoing services. Similarly, research support payments are recorded as revenue as we perform the research under the related agreements. We record grant revenues as we incur
expenses related to the grant projects. All amounts received under collaborative research agreements or research grants are nonrefundable, regardless of the success of the underlying research.
Revenues from milestone payments are recognized when earned, as evidenced by written acknowledgment from our collaborator, provided that (i) the milestone event is
substantive and its achievement was not reasonably assured at the inception of the agreement, and (ii) our performance obligations after the milestone achievement will continue to be funded by our collaborator at a comparable level to that before
the milestone achievement. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of our performance obligations under the agreement.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative
would not produce a materially different result. See our audited financial statements and notes thereto which begin on page F-1 of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by accounting
principles generally accepted in the United States.
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Results of Operations
General
From inception
(February 10, 1987) through June 30, 2002, revenues of Cortex Pharmaceuticals, Inc. (“Cortex” or the “Company”) have consisted of (i) $21,662,000 of license fees and research and development funding, (ii) net interest income
aggregating $2,034,000 and (iii) $1,168,000 of grant revenue.
In January 1999, the Company entered a research
collaboration and exclusive worldwide license agreement with NV Organon (“Organon”), a pharmaceutical business unit of Akzo Nobel. The agreement will allow Organon to develop and commercialize the Company’s proprietary
AMPAKINE® technology for the treatment of schizophrenia and depression. In
connection with the agreement, the Company received a $2,000,000 up-front licensing payment and research support payments of roughly $3,000,000 per year for two years. During the year ended June 30, 2001, the Company received the remaining scheduled
research support from the agreement of $1,287,000.
The agreement with Organon also includes milestone payments
based upon clinical development, plus royalty payments on worldwide sales. Cortex achieved its first milestone under the agreement in May 2000, when Organon selected a candidate compound to pursue in Phase I clinical testing as a potential treatment
for schizophrenia. Achieving this milestone triggered a $2,000,000 payment from Organon, which Cortex recorded as revenue upon achievement.
Cortex achieved its second milestone under the agreement in September 2001, when Organon elected to continue development of the selected compound in Phase II clinical testing. Achieving the second
milestone triggered another $2,000,000 payment from Organon, with the related revenue recorded upon achievement of the milestone.
In April 2000, the Company entered into an option agreement with Shire Pharmaceuticals Group, plc (“Shire”) under which Shire evaluated the use of the Company’s AMPAKINE CX516 for the treatment of Attention Deficit
Hyperactivity Disorder (“ADHD”). In exchange for the option, Cortex received $130,000 and issued 254,353 shares of common stock to Shire for $870,000. Shire was responsible for all costs associated with the clinical trial.
Shire had the right to convert its option into an exclusive worldwide license for the AMPAKINE technology for ADHD under a
development and licensing agreement. In late June 2002, Shire elected not to exercise its option and terminated the Phase II study before reaching the anticipated enrollment levels. Under the terms of the option agreement, Cortex regained all rights
to CX516 and the AMPAKINE technology for ADHD. Cortex executed its right to acquire the data from the study, which it is analyzing while pursuing new partners that have expressed an interest in the AMPAKINE technology as a potential treatment for
the disorder.
In October 2000, the Company entered a research collaboration and an exclusive license agreement
with Les Laboratoires Servier (“Servier”). The agreement will allow Servier to develop and commercialize the Company’s AMPAKINE technology for the treatment of declines in cognitive performance associated with aging and
neurodegenerative diseases. The indications covered include, but are not limited to, Alzheimer’s disease, Mild Cognitive Impairment, sexual dysfunction, and the dementia associated with multiple sclerosis and Lou Gehrig’s disease.
The agreement with Servier includes a nonrefundable up-front fee of $5,000,000, which Cortex is recording as
revenue ratably over the agreement’s three-year research phase. The agreement also includes research support payments of $2,025,000 per year for three years (subject to Cortex providing agreed-upon levels of research personnel). The amount of
research support is subject to annual adjustment based
24
Table of Contents
upon the increase in the U.S. Department of Labor’s Consumer Price Index. Currently, Cortex
receives research support of roughly $2,080,000 per year. The agreement also includes milestone payments, plus royalty payments on sales in licensed territories.
In October 2002, Servier agreed to provide Cortex with $4,000,000 of additional research support, in exchange for rights to the Company’s AMPAKINE compounds for the potential treatment of anxiety
disorders, in Servier’s licensed territories. The $4,000,000 will be paid in quarterly installments of $500,000 over a two-year period, beginning in October 2002.
From inception (February 10, 1987) through June 30, 2002, the Company sustained losses aggregating $40,882,000. Due to projected fluctuations in funding, continuing losses
are likely over the next several years, as the Company’s ongoing operating expenses will only be offset, if at all, by research support payments and possible milestone payments from its research collaborations with Organon and Servier, or under
planned strategic alliances that the Company is seeking with other pharmaceutical companies for the clinical development, manufacturing and marketing of its products. The nature and timing of payments to Cortex under the Organon and Servier
agreements or other planned strategic alliances, if and when entered into, are likely to significantly affect the Company’s operations and financing activities and to produce substantial period-to-period fluctuations in reported financial
results. Over the longer term, the Company will require successful commercial development of its products by Organon, Servier, or its other prospective partners to attain sustained profitable operations from royalties or other product-based
revenues.
The Company believes that inflation and changing prices have not had a material impact on its ongoing
operations to date.
Fiscal Years ended June 30, 2002 and 2001
For the fiscal year ended June 30, 2002, the Company’s net loss of $983,000 compared to a net loss of $2,673,000 for the prior year.
The difference primarily represented increased research and licensing revenues.
Revenues for the year ended June
30, 2002 included a full year of research and licensing revenues from the agreement with Servier. Under the related agreement, Cortex receives roughly $2,025,000 of research support per year for a minimum of three years (subject to Cortex providing
agreed-upon levels of research), beginning in December 2000. Cortex also received an up-front payment of $5,000,000 from Servier, which it is recording as revenue ratably over the agreement’s three-year collaborative research phase.
Revenues for the year ended June 30, 2002 also included a $2,000,000 milestone payment from the agreement with
Organon, triggered when Organon elected to continue development of an AMPAKINE compound by entering Phase II clinical studies for schizophrenia. For the year ended June 30, 2001, revenues from the Organon agreement included the remaining scheduled
research support of $1,470,000. For the same period ending June 30, 2001, Cortex recorded $530,000 of licensing revenues from the Organon agreement, in accordance with Staff Accounting Bulletin No. 101 (“SAB 101”), as explained more fully
below.
Research and development expenses increased to $5,043,000, or by 14%, during the year ended June 30, 2002
compared to the prior year. The increase included expenses for a meeting of Principal Investigators for the Phase II clinical study of the AMPAKINE CX516 in patients with Mild Cognitive Impairment. The cross-national study, conducted in
collaboration with Servier, commenced enrollment in March 2002. Servier has agreed to support the bulk of the costs for this study.
Research and development expenses for the year ended June 30, 2002 also included technology access payments related to the Organon milestone achieved in September 2001. The Company previously licensed the AMPAKINE technology
from the University of California. Under the related agreement, the Company is required to remit a portion of certain remuneration received in connection with sublicensing agreements. When the Company achieved its milestone under its agreement with
Organon, a technology access payment to the University of California became due.
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Table of Contents
General and administrative expenses of $2,444,000 for the year ended June 30,
2002 were materially consistent with those from the prior year.
Fiscal Years ended June 30, 2001 and 2000
For the fiscal year ended June 30, 2001, the Company’s net loss of $2,673,000 compared to a net loss of
$197,000 for the prior year. The difference primarily represented decreased revenues from the research collaboration with Organon.
Revenues for the year ended June 30, 2000 included a $2,000,000 milestone payment, triggered when Organon selected a lead compound to pursue in Phase I clinical testing. Revenues for the fiscal year ended June 30, 2000 also
included a full-year of Organon research revenues. The two-year collaborative research phase of the Organon agreement ended in mid-January 2001, producing only roughly a half-year of research revenues for the year ended June 30, 2001.
During the fiscal year ended June 30, 2001, revenues related to the agreement with Servier partially offset the decreased
revenues from the agreement with Organon. Cortex received a $5,000,000 nonrefundable, up-front payment from Servier in October 2000, and in accordance with SAB 101, is recording the related revenues ratably over the three-year research phase of the
related agreement. As a result of SAB 101, approximately $940,000 of the $5,000,000 received was recorded as licensing revenues during the year ended June 30, 2001. The agreement with Servier also provided research revenues of $1,148,000.
Research and development expenses increased to $4,410,000, or by 13%, during the year ended June 30, 2001
compared to the prior year. Most of the increase related to costs for preparing a Notice of Claimed Investigational Exemption for a New Drug (“IND”) and expenses for manufacturing drug for use in planned clinical trials.
General and administrative expenses amounted to $2,431,000 for the year ended June 30, 2001, increasing 34% from the prior
year. Most of the increase represents costs related to expanded investor relations activities, initial listing fees for The American Stock Exchange and salary expenses related to the addition of a business development executive late in fiscal 2000.
For the year ended June 30, 2001, the Company recorded a charge of $530,000 to reflect the cumulative effect of a
change in accounting principle related to the required adoption of SAB 101. Issued by the Securities and Exchange Commission, SAB 101 required the Company to change its accounting method for the up-front payment received from the agreement with
Organon in 1999.
Instead of recording the revenue from the Organon up-front payment when it was received, under
SAB 101 the Company restated the revenue ratably over the agreement’s two-year contract period. With the recorded cumulative effect of the change in accounting principle of $530,000, restating revenues by $530,000 had no impact on the net loss
or net loss per share for the year ended June 30, 2001. Results for years prior to the year ended June 30, 2001 were not restated.
Liquidity and Capital Resources
Cortex has funded its organizational and research and
development activities to date primarily from the issuance of equity securities, with net proceeds from inception (February 10, 1987) through June 30, 2002 aggregating $38,632,000. Net interest income from inception through June 30, 2002 was
$2,034,000.
Research and licensing payments received in connection with the agreement with Organon totaled
$11,880,000 through June 30, 2002. Of this amount, Cortex received $2,000,000 during the year ended June 30, 2002, representing the second milestone from the Organon agreement. The milestone was triggered in September 2001, when Organon elected to
continue development of an AMPAKINE compound
26
Table of Contents
by entering Phase II clinical testing. Under the terms of the agreement, Cortex may receive additional
milestone payments based on clinical development of the licensed technology and ultimately, royalties on worldwide sales.
Research and licensing payments received under the agreement with Servier totaled $8,707,000 through June 30, 2002. Of this amount, Cortex received $2,053,000 during the year ended June 30, 2002. The agreement provides research
support of approximately $2,000,000 per year for three years, subject to annual adjustment based on the U.S. Department of Labor’s Consumer Price Index. Beginning in October 2002, Servier has agreed to provide an additional $4,000,000 of
research support to Cortex, to be paid in quarterly installments of $500,000 over a two-year period. The agreement also includes milestone payments based upon successful clinical development and royalties on sales in licensed territories.
In October 2000, Cortex received notice of a Phase II Small Business Innovative Research (“SBIR”) award
from the National Institutes of Health. The award will provide up to $1,074,000 over a three-year period and will offset the Company’s expenses in researching its AMPAKINE compounds as a potential new therapy for stroke. As of June 30, 2002,
Cortex had received approximately $400,000 related to this grant award.
In September 2001, the Company received
notice of a second Phase II SBIR award from the National Institutes of Health. This award will provide up to $770,000 over a two-year period, which will allow Cortex to follow-up on previously reported studies of the AMPAKINE CX516 as a combination
therapy for schizophrenia. Earlier tests were encouraging, with AMPAKINE-treated patients showing improvement in a number of clinical and neurocognitive scores. As of June 30, 2002, Cortex had received $298,000 from this grant award.
Cash Proceeds
As of June 30, 2002, the Company had cash and cash equivalents totaling $1,849,000 and a working capital deficit of $349,000. As of June 30, 2001, the Company had cash and cash equivalents of
$4,558,000 and working capital of $1,984,000. The decrease in cash as of June 30, 2002 reflected amounts required to fund operations.
For both periods, working capital included deferred revenue relating to the Company’s $5,000,000 nonrefundable, up-front payment from the agreement with Servier. In accordance with SAB 101, the Company is recording the
revenue related to the up-front payment ratably over the agreement’s three-year collaborative research phase, which began in December 2000. Current liabilities as of June 30, 2002 and 2001 included $1,667,000 of unearned revenues from the
Servier up-front fee. Excluding these unearned revenues, working capital as of June 30, 2002 and 2001 totaled $1,318,000 and $3,651,000, respectively.
Commitments
The Company leases approximately 32,000 square
feet of research laboratory, office and expansion space under an operating lease that expires May 31, 2004. The commitments under the lease agreement for the years ending June 30, 2003 and 2004 are $358,000 and $343,000, respectively. From inception
(February 10, 1987) through June 30, 2002, net expenditures for furniture, equipment and leasehold improvements aggregated $2,608,000.
The Company is committed to $408,000 for sponsored research and other remuneration to academic institutions, of which $305,000 is payable over the next 12 months. In addition, in August 2002 the Company became committed to
severance payments to its former Chief Executive Officer in the aggregate amount of $334,000, which payments will be made in monthly installments commencing in mid-August 2002 and ending in mid-August 2003.
27
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Together with its corporate partner, Servier, the Company is conducting a
cross-national clinical study with the AMPAKINE CX516 in patients with Mild Cognitive Impairment (MCI). Enrollment in the trial began in March 2002 and Servier has agreed to incur the bulk of the related costs. Remaining Cortex commitments for Phase
I/IIa clinical studies on the AMPAKINE compounds are not significant.
In June 2000, the Company received $247,300
from the Institute for the Study of Aging (the “Institute”), which will partially offset the Company’s costs for the testing in patients with MCI. Given that Cortex must use the funding from the Institute solely for clinical trials,
the Company has recorded the amounts received as restricted cash in its balance sheet. Provided that Cortex complies with the conditions of the funding agreement, including the restricted use of the amounts received, repayment of the advance shall
not be required unless Cortex enters an AMPAKINE compound into Phase III clinical trials for Alzheimer’s disease. Upon such potential clinical trials, repayment would include interest computed at a rate equal to one-half of the prime lending
rate. In lieu of cash, in the event of repayment the Institute may elect to receive the balance of outstanding principal and accrued interest as shares of Cortex common stock. The conversion price for such form of repayment shall initially equal
$4.50 per share, subject to adjustment under certain circumstances.
Staffing
As of June 30, 2002, Cortex had 29 employees. As of October 1, 2002, Cortex had 24 employees. Neither significant investments in plant or
equipment nor increases to staffing levels are contemplated under current spending plans for the upcoming fiscal year.
Outlook
Cortex anticipates that its cash and cash equivalents and scheduled research
support payments from its agreements with Servier will be sufficient to satisfy the Company’s capital requirements into early fiscal year 2004. Additional funds will be required to continue operations beyond that time. Cortex may receive
additional milestone payments from the Organon and Servier agreements, but there is no assurance that the Company will receive such milestone payments within the desired timeframe, or at all. See “Risk Factors—If we cannot raise capital
on acceptable terms, we may need to significantly curtail our operations.”
In order to provide for both
its immediate and longer-term spending requirements, the Company is presently seeking collaborative or other arrangements with larger pharmaceutical companies. Under these agreements, it is intended that such companies would provide additional
capital to the Company in exchange for exclusive or non-exclusive license or other rights to certain of the technologies and products the Company is developing. Competition for such arrangements is intense, however, with a large number of
biopharmaceutical companies attempting to secure alliances with more established pharmaceutical companies. Although the Company has been engaged in discussions with candidate companies, there is no assurance that an agreement or agreements will
arise from these discussions in a timely manner, or at all, or that revenues that may be generated thereby will offset operating expenses sufficiently to reduce the Company’s short and longer-term funding requirements.
Because there is no assurance that the Company will secure additional corporate partnerships, the Company may raise additional capital
through the sale of debt or equity securities. There is no assurance that funds will be available on favorable terms, or at all. If equity securities are issued to raise additional funds, dilution to existing stockholders is likely to result.
The Company’s proposed products are in the preclinical or early clinical stage of development and will
require significant further research, development, clinical testing and regulatory clearances. They are subject to the risks of failure inherent in the development of products based on innovative technologies. These risks include the possibilities
that any or all of the proposed products will be found to be ineffective
28
Table of Contents
or unsafe, or otherwise fail to receive necessary regulatory clearances; that the proposed products,
although effective, will be uneconomical to market; that third parties may now or in the future hold proprietary rights that preclude the Company from marketing them; or that third parties will market superior or equivalent products. Accordingly,
the Company is unable to predict whether its research and development activities will result in any commercially viable products or applications. Further, due to the extended testing and regulatory review process required before marketing clearance
can be obtained, the Company does not expect to be able to commercialize any therapeutic drug for at least five years, either directly or through its prospective corporate partners or licensees. There can be no assurance that the Company’s
proposed products will prove to be safe or effective or receive regulatory approvals that are required for commercial sale. See “Business—Risk Factors.”
The Company is
exposed to certain market risks associated with interest rate fluctuations on its marketable securities and borrowing arrangement. All investments in marketable securities are entered into for purposes other than trading. The Company is not subject
to risks from currency rate fluctuations as it does not typically conduct transactions in foreign currencies. In addition, the Company does not utilize hedging contracts or similar instruments.
The Company’s exposure to interest rate risk arises from financial instruments entered into in the normal course of business. Certain of the Company’s
financial instruments are fixed rate, short-term investments in government and corporate notes and bonds, which are available for sale (and have been marked to market in the accompanying financial statements). Changes in interest rates generally
affect the fair value of the investments, however, because these financial instruments are considered “available for sale,” all such changes are reflected in the financial statements in the period affected. The Company manages interest
rate risk on its investment portfolio by matching scheduled investment maturities with its cash requirements. At June 30, 2002, the Company’s investment portfolio had a fair value and carrying amount of approximately $1,943,000. If market
interest rates were to increase immediately and uniformly by 10% from levels as of June 30, 2002, the resulting decline in the fair value of fixed rate bonds held within the portfolio would not be material to the Company’s financial position,
results of operations and cash flows.
The Company’s borrowing consists solely of its advance from the
Institute for the Study of Aging, which is subject to potential repayment in the event that Cortex enters an AMPAKINE compound into Phase III clinical testing as a potential treatment for Alzheimer’s disease. Potential repayment would include
interest accruing at a discount to the prime lending rate. Changes in interest rates generally affect the fair value of such debt, but, based upon historical activity, such changes are not expected to have a material impact on earnings or cash
flows. At June 30, 2002, the principal and accrued interest of the advance amounted to $264,672.
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.
Not applicable.
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Table of Contents
PART III
The sections entitled
“Nominees for Director,” “Executive Officers,” “Other Key Employees,” “Scientific Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” included in the Company’s
Proxy Statement for its 2002 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2002, are incorporated herein by reference.
Item |
The sections entitled
“Executive Compensation,” “Option Matters,” “Employment and Consulting Agreements,” “Compensation Committee Interlocks and Insider Participation” and “Director Compensation” included in the
Company’s Proxy Statement for its 2002 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2002, are incorporated herein by reference.
The sections
entitled “Principal Stockholders” and “Equity Compensation Plan Information” included in the Company’s Proxy Statement for its 2002 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission
within 120 days after the end of fiscal 2002, are incorporated herein by reference.
The sections entitled
“Certain Transactions” and “Compensation Committee Interlocks and Insider Participation” included in the Company’s Proxy Statement for its 2002 Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 2002, are incorporated herein by reference.
Not applicable.
Part IV
(a) List of documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to
Financial Statements on page F-1, where these documents are listed.
(2) Financial Statement Schedules
The financial statement
schedules have been omitted because the required information is not applicable, or not present in amounts sufficient to require submission of the schedules, or because the information is included in the financial statements or notes thereto.
(3) Exhibits
See (c) below.
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Table of Contents
(b) Reports on Form 8-K during the fourth quarter:
No reports on Form 8-K were filed during the quarter ended June 30, 2002.
31
Table of Contents
(c) 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, by Certificate of Amendment of Restated Certificate of Incorporation filed December 21, 1998, and by Certificate of Designation filed February 11, 2002, incorporated by reference to Exhibit 3.1 of the Amendment No. 1
to Registration Statement on Form 8-A, No.001-16467, filed February 15, 2002. | |
| 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. | |
| 4.1 |
Rights Agreement, dated as of February 8, 2002, between the Company and American Stock Transfer & Trust Company,
which includes as Exhibit A thereto a form of Certificate of Designation for the Series A Junior Participating Preferred Stock, as Exhibit B thereto the Form of Rights Certificate and as Exhibit C thereto a Summary of Terms of Stockholder Rights
Plan, incorporated by reference to Exhibit 4.2 to the Company’s Amendment No. 1 to Registration Statement on Form 8-A, No. 001-16467, filed February 15, 2002. | |
| 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. * |
|
| 10.19 |
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-KSB 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). | |
| 10.44 |
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. | |
| 10.49 |
Settlement Agreement between the Company and Alkermes, Inc., dated October 5, 1995, incorporated by reference to the
same numbered Exhibit to the Company’s Annual Report on Form 10-KSB filed October 13, 1995. (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company’s Application
requesting confidential treatment under Rule 406 of the Securities Act of 1933). | |
| 10.60 |
Amended and Restated 1996 Stock Incentive Plan. | |
| 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, incorporated by reference to the same number Exhibit to the Company’s Annual Report on Form 10-KSB filed September 28, 1999. |
32
Table of Contents
| Exhibit Number |
Description | |
| 10.67 |
Collaborative Research, Joint Clinical Research and Licensing Agreements with Les Laboratoires Servier dated October
13, 2000, incorporated by reference to the same numbered Exhibit to the Company’s Quarterly Report on Form 10-QSB filed November 14, 2000. (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 Act of 1934). | |
| 10.69 |
Employment agreement dated May 17, 2000, between the Company and James H. Coleman, incorporated by reference to the
same numbered Exhibit to the Company’s Quarterly Report on Form 10-QSB filed February 12, 2001. | |
| 10.70 |
Severance agreement dated October 26, 2000, between the Company and Maria S. Messinger, incorporated by reference to
the same numbered Exhibit to the Company’s Quarterly Report on Form 10-QSB filed February 12, 2001. | |
| 10.71 |
Employment agreement dated June 5, 1995, between the Company and Gary A. Rogers, Ph.D. | |
| 10.72 |
Employment agreement dated May 1, 2002, between the Company and Joann L. Data, M.D., Ph.D. | |
| 10.73 |
Amendment dated October 3, 2002 to the Collaboration Research Agreement with Les Laboratoires Servier dated
October 13, 2000. | |
| 21 |
Subsidiaries of the Registrant, incorporated by reference to the same numbered Exhibit to the Company’s Annual
Report on Form 10-KSB filed October 13, 2000. | |
| 23.1 |
Consent of Ernst & Young LLP, Independent Auditors. | |
| 24 |
Power of Attorney (see page S-1). | |
| 99.1 |
Certification of Periodic Report by Roger G. Stoll, Ph.D., Chairman, President and Chief Executive
Officer | |
| 99.2 |
Certification of Periodic Report by Maria S. Messinger, Vice President, Chief Financial Officer and Corporate
Secretary |
* |
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.
|
33
Table of Contents
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CORTEX PHARMACEUTICALS, INC. | ||
| By: |
/s/ ROGER G. STOLL, PH.D.
| |
| Roger G. Stoll, Ph.D. Chairman, President and Chief Executive Officer | ||
We, the undersigned directors and officers of Cortex
Pharmaceuticals, Inc., do hereby constitute and appoint each of Roger G. Stoll, Ph.D. and Maria S. Messinger as our true and lawful attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our name and behalf in
our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys-in-fact and agents, or either of them, may deem necessary or advisable to enable said
corporation to comply with the Securities and Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but
without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said
attorney-in-fact and agent, shall do or cause to be done by virtue hereof.
In accordance with the Securities
Exchange Act of 1934, 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/ ROGER G. STOLL, PH.D. Roger G. Stoll, Ph.D. (Principal
Executive Officer) |
Chairman of the Board, President and Chief Executive Officer |
October 11, 2002 | ||
| /s/ MARIA S. MESSINGER Maria S. Messinger (Principal Financial and
Accounting Officer) |
Vice President, Chief Financial Officer and Secretary |
October 11, 2002 | ||
| /s/ ROBERT F. ALLNUTT Robert F. Allnutt |
Director |
October 11, 2002 | ||
| /s/ CHARLES J. CASAMENTO Charles J. Casamento |
Director |
October 11, 2002 | ||
| /s/ CARL W. COTMAN, PH.D. Carl W. Cotman, Ph.D. |
Director |
October 11, 2002 | ||
| /s/ M. ROSS JOHNSON, PH.D. M. Ross Johnson, Ph.D. |
Director |
October 11, 2002 |
S-1
Table of Contents
OF THE SARBANES-OXLEY ACT OF 2002
I, Roger G. Stoll, Ph.D., certify that:
1. I have reviewed this annual report on Form 10-K of Cortex Pharmaceuticals, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
| /S/ ROGER G. STOLL,
PH.D. Roger G. Stoll, Ph.D. Chairman, President and Chief Executive Officer (Principal Executive Officer) |
Date:
October 11,
2002
I, Maria S. Messinger, certify that:
1. I have reviewed this annual
report on Form 10-K of Cortex Pharmaceuticals, Inc.;
2. Based on my knowledge, this
annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report; and
3. Based on my knowledge, the financial
statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual
report.
| /s/ MARIA S. MESSINGER
|
| Maria S. Messinger Vice
President, Chief Financial Officer and Secretary (Principal
Financial Officer) |
Date:
October 11,
2002
S-2
Table of Contents
| Page | ||
| F-2 | ||
| F-3 | ||
| F-4 | ||
| F-5 | ||
| F-6 | ||
| F-7 |
F-1
Table of Contents
The
Stockholders and Board of Directors
Cortex Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Cortex Pharmaceuticals, Inc. (the “Company”) as of June 30, 2002 and 2001, and the related statements of
operations, stockholders’ (deficit) equity and cash flows for the years ended June 30, 2002, 2001 and 2000. 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 auditing standards generally
accepted in the United States. 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. at June 30, 2002 and 2001, and the results of its operations and its cash flows for the three years then ended, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the financial
statements, in 2001 the Company changed its revenue recognition policy.
/s/ ERNST & YOUNG LLP
San Diego, California
July 19, 2002, except for
paragraph 5 of footnote 1
and paragraph 3 of
footnote 6, for which the
date is October
3, 2002.
F-2
Table of Contents
CORTEX PHARMACEUTICALS, INC.
| June 30, 2002 |
June 30, 2001 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ |
1,849,009 |
|
$ |
4,557,516 |
| ||
| Restricted cash |
|
180,886 |
|
|
192,300 |
| ||
| Accounts receivable |
|
115,472 |
|
|
— |
| ||
| Other current assets |
|
350,872 |
|
|
260,679 |
| ||
| |
|
|
|
|
| |||
| Total current assets |
|
2,496,239 |
|
|
5,010,495 |
| ||
| Furniture, equipment and leasehold improvements, net |
|
451,280 |
|
|
496,586 |
| ||
| Other |
|
33,407 |
|
|
33,407 |
| ||
| |
|
|
|
|
| |||
| $ |
2,980,926 |
|
$ |
5,540,488 |
| |||
| |
|
|
|
|
| |||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ |
225,999 |
|
$ |
391,784 |
| ||
| Accrued wages, salaries and related expenses |
|
167,905 |
|
|
146,676 |
| ||
| Unearned revenue |
|
2,187,092 |
|
|
2,230,117 |
| ||
| Advance for Alzheimer’s project |
|
264,672 |
|
|
258,110 |
| ||
| |
|
|
|
|
| |||
| Total current liabilities |
|
2,845,668 |
|
|
3,026,687 |
| ||
| Unearned revenue, net of current portion |
|
726,852 |
|
|
2,393,518 |
| ||
| Stockholders’ (deficit) equity: |
||||||||
| 9% cumulative convertible preferred stock, $0.001 par value; $1.00 per share liquidation preference; shares authorized:
1,250,000; shares issued and outstanding: none (2002) and 15,000 (2001) |
|
— |
|
|
15,000 |
| ||
| Series B convertible preferred stock, $0.001 par value; $0.6667 per share liquidation preference; shares authorized:
3,200,000; shares issued and outstanding: 37,500; common shares issuable upon conversion: 3,679 |
|
21,703 |
|
|
21,703 |
| ||
| Common stock, $0.001 par value; shares authorized: 30,000,000; shares issued and outstanding: 16,849,383 (2002) and
16,629,887 (2001) |
|
16,848 |
|
|
16,629 |
| ||
| Additional paid-in capital |
|
42,284,085 |
|
|
41,998,545 |
| ||
| Accumulated deficit |
|
(42,914,230 |
) |
|
(41,931,594 |
) | ||
| |
|
|
|
|
| |||
| Total stockholders’ (deficit) equity |
|
(591,594 |
) |
|
120,283 |
| ||
| |
|
|
|
|
| |||
| $ |
2,980,926 |
|
$ |
5,540,488 |
| |||
| |
|
|
|
|
| |||
See accompanying notes.
F-3
Table of Contents
CORTEX PHARMACEUTICALS, INC.
| Years ended June 30, |
||||||||||||
| 2002 |
2001 |
2000 |
||||||||||
| Revenues: |
||||||||||||
| Research and license revenue |
$ |
5,777,217 |
|
$ |
4,263,986 |
|
$ |
5,369,488 |
| |||
| Grant revenue |
|
655,286 |
|
|
178,849 |
|
|
138,999 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Total revenues |
|
6,432,503 |
|
|
4,442,835 |
|
|
5,508,487 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Operating expenses: |
||||||||||||
| Research and development |
|
5,042,849 |
|
|
4,409,708 |
|
|
3,896,627 |
| |||
| General and administrative |
|
2,444,433 |
|
|
2,431,321 |
|
|
1,814,632 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Total operating expenses |
|
7,487,282 |
|
|
6,841,029 |
|
|
5,711,259 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Loss from operations |
|
(1,054,779 |
) |
|
(2,398,194 |
) |
|
(202,772 |
) | |||
| Interest income, net |
|
72,143 |
|
|
254,855 |
|
|
5,370 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Loss before cumulative effect of change in accounting principle |
|
(982,636 |
) |
|
(2,143,339 |
) |
|
(197,402 |
) | |||
| |
|
|
|
|
|
|
|
| ||||
| Cumulative effect of change in accounting principle |
|
— |
|
|
(530,000 |
) |
|
— |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Net loss before preferred stock dividends |
|
(982,636 |
) |
|
(2,673,339 |
) |
|
(197,402 |
) | |||
| Dividends on 9% cumulative convertible preferred stock |
|
675 |
|
|
(10,462 |
) |
|
2,475 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Net loss applicable to common stock |
$ |
(983,311 |
) |
$ |
(2,662,877 |
) |
$ |
(199,877 |
) | |||
| |
|
|
|
|
|
|
|
| ||||
| Basic and diluted net loss per share: |
||||||||||||
| Loss before cumulative effect of change in accounting principle |
$ |
(0.06 |
) |
$ |
(0.13 |
) |
$ |
(0.01 |
) | |||
| Cumulative effect of change in accounting principle |
|
— |
|
|
(0.03 |
) |
|
— |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Net loss per share, basic and diluted |
$ |
(0.06 |
) |
$ |
(0.16 |
) |
$ |
(0.01 |
) | |||
| |
|
|
|
|
|
|
|
| ||||
| Shares used in basic and diluted calculation |
|
16,712,115 |
|
|
16,602,846 |
|
|
15,795,595 |
| |||
| |
|
|
|
|
|
|
|
| ||||
See accompanying notes.
F-4
Table of Contents
CORTEX PHARMACEUTICALS, INC.
| 9% cumulative convertible preferred stock |
Series B convertible preferred stock |
Common stock |
Additional paid-in capital |
Deferred compensation |
Accumulated deficit |
Total |
|||||||||||||||||||||
| Balance, June 30, 1999 |
$ |
27,500 |
|
$ |
43,405 |
|
$ |
15,519 |
$ |
38,811,100 |
|
$ |
— |
|
$ |
(39,060,853 |
) |
$ |
(163,329 |
) | |||||||
| Issuance of 496,459 shares of common stock upon exercise of warrants |
|
— |
|
|
— |
|
|
496 |
|
1,501,844 |
|
|
— |
|
|
— |
|
|
1,502,340 |
| |||||||
| Issuance of 302,301 shares of common stock upon exercise of stock options |
|
— |
|
|
— |
|
|
303 |
|
113,049 |
|
|
— |
|
|
— |
|
|
113,352 |
| |||||||
| Issuance of 254,353 shares of common stock to Shire Pharmaceuticals Group, plc |
|
— |
|
|
— |
|
|
254 |
|
826,586 |
|
|
— |
|
|
— |
|
|
826,840 |
| |||||||
| Conversion of 37,500 shares of Series B preferred stock into 3,679 shares of common stock |
|
— |
|
|
(21,702 |
) |
|
3 |
|
21,699 |
|
|
— |
|
|
— |
|
|
— |
| |||||||
| Issuance of warrants to purchase 200,000 shares of common stock |
|
— |
|
|
— |
|
|
— |
|
241,500 |
|
|
— |
|
|
— |
|
|
241,500 |
| |||||||
| Issuance of stock options to consultants |
|
— |
|
|
— |
|
|
— |
|
92,000 |
|
|
(92,000 |
) |
|
— |
|
|
— |
| |||||||
| Extension of stock options previously granted to former Chairman of the Board |
|
— |
|
|
— |
|
|
— |
|
32,490 |
|
|
— |
|
|
— |
|
|
32,490 |
| |||||||
| 9% preferred stock dividends |
|
— |
|
|
— |
|
|
— |
|
(2,475 |
) |
|
— |
|
|
— |
|
|
(2,475 |
) | |||||||
| Net loss and comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
(197,402 |
) |
|
(197,402 |
) | |||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Balance, June 30, 2000 |
|
27,500 |
|
|
21,703 |
|
|
16,575 |
|
41,637,793 |
|
|
(92,000 |
) |
|
(39,258,255 |
) |
|
2,353,316 |
| |||||||
| Issuance of 52,047 shares of common stock upon exercise of stock options |
|
— |
|
|
— |
|
|
52 |
|
26,203 |
|
|
— |
|
|
— |
|
|
26,255 |
| |||||||
| Conversion of 12,500 shares of 9% preferred stock into 1,666 shares of common stock |
|
(12,500 |
) |
|
— |
|
|
2 |
|
12,498 |
|
|
— |
|
|
— |
|
|
— |
| |||||||
| Adjustment of accrued dividends for conversion of 9% preferred stock |
|
— |
|
|
— |
|
|
— |
|
12,375 |
|
|
— |
|
|
— |
|
|
12,375 |
| |||||||
| Issuance and vesting of stock options for consultants |
|
— |
|
|
— |
|
|
— |
|
111,832 |
|
|
92,000 |
|
|
— |
|
|
203,832 |
| |||||||
| Non-cash compensation charges for stock options re-priced in 1998 |
|
— |
|
|
— |
|
|
— |
|
199,757 |
|
|
— |
|
|
— |
|
|
199,757 |
| |||||||
| 9% preferred stock dividends |
|
— |
|
|
— |
|
|
— |
|
(1,913 |
) |
|
— |
|
|
— |
|
|
(1,913 |
) | |||||||
| Net loss and comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
(2,673,339 |
) |
|
(2,673,339 |
) | |||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Balance, June 30, 2001 |
|
15,000 |
|
|
21,703 |
|
|
16,629 |
|
41,998,545 |
|
|
— |
|
|
(41,931,594 |
) |
|
120,283 |
| |||||||
| Issuance of 217,500 shares of common stock upon exercise of stock options |
|
— |
|
|
— |
|
|
217 |
|
90,449 |
|
|
— |
|
|
— |
|
|
90,666 |
| |||||||
| Conversion of 15,000 shares of 9% preferred stock into 1,999 shares of common stock |
|
(15,000 |
) |
|
— |
|
|
2 |
|
14,998 |
|
|
— |
|
|
— |
|
|
— |
| |||||||
| Issuance and vesting of stock options for consultants |
|
— |
|
|
— |
|
|
— |
|
139,542 |
|
|
— |
|
|
— |
|
|
139,542 |
| |||||||
| Non-cash compensation charges for stock options re-priced in 1998 |
|
— |
|
|
— |
|
|
— |
|
41,226 |
|
|
— |
|
|
— |
|
|
41,226 |
| |||||||
| 9% preferred stock dividends |
|
— |
|
|
— |
|
|
— |
|
(675 |
) |
|
— |
|
|
— |
|
|
(675 |
) | |||||||
| Net loss and comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
(982,636 |
) |
|
(982,636 |
) | |||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Balance, June 30, 2002 |
$ |
— |
|
$ |
21,703 |
|
$ |
16,848 |
$ |
42,284,085 |
|
$ |
— |
|
$ |
(42,914,230 |
) |
$ |
(591,594 |
) | |||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
See accompanying notes.
F-5
Table of Contents
CORTEX PHARMACEUTICALS, INC.
| Years ended June 30, |
||||||||||||
| 2002 |
2001 |
2000 |
||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net loss before preferred stock dividends |
$ |
(982,636 |
) |
$ |
(2,673,339 |
) |
$ |
(197,402 |
) | |||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||||||
| Depreciation and amortization |
|
153,176 |
|
|
149,478 |
|
|
172,764 |
| |||
| Stock option compensation expense |
|
180,768 |
|
|
403,589 |
|
|
32,490 |
| |||
| Warrants issued for debt restructuring |
|
— |
|
|
— |
|
|
241,500 |
| |||
| Changes in operating assets/liabilities: |
||||||||||||
| Restricted cash |
|
11,414 |
|
|
55,000 |
|
|
— |
| |||
| Accounts receivable |
|
(115,472 |
) |
|
— |
|
|
— |
| |||
| Other current assets |
|
(90,193 |
) |
|
(156,877 |
) |
|
(42,825 |
) | |||
| Accounts payable and accrued expenses |
|
(144,556 |
) |
|
(20,891 |
) |
|
(31,620 |
) | |||
| Unearned revenue |
|
(1,709,691 |
) |
|
4,321,550 |
|
|
203,501 |
| |||
| Changes in other assets and other liabilities |
|
6,562 |
|
|
10,810 |
|
|
(185,952 |
) | |||
| |
|
|
|
|
|
|
|
| ||||
| Net cash (used in) provided by operating activities |
|
(2,690,628 |
) |
|
2,089,320 |
|
|
192,456 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Cash flows from investing activities: |
||||||||||||
| Purchase of fixed assets |
|
(107,870 |
) |
|
(247,494 |
) |
|
(39,364 |
) | |||
| |
|
|
|
|
|
|
|
| ||||
| Net cash used in investing activities |
|
(107,870 |
) |
|
(247,494 |
) |
|
(39,364 |
) | |||
| |
|
|
|
|
|
|
|
| ||||
| Cash flows from financing activities: |
||||||||||||
| Proceeds from issuance of common stock |
|
90,666 |
|
|
26,254 |
|
|
2,442,532 |
| |||
| Payment of 9% preferred stock dividends |
|
(675 |
) |
|
(15,525 |
) |
|
— |
| |||
| Principal payments on note payable to Alkermes, Inc. |
|
— |
|
|
— |
|
|
(800,000 |
) | |||
| |
|
|
|
|
|
|
|
| ||||
| Net cash provided by financing activities |
|
89,991 |
|
|
10,729 |
|
|
1,642,532 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| (Decrease) increase in cash and cash equivalents |
|
(2,708,507 |
) |
|
1,852,555 |
|
|
1,795,624 |
| |||
| Cash and cash equivalents, beginning of year |
|
4,557,516 |
|
|
2,704,961 |
|
|
909,337 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Cash and cash equivalents, end of year |
$ |
1,849,009 |
|
$ |
4,557,516 |
|
$ |
2,704,961 |
| |||
| |
|
|
|
|
|
|
|
| ||||
| Supplemental disclosure of cash flow information: |
||||||||||||
| Cash paid for interest |
$ |
— |
|
$ |
— |
|
$ |
239,700 |
| |||
| Supplemental schedule of non-cash investing and financing activities: |
||||||||||||
| Conversion of preferred stock to common stock |
$ |
15,000 |
|
$ |
12,500 |
|
$ |
21,702 |
| |||
| Advance for Alzheimer’s project |
|
— |
|
|
— |
|
|
247,300 |
| |||
See accompanying notes.
F-6
Table of Contents
CORTEX PHARMACEUTICALS, INC.
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.
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 4). The agreement will enable Organon to develop and commercialize the Company’s AMPAKINE® technology for the treatment of schizophrenia and depression. In October 2000, the Company entered into a research
collaboration and exclusive license agreement with Les Laboratoires Servier (“Servier”). The agreement, as amended in October 2002, will enable Servier to develop and commercialize the Company’s AMPAKINE technology for the treatment
of anxiety disorders and memory impairment associated with aging and neurodegenerative diseases, such as Alzheimer’s disease (Note 6).
The Company is seeking collaborative or other arrangements with additional pharmaceutical companies, under which such companies would provide 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 presently engaged in discussions with a number of candidate companies, there can be no assurance that an agreement will arise from these
discussions in a timely manner, or at all, or that any agreement that may arise from these discussions will successfully reduce the Company’s short-term or long-term funding requirements.
Basis of Presentation—From inception through June 30, 2002, the Company has generated only modest operating revenues and has incurred losses approximating
$40,882,000. The Company has derived the majority of its revenues from its agreements with Organon and Servier, as further described in Notes 4 and 6, respectively. These agreements contributed 89%, 92% and 97% of total revenues for the years ended
June 30, 2002, 2001 and 2000, respectively.
The Company anticipates that it has sufficient capital and committed
funding to maintain its operations into early fiscal year 2004; however, successful completion of the Company’s development program and its transition, ultimately, to attaining profitable operations is dependent upon obtaining additional
financing adequate to fulfill its research and development activities, and achieving a level of revenue adequate to support the Company’s cost structure. There can be no assurance that the Company will be successful in these areas. To
supplement its existing resources, the Company will likely need to raise additional capital through the sale of debt or equity. There can be no assurance that such capital will be available on favorable terms, or at all; if additional funds are
raised by issuing equity securities, dilution to existing stockholders is likely to result. The Company earned 58% of its revenues for the year ended June 30, 2002 from its agreement with Servier. In October 2002, the Company signed an additional
agreement with Servier that committed additional funding to the Company of $500,000 per quarter through September 2004. Currently, the Company’s operations are limited primarily to research and development focused under the Servier agreements.
Continuation of the Company’s operations is dependent upon the Company receiving the committed funding from Servier under the existing contracts, which will total approximately $3,580,000 during the fiscal year ending June 30, 2003. Should
Servier not fund its obligation under the agreements, given the Company’s current lack of working capital, the Company would have to take immediate action to curtail its spending in order to continue as a going concern.
Cash Equivalents—The Company considers all highly liquid short-term investments with maturities of less than three months when
acquired to be cash equivalents.
Concentrations of Credit Risk—Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company limits its exposure to credit loss by investing its cash with high credit quality financial institutions.
F-7
Table of Contents
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.
Long-Lived Assets—The Company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the total amount of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying
amount. The Company has not recognized any impairment losses through June 30, 2002.
Revenue
Recognition—The Company recognizes research revenue from the collaborations with Organon (Note 4) and Servier (Note 6) as services are performed under the agreement. The Company records grant revenues as the expenses related to the grant
projects are incurred. All amounts received under collaborative research agreements or research grants are nonrefundable, regardless of the success of the underlying research.
Revenues from milestone payments are recognized when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is
substantive and its achievement was not reasonably assured at the inception of the agreement, and (ii) the Company’s performance obligations after the milestone achievement will continue to be funded by the collaborator at a comparable level to
that before the milestone was achieved. If both of these criteria are not met, the milestone payment would be recognized over the remaining minimum period of the Company’s performance obligations under the arrangement. Royalties, if any, will
be recognized as earned.
Restatement—In December 1999, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting Bulletin No. 101, “Revenue Recognition” (“SAB 101”). SAB 101 provides the SEC Staff’s views in applying accounting principles generally accepted in the United States to various
revenue recognition issues, and specifically addresses revenue recognition for up-front, nonrefundable fees received in connection with research collaboration arrangements. It is the SEC’s position that revenues from such fees generally should
be recorded over the term of the related agreements.
As required, Cortex adopted SAB 101 in the fourth quarter of
its fiscal year ending June 30, 2001. The Company’s previous accounting policy was to recognize such nonrefundable fees as revenues when it received the related payments. SAB 101 required Cortex to change its accounting method for the up-front
fee from the collaboration with Organon signed in 1999 (Note 4).
After adopting SAB 101, for the fiscal year
ending June 30, 2001, the Company restated revenues to include $530,000 of revenues originally recorded when it received the up-front payment from Organon. For the same period, the Company recorded an offsetting cumulative effect of the change in
accounting principal of $530,000. There was no net impact on the reported net loss or net loss per share.
Before
adopting SAB 101, Cortex applied the related principles to its accounting for the up-front fee from the agreement with Servier (Note 6). Cortex is recording the revenues from Servier’s $5,000,000 nonrefundable fee ratably over the three-year
research phase of the agreement, which began in December 2000.
Prior year results have not been restated in the
accompanying statement of operations. Had this change in accounting principle been applied retroactively, the net income (loss) applicable to common shares and earnings (loss) per share amounts for the fiscal years ended June 30, 2001 and 2000 would
have been as follows:
| Years ending June 30, | |||||||
| 2001 |
2000 | ||||||
| Pro forma net (loss) income applicable to common shares |
$ |
(2,132,877 |
) |
$ |
800,123 | ||
| Pro forma basic (loss) earnings per share |
$ |
(0.13 |
) |
$ |
0.05 | ||
| Pro forma diluted (loss) earnings per share |
$ |
(0.13 |
) |
$ |
0.04 | ||
F-8
Table of Contents
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, given that 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.
In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB 25 (“FIN 44”).” As required, the Company adopted the Interpretation on July 1, 2000. The Interpretation requires that stock options that have been modified to reduce the exercise price be accounted for as
variable. Prior to release of FIN 44, in December 1998 the Company re-priced previously issued stock options. By adopting the Interpretation, the Company now applies variable accounting for these options. Consequently, if the market price of the
Company’s stock increases, the Company will recognize additional compensation expense that it otherwise would not have incurred. For the fiscal year ended June 30, 2002, the effect of applying the Interpretation was an increase in the net loss
of $41,226, with no impact on the net loss per share. For the fiscal year ended June 30, 2001, the effect of applying the Interpretation was an increase in the net loss of $199,757, or $0.01 per share.
Research and Development Costs—All costs related to research and development activities are treated as expenses in the period
incurred.
Net Loss per Share—In accordance with Statement of Financial Accounting Standards No. 128,
“Earnings per Share” (“SFAS 128”), net loss per share is computed based on the weighted average number of common shares outstanding and includes dividends accrued on the Company’s 9% Cumulative Convertible Preferred Stock.
As of June 30, 2002 and 2001, there were no and 15,000 shares, respectively, of the 9% Cumulative Convertible Preferred Stock outstanding.
The Company has reserved 2.9 million shares of common stock for issuance upon exercise of outstanding stock options and stock purchase warrants, as well as for conversion of the Company’s Series B preferred stock, as
further described in Note 3. The effect of the potentially issuable shares of common stock was not included in the calculation of diluted loss per share because the effect would be anti-dilutive.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
New
Accounting Standards—In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”) and No. 142, “Goodwill and Other
Intangible Assets” (“SFAS 142”). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives, but with
no maximum life. The amortization provisions of SFAS 142 apply immediately to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to
adopt SFAS 142 effective July 1, 2002. As of June 30, 2002, the Company does not have any recorded goodwill or unamortized intangible assets.
In October 2001, the Financial Accounting Standards Board issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The Statement
supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” however it retains the fundamental provisions of that Statement related to the recognition and measurement of the
impairment of long-lived assets to be held and used. Cortex is required to adopt SFAS 144 effective July 1,
F-9
Table of Contents
2002. The adoption is not expected to have a material impact on the Company’s operating results and
financial condition.
Note 2—Detail of Selected Balance Sheet Accounts
Other current assets consist of the following:
| June 30, | ||||||
| 2002 |
2001 | |||||
| Prepaid license fees |
$ |
116,296 |
$ |
116,296 | ||
| Prepaid sponsored research |
|
53,911 |
|
44,110 | ||
| Prepaid insurance fees |
|
52,234 |
|
20,754 | ||
| Prepaid financing costs |
|
47,000 |
|
— | ||
| Prepaid consulting fees |
|
7,500 |
|
35,598 | ||
| Other |
|
73,931 |
|
43,921 | ||
| |
|
|
| |||
| $ |
350,872 |
$ |
260,679 | |||
| |
|
|
| |||
Furniture, equipment and leasehold improvements consist of the
following:
| June 30, |
||||||||
| 2002 |
2001 |
|||||||
| Laboratory equipment |
$ |
1,400,216 |
|
$ |
1,340,996 |
| ||
| Leasehold improvements |
|
716,724 |
|
|
696,295 |
| ||
| Furniture and equipment |
|
175,431 |
|
|
172,896 |
| ||
| Computers and software |
|
315,701 |
|
|
290,015 |
| ||
| |
|
|
|
|
| |||
| |
2,608,072 |
|
|
2,500,202 |
| |||
| Accumulated depreciation |
|
(2,156,792 |
) |
|
(2,003,616 |
) | ||
| |
|
|
|
|
| |||
| $ |
451,280 |
|
$ |
496,586 |
| |||
| |
|
|
|
|
| |||
Unearned revenue consists of the following:
| June 30, | ||||||
| 2002 |
2001 | |||||
| License revenue |
$ |
2,393,519 |
$ |
4,060,185 | ||
| Research revenue |
|
520,425 |
|
563,450 | ||
| |
|
|
| |||
| $ |
2,913,944 |
$ |
4,623,635 | |||
| |
|
|
| |||
Note 3—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”); 35,000 have been designated as Series A Junior Participating Preferred Stock (non-voting, “Series A Junior Participating”) and 514,500 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 outstanding as of June 30, 2001
consisted of 15,000 shares outstanding of an original 1,250,000 shares of 9% Preferred issued in a 1988 private placement. In April 2002, the remaining shares of 9% Preferred outstanding were converted into 1,999 shares of common stock. Cash
F-10
Table of Contents
dividends on the 9% Preferred accrued semi-annually on June 15th and December 15th at the rate of $0.09 per share per annum. Upon conversion of
the 9% Preferred, accrued and unpaid dividends were credited to additional paid-in capital.
Series B Convertible
Preferred Stock outstanding as of June 30, 2002 and June 30, 2001 consisted of 37,500 shares of Series B Preferred issued in a May 1991 private placement. Each share of Series B Preferred is convertible into approximately 0.09812 shares of common
stock at an effective conversion price of $6.795 per share of common stock, subject to adjustment under certain circumstances. As of June 30, 2002, the remaining shares of Series B Preferred outstanding are convertible into 3,679 shares of common
stock. The Company may redeem the Series B Preferred at a price of $0.6667 per share, an amount equal to its liquidation preference, at any time upon 30 days’ prior notice.
Common Stock and Common Stock Purchase Warrants
In connection with the February 1998 restructuring of a note payable to Alkermes, Inc. (Note 7), 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. In connection with the July 1999 restructuring of the note payable, the Company issued to Alkermes five-year warrants to purchase 200,000 shares of common stock at a weighted-average exercise price of $1.48 per share. The exercise prices were
derived from the fair market value of the Company’s common stock on the date of issuance. The Company fully repaid the note during the fiscal year ended June 30, 2000.
As of June 30, 2002, the Company had reserved an aggregate of 3,679 shares for issuance upon conversion of the Series B Preferred Stock; 275,000 shares for issuance upon
exercise of warrants; 2,628,415 shares for issuance upon exercise of outstanding stock options; and 372,596 shares for issuance upon exercise of stock options available for future grant.
Stock Option and Stock Purchase Plans
1996 Stock Incentive Plan—The 1996 Plan provides for the granting of options and rights to purchase up to an aggregate of 3,574,359 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. 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 on the date of grant. The exercise price of incentive stock options must be at least equal to
the fair market value of the common stock on the date of grant.
Each non-employee director (other than those who
serve on the Board of Directors to oversee an investment in the Company) is automatically granted options to purchase 30,000 shares of common stock upon commencement of service as a director and additional options to purchase 10,000 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% on the anniversary dates of the dates of grant. As of June 30, 2002, options to purchase an aggregate of 2,628,415 shares of common stock were outstanding under the 1996 Plan, and an
additional 372,596 shares of common stock were reserved for future option grants.
As of June 30, 2002, options to
purchase an aggregate of 1,649,631 shares of common stock were exercisable under the Company’s stock option plans. During the years ended June 30, 2002 and 2001, no options to purchase shares of common stock were issued with exercise prices
below the fair market value of the common stock on the dates of grant.
F-11
Table of Contents
Stock option transactions under the Company’s stock option plans for each of
the three years in the period ended June 30, 2002 are summarized below:
| Number of shares |
Weighted average exercise
price per share | |||||
| Outstanding as of June 30, 1999 |
1,442,796 |
|
$ |
0.42 | ||
| Granted |
787,665 |
|
|
1.68 | ||
| Exercised |
(302,301 |
) |
|
0.38 | ||
| Forfeited |
(73,681 |
) |
|
0.77 | ||
| |
|
|||||
| Outstanding as of June 30, 2000 |
1,854,479 |
|
$ |
0.95 | ||
| Granted |
641,949 |
|
|
2.39 | ||
| Exercised |
(52,047 |
) |
|
2.23 | ||
| Forfeited |
(13,775 |
) |
|
3.68 | ||
| |
|
|||||
| Outstanding as of June 30, 2001 |
2,430,606 |
|
$ |
1.32 | ||
| Granted |
455,157 |
|
|
2.48 | ||
| Exercised |
(217,500 |
) |
|
0.42 | ||
| Forfeited |
(39,848 |
) |
|
2.78 | ||
| |
|
|||||
| Outstanding as of June 30, 2002 |
2,628,415 |
|
$ |
1.58 | ||
| |
|
|||||
| Available for future grant |
372,596 |
|
||||
| |
|
|||||
Pro Forma Information—The Company has elected to
account 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 Company’s employee stock options have
been granted at exercise prices equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS
123”), and has been determined as if the Company had accounted for its employee stock plans under the fair value method. The fair value was estimated at the date of grant using the Black-Scholes option pricing model and the following
assumptions for the years ended June 30, 2002, 2001 and 2000, respectively: weighted average risk-free interest rates of 3.4%, 4.8% and 6.4%; dividend yields of 0%; volatility factors of the expected market price of the Company’s common stock
of 68%, 108% and 144%; and a weighted average life of 4.5 years, 3.9 years and 3.7 years. The estimated weighted average fair value of options granted during the years ended June 30, 2002, 2001 and 2000 was $1.39, $1.75 and $1.43, 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, 2002, 2001 and 2000:
| Year ended June 30, |
||||||||||||
| 2002 |
2001 |
2000 |
||||||||||
| Pro forma net loss |
$ |
(1,667,927 |
) |
$ |
(3,434,990 |
) |
$ |
(547,237 |
) | |||
| Pro forma net loss applicable to |
||||||||||||
| common stock |
|
(1,668,602 |
) |
|
(3,424,528 |
) |
|
(549,712 |
) | |||
| Pro forma net loss per share |
$ |
(0.10 |
) |
$ |
(0.21 |
) |
$ |
(0.03 |
) | |||
F-12
Table of Contents
Information regarding stock options outstanding at June 30, 2002 is as follows:
| Options Outstanding |
Options Exercisable | |||||||||
| Range of exercise
prices |
Number outstanding at June
30, 2002 |
Weighted average remaining contractual
life |
Weighted average exercise price |
Number exercisable at June 30, 2002 |
Weighted average exercise price | |||||
| $0.34 – 0.50 |
872,317 |
6.04 years |
$0.43 |
872,317 |
$0.43 | |||||
| 0.65 – 2.09 |
694,624 |
7.84 years |
1.20 |
427,648 |
1.04 | |||||
| 2.11 – 2.78 |
825,120 |
9.14 years |
2.60 |
178,954 |
2.65 | |||||
| 2.84 – 4.44 |
236,354 |
7.88 years |
3.29 |
170,712 |
3.28 | |||||
| |
|
|||||||||
| 2,628,415 |
1,649,631 |
|||||||||
| |
|
|||||||||
Stockholder Rights Plan
On February 5, 2002, the Company’s Board of Directors approved the adoption of a Stockholder Rights Plan to protect stockholder
interests against takeover strategies that may not provide maximum stockholder value. A dividend of one Right for each outstanding share of the Company’s common stock was distributed to stockholders of record on February 15, 2002. Each share of
common stock presently outstanding that had been issued since February 15, 2002 also includes one Right and each share of common stock that may be issued after the date hereof but prior to the Distribution Date (as defined below) will also include
one Right. The Rights automatically attached to outstanding shares of common stock and no separate certificates were issued. The Rights trade only together with the Company’s common stock.
Each Right allows its holder to purchase one one-thousandth of a share (a “Unit”) of Series A Junior Participating Preferred Stock at a purchase price of
$75.00 per Unit. The Rights are not currently exercisable, but will become exercisable on the 10th
business day following the occurrence of certain events relating to a person or group (“Acquiring Person”) acquiring or attempting to acquire fifteen percent (15%) or more of the outstanding shares of the Company’s common stock (the
“Distribution Date”). If the Rights become exercisable, then any Rights held by the Acquiring Person are void. In such event, each other holder of a Right that has not been exercised will have the right upon exercise to purchase shares of
the Company’s common stock (or common stock of the Acquiring Person in certain situations) having a value equal to two times the exercise price of the Right. Unless redeemed or exchanged earlier by the Company, the Rights expire on February 15,
2012.
The Company has 35,000 shares of Series A Junior Participating Preferred Stock authorized (35,000,000
Units), of which no shares or Units are issued or outstanding at June 30, 2002. Each Unit would entitle the holder to (A) one vote, voting together with the shares of common stock; (B) in the event that the Company’s assets are liquidated, a
payment of $1.00 or an amount equal to the payment to be distributed per share of common stock, whichever is greater; and (C) in the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, a payment in
the amount equal to the payment received per share of common stock. The number of Rights per share of common stock, and the purchase price, are subject to adjustment in the event of each and any stock split, stock dividend or similar event.
F-13
Table of Contents
Note 4—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 of the Netherlands. The agreement will enable Organon to develop and commercialize the Company’s proprietary AMPAKINE technology for the treatment of schizophrenia and depression.
In connection with the Organon agreement, the Company received an up-front payment of $2,000,000. The agreement also included
research support of roughly $3,000,000 per year for two years.
During the fiscal year ended June 30, 2000, the
Company achieved its first milestone under the agreement, triggered when Organon selected an AMPAKINE compound to pursue in Phase I clinical testing as a potential treatment for schizophrenia.
During the year ended June 30, 2002, Organon notified Cortex of its intent to continue developing the selected compound by entering Phase II clinical testing,
triggering a second milestone payment of $2,000,000. Cortex remains eligible for additional milestone payments based upon further clinical development of the licensed technology, and ultimately, royalties on worldwide sales.
Note 5—Option Agreement with Shire Pharmaceuticals Group, plc
In April 2000, the Company entered into an option agreement with Shire Pharmaceuticals Group, plc (“Shire”) under which Shire agreed to evaluate the use of the Company’s AMPAKINE CX516
for the treatment of Attention Deficit Hyperactivity Disorder (“ADHD”). In exchange for the option, Cortex received $130,000; Shire also purchased 254,353 shares of Cortex common stock for $870,000. Shire was responsible for all costs
associated with the clinical trial, which consisted of a double-blind, placebo-controlled evaluation of CX516 in ADHD patients.
Shire had the right to convert its option into an exclusive worldwide license for the AMPAKINE technology for ADHD under a development and licensing agreement. Had Shire elected to execute this agreement, Cortex would have received
an up-front fee, milestone payments based on successful clinical and commercial development, research support for additional AMPAKINE compounds and royalties on sales.
In late June 2002, Shire elected not to exercise its option to the AMPAKINE technology for ADHD and terminated its Phase II study before reaching the anticipated enrollment
levels. Under the terms of the option agreement, Cortex regained all rights to CX516 and the AMPAKINE technology for ADHD. Cortex executed its right to acquire the data from the study, which it is analyzing while pursuing new partners that have
expressed interest in the platform as a potential treatment for the disorder.
Note 6—Research and License Agreement with Les
Laboratoires Servier
In October 2000, the Company entered into a research
collaboration and exclusive license agreement with Les Laboratoires Servier. The agreement will enable Servier to develop and commercialize Cortex’s proprietary AMPAKINE technology for the treatment of declines in cognitive performance
associated with aging and neurodegenerative diseases. The indications covered include, but are not limited to, Alzheimer’s disease, Mild Cognitive Impairment, sexual dysfunction, multiple sclerosis and Lou Gehrig’s disease. The territory
covered by the exclusive license excludes North America, allowing Cortex to retain commercialization rights in its domestic market. The territory covered by the agreement also excludes South America (except Argentina, Brazil and Venezuela),
Australia and New Zealand.
In connection with the agreement, Servier paid Cortex a
nonrefundable, up-front payment of $5,000,000 and research support payments of $3,707,000 of which $2,053,000 was received during the year ended June 30, 2002. The agreement includes research support of approximately $2,000,000 per year for three
years, subject to Cortex providing agreed-upon levels of research. The amount of support is subject to annual adjustment based upon the increase in the U.S. Department of Labor’s Consumer Price Index. Under the October 2000 agreement, Cortex
currently receives annual support of approximately $2,080,000. The agreement also includes milestone payments based upon clinical development and royalty payments on sales in licensed territories.
In October 2002, Servier agreed to provide Cortex with $4,000,000 of additional research support, in exchange for
rights to the Company’s AMPAKINE compounds for the potential treatment of anxiety disorders, in Servier’s licensed territories. The $4,000,000 will be paid in quarterly installments of $500,000 over a two-year period, beginning in October
2002.
F-14
Table of Contents
Note 7—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 technology. In connection with the agreement, the Company granted Alkermes an exclusive worldwide license to commercialize calpain inhibitor products for the prevention and treatment of neurodegenerative diseases and
disorders of the central and peripheral nervous systems.
In November 1993, Alkermes filed an action alleging that
the Company had breached the agreement by developing calpain inhibitors for cerebral vasospasm. In October 1995, the Company and Alkermes agreed to a settlement of the dispute. 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.
Subsequently,
the terms of the note were restructured a number of times, with Cortex issuing warrants to Alkermes as a condition for such restructurings. In March 2000, the Company paid Alkermes the remaining balance of the note’s principal and accrued
interest.
Note 8—Advance from the Institute for the Study of Aging
In June 2000, the Company received $247,300 from the Institute for the Study of Aging (the “Institute”) to fund testing of the Company’s AMPAKINE CX516
in patients with mild cognitive impairment (“MCI”). Patients with MCI represent the earliest clinically-defined group with memory impairment beyond that expected for normal individuals of the same age and education, but such patients do
not meet the clinical criteria for Alzheimer’s disease. The Institute is a non-profit foundation based in New York City and dedicated to the improvement in quality of life for the elderly.
As the funding from the Institute must be used solely for the planned clinical trials in MCI patients, Cortex has recorded the amounts received as restricted cash in
the Company’s balance sheet. Provided that Cortex complies with the conditions of the funding agreement, including the restricted use of the amounts received, repayment of the advance shall be forgiven unless Cortex enters an AMPAKINE into
Phase III clinical trials for Alzheimer’s disease. Upon such potential clinical trials, repayment would include the principal amount plus accrued interest computed at a rate equal to one-half of the prime lending rate. In lieu of cash, in the
event of repayment the Institute may elect to receive the outstanding principal balance and any accrued interest thereon as shares of Cortex common stock. The conversion price for such form of repayment shall initially equal $4.50 per share, subject
to adjustment under certain circumstances.
Note 9—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,
2002, 2001 and 2000 was approximately $279,000, $240,000 and $269,000, respectively. Commitments under the lease for the years ending June 30, 2003 and 2004 are approximately $358,000 and $343,000, respectively.
As of June 30, 2002, the Company has employment agreements with three of its executive officers, which agreements expire in May 2004. The
agreements involve annual salary payments aggregating $510,000 and provide for bonuses under certain circumstances. Subsequent to June 30, 2002, the Company was committed to severance payments to its former President and Chief Executive Officer, of
which all but $63,000 is included within the $510,000 of aggregated annual salary payments, disclosed above.
The
Company has entered into severance agreements with each of its executive officers. In the event of a termination of employment, under certain circumstances, these severance agreements provide defined benefits to the executive officers, including
compensation equal to 12 to 18 months of the executive officer’s then current salary.
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.
F-15
Table of Contents
As of June 30, 2002, commitments under scientific consulting and external
research agreements for services to be received for the years ending June 30, 2003, 2004, 2005, 2006 and 2007 aggregated approximately $430,000, $178,000, $58,000, $58,000 and $58,000, respectively.
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 $80,000 for the year ending June 30, 2003 and for each year thereafter for the
remaining life of the patents covering the subject technologies.
The agreements with the academic institution
committed the Company to pay up to an additional $875,000 upon achievement of certain clinical testing and regulatory approval milestones. The Company also is required to remit a portion of certain remuneration received in connection with
sublicensing agreements. As of June 30, 2002, the Company is committed to pay the academic institution approximately $267,000 related to such remuneration during the year ended June 30, 2003.
Note 10—Related Party Transactions
During
the years ended June 30, 2002, 2001 and 2000, the Company paid or accrued scientific and other consulting fees to stockholders aggregating $70,500, $96,750 and $82,250, 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.
Note 11—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” (“SFAS 109”). 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, 2002, the Company had federal and California tax net operating loss carryforwards of
approximately $36,100,000 and $9,400,000, 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 2003 (approximately $856,000 expired in 2002), while the federal carryforwards begin expiring in 2004. The
Company also has federal and California research and development tax credit carryforwards totaling $1,200,000 and $483,000, respectively. The federal research and development tax credit carryforwards 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, 2002 and June 30, 2001 are shown below. A valuation allowance of $17,327,000 as of June 30, 2002 has been established against the Company’s deferred tax assets as realization
of such assets is uncertain.
F-16
Table of Contents
Deferred tax assets consist of the following:
| June 30, |
||||||||
| 2002 |
2001 |
|||||||
| Net operating loss carryforwards |
$ |
13,175,000 |
|
$ |
11,851,000 |
| ||
| Capital loss carryforwards |
|
22,000 |
|
|
22,000 |
| ||
| Research and development credits |
|
1,470,000 |
|
|
1,357,000 |
| ||
| Capitalized research and development costs |
|
1,267,000 |
|
|
1,318,000 |
| ||
| Unearned revenue |
|
1,187,000 |
|
|
1,861,000 |
| ||
| Depreciation |
|
118,000 |
|
|
119,000 |
| ||
| Other, net |
|
88,000 |
|
|
97,000 |
| ||
| |
|
|
|
|
| |||
| Net deferred tax assets |
|
17,327,000 |
|
|
16,625,000 |
| ||
| Valuation allowance for deferred tax assets |
|
(17,327,000 |
) |
|
(16,625,000 |
) | ||
| |
|
|
|
|
| |||
| Total deferred tax assets |
$ |
— |
|
$ |
— |
| ||
| |
|
|
|
|
| |||
Note 12—Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for the years ended June 30, 2002 and 2001, respectively is as follows:
| 1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
||||||||||||
| 2002 Quarters |
|||||||||||||||
| Total revenues |
$ |
3,069,376 |
$ |
1,102,898 |
|
$ |
1,153,618 |
|
$ |
1,106,611 |
| ||||
| Total costs and expenses |
|
1,907,963 |
|
2,077,001 |
|
|
2,003,362 |
|
|
1,498,956 |
| ||||
| Income (loss) from operations |
|
1,161,413 |
|
(974,103 |
) |
|
(849,744 |
) |
|
(392,345 |
) | ||||
| Net income (loss) |
$ |
1,195,907 |
$ |
(956,406 |
) |
$ |
(839,488 |
) |
$ |
(382,649 |
) | ||||
| Basic and diluted income (loss) per share |
$ |
0.07 |
$ |
(0.06 |
) |
$ |
(0.05 |
) |
$ |
(0.02 |
) | ||||
| 1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
|||||||||||||||||||||||||
| As previously Reported |
As Restated |
As previously Reported |
As Restated |
As previously Reported |
As Restated |
|||||||||||||||||||||||
| 2001 Quarters |
||||||||||||||||||||||||||||
| Total revenues |
$ |
716,574 |
|
$ |
966,574 |
|
$ |
836,380 |
|
$ |
1,086,380 |
|
$ |
1,240,078 |
|
$ |
1,270,078 |
|
$ |
1,119,803 |
| |||||||
| Total costs and expenses |
|
2,074,338 |
|
|
2,074,338 |
|
|
1,287,778 |
|
|
1,287,778 |
|
|
1,564,794 |
|
|
1,564,794 |
|
|
1,914,119 |
| |||||||
| Loss from operations |
|
(1,357,764 |
) |
|
(1,107,764 |
) |
|
(451,398 |
) |
|
(201,398 |
) |
|
(324,716 |
) |
|
(294,716 |
) |
|
(794,316 |
) | |||||||
| Loss before change in accounting principle |
|
(1,311,497 |
) |
|
(1,061,497 |
) |
|
(371,688 |
) |
|
(121,688 |
) |
|
(250,060 |
) |
|
(220,060 |
) |
|
(740,094 |
) | |||||||
| Cumulative effect of change in accounting principle |
|
— |
|
|
(530,000 |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
| |||||||
| Net loss |
$ |
(1,311,497 |
) |
$ |
(1,591,497 |
) |
$ |
(371,688 |
) |
|
(121,688 |
) |
$ |
(250,060 |
) |
$ |
(220,060 |
) |
$ |
(740,094 |
) | |||||||
| Per common share: |
||||||||||||||||||||||||||||
| Loss before change in accounting principle |
$ |
(0.08 |
) |
$ |
(0.07 |
) |
$ |
(0.02 |
) |
$ |
(0.01 |
) |
$ |
(0.02 |
) |
$ |
(0.01 |
) |
$ |
(0.04 |
) | |||||||
| Cumulative effect of change in accounting principle |
|
— |
|
|
(0.03 |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
| |||||||
| Basic and diluted loss per share |
$ |
(0.08 |
) |
$ |
(0.10 |
) |
$ |
(0.02 |
) |
$ |
(0.01 |
) |
$ |
(0.02 |
) |
$ |
(0.01 |
) |
$ |
(0.04 |
) | |||||||
Quarterly results for 2001 reflect a change in revenue recognition
policy to adopt the SEC’s Staff Accounting Bulletin No. 101 (See Note 1).
F-17
Table of Contents
CORTEX PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
Year ended June 30, 2002
| Exhibit Number |
Description |
Sequentially Numbered Page | ||
| 3.1 |
Restated Certificate of Incorporation dated April 11, 1989, as amended by Certificate of Amendment of June 27, 1989,
by Certificate of Designation filed April 29, 1991, by Certificate of Correction filed May 1, 1991, by Certificate of Amendment of Certificate of Designation filed June 13, 1991, by Certificate of Amendment of Certificate of Incorporation filed
November 12, 1992, by Certificate of Amendment of Restated Certificate of Incorporation filed January 11, 1995, by Certificate of Designation filed December 8, 1995, by Certificate of Designation filed October 15, 1996, by Certificate of Designation
filed June 4, 1997, by Certificate of Amendment of Restated Certificate of Incorporation filed December 21, 1998, and by Certificate of Designation filed February 11, 2002, incorporated by reference to Exhibit 3.1 of the Amendment No. 1 to
Registration Statement on Form 8-A, No. 001-16467, filed February 15, 2002. |
|||
| 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. |
|||
| 4.1 |
Rights Agreement, dated as of February 8, 2002, between the Company and American Stock Transfer & Trust Company,
which includes as Exhibit A thereto a form of Certificate of Designation for the Series A Junior Participating Preferred Stock, as Exhibit B thereto the Form of Rights Certificate and as Exhibit C thereto a Summary of Terms of Stockholder Rights
Plan, incorporated by reference to Exhibit 4.2 to the Company’s Amendment No. 1 to Registration Statement on Form 8-A, No. 001-16467, filed February 15, 2002 |
|||
| 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.* |
|||
| 10.19 |
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). |
|||
| 10.44 |
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. |
|||
| 10.49 |
Settlement Agreement between the Company and Alkermes, Inc., dated October 5, 1995, incorporated by reference to the
same numbered Exhibit to the Company’s Annual Report on Form 10-KSB filed October 13, 1995. (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company’s Application
requesting confidential treatment under Rule 406 of the Securities Act of 1933). |
|||
| 10.60 |
Amended and Restated 1996 Stock Incentive Plan. |
EXH-1
Table of Contents
| Exhibit Number |
Description |
Sequentially Numbered
Page | ||
| 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, incorporated by reference to the same numbered Exhibit to the Company’s Annual Report on Form 10-KSB filed September 28, 1999. |
|||
| 10.67 |
Collaborative Research, Joint Clinical Research and Licensing Agreements with Les Laboratories Servier dated October
13, 2000, incorporated by reference to the same numbered Exhibit to the Company’s Quarterly Report on Form 10-QSB filed November 14, 2000. (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 Ruled 24b-2 of the Securities Act of 1934). |
|||
| 10.69 |
Employment agreement dated May 17, 2000, between the Company and James H. Coleman, incorporated by reference to the
same numbered Exhibit to the Company’s Report on Form 10-QSB filed February 12, 2001. |
|||
| 10.70 |
Severance agreement dated October 26, 2000, between the Company and Maria S. Messinger, incorporated by reference to
the same numbered Exhibit to the Company’s Quarterly Report on Form 10-QSB filed February 12, 2001. |
|||
| 10.71 |
Employment agreement dated June 5, 1995 between the Company and Gary A. Rogers, Ph.D. |
|||
| 10.72 |
Employment agreement dated May 1, 2002 between the Company and Joann L. Data, M.D., Ph.D. |
|||
| 10.73 |
Amendment dated October 3, 2002 to the Collaboration Research Agreement with Les Laboratoires Servier dated October
13, 2000. |
|||
| 21 |
Subsidiaries of the Registrant, incorporated by reference to the same numbered Exhibit to the Company’s Annual
Report on Form 10-KSB filed October 13, 2000. |
|||
| 23.1 |
Consent of Ernst & Young LLP, Independent Auditors. |
|||
| 24 |
Power of Attorney (included as part of the signature page of this Annual Report on Form 10-KSB. |
|||
| 99.1 |
Certification of Periodic Report by Roger G. Stoll, Ph.D., Chairman, President and Chief Executive
Officer |
|||
| 99.2 |
Certification of Periodic Report by Maria S. Messinger, Vice President, Chief Financial Officer and Corporate
Secretary |
* |
Incorporated by reference to the same numbered exhibit of the Company’s Registration Statement on Form S-1, No. 33-28284, effective on July 18, 1989.
|
EXH-2