RespireRx Pharmaceuticals Inc. - Quarter Report: 2009 September (Form 10-Q)

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED September 30, 2009

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission file number 1-16467

Cortex Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

15241 Barranca Parkway, Irvine, California 92618

(Address of principal executive offices, including zip code)

(949) 727-3157

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    YES  ¨    NO  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

68,412,618 shares of Common Stock as of November 11, 2009

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CORTEX PHARMACEUTICALS, INC.

INDEX

Item 1A of Part II has been omitted based on the Company’s status as a “smaller reporting company.” Items 1 and 3 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.

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PART I. FINANCIAL INFORMATION

Cortex Pharmaceuticals, Inc.

Condensed Balance Sheets

Note: The balance sheet as of December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying notes.

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Cortex Pharmaceuticals, Inc.

Condensed Statements of Operations

(Unaudited)

See accompanying notes.

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Cortex Pharmaceuticals, Inc.

Condensed Statements of Cash Flows

(Unaudited)

See accompanying notes.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(Unaudited)

Note 1 — Basis of Presentation and Significant Accounting Principles

The accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full fiscal year. For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

The Company has incurred net losses and cash outflows from operations of approximately $6,842,000 and $6,003,000, respectively, for the nine months ended September 30, 2009 and expects to incur additional losses and negative cash flow from operations in fiscal 2009 and for several more years. Management believes the Company currently has adequate financial resources to conduct operations late into the fourth quarter of 2009. This raises substantial doubt about the Company’s ability to continue as a going concern, which will be dependent on its ability to obtain additional financing and to generate sufficient cash flows to meet its obligations on a timely basis.

In March 2009, as part of its efforts to conserve its existing capital resources, the Company implemented a reduction of approximately 50% of its workforce and reduced the base salary for each of its executive officers by 20%.

The Company is exploring its strategic and financial alternatives, including, but not limited to, new collaborations for its AMPAKINE program that 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. Although the Company is presently engaged in such discussions, there can be no assurance that an agreement will arise from these discussions in a timely manner, or at all.

The Company also may need to raise additional capital through the sale of debt or equity. If the Company is unable to obtain additional financing to fund operations beyond the fourth quarter of 2009, it will need to eliminate some or all of its activities, merge with another company, license or sell some or all of its assets to another company, or cease operations entirely. There can be no assurance that the Company will be able to obtain additional financing on favorable terms or at all, or that the Company will be able to merge with another Company or license or sell any or all of its assets.

The Company has evaluated events or transactions that have occurred subsequent to the balance sheet date of September 30, 2009 through November 16, 2009, which is the date of issuance of the financial statements.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

Revenue Recognition

The Company recognizes revenue when all four of the following criteria are met: (i) pervasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the fees earned can be readily determined; and (iv) collectibility of the fees is reasonably assured.

Amounts received for upfront technology license fees under multiple-element arrangements are deferred and recognized over the period of committed services or performance, if such arrangements require the Company’s on-going services or performance.

Employee Stock Options and Stock-based Compensation

The Company’s 2006 Stock Incentive Plan (the “2006 Plan”) provides for a variety of equity vehicles to allow flexibility in implementing equity awards, including incentive stock options, nonqualified stock options, restricted stock grants, stock appreciation rights, stock payment awards, restricted stock units and dividend equivalents to qualified employees, officers, directors, consultants and other service providers. The exercise price of stock options offered under the 2006 Plan must be at least 100% of the fair market value of the common stock on the date of grant. If the person to whom an incentive stock option is granted is a 10% stockholder of the Company on the date of grant, the exercise price per share shall not be less than 110% of the fair market value on the date of grant. Options granted generally vest over a three-year period, although options granted to officers may include more accelerated vesting. Options generally expire ten years from the date of grant, but options granted to consultants may expire five years from the date of grant.

The Company recognizes expense in its financial statements for all share-based payments to employees, including grants of employee stock options, based on their fair values.

For options granted during the three months and nine months ended September 30, 2009 and 2008, the fair value of each option award was estimated using the Black-Scholes option pricing model and the following assumptions:

Expected volatility is based on the historical volatility of the Company’s stock. The Company also uses historical data to estimate the expected term of options granted and employee termination rates. The risk-free rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.

The weighted-average grant-date fair value per share of options granted during the three months ended September 30, 2009 and 2008 was $0.17 and $0.76, respectively. The weighted average grant-date fair value per share of options granted during the nine months ended September 30, 2009 and 2008 was $0.17 and $0.52, respectively.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

A summary of option activity for the nine months ended September 30, 2009 is as follows:

As of September 30, 2009, there was approximately $750,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That non-cash cost is expected to be recognized over a weighted-average period of 1.5 years.

Stock options and warrants issued as compensation for services to be provided to the Company by non-employees are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The Company recognizes this expense over the period in which the services are provided. This expense is a non-cash charge and has no impact on the Company’s available cash or working capital.

There were no stock option exercises during the nine months ended September 30, 2009 or 2008. The Company issues new shares to satisfy stock option exercises.

A summary of warrant activity for the nine months ended September 30, 2009 is as follows:

Outstanding warrants as of September 30, 2009 include a five-year warrant issued in July 2005 to purchase 100,000 shares of the Company’s common stock at an exercise price of $2.75 per share. This warrant is subject to certain conditions before becoming exercisable, which conditions remain unmet as of September 30, 2009.

Additionally, outstanding warrants as of September 30, 2009 include three and a half-year warrants to purchase 6,060,470 shares of the Company’s common stock at an exercise price of $0.27 per share and warrants to purchase 606,047 shares of the Company’s common stock at an exercise price of $0.3656 per share. These warrants were issued in connection with the Company’s private placement completed in July 2009 and become exercisable on January 31, 2010. All other warrants outstanding as of September 30, 2009 are immediately exercisable.

The effect of potentially issuable shares of common stock was not included in the calculation of diluted loss per share given that the effect would be anti-dilutive.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

Registration Payment Arrangements

In connection with a prior private placement of the Company’s common stock and warrants to purchase shares of the Company’s common stock completed in December 2004, the Company entered into an agreement that committed it to timely register the shares underlying the issued warrants. The registration agreement specified potential cash penalties if the Company did not timely register the related shares with the Securities and Exchange Commission (the “SEC”).

The registration rights agreement for the related transaction further provides that if a registration statement is not filed or does not become effective within the defined time period, or if after its initial effectiveness the registration statement ceases to remain continuously effective for all securities for which it is required to be effective, then in addition to any other rights the holders may have, the Company would be required to pay each holder an amount in cash, as liquidated damages, equal to 2% per month of the aggregate purchase price paid by such holder in the private placement for the common stock and warrants then held, prorated daily.

The registration statement for the transaction was filed and declared effective by the SEC within the allowed timeframe. As a result, the Company was not required to pay any liquidated damages in connection with the initial registration for such transaction.

In connection with its obligation to maintain effectiveness of the registration statements filed with the December 2004 transaction, as of September 30, 2009 the Company has estimated the maximum potential amount of undiscounted payments that it could be required to make under the registration arrangements as approximately $367,000.

Given that the Company did not deem the transfer of consideration under its existing registration payment arrangement as probable as of September 30, 2009 or 2008, no related expense or liability has been recorded during the nine-month periods ended September 30, 2009 and 2008.

As described more fully in Note 3, in July 2009 the Company completed a private placement of newly designated Series F Convertible Preferred Stock and warrants to purchase additional shares of the Company’s common stock. The warrants issued in the July 2009 transaction are not subject to an agreement to register the underlying common shares and as a result are not subject to the above accounting and disclosure considerations.

Marketable Securities

The Company utilizes quoted prices in active markets for identical assets to record the fair value of its marketable securities. Such marketable securities are carried at fair value, with unrealized gains and losses, net of any tax, reported as a separate component of stockholders’ equity.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on short-term investments are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

Comprehensive Loss

The Company presents unrealized gains and losses on its marketable securities, classified as “available for sale,” in its statement of stockholders’ equity and comprehensive income or loss on an annual basis and in a footnote in its quarterly reports. During the three months ended September 30, 2009 and 2008, total comprehensive loss was approximately $1,728,000 and $3,209,000, respectively. During the nine months ended September 30, 2009 and 2008, total comprehensive loss was approximately $6,838,000 and $11,551,000, respectively. Other comprehensive income or loss consists of unrealized gains or losses on the Company’s marketable securities, which are comprised of securities of the U.S. government or its agencies, corporate bonds and other asset backed securities. Unrealized losses on the Company’s marketable securities for the three months ended September 30, 2009 were less than $1,000. For the three months ended September 30, 2008, unrealized losses amounted to approximately $61,000. For the nine months ended September 30, 2009 and 2008, unrealized gains and losses on the Company’s marketable securities amounted to a gain of approximately $4,000 and a loss of approximately $85,000, respectively.

New Accounting Standards

In June 2009, the FASB issued FASB ASC 105, “Generally Accepted Accounting Principles” (FASB ASC 105) as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative generally accepted accounting principles for SEC registrants. The Codification included within FASB ASC 105, which is effective for the Company’s financial statements for the three and nine months ended September 30, 2009, supersedes all then-existing non-SEC accounting and reporting standards. Adoption of FASB ASC 105 did not have an impact on the Company’s financial position or results of operations.

Note 2 — Registered Direct Offering of Newly-Designated Series E Convertible Preferred Stock

In April 2009, the Company completed a registered direct offering of 1,475 shares of its newly designated 0% Series E Convertible Preferred Stock and warrants to purchase an aggregate of 6,941,176 shares of its common stock to a single institutional investor in exchange for gross proceeds of $1,475,000. Net proceeds from the offering were approximately $1,250,000.

The convertible preferred stock and warrants were sold in units, at a per unit purchase price of $1,000, and with each unit consisting of one share of convertible preferred stock and a warrant to purchase approximately 4,706 shares of common stock. The preferred stock was subsequently fully converted into 8,676,471 shares of the Company’s common stock at a conversion price of $0.17 per share. The warrants have an exercise price of $0.3401 per share and are exercisable on or before October 17, 2012.

The Company also issued warrants to purchase up to an additional aggregate of 433,824 shares of the Company’s common stock to the placement agent for the transaction. These warrants have an exercise price of $0.26 per share and are exercisable on or before October 17, 2012.

In recording the proceeds from this offering, the Company estimated the fair value of the warrants issued to the investor using the Black-Scholes option pricing model. The value of the convertible preferred stock was estimated based upon the fair value of the underlying common stock issuable upon conversion. The Company then used the relative fair value method to allocate the proceeds to the investor warrants and the convertible preferred stock.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

The Company calculated an effective conversion price for the preferred stock based upon the allocated proceeds and then measured the intrinsic value of the beneficial conversion rights embedded within the preferred stock. The beneficial conversion rights relate to the difference between the fair value of the Company’s common stock and the conversion price of the preferred stock on the closing date of the offering.

Given that the 0% Series E Convertible Preferred Stock was immediately convertible, the value of the beneficial conversion rights was fully amortized at the date of issuance of the preferred stock through a charge to the Company’s accumulated deficit. That charge is reflected in the accompanying statement of operations as an increase in the net loss for purposes of determining the net loss applicable to common stock for the nine months ended September 30, 2009.

Note 3 — Private Placement of Newly Designated Series F Convertible Preferred Stock

In July 2009, the Company completed a private placement of 4,029 shares of its newly designated Series F Convertible Preferred Stock with a stated value of $1,000 per share and warrants to purchase an aggregate of 6,060,470 shares of its common stock to a single institutional investor in exchange for gross proceeds of $4,029,000, of which $2,029,000 was placed in an escrow account. For conversions of the preferred stock prior to July 29, 2014, Cortex agreed to pay the holder an amount from the escrow account equal to approximately $504 per $1,000 of stated value of the preferred stock converted.

As of September 30, 2009, the preferred stock has fully converted into 12,120,938 shares of the Company’s common stock at a conversion price of $0.3324 per share and the $2,029,000 held in the escrow account has been repaid to the investor.

The warrants issued to the investor have an exercise price of $0.2699 per share and are exercisable on or after January 31, 2010 and on or before January 31, 2013.

The Company also issued warrants to purchase up to an additional aggregate of 606,047 shares of the Company’s common stock to the placement agent for the transaction. These warrants have an exercise price of $0.3656 per share and the same term of exercisability as the warrants issued to the investor.

In recording the proceeds from this offering, the Company estimated the fair value of the warrants issued to the investor using the Black-Scholes option pricing model. The value of the convertible preferred stock was estimated based upon the fair value of the underlying common stock issuable upon conversion. The Company then used the relative fair value method to allocate the proceeds to the investor warrants and the convertible preferred stock.

The Company calculated an effective conversion price for the preferred stock based upon the allocated proceeds and then measured the intrinsic value of the beneficial conversion rights embedded within the preferred stock. The beneficial conversion rights relate to the difference between the fair value of the Company’s common stock and the conversion price of the preferred stock on the closing date of the offering.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

Given that the Series F Convertible Preferred Stock was convertible upon effectiveness of the registration statement for the underlying shares of the Company’s common stock, which occurred during August 2009, the value of the beneficial conversion rights has been fully amortized as of September 30, 2009 through a charge to the Company’s accumulated deficit. That charge is reflected in the accompanying statement of operations as an increase in the net loss for purposes of determining the net loss applicable to common stock for the three months and nine months ended September 30, 2009.

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The following discussion and analysis should be read in conjunction with the Financial Statements and Notes relating thereto appearing elsewhere in this report and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Introductory Note

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and we intend 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,” “plans,” 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 our proposed products and (iv) the need for, and availability of, additional financing.

The forward-looking statements included herein are based on current expectations, which involve a number of risks and uncertainties and assumptions regarding our business and technology. These assumptions 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 our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized and actual results may differ materially. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that we file from time to time with the Securities and Exchange Commission, or the SEC, including, without limitation, Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and subsequent Current Reports on Form 8-K.

About Cortex Pharmaceuticals

We are engaged in the discovery and development of innovative pharmaceuticals for the treatment of psychiatric disorders, neurological diseases and brain-mediated breathing disorders. Our primary focus is to develop novel small molecules that positively modulate AMPA-type glutamate receptors, a complex of proteins involved in communication between nerve cells in the mammalian brain. We are developing a family of proprietary pharmaceuticals known as AMPAKINE^® compounds, which enhance the activity of the AMPA receptor. We believe that AMPAKINE compounds hold promise for the treatment of neurological and psychiatric diseases and disorders that are known, or thought, to involve depressed functioning of pathways in the brain that use glutamate as a neurotransmitter. Our most advanced clinical compounds are CX717 and CX1739, which currently are in Phase II clinical development.

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We previously reported statistically and clinically positive results with CX717 in the treatment of adult patients with Attention Deficit Hyperactivity Disorder, or ADHD. The compound has been targeted for acute use as an intravenous agent in the treatment of drug-induced respiratory depression. During 2008, we announced results from two pilot studies completed with oral CX717, which demonstrated that the compound prevented the onset of opiate-induced respiratory depression in humans, while at the same time, maintaining the pain-relieving properties of the opiate. We have now completed the development of an intravenous formulation of CX717 that has shown stability over a period of more than eight months under accelerated conditions. Subject to the availability of sufficient financial resources, we plan to conduct additional preclinical safety and toxicology studies with the intravenous formulation of CX717, followed by pharmacokinetic and dose-ranging studies in humans with the new formulation prior to initiating Phase IIb efficacy trials.

Our AMPAKINE compound CX1739 is substantially more potent than CX717 in animal studies. CX1739 has successfully completed human Phase I clinical trials and is currently being tested in a Phase II trial in the U.K. for the treatment of sleep apnea. We plan to begin Phase II trials with CX1739 for the treatment of adult ADHD at such time as we have sufficient financial resources.

Additional drug candidates are being readied for further development, including CX1942, CX2007 and CX2076. CX1942 has enhanced water solubility that facilitates its formulation as an intravenous agent for a hospital product for the treatment of respiratory depression. It may also be developed as a fixed-dose combination product with a generic opioid as a safer oral analgesic. CX2007 and CX2076 exhibit a significantly increased metabolic half-life in animals, which may ultimately result in a once-a-day treatment potential in humans. This further development will be dependent upon obtaining additional financial resources to conduct such studies.

Over the past three years, we have filed several new patents for our AMPAKINE compounds that, if granted, will provide patent protection for our new compounds up to 2029. Additionally, the method of use patent that we licensed from the University of Alberta may provide patent coverage through 2027 for the use of AMPAKINE compounds in the treatment of respiratory depression.

The AMPAKINE platform addresses large potential markets. Our business plan involves partnering with larger pharmaceutical companies for research, development, clinical testing, manufacturing and global marketing of AMPAKINE compounds for those indications that require sizable, expensive Phase III clinical trials and very large sales forces to achieve significant market penetration.

At the same time, subject to availability of sufficient financial resources, we plan to develop compounds internally for a selected set of indications, some of which will allow us to apply for orphan drug status. Such designation by the Food and Drug Administration, or the FDA, is usually applied to products where the number of patients in the United States in the given disease category is typically less than 200,000. These orphan drug indications typically require more modest investment in the development stages, follow a quicker regulatory path to approval, and involve a more concentrated and smaller sales force targeted at selected medical centers and a limited number of medical specialists in the United States and Europe.

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In our licensing discussions, we seek to reserve rights that may be viewed as a natural expansion beyond some of the orphan drug uses to selected larger areas of therapy to thereby allow us to potentially further develop our compounds for such larger non-orphan drug indications. If we are successful in the pursuit of this operating strategy, we may be in a position to contain our costs over the next few years, to maintain our focus on the research and early development of novel pharmaceuticals (where we believe that we have the ability to compete) and eventually to participate more fully in the commercial development of AMPAKINE products in the United States.

Critical Accounting Policies and Management Estimates

The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our 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.

Employee Stock Options and Stock-Based Compensation

We measure our share-based compensation cost at the grant date based on the estimated value of the award and recognize it as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

As of September 30, 2009, there was approximately $750,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. These non-cash costs are expected to be recognized over a weighted-average period of 1.5 years.

Stock options and warrants issued to our consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. We recognize this expense over the period the services are provided.

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 our judgment in their application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result.

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Going Concern

Our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern, in its report on our Financial Statements for the fiscal year ended December 31, 2008, based on significant operating losses that we incurred and the fact that we do not have adequate working capital to finance our day-to-day operations. Our continued existence depends upon the success of our efforts to raise additional capital necessary to meet our obligations as they become due and to obtain sufficient capital to execute our business plan. We intend to obtain capital primarily through issuances of debt or equity or entering into collaborative arrangements with corporate partners. There can be no assurance that we will be successful in completing additional financing or collaboration transactions. If we cannot obtain adequate funding, we may be required to significantly curtail or even shut down our operations.

Results of Operations

General

In January 1999, we entered into a research collaboration and exclusive worldwide license agreement with NV Organon, or Organon. In November 2007, Organon was acquired by Schering-Plough Corporation. Subsequently, in November 2009, Merck & Co. Inc. acquired Schering-Plough Corporation. Our agreement with Organon will allow them to develop and commercialize our proprietary AMPAKINE technology for the treatment of schizophrenia and depression. In connection with the agreement, we received $2,000,000 up-front and research support payments of approximately $3,000,000 per year for two years. The agreement with Organon also includes milestone payments based upon clinical development, plus royalty payments on worldwide sales. To date, we have received milestone payments from Organon totaling $6,000,000. For each milestone payment, we recorded the related revenue upon achievement of the milestone.

In October 2000, we entered into a research collaboration agreement and a license agreement with Les Laboratoires Servier, or Servier. The agreements will allow Servier to develop and commercialize select AMPAKINE compounds in defined territories of Europe, Asia the Middle East and certain South American countries as a treatment for (i) declines in cognitive performance associated with aging, (ii) neurodegenerative diseases and (iii) anxiety disorders. 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 Amyotrophic Lateral Sclerosis. The research collaboration agreement, as amended, included an up-front payment by Servier of $5,000,000 and research support payments of approximately $2,025,000 per year through early December 2006 (subject to us providing agreed-upon levels of research personnel). In early December 2006, we terminated the research collaboration with Servier and as a result the worldwide rights for the AMPAKINE technology for the treatment of neurodegenerative diseases have been returned to us, other than three compounds selected by Servier for commercialization in its territory. Should any of these compounds be successfully commercialized by Servier, we would receive payments based upon key clinical development milestones and royalty payments on sales in licensed territories.

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From inception (February 10, 1987) through September 30, 2009, we have sustained losses aggregating approximately $114,165,000. Continuing losses are anticipated over the next several years. During that time, our ongoing operating expenses will only be offset, if at all, by proceeds from Small Business Innovative Research grants and by possible milestone payments from Organon and Servier. Ongoing operating expenses may also be funded by payments under planned strategic alliances that we are seeking with other pharmaceutical companies for the clinical development, manufacturing and marketing of our products. The nature and timing of payments to us under the Organon and Servier agreements or other planned strategic alliances, if and when entered into, are likely to significantly affect our operations and financing activities and to produce substantial period-to-period fluctuations in reported financial results. Over the longer term, we will be dependent upon the successful introduction of a new product into the North American market from our internal development, as well as the successful commercial development of our products by Organon, Servier or our other prospective partners to attain profitable operations from royalties or other product-based revenues.

Comparison of the Three Months and Nine Months ended September 30, 2009 and 2008

For the three months ended September 30, 2009, our net loss applicable to common stock of approximately $3,243,000 compares with a net loss applicable to common stock of approximately $3,148,000 for the corresponding prior year period, an increase of 3%. Our net loss applicable to common stock of approximately $9,189,000 for the nine months ended September 30, 2009 compares with a net loss applicable to common stock of approximately $11,466,000 for the corresponding prior year period, a decrease of 20%.

The net losses applicable to common stock for the 2009 periods include charges of approximately $1,515,000 related to the beneficial conversion feature of our Series F Convertible Preferred Stock that we issued in July 2009. For the nine months ended September 30, 2009, the net loss applicable to common stock also includes charges of approximately $832,000 related to the beneficial conversion feature of our 0% Series E Convertible Preferred Stock that we issued in April 2009. These non-cash charges relate to the accounting requirements for the difference between the fair value of our common stock and the conversion price of the preferred stock on the date of issuance of the preferred stock. Excluding these non-cash charges, the decreases in net losses applicable to common stock reflect decreased research and development expenses, as explained more fully below.

Our research and development expenses for the three-month period ended September 30, 2009 decreased from approximately $2,205,000 to approximately $846,000, or by 62%, from the corresponding prior year period, reflecting prior year expenses for external research and our clinical studies with AMPAKINE CX717 in respiratory depression. For the nine-month period ended September 30, 2009, our research and development expenses decreased from approximately $8,759,000 to approximately $4,009,000, or by 54%, due to the clinical studies with CX717 and preclinical development expenses during the prior year periods for our AMPAKINE CX1739, which is now in human clinical testing.

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Salary and related expenses for our research and development personnel decreased relative to the corresponding prior year periods due to expenses for our President and Chief Executive Officer, Dr. Mark Varney. Before his appointment to President and Chief Executive Officer in August 2008, Dr. Varney served as our Chief Scientific Officer and Chief Operating Officer and his salary-related expenses were included in research and development. After his appointment, including the three-month and nine-month periods ended September 30, 2009, Dr. Varney’s salary related expenses have been recorded in general and administrative expenses. Salary and related expenses for our research and development personnel further decreased as a result of our reduction in force that we implemented in mid-March 2009.

Our non-cash stock compensation charges related to research and development for the three months ended September 30, 2009 decreased from approximately $162,000 to approximately $84,000, or by 48%, relative to the corresponding prior year period. For the nine months ended September 30, 2009, the non-cash stock compensation charges for research and development decreased from approximately $646,000 to approximately $222,000, or by 66%, compared with the corresponding prior year period, reflecting fluctuations in our stock price and the vesting schedules of granted stock options.

Our general and administrative expenses for the three-month period ended September 30, 2009 decreased from approximately $1,026,000 to approximately $883,000, or by 14%, compared to the corresponding prior year period, primarily reflecting savings from salary reductions that we implemented for our executive officers earlier this year and decreased non-cash stock-based compensation charges.

For the nine months ended September 30, 2009, our general and administrative expenses decreased from approximately $3,108,000 to approximately $2,851,000, or by 8%, compared to the corresponding prior year period, due to decreased non-cash stock-based compensation charges and prior year consulting fees for market research in the field of respiratory depression, an indication we are pursuing with our AMPAKINE CX717.

For the three months ended September 30, 2009, our non-cash stock compensation charges within general and administrative expenses decreased from approximately $155,000 to approximately $116,000, or by 25%, relative to the corresponding prior year period. For the nine months ended September 30, 2009, these charges decreased from approximately $417,000 to approximately $234,000, or by 44%, relative to the corresponding prior year period, primarily due to fluctuations in our stock price.

Net interest income for the three months ended September 30, 2009 decreased from approximately $83,000 to approximately $1,000, or by 99% compared to the corresponding prior year period. For the nine months ended September 30, 2009, our net interest income decreased from approximately $400,000 to approximately $18,000, or by 95% compared to the corresponding prior year period, with decreases for both periods resulting from a decrease in cash available for investing.

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Liquidity and Capital Resources

Sources and Uses of Cash

From inception (February 10, 1987) through September 30, 2009, we have funded our organizational and research and development activities primarily through the issuance of equity securities, funding related to collaborative agreements, various research grants and net interest income.

Under the agreements signed with Servier in October 2000, as amended to date, Servier has selected three AMPAKINE compounds that it may develop for potential commercialization. We remain eligible to receive payments based upon defined clinical development milestones of the licensed compounds and royalties on sales in licensed territories. Under the terms of the agreement with Organon, we may receive additional milestone payments based on clinical development of Org24448 and Org26576, and ultimately, royalties on worldwide sales.

We also may receive proceeds from the exercise of previously issued warrants to purchase shares of our common stock. The table below summarizes the warrants that remain outstanding as of September 30, 2009 that were issued in connection with prior offerings and placements of our common stock.

All of the warrants outstanding from the December 2004 and January 2007 transactions provide a call right in our favor to the extent that the closing price of our common stock exceeds $7.50 per share and $3.35 per share, respectively, for 13 consecutive trading days, subject to certain circumstances.

Similarly, subject to certain circumstances, the warrants issued to the investor in the April 2009 and July 2009 transactions provide a call right in our favor to the extent that the closing price of our common stock exceeds $0.68 per share and $0.54 per share, respectively, for 20 consecutive trading days. Warrants issued to the placement agent for the April 2009 and July 2009 transactions provide a call right in our favor to the extent that the closing price of our common stock exceeds $0.52 per share and $0.54 per share, respectively, for 20 consecutive trading days, subject to certain circumstances. We can give no assurance that we will receive proceeds from the exercise of any of the outstanding warrants.

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As of September 30, 2009, we had cash and cash equivalents totaling approximately $1,081,000 and a working capital deficit of approximately $750,000. In comparison, as of December 31, 2008, we had cash, cash equivalents and marketable securities of approximately $4,141,000 and working capital of approximately $2,541,000. The decreases in cash and working capital reflect amounts required to fund our operations.

For the nine months ended September 30, 2009, net cash used in operating activities was approximately $6,003,000 and included our net loss for the period of approximately $6,842,000, adjusted for non-cash expenses for depreciation and stock compensation approximating $602,000, and changes in operating assets and liabilities. Net cash used in operating activities was approximately $10,154,000 during the nine months ended September 30, 2008, and included our net loss for the period of approximately $11,466,000, adjusted for non-cash expenses for depreciation and stock compensation approximating $1,176,000, and changes in operating assets and liabilities.

For the nine months ended September 30, 2009, net cash provided by investing activities approximated $2,714,000 and represented the proceeds from the sales and maturities of marketable securities, partially offset by minimal fixed asset purchase and sale activity. Net cash provided by investing activities approximated $8,930,000 during the nine months ended September 30, 2008, and primarily resulted from the sales and maturities of marketable securities of approximately $11,391,000, partially offset by the purchases of marketable securities of approximately $2,339,000. Fixed asset purchases for the prior year period approximated $122,000.

Net cash provided by financing activities approximated $2,940,000 during the nine months ended September 30, 2009, and resulted from our registered direct offering of our 0% Series E Convertible Preferred Stock in April 2009 and our private placement of our Series F Convertible Preferred Stock in July 2009. There was no cash provided by or used in financing activities for the nine months ended September 30, 2008.

Commitments

We lease approximately 32,000 square feet of research laboratory, office and expansion space under an operating lease that expires May 31, 2012. The commitments under the lease agreement for the remaining three months of the year ending December 31, 2009 and the years ending December 31, 2010, 2011 and 2012 are approximately $135,000, $556,000, $581,000 and $248,000, respectively.

In addition to amounts reflected on the balance sheet as of September 30, 2009, our remaining commitments for preclinical and clinical studies amount to approximately $1,256,000. Separately, we are committed to approximately $70,000 for sponsored research at academic institutions, all of which is payable over the next twelve months.

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In June 2000, we received approximately $247,000 from the Institute for the Study of Aging, or the Institute, a non-profit foundation supported by the Estee Lauder Trust. The advance partially offset our limited costs for our testing in patients with mild cognitive impairment that we conducted with our partner, Servier. Provided that we comply with the conditions of the funding agreement, including the restricted use of the amounts received, we will not be required to repay the advance unless we enter 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 our common stock. The conversion price for such form of repayment shall initially equal $4.50 per share, subject to adjustment under certain circumstances.

Staffing

Following our announced reduction in our workforce in March 2009, we have 13 full-time employees. We do not anticipate significant increases in the number of our full-time employees within the coming year.

Outlook

With the net proceeds from our private placement of convertible preferred stock and warrants completed in July 2009, as discussed more fully above, we believe that we have adequate financial resources to conduct our operations late into the fourth quarter of 2009. This raises substantial doubt about our ability to continue as a going concern, which will be dependent on our ability to obtain additional financing and generate sufficient cash flows to meet our obligations on a timely basis.

We incurred net losses of approximately $6,842,000 during the nine months ended September 30, 2009. Our ongoing cash requirements will depend on numerous factors, particularly the progress of clinical trials of our AMPAKINE CX1739 and our ability to negotiate and complete collaborative agreements, out-licensing arrangements or other strategic transactions. In order to help fund our on-going operating cash requirements, we intend to seek new collaborations for our AMPAKINE programs that include initial cash payments and on-going development support. We may also seek to raise additional funds and explore other strategic and financial alternatives, such as a merger or sale of assets transaction.

There are significant uncertainties as to our ability to access potential sources of capital. We may not be able to enter into any collaboration on terms acceptable to us, or at all, due to conditions in the pharmaceutical industry or in the economy in general. Competition for such arrangements is intense, with a large number of biopharmaceutical companies attempting to secure alliances with more established pharmaceutical companies. Although we have 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 our short-term funding requirements.

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Even if we are successful in obtaining a collaboration for our AMPAKINE program, we may have to relinquish rights to technologies, product candidates or markets that we might otherwise seek to develop ourselves. These same risks apply to any attempt to out-license our compounds.

Similarly, due to market conditions, the illiquid nature of our stock and other possible limitations on equity offerings, we may not be able to sell additional securities or raise other funds on terms acceptable to us, if at all. Any additional equity financing, if available, would likely result in substantial dilution to existing stockholders.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is forward-looking information, and actual results could vary.

Additional Risks and Uncertainties

Our 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, but are not limited to, the possibilities that any or all of the proposed products will be found to be ineffective 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 us from marketing them; or that third parties will market superior or equivalent products. Accordingly, we are unable to predict whether our 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, we do not expect to be able to commercialize any therapeutic drug for at least four years, either directly or through our current or prospective partners or licensees. There can be no assurance that our proposed products will prove to be safe or effective or receive regulatory approvals that are required for commercial sale.

Off-Balance Sheet Arrangements

We have not engaged in any “off-balance sheet arrangements” within the meaning of Item 303(a)(4)(ii) of Regulation S-K.

We are exposed to certain market risks associated with interest rate fluctuations on our advance from the Institute for the Study of Aging, which is subject to potential repayment in the event that we enter an AMPAKINE compound into Phase III clinical testing as a potential treatment for Alzheimer’s disease. Potential repayment would include interest accruing at a rate equal to one-half of 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. As of September 30, 2009, the principal and accrued interest of the advance amounted to approximately $315,000.

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We are not subject to significant risks from currency rate fluctuations as we typically conduct a limited number of transactions in foreign currencies. In addition, we do not utilize hedging contracts or similar instruments.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or the CEO, and Chief Financial Officer, or the CFO, as appropriate, to allow timely decisions regarding required disclosure.

We performed an evaluation, under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based upon that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were effective in timely alerting them to material information required to be included in our periodic filings under the Exchange Act.

There has been no change in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

Issuances of Unregistered Equity Securities

In July 2009, we issued 4,029 shares of our newly designated Series F Convertible Preferred Stock and warrants to purchase up to an aggregate of 6,060,470 shares of our common stock in a private placement to a single accredited investor (as defined by Rule 501 under the Securities Act). The shares of Series F Convertible Preferred Stock, with a stated value of $1,000 per share, were convertible into shares of common stock at a price of $0.3324 per share and were fully-converted into an aggregate of 12,120,938 shares of common stock as of September 30, 2009. The resale of the shares of common stock underlying the Series F Convertible Preferred Stock is registered pursuant to a registration on Form S-3 (No. 333-161143) that the SEC declared effective on August 20, 2009. The related warrants have an exercise price of $0.2699 per share and are exercisable on or after January 31, 2010 and on or before January 31, 2013. The warrants are subject to a call provision that permits us to cancel the warrants (unless earlier exercise by the holder) in the event the volume weighted average price of our common stock exceeds $0.5398 for a period of 20 consecutive trading days, the average daily volume of our common stock during such 20 trading day period exceeds $100,000 per trading day and certain other conditions are satisfied. The gross proceeds of the offering were $4,029,000, of which $2,029,000 was placed into escrow at the closing and subsequently paid to the investor upon conversion of the Series F Convertible Preferred Stock.

Additionally, we issued unregistered warrants to purchase up to an aggregate of 606,047 shares of our common stock to the placement agent for the transaction. These warrants have an exercise price of $0.3656 per share, are exercisable on or after January 31, 2010 and on or before January 31, 2013, and contain the same call rights as the warrants issued to the investor.

The issuances of the foregoing Series F Convertible Preferred Stock and warrants were made in reliance upon the exemption from the registration provisions of the Securities Act set forth in Section 4(2) thereof as a transaction by an issuer not involving any public offering. The transaction documents contain representations to support our reasonable belief that the investor and the placement agent are each familiar with or has access to information concerning our business affairs and financial condition, and that they are each acquiring such securities for investment and not with a view to the distribution thereof. At the time of their issuance, the Series F Convertible Preferred Stock and warrants were deemed to be restricted securities for purposes of the Securities Act and such securities (and shares issued upon exercise of the warrants will) bear legends to that effect.

Repurchases of Equity Securities

During the quarter ended September 30, 2009, we did not repurchase any of our outstanding equity securities.

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Exhibits

SIGNATURES

Pursuant to the requirements 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.

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