RespireRx Pharmaceuticals Inc. - Quarter Report: 2010 March (Form 10-Q)

Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED March 31, 2010

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 May 13, 2010

Table of Contents

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.

Page 2 of 26

Table of Contents

PART I. FINANCIAL INFORMATION

Cortex Pharmaceuticals, Inc.

Condensed Balance Sheets

See accompanying notes.

Note: The balance sheet as of December 31, 2009 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.

Page 3 of 26

Table of Contents

Cortex Pharmaceuticals, Inc.

Condensed Statements of Operations

(Unaudited)

See accompanying notes.

Page 4 of 26

Table of Contents

Cortex Pharmaceuticals, Inc.

Condensed Statements of Cash Flows

(Unaudited)

See accompanying notes.

Page 5 of 26

Table of Contents

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 three-month period ended March 31, 2010 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, 2009.

In January 1999, the Company entered into a research collaboration and exclusive worldwide license agreement with NV Organon (“Organon”) that will enable Organon to develop and commercialize the Company’s AMPAKINE^® technology for the treatment of schizophrenia and depression. In November 2007, Organon was acquired by Schering-Plough Corporation. In November 2009, Schering-Plough Corporation was acquired by Merck & Co. Inc.

In October 2000, the Company entered into a research collaboration agreement and an exclusive license agreement with Les Laboratoires Servier (“Servier”). The agreements, as amended to date, will enable Servier to develop and commercialize select AMPAKINE compounds for the treatment of (i) declines in cognitive performance associated with aging, (ii) neurodegenerative diseases, such as Alzheimer’s disease, and (iii) anxiety disorders. In early December 2006, the Company terminated the research collaboration with Servier. The license agreement with Servier, as amended to date, continues in full force and effect in accordance with its terms.

In March 2010, the Company entered into an asset purchase agreement with Biovail Laboratories International SRL (“Biovail”) pursuant to which Biovail acquired the Company’s rights to certain AMPAKINE compounds and related intellectual property, including CX717, for use in the field of respiratory depression or vaso-occlusive crises associated with sickle cell disease. As part of the transaction, Biovail licensed back to the Company exclusive and irrevocable rights to certain of the acquired AMPAKINE compounds for use outside of the field of respiratory depression or vaso-occlusive crises associated with sickle cell disease.

To supplement its existing resources, in addition to seeking licensing arrangements with other pharmaceutical companies, the Company may seek 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.

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.

Page 6 of 26

Table of Contents

Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

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.

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, if any, 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.

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 ended March 31, 2010, the fair value of each option award was estimated using the Black-Scholes option pricing model and the following assumptions: weighted average risk-free interest rate of 3.2%; dividend yield of 0%; weighted average life of 6.9 years and volatility factor of the expected market price of the Company’s common stock of 108%. There were no options granted during the three months ended March 31, 2009.

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 estimated 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 March 31, 2010 was $0.14.

Page 7 of 26

Table of Contents

Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

A summary of option activity for the three months ended March 31, 2010 is as follows:

As of March 31, 2010, there was approximately $453,000 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 1.3 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 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 three months ended March 31, 2010 or 2009. The Company issues new shares to satisfy stock option exercises.

A summary of warrant activity for the three months ended March 31, 2010 is as follows:

Outstanding warrants as of March 31, 2010 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. Those conditions remain unmet as of March 31, 2010. All other warrants outstanding as of March 31, 2010 are immediately exercisable.

Net Income (Loss) per Share

For the three months ended March 31, 2010, the effect of potentially issuable shares of common stock was not included in the calculation of diluted income per share given that the Company’s outstanding options and warrants were not “in-the-money” as of such date.

For the three months ended March 31, 2009, 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.

Page 8 of 26

Table of Contents

Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

Comprehensive Income (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. 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.

During the three months ended March 31, 2010, total comprehensive income was approximately $5,596,000, which was the same as the Company’s net income for the period, given that the Company had no unrealized gains or losses on marketable securities. For the three months ended March 31, 2009, total comprehensive loss was approximately $3,163,000, which included unrealized gains on the Company’s marketable securities for the period of approximately $5,000.

Reclassifications

Certain reclassifications have been made to the balance sheet as of December 31, 2009 to conform with the presentation as of March 31, 2010.

New Accounting Standards

In April 2010, the Financial Accounting Standards Board issued Accounting Standards Update No. 2010-17, “Revenue Recognition—Milestone Method” (ASU 2010-17). ASU 2010-17 includes revenue-related guidance for companies that provide research or development deliverables in an arrangement in which one or more payments are contingent upon achieving uncertain future events or circumstances.

The amendments in the update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted and a company may elect, but is not required, to adopt the amendments in the update retrospectively for all prior periods.

Given that the guidance within the update is generally consistent with the Company’s existing revenue recognition considerations for its milestone payments, the Company does not believe that adoption of the update will have a material impact on either its financial position or its result of operations.

Note 2 — Issuance of Convertible Promissory Note

In January 2010, the Company completed a private placement of a convertible promissory note in the principal amount of $1,500,000 with a single accredited institutional investor, Samyang Optics Co., Ltd. (“Samyang”) of Korea. The promissory note accrues simple interest at the rate of 6% per annum and may be converted into unregistered shares of the Company’s common stock at Samyang’s election at any time on or after April 15, 2010 and on or before the January 15, 2011 maturity date (the “maturity date”).

Prior to and no less than three months before the maturity date, Samyang has the option to elect repayment of the note in cash, which repayment would be made by the Company within three months after the maturity date. Additionally, the Company may elect to prepay any portion of the amount due under the note prior to the maturity date, however, any prepaid principal amount will include a prepayment fee equal to the difference between the interest accrued on such amount to the prepayment date and the interest that would have accrued to the maturity date if such amount had not been prepaid. Any amounts outstanding under the note that have not been converted or elected to be repaid shall automatically convert into unregistered shares of common stock after the close of business on the maturity date. The number of common shares issuable upon conversion of the promissory note shall be

Page 9 of 26

Table of Contents

Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

based upon the greater of: (i) $0.134 per share or (ii) an amount representing a 15% discount to the five-day volume weighted average closing price of the Company’s common stock immediately prior to the conversion date of the promissory note.

In connection with any conversion of the promissory note, the Company is obligated to issue to Samyang two-year warrants to purchase additional unregistered shares of the Company’s common stock representing 40% of the number of shares of common stock issued upon conversion of the principal under the promissory note. The warrant to purchase additional shares shall include an exercise price per share representing a 40% premium to the price per share at which the common stock is issued upon conversion of the promissory note.

Given the potential redemption by the investor, the Company has recorded the issuance of the promissory note as a liability in the accompanying financial statements. The Company evaluated the conversion feature within the promissory note and determined that such embedded feature is indexed to the Company’s common stock and should not be separated from the promissory note and accounted for as a derivative instrument. The Company also evaluated the exercise feature for the potentially issuable warrants and deemed the instruments indexed to the Company’s common stock and subject to equity classification within the Company’s balance sheet.

In recording the proceeds from the private placement, the value of the promissory note was estimated as of the issuance date based upon the fair value of the underlying common stock issuable upon its conversion. The fair value of the warrants potentially issuable to the investor was estimated using the Black-Scholes option pricing model. The Company then used the relative fair value method to allocate the proceeds to the promissory note and the potentially issuable warrants.

Based upon the allocated proceeds, the Company calculated an effective conversion price for the promissory note and then measured the intrinsic value of the beneficial conversion right embedded within the promissory note. The beneficial conversion right is based on the difference between the fair value of the Company’s common stock and the effective conversion price of the promissory note on the closing date of the offering.

The value of the beneficial conversion right of approximately $224,000 is being amortized as interest expense over the 15-month period until potential redemption of the promissory note, or April 15, 2011, along with capitalized offering costs incurred in connection with the transaction. No value will be recorded for the warrants until such warrants are issued in connection with a conversion of the promissory note.

Note 3 — Sale of AMPAKINE Assets

On March 25, 2010, the Company entered into an asset purchase agreement with Biovail Laboratories International SRL (“Biovail”). Pursuant to the asset purchase agreement, Biovail acquired the Company’s interests in CX717, CX1763, CX1942 and the injectable dosage form of CX1739, as well as certain of its other AMPAKINE compounds and related intellectual property for use in the field of respiratory depression or vaso-occlusive crises associated with sickle cell disease.

In connection with the transaction, Biovail paid the Company the lump sum of $9,000,000 upon the execution of the asset purchase agreement and will pay it an additional $1,000,000 upon the later of the completion of the specified transfer plan or September 25, 2010. The Company recorded the $9,000,000 received upon execution of the related agreement as revenue during the quarter ended March 31, 2010 and will record the additional $1,000,000 as revenue upon completion of the specified transfer plan.

Page 10 of 26

Table of Contents

Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

In addition, the Company will have the right to receive up to three milestone payments in an aggregate amount of up to $15,000,000 plus the reimbursement of certain related expenses, each conditioned upon the occurrence of particular events relating to the clinical development of certain assets that Biovail acquired.

As part of the transaction, Biovail licensed back to the Company certain exclusive and irrevocable rights to all dosage forms of CX1739, other than the injectable dosage form. Biovail’s rights to the injectable dosage form of CX1739 are limited to use in the field of respiratory depression or vaso-occlusive crises associated with sickle cell disease. The Company is free to develop all other dosage forms of CX1739 for all uses outside of those indications. Accordingly, following the transaction with Biovail, the Company retains its rights to develop and commercialize the majority of its AMPAKINE compounds as a potential treatment for neurological diseases and psychiatric disorders. Additionally, the Company retains its rights to develop and commercialize the AMPAKINE compounds as a potential treatment for sleep apnea disorders.

Page 11 of 26

Table of Contents

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, 2009.

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 sleep apnea. 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 compound is CX1739, which currently is in Phase II clinical development.

Page 12 of 26

Table of Contents

We previously reported statistically and clinically positive results with CX717 in the treatment of adult patients with Attention Deficit Hyperactivity Disorder, or ADHD. CX717 was included in the assets acquired by Biovail in March 2010 (see Note 3 to Notes to Condensed Financial Statements).

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 United Kingdom for the treatment of sleep apnea. Given the positive results previously demonstrated with CX717 in adults with ADHD, we plan to initiate a Phase II study with CX1739 as a potential treatment for ADHD.

Although CX1739 was acquired by Biovail in our March 2010 transaction, certain rights to AMPAKINE compounds sold to Biovail were retained by us through a grant back license from Biovail. Specifically, Biovail’s rights to CX1739 are limited to an intravenous dosage form to treat respiratory depression or vaso-occlusive crises associated with sickle cell disease. Consequently, following the transaction we retained our exclusive rights to pursue the development of CX1739 in all non-intravenous dosage forms and certain of the other subject AMPAKINE compounds in the same patent family for indications other than the treatment of respiratory depression or vaso-occlusive crises associated with sickle cell disease. The structure of the transaction with Biovail permits us to pursue the development of CX1739 and certain other of the acquired AMPAKINE compounds as a potential treatment for sleep apnea disorders, ADHD and other indications. Additionally, we retained all composition of matter patent rights for the compounds in the CX2007 and CX2076 patent series. Additional drug candidates from this series of compounds are being readied for further development. These compounds 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.

We have filed several new patents for our AMPAKINE compounds that, if granted, will provide patent protection for our new compounds up to 2028.

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.

Page 13 of 26

Table of Contents

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.

Revenue Recognition

We recognize 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 our on-going services or performance.

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) our performance obligations, if any, 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 our performance obligations under the arrangement.

Page 14 of 26

Table of Contents

Employee Stock Options and Stock-Based Compensation

We measure our share-based compensation cost at the grant date based on the estimated fair 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 forfeit. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

As of March 31, 2010, there was approximately $453,000 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 1.3 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.

Convertible Debt and Equity Instruments

We review the features of our issued financing instruments to determine whether such instruments are appropriately measured and classified as either debt or equity in our financial statements. Generally, instruments that include a provision that may require settlement in cash are recorded as a liability.

The conversion features within our issued convertible instruments are valued separately from the preferred stock or debt securities. We allocate the proceeds received from a financing transaction that includes a convertible instrument to the convertible preferred stock or debt and any detachable instruments, such as warrants, on a relative fair value basis.

The value allocated to the convertible instrument is used to estimate an effective conversion price for the convertible preferred stock or debt, and to measure the intrinsic value, if any, of the conversion feature on the date that we issue the securities.

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.

Page 15 of 26

Table of Contents

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.

In March 2010, we entered into an asset purchase agreement with Biovail Laboratories International SRL (“Biovail”). Pursuant to the asset purchase agreement, Biovail acquired our interests in CX717, CX1763, CX1942 and the injectable dosage form of CX1739, as well as certain of our other AMPAKINE compounds and related intellectual property for use in the field of respiratory depression or vaso-occlusive crises associated with sickle cell disease. In connection with the transaction, Biovail paid us a lump sum of $9,000,000 upon execution of the asset purchase agreement and will pay us an additional $1,000,000 upon the later of the completion of the specified transfer plan or September 25, 2010. In addition, we will have the right to receive up to three milestone payments in an aggregate amount of up to $15,000,000 plus the reimbursement of certain related expenses, each conditioned upon the occurrence of particular events relating to the clinical development of certain assets that Biovail acquired.

Page 16 of 26

Table of Contents

As part of the transaction, Biovail licensed back to us certain exclusive and irrevocable rights to some acquired AMPAKINE compounds, other than CX717, an injectable dosage form of CX1739, CX1763 and CX1942, for use outside of the field of respiratory depression or vaso-occlusive crises associated with sickle cell disease. Accordingly, following the transaction with Biovail, we retain rights for the majority of patented compounds in our AMPAKINE drug library, as well as all rights to the non-acquired AMPAKINE compounds for the treatment of neurological diseases and psychiatric disorders that have historically been a focus of our portfolio. Additionally, we retain our rights to develop and commercialize AMPAKINE compounds as a potential treatment for sleep apnea disorders, including an oral dosage form of CX1739.

From inception (February 10, 1987) through the fiscal quarter ended on March 31, 2010, we have sustained losses aggregating approximately $110,168,000. 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, Servier and Biovail. 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, Servier and Biovail 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 ended March 31, 2010 and 2009

For the three months ended March 31, 2010, our net income of approximately $5,596,000 compares with a net loss of approximately $3,168,000 for the corresponding prior year period, due primarily to revenues of $9,000,000 from the transaction with Biovail, as detailed above.

Our research and development expenses for the three-month period ended March 31, 2010 decreased from approximately $2,115,000 to approximately $1,624,000, or by 23%, from the corresponding prior year period and included sublicense payments approximating $910,000 related to the transaction with Biovail. Excluding those amounts, our research and development expenses decreased significantly relative to the prior year period due to the reduction in force that we implemented in mid-March 2009 and as a result of decreased clinical development expenses.

Our expenses for the prior year period included amounts for Phase I clinical testing of AMPAKINE CX1739, as well as initiation of a Phase IIa proof of concept study with the compound in sleep apnea. Enrollment in the sleep apnea study has been slower than anticipated during the current year period, due in large part to our financial constraints prior to the transaction with Biovail. We expect the results from this study in late summer 2010.

Our non-cash stock compensation charges related to research and development for the three months ended March 31, 2010 decreased from approximately $84,000 to approximately $32,000, or by 62%, relative to the corresponding prior year period, reflecting fluctuations in our stock price and the vesting schedules of granted stock options.

Page 17 of 26

Table of Contents

Our general and administrative expenses for the three-month period ended March 31, 2010 increased from approximately $1,068,000 to approximately $1,708,000, or by 60%, compared to the corresponding prior year period, primarily reflecting legal and investment banking fees related to the March 2010 transaction that we completed with Biovail.

For the three months ended March 31, 2010, our non-cash stock compensation charges within general and administrative expenses increased from approximately $69,000 to approximately $84,000, or by 22%, relative to the corresponding prior year period, due to timing of grants to non-employee members of our Board of Directors.

Our net interest expense for the three months ended March 31, 2010 of approximately $67,000 compares with net interest income of approximately $15,000 for the prior year period. Net interest expense for the current year period includes amounts accruing on our convertible promissory note, along with amortization of capitalized offering costs and the beneficial conversion feature related to such convertible note transaction.

Liquidity and Capital Resources

Sources and Uses of Cash

Pursuant to the terms of our transaction with Biovail in March 2010, Biovail paid us the lump sum of $9,000,000, and Biovail will pay us an additional $1,000,000 upon the later of the completion of the specified transfer plan or September 25, 2010. In addition, we have the right to receive up to three milestone payments in an aggregate amount of up to $15,000,000 plus the reimbursement of certain related expenses, all of which are conditioned upon the occurrence of particular events relating to the clinical development of those certain assets that were transferred to Biovail in connection with the transaction.

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 were issued in connection with prior offerings and placements of our common stock and that remain outstanding as of March 31, 2010.

Page 18 of 26

Table of Contents

The warrants issued to the investor in April 2009 were originally issued at an exercise price of $0.3401 per share. In February 2010, the exercise price of these warrants was reduced to $0.2721 in exchange for the investor’s consent and waiver with respect to the Company’s completed financing transaction with Samyang Optics Co., Ltd in January 2010 (see Note 2 to Notes to Condensed Financial Statements).

All of the warrants outstanding from the January 2007 transaction provide a call right in our favor to the extent that the closing price of our common stock exceeds $3.35 per share 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.

As of March 31, 2010, we had cash and cash equivalents totaling approximately $7,929,000 and working capital of approximately $5,353,000. In comparison, as of December 31, 2009, we had cash, cash equivalents and marketable securities of approximately $226,000 and a working capital deficit of approximately $1,976,000. The increases in cash and working capital reflect amounts received from our March 2010 transaction with Biovail, as detailed above, as partially offset by amounts required to fund our operations.

For the three months ended March 31, 2010, net cash provided by operating activities was approximately $6,197,000 and included our net income for the period of approximately $5,596,000, adjusted for non-cash expenses for depreciation, amortization and stock compensation approximating $193,000, and changes in operating assets and liabilities. Net cash used in operating

Page 19 of 26

Table of Contents

activities was approximately $2,310,000 during the three months ended March 31, 2009, and included our net loss for the period of approximately $3,168,000, adjusted for non-cash expenses for depreciation and stock compensation approximating $205,000, and changes in operating assets and liabilities.

For the three months ended March 31, 2010, net cash provided by investing activities approximated $34,000 and represented the net proceeds from the sales and purchases of fixed assets. Net cash provided by investing activities approximated $2,501,000 during the three months ended March 31, 2009, and represented the proceeds from the sales and maturities of marketable securities.

Net cash provided by financing activities approximated $1,472,000 during the three months ended March 31, 2010 and resulted from our private placement of a convertible promissory note in January 2010. There was no cash provided by or used in financing activities for the three months ended March 31, 2009.

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 nine months of the year ending December 31, 2010, the year ending December 31, 2011 and the five months ending May 31, 2012 are approximately $420,000, $581,000 and $248,000, respectively.

In addition to amounts reflected on the balance sheet as of March 31, 2010, our remaining commitments for preclinical and clinical studies amount to approximately $1,123,000.

In March 2009, each of our executive officers agreed to a 20% reduction in their base salary in an effort to conserve our available financial resources. Following the proceeds from the transaction with Biovail in March 2010 (see Note 3 to Notes to Condensed Financial Statements), we believe it is reasonably possible that the prior salary amounts will be reinstated and that some of the previously unpaid salary amounts will be restored to the executive officers, but the timing of such salary reinstatement and the amount of any restoration cannot be reasonably estimated and is subject to the discretion of the Compensation Committee of the Board of Directors.

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.

Page 20 of 26

Table of Contents

Staffing

As of March 31, 2010, we had 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 proceeds from our transactions with Biovail in March 2010, as discussed more fully above, we believe that we have adequate financial resources to conduct our operations into the second quarter of 2011. 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.

Our ongoing cash requirements will depend on numerous factors, particularly the progress of our clinical trials involving CX1739 and our ability to negotiate and complete collaborative agreements or out-licensing arrangements. In order to help fund our on-going operating cash requirements, we intend to seek new collaborations for our “low impact” and “high impact” 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.

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 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.

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

Page 21 of 26

Table of Contents

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 March 31, 2010, the principal and accrued interest of the advance amounted to approximately $317,000.

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.

Page 22 of 26

Table of Contents

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.

PART II. OTHER INFORMATION

Issuances of Unregistered Equity Securities

In January 2010, we completed a private placement of a convertible promissory note in the principal amount of $1,500,000 with a single accredited institutional investor, Samyang Optics Co., Ltd. (“Samyang”) of Korea. The promissory note accrues simple interest at the rate of 6% per annum and may be converted into unregistered shares of the Company’s common stock at Samyang’s election at any time on or after April 15, 2010 and on or before the January 15, 2011 maturity date (the “maturity date”).

Prior to and no less than three months before the maturity date, Samyang has the option to elect repayment of the note in cash, which repayment would be made by us within three months after the maturity date. Any amounts outstanding under the note that have not been converted or elected to be repaid shall automatically convert into unregistered shares of common stock after the close of business on the maturity date. The number of common shares issuable upon conversion of the

Page 23 of 26

Table of Contents

promissory note shall be based upon the greater of: (i) $0.134 per share or (ii) an amount representing a 15% discount to the five-day volume weighted average closing price of our common stock immediately prior to the conversion date of the promissory note.

In connection with any conversion of the promissory note, we are obligated to issue to Samyang two-year warrants to purchase additional unregistered shares of our common stock representing 40% of the number of shares of common stock issued upon conversion of the principal under the promissory note. The warrant to purchase additional shares shall include an exercise price per share representing a 40% premium to the price per share at which the common stock is issued upon conversion of the promissory note.

The issuance of the foregoing convertible promissory note was 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 is an “accredited investor” as defined in Rule 501 under the Securities Act, and that it is acquiring such security for investment and not with a view to the distribution thereof. At the time of its issuance, the convertible promissory note was deemed to be a restricted security for purposes of the Securities Act and such security (and shares issued upon conversion of the convertible promissory note will) bear a legend to that effect.

Repurchases of Equity Securities

During the quarter ended March 31, 2010, we did not repurchase any of our outstanding equity securities.

Page 24 of 26

Table of Contents

Exhibits

Page 25 of 26

Table of Contents

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.

Page 26 of 26