RespireRx Pharmaceuticals Inc. - Quarter Report: 2011 March (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 March 31, 2011

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.

78,858,197 shares of Common Stock as of May 18, 2011

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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 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

See accompanying notes.

Note: The balance sheet as of December 31, 2010 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.

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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 notes 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, 2011 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, 2010.

The Company has incurred net losses and cash outflows from operations of approximately $1,556,000 and $1,441,000, respectively, for the three months ended March 31, 2011 and expects to incur additional losses and negative cash flow from operations in fiscal 2011 and for several more years. Management believes the Company has adequate financial resources to conduct operations late into the second quarter of 2011. 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.

The Company is exploring its strategic and financial alternatives, including, but not limited to, new collaborations for its AMPAKINE^® program which 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 discussions with a number of candidate companies, there can be no assurance that an agreement will arise from these discussions in a timely manner, or at all.

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 second quarter of 2011, 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.

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.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

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.

The Company records research grant revenues as the expenses related to the grant projects are incurred. Amounts received under research grants are nonrefundable, regardless of the success of the underlying research, to the extent that such amounts are expended in accordance with the approved grant project.

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, 2011 and 2010, 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 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, 2011 and 2010 was $0.11 and $0.14, respectively.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

A summary of option activity for the three months ended March 31, 2011 is as follows:

As of March 31, 2011, there was approximately $136,000 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 one year.

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, 2011 or 2010. The Company issues new shares to satisfy stock option exercises.

Consistent with December 31, 2010, as of March 31, 2011 warrants to purchase up to 24,126,952 shares of the Company’s common stock were outstanding at a weighted-average exercise price of $0.74 per share.

Net Income (Loss) per Share

For the three months ended March 31, 2011, 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.

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.

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 note 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.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

During the three months ended March 31, 2011 and 2010, total comprehensive income or loss approximated the Company’s net income or loss for the respective period, given that the Company had no significant unrealized gains or losses on marketable securities for either period.

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 became effective on a prospective basis for milestones achieved by the Company on or after January 1, 2011. Given that the guidance within the update is generally consistent with the Company’s existing revenue recognition considerations for its milestone payments, adoption of the update did not have a material impact on either the Company’s financial position or its result of operations.

Note 2 — Transactions with Biovail

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 $9,000,000 upon the execution of the asset purchase agreement in March 2010 and an additional $1,000,000 upon completion of the specified transfer plan in September 2010. In addition, the agreement provided the Company with 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. None of these events have occurred and accordingly, the Company has not recorded any milestone revenue related to the Biovail transaction.

As part of the transaction, Biovail licensed back to the Company 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, the Company retained its rights to develop and commercialize the non-acquired AMPAKINE compounds as a potential treatment for neurological diseases and psychiatric disorders. Additionally, the Company retained its rights to develop and commercialize the AMPAKINE compounds as a potential treatment for sleep apnea disorders, including an oral dosage form of AMPAKINE CX1739.

In September 2010, Biovail’s parent corporation, Biovail Corporation, combined with Valeant Pharmaceuticals International in a merger transaction and the combined company was renamed “Valeant Pharmaceuticals International, Inc.” (“Valeant”). Following the merger, Valeant and Biovail conducted a strategic and financial review of its product pipeline and, as a result, in November 2010, Biovail announced its intent to exit from the respiratory depression project acquired from the Company in March 2010.

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Cortex Pharmaceuticals, Inc.

Notes to Condensed Financial Statements—(Continued)

(Unaudited)

Following that announcement, the Company entered into discussions with Biovail regarding the future of the respiratory depression project. In March 2011, the Company entered into a new agreement with Biovail to reacquire the AMPAKINE compounds, patents and rights that Biovail acquired from the Company in March 2010. The new agreement includes an upfront payment by Cortex of $200,000 and potential future payments of up to $15,150,000 based upon the achievement of certain development and New Drug Application submission and approval milestones. Biovail is also eligible to receive additional payments of up to $15,000,000 based upon the Company’s net sales of an intravenous dosage form of the compounds for respiratory depression.

The Company has recorded the $200,000 upfront payment to reacquire the respiratory depression project from Biovail as research and development expense during the quarter ended March 31, 2011.

At any time following the completion of Phase I clinical studies and prior to the end of Phase IIa clinical studies, Biovail retains an option to co-develop and co-market intravenous dosage forms of an AMPAKINE compound as a treatment for respiratory depression and vaso-occlusive crises associated with sickle cell disease. In such an event, the Company would be reimbursed for certain development expenses to date and Biovail would share in all such future development costs with the Company. If Biovail makes the co-marketing election, the Company would owe no further milestone payments to Biovail and the Company would be eligible to receive a royalty on net sales of the compound by Biovail or its affiliates and licensees.

Note 3 — 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 accrued simple interest at the rate of 6% per annum and was convertible 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.

In June 2010, the promissory note and the related accrued interest were converted by Samyang into a total of 10,445,579 unregistered shares of the Company’s common stock at an effective conversion price of $0.147 per share. The number of common shares issuable upon conversion of the promissory note was 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.

In connection with the conversion of the promissory note, the Company was obligated to issue to Samyang two-year warrants to purchase up to 4,081,633 additional unregistered shares of the Company’s common stock at an exercise price of $0.206 per share. The warrants include a call right, in favor of the Company, to the extent the weighted average closing price of the Company’s common stock exceeds $0.309 per share for each of ten consecutive trading days, subject to certain circumstances.

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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, 2010.

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

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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, both of which are in Phase II clinical development.

We previously reported statistically and clinically positive results with CX717 in the treatment of adult patients with Attention Deficit Hyperactivity Disorder, or ADHD, and in the prevention of respiratory depression induced by pain-relieving opiates.

With additional financial resources, we plan to develop an intravenous dosage formulation of CX717, which would provide better treatment options for respiratory depression in a hospital setting.

Our AMPAKINE CX1739 is substantially more potent than CX717 in animal studies. CX1739 has successfully completed human Phase I clinical trials and recently completed testing in a Phase II pilot study in the United Kingdom for the treatment of sleep apnea. We believe that the results from the pilot study warrant pursuing a larger trial to test the response to CX1739 by patients with central forms of sleep apnea.

Given the positive results previously demonstrated with CX717 in adults with ADHD, with additional financial resources we also plan to initiate a Phase II study with CX1739 as a potential treatment for ADHD.

We have filed several new patents for our AMPAKINE compounds that, if granted, will provide patent protection for our new compounds up to 2028. In April 2011, we announced the receipt of a notice of allowance for the patent filed for our lead compound AMPAKINE CX1739 and approximately 80 additional compound structures.

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.

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.

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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.

We record research grant revenues as the expenses related to the grant projects are incurred. Amounts received under research grants are nonrefundable, regardless of the success of the underlying research, to the extent that such amounts are expended in accordance with the approved grant project.

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. Additional key input assumptions used to estimate the fair value of share-based awards include the expected option term, the expected volatility of the Company’ stock over the option’s expected term, the risk-free interest rate over the option’s expected term and the Company’s expected annual dividend yield. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

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.

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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.

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 for the fiscal year ended December 31, 2010, given that we do not have adequate working capital to finance our day-to-day operations for at least the following twelve month period. 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 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

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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.

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 were returned to us, other than three compounds selected by Servier for commercialization in its territory. In November 2010, Servier selected a jointly discovered high impact AMPAKINE compound, CX1632 (S47445), to advance into Phase I clinical testing. Should the compound 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 $9,000,000 upon execution of the asset purchase agreement in March 2010 and an additional $1,000,000 upon completion of the specified transfer plan in September 2010. In addition, the agreement provided us with 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 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 retained 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 retained our rights to develop and commercialize AMPAKINE compounds as a potential treatment for sleep apnea disorders, including an oral dosage form of CX1739.

In September 2010, Biovail’s parent corporation, Biovail Corporation, combined with Valeant Pharmaceuticals International in a merger transaction and the combined company was renamed “Valeant Pharmaceuticals International, Inc.” (“Valeant”). Following the merger, Valeant and Biovail conducted a strategic and financial review of the product pipeline and, as a result, in November 2010, Biovail announced its intent to exit from the respiratory depression project acquired from us in March 2010.

Following that announcement, we entered into discussions with Biovail regarding the future of the respiratory depression project. In March 2011, we entered into a new agreement with Biovail to reacquire the AMPAKINE compounds, patents and rights that Biovail acquired from us in March 2010. The new agreement includes an upfront payment by us of $200,000 and potential future payments of

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up to $15,150,000 based upon the achievement of certain development and New Drug Application submission and approval milestones. Biovail is also eligible to receive additional payments of up to $15,000,000 based upon our net sales of an intravenous dosage form of the compounds for respiratory depression.

In addition, at any time following the completion of Phase I clinical studies and prior to the end of Phase IIa clinical studies, Biovail retains an option to co-develop and co-market intravenous dosage forms of an AMPAKINE compound as a treatment for respiratory depression and vaso-occlusive crises associated with sickle cell disease. In such an event, we would be reimbursed for certain development expenses to date and Biovail would share in all such future development costs with us. If Biovail makes the co-marketing election, we would owe no further milestone payments to Biovail and we would be eligible to receive a royalty on net sales of the compound by Biovail or its affiliates and licensees.

From inception (February 10, 1987) through the fiscal quarter ended on March 31, 2011, we have sustained losses aggregating approximately $115,692,000. 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 research grants and by possible milestone payments from 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 Servier agreement 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 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, 2011 and 2010

For the quarter ended March 31, 2011, our net loss of approximately $1,556,000 compares to net income of approximately $5,596,000 for the corresponding prior year quarter, with the prior year period reflecting revenues of $9,000,000 from our transaction with Biovail during March 2010, as detailed above.

Grant revenues for the quarter ended March 31, 2011 include amounts awarded by the Michael J. Fox Foundation for Parkinson’s Research. The related grant provides funding to test select AMPAKINE compounds for their ability to restore brain function in animal models of Parkinson’s disease.

Our research and development expenses for the quarter ended March 31, 2011 decreased to $644,000 from approximately $1,624,000, or by 60%, compared to the corresponding prior year quarter, with the decrease primarily reflecting sublicensing fees of $910,000 related to the March 2010 transaction with Biovail. Expense for the 2011 period includes the $200,000 payment to reacquire the AMPAKINE rights and compounds from Biovail in March 2011.

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Other costs related to the access and protection of our AMPAKINE technology totaled approximately $116,000 and $119,000 for the three months ended March 31, 2011 and 2010, respectively. For the same periods, our expenses for research and development personnel, outside experts and consultants approximated $209,000 and $366,000, respectively, with most of the decrease due to a decrease in personnel-related expenses. Costs for laboratory facility and supply expenses were approximately $104,000 and $119,000 for the quarters ended March 31, 2011 and 2010, respectively.

Amounts incurred for internal research and development costs, including indirect amounts allocated to research and development, and costs for retaining outside experts for consulting and research activities are deemed to benefit the entire AMPAKINE platform rather than specific AMPAKINE compounds.

For the quarter ended March 31, 2011, our non-cash stock compensation charges for research and development amounted to a credit of approximately $29,000 compared to charges of approximately $32,000 for the corresponding prior year period, with the difference reflecting recovered amounts related to previously forfeited options.

Clinical development expenses of $44,000 for the quarter ended March 31, 2011 include amounts related to our Phase IIa proof of concept study with AMPAKINE CX1739 in sleep apnea. For the quarter ended March 31, 2010, clinical development expenses of $78,000 primarily represented amounts incurred for our completed Phase II studies with AMPAKINE CX717 in respiratory depression. CX717 was sold in our transaction that we completed with Biovail in March 2010 and subsequently reacquired by us in March 2011.

At this time, we are just beginning the clinical development of CX1739 and developing other preclinical backup candidates. Subject to the availability of sufficient finances, as the clinical development of CX1739 expands, our research and development costs are anticipated to increase significantly.

External preclinical and clinical expenses to date through March 31, 2011 for CX717 and CX1739 amounted to approximately $16,000,000 and $3,500,000, respectively.

Our general and administrative expenses for the three months ended March 31, 2011 decreased from approximately $1,708,000 to approximately $940,000, or by 45%, compared to the corresponding prior year period, with the decrease mostly reflecting legal and investment banking fees incurred in the prior year period related to the March 2010 transaction that we completed with Biovail.

For the three months ended March 31, 2011, our non-cash stock compensation charges within general and administrative expenses decreased from approximately $84,000 to approximately $44,000, or by 48%, relative to the corresponding prior year period, primarily due to the completed vesting schedules of earlier granted stock options.

For the three months ended March 31, 2011, net interest income of approximately $1,000 compares with net interest expense of approximately $67,000 for the prior year period. Net interest expense for the three months ended March 31, 2010 includes amounts accruing on our convertible promissory note issued to Samyang, along with amortization of capitalized offering costs and the beneficial conversion feature related to such convertible note transaction.

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Liquidity and Capital Resources

Sources and Uses of Cash

Pursuant to the terms of our transaction with Biovail in March 2010, Biovail paid us $10,000,000 during the year ended December 31, 2010, including $9,000,000 during the quarter ended March 31, 2010. Additionally, the March 2010 transaction included rights to receive milestone payments and expense reimbursements from Biovail. However, pursuant to the terms of our March 2011 asset repurchase transaction with Biovail, we are no longer entitled to receive any future milestone payments or expense reimbursements from Biovail. Rather, as disclosed previously in this Quarterly Report on Form 10-Q, as a result of the March 2011 transaction we are obligated to make future payments to Biovail depending upon the occurrence of particular events relating to the clinical development of the repurchased assets.

Under the agreements signed with Servier in October 2000, as amended to date, in November 2010 Servier selected the jointly discovered AMPAKINE compound, CX1632 (S47445), to advance into Phase I clinical trials. We remain eligible to receive payments based upon defined clinical development milestones of the licensed compound and royalties on sales in licensed territories. There can be no assurance that we will receive such milestone payments within our desired timeframe, or if such payments will be received at all.

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 outstanding as of March 31, 2011 that were issued in connection with prior offerings and placements of our securities.

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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.

Warrants issued to the investor in the April 2009 transaction were originally issued with an exercise price of $0.34 per share. In February 2010, the exercise price for these warrants was reduced to $0.27 per share in exchange for the investor’s consent and waiver with respect to our private placement of a convertible promissory note that we completed in January 2010, as explained more fully in Note 3 in the Notes to the Financial Statements.

Warrants issued to Samyang in connection with the conversion of its promissory note in June 2010 provide a call right in our favor to the extent that the weighted average closing price of our common stock exceeds $0.309 per share for each of ten consecutive trading days, subject to certain circumstances.

Warrants detailed above with issuance dates between January 2007 and June 2009 may be settled by a cashless exercise. In such an event, the holder of the warrants would receive a number of unregistered shares representing the gain on exercise of such warrants, divided by the volume weighted average price of the Company’s common stock on the trading day immediately preceding such exercise.

None of the warrants detailed above are “in-the-money” as of March 31, 2011. We can give no assurance that we will receive proceeds from the exercise of any of the outstanding warrants.

As of March 31, 2011, we had cash and cash equivalents totaling approximately $1,589,000 and working capital of approximately $599,000. In comparison, as of December 31, 2010, we had cash, cash equivalents and marketable securities of approximately $3,031,000 and working capital of approximately $2,120,000. The decreases in cash and working capital reflect amounts required to fund our operations.

For the three months ended March 31, 2011, net cash used in operating activities was approximately $1,441,000, and included our net loss for the period of approximately $1,556,000, adjusted for non-cash expenses for depreciation and stock compensation approximating $40,000, and changes in operating assets and liabilities. Net cash provided by operating activities was approximately $6,197,000 for the three months ended March 31, 2010 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.

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For the three months ended March 31, 2011, net cash provided by investing activities approximated $1,993,000 and primarily represented the proceeds from the maturity of marketable securities. For the three months ended March 31, 2010, net cash provided by investing activities approximated $34,000 and represented the proceeds from the sales and purchases of fixed assets.

There was no cash provided by or used in financing activities for the three months ended March 31, 2011. 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.

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, 2011 and the five months ending May 31, 2012 are approximately $445,000 and $249,000, respectively.

In addition to amounts reflected on the balance sheet as of March 31, 2011, our remaining commitments for preclinical and clinical studies amount to approximately $204,000. Separately, as of March 31, 2011 we are committed to approximately $138,000 for research related to the grant from the Michael J. Fox Foundation for Parkinson’s Research, which costs will be covered by funds awarded and received under the grant. These related funds have been recorded as restricted cash in our financial statements as of March 31, 2011.

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, repayment of the advance has been extended until 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

As of March 31, 2011, we had 11 full-time employees. We do not anticipate significant increases in the number of our full-time employees within the coming year.

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Outlook

We believe that we have adequate financial resources to conduct our operations late 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 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

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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 due when 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, 2011, the principal and accrued interest of the advance amounted to approximately $321,000.

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.

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.

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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

Exhibits

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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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