U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
* QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
-----
OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2001
------------------
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________TO ___________
Commission file number 0-17951
Cortex Pharmaceuticals, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0303583
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 year)
Indicate by mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days.
YES * NO _____
-----
Indicate the number of shares outstanding of each of the issuer?s classes of
common stock, as of the latest practicable date.
16,629,887 shares of Common Stock as of November 9, 2001
Page 1 of 15
CORTEX PHARMACEUTICALS, INC.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets -- September 30, 2001 and June 30, 2001.. 3
Statements of Operations -- Three months ended
September 30, 2001 and 2000............................. 4
Statements of Cash Flows -- Three months ended
September 30, 2001 and 2000.............................. 5
Notes to Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 10
Item 3. Quantitative and Qualitative Disclosures of Market Risk 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................... 15
SIGNATURES....................................................... 15
Page 2 of 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Cortex Pharmaceuticals, Inc.
Balance Sheets
(Unaudited) (Note)
September 30, 2001 June 30, 2001
- ----------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,152,435 $ 4,557,516
Restricted cash 192,300 192,300
Accounts receivable 2,038,496 --
Other current assets 162,029 260,679
------------ ------------
Total current assets 5,545,260 5,010,495
Furniture, equipment and leasehold improvements, net 490,283 496,586
Other 33,407 33,407
------------ ------------
$ 6,068,950 $ 5,540,488
============ ============
Liabilities and Stockholders? Equity
Current liabilities:
Accounts payable $ 613,488 $ 391,784
Accrued wages, salaries and related expenses 147,387 146,676
Unearned revenue 1,708,267 2,230,117
Advance for Alzheimer's project 260,141 258,110
------------ ------------
Total current liabilities 2,729,283 3,026,687
Unearned revenue, net of current portion 1,976,852 2,393,518
Stockholders' equity:
9% cumulative convertible preferred stock, $0.001
par value; $1.00 per share liquidation preference;
shares authorized: 1,250,000; shares issued and
outstanding: 15,000 15,000 15,000
Series B convertible preferred stock, $0.001 par value;
$0.6667 per share liquidation preference; shares
authorized: 3,200,000; shares issued and
outstanding: 37,500 21,703 21,703
Common stock, $0.001 par value; shares authorized:
30,000,000; shares issued and outstanding:
16,629,887 16,629 16,629
Additional paid-in capital 42,045,170 41,998,545
Accumulated deficit (40,735,687) (41,931,594)
------------ ------------
Total stockholders' equity 1,362,815 120,283
------------ ------------
$ 6,068,950 $ 5,540,488
============ ============
See accompanying notes.
Note: The balance sheet as of June 30, 2001 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
Page 3 of 15
Cortex Pharmaceuticals, Inc.
Statements of Operations
(Unaudited)
Three months ended
September 30,
--------------------------
2001 2000
- --------------------------------------------------------------------------------
(Restated)
Revenues:
Research and license revenue $ 2,938,516 $ 955,824
Grant revenue 130,860 10,750
----------- -----------
Total revenues 3,069,376 966,574
Operating expenses:
Research and development expenses 1,366,269 1,230,732
General and administrative expenses 541,694 843,606
---------- -----------
Total operating expenses 1,907,963 2,074,338
---------- -----------
Income (loss) from operations 1,161,413 (1,107,764)
Interest, net 34,494 46,267
---------- -----------
Income (loss) before cumulative effect of
change in accounting principle 1,195,907 (1,061,497)
---------- -----------
Cumulative effect of change in accounting principle -- (530,000)
---------- -----------
Net income (loss) applicable to common shares $1,195,907 $(1,591,497)
========== ===========
Basic and diluted net income (loss) per share:
Net income (loss) per share before cumulative
effect of change in accounting principle $ 0.07 $ (0.07)
Cumulative effect of change in accounting principle -- (0.03)
---------- -----------
Net income (loss) per share, basic and diluted $ 0.07 $ (0.10)
========== ===========
Shares used in calculating per share amounts
Basic 16,629,887 16,580,318
Diluted 17,972,217 16,580,318
See accompanying notes.
Page 4 of 15
Cortex Pharmaceuticals, Inc.
Statements of Cash Flows
(Unaudited)
Three months ended
September 30,
------------------------------
2001 2000
- -------------------------------------------------------------------------------------
(Restated)
Cash flows from operating activities:
Net income (loss) $ 1,195,907 $(1,591,497)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 39,030 35,115
Stock option compensation expense 46,625 585,178
Changes in operating assets/liabilities:
Accounts receivable (2,038,496) --
Accounts payable and accrued expenses 222,415 84,928
Unearned revenue (938,516) 873,176
Other current assets 98,650 10,847
Changes in other assets and other liabilities 2,031 2,937
----------- -----------
Net cash provided by (used in) operating activities (1,372,354) 684
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (32,727) (15,588)
----------- -----------
Net cash used in investing activities (32,727) (15,588)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 2,626
----------- -----------
Net cash provided by financing activities -- 2,626
----------- -----------
Decrease in cash and cash equivalents (1,405,081) (12,278)
Cash and cash equivalents, beginning of period 4,557,516 2,704,961
----------- -----------
Cash and cash equivalents, end of period $ 3,152,435 $ 2,692,683
=========== ===========
See accompanying notes.
Page 5 of 15
Cortex Pharmaceuticals, Inc.
Notes to Financial Statements
(Unaudited)
Note 1 -- Basis of Presentation
The accompanying unaudited 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 September 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2002. For further
information, refer to the financial statements and notes thereto included in the
Company's 2001 Annual Report on Form 10-KSB.
In January 1999, the Company entered into a research collaboration and exclusive
worldwide license agreement with NV Organon ("Organon"), a subsidiary of Akzo
Nobel (Note 2). The agreement will enable Organon to develop and commercialize
the Company's Ampakine/(R)/ technology for the treatment of schizophrenia and
depression. In April 2000, the Company entered into an option agreement with
Shire Pharmaceuticals Group, plc ("Shire") under which Shire will evaluate the
use of the Company's Ampakine CX516 for the treatment of Attention Deficit
Hyperactivity Disorder (Note 3). In October 2000, the Company entered into a
research collaboration and exclusive license agreement with Les Laboratoires
Servier ("Servier"). The agreement will enable Servier to develop and
commercialize the Company's Ampakine technology for the treatment of memory
impairment associated with aging and neurodegenerative diseases such as
Alzheimer's disease (Note 4).
The Company is seeking collaborative arrangements with other pharmaceutical
companies for other applications of the Ampakine compounds, under which such
companies would provide additional capital to the Company in exchange for
exclusive or non-exclusive license or other rights to the technologies and
products that the Company is developing. Competition for corporate partnering
with major pharmaceutical companies is intense, with a large number of
biopharmaceutical companies attempting to arrive at such arrangements.
Accordingly, although the Company is in discussions with a number of candidate
companies, there is no assurance that an agreement will arise from these
discussions in a timely manner, or at all, or that an agreement that may arise
from these discussions will successfully reduce the Company's short or longer-
term funding requirements.
To supplement its existing resources, the Company is likely 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 research revenue from its collaborations with Organon
(Note 2) and Servier (Note 4) as services are performed under the agreements.
The Company records grant revenues as the expenses related to the grant projects
are incurred. All amounts received under collaborative research agreements or
research grants are nonrefundable, regardless of the success of the underlying
research.
Revenues from milestone payments are recognized when earned, as evidenced by
written acknowledgement from the collaborator, provided that (i) the milestone
event is substantive and its achievement was not reasonably assured at the
inception of the agreement, and (ii) the Company's performance obligations after
the milestone achievement will continue to be funded by the collaborator at a
comparable level to before the milestone achievement. If both of these criteria
are not met, the
Page 6 of 15
milestone payment would be recognized over the remaining period of the Company's
performance obligations under the arrangement. Royalties, if any, will be
recognized as earned.
Restatement
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101 provides
the SEC Staff's views in applying generally accepted accounting principles to
various revenue recognition issues, and specifically addresses revenue
recognition for up-front, nonrefundable fees received in connection with
research collaboration arrangements. It is the SEC's position that such fees
should be generally recognized over the term of the related agreements.
The Company's previous accounting policy was to recognize such nonrefundable
fees as revenues when the payments were received. SAB 101 required Cortex to
change its accounting method for the up-front fee from the collaboration with
Organon (Note 2) in 1999.
As required, Cortex adopted SAB 101 in the fourth quarter of its fiscal year
ending June 30, 2001. As a result, for the quarter ended September 30, 2000, the
Company restated revenues to include $250,000 originally recorded when the
up-front payment was received in 1999. This restatement decreased the net loss
per share (before the cumulative effect of the change in accounting principle)
from $0.08 to $0.07, or by $0.01.
The cumulative effect of the change in accounting principle related to SAB 101
of $530,000 was retroactively recorded as of July 1, 2000, increasing the net
loss per share by $0.03 for the quarter ended September 30, 2000. The net impact
of the restated revenues and cumulative effect of the change in accounting
principle was an increase in the previously reported net loss for the quarter
ended September 30, 2000 of $0.02 per share.
Net Income Per Share
Basic earnings per share includes no dilution and is computed by dividing net
income applicable to common shares by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
effect of additional common shares issuable upon exercise of outstanding stock
options and warrants. In the computation of net loss per share, the effect of
potentially issuable shares of common stock were not included in the calculation
of diluted loss per share because their effect would be anti-dilutive. The
calculations of basic and diluted weighted average shares outstanding are as
follows:
Three months ended
September 30,
------------------
2001 2000
------- -------
Numerator:
Net income (loss) applicable to common shares $ 1,195,907 $(1,591,497)
=========== ===========
Denominator:
Weighted average common shares -- basic 16,629,887 16,580,318
Net effect of dilutive securities:
Stock options 1,228,589 --
Warrants 113,741 --
----------- -----------
Weighted average common shares -- diluted 17,972,217 16,580,318
=========== ===========
Earnings (loss) per share -- basic $ 0.07 $ (0.10)
Earnings (loss) per share -- diluted $ 0.07 $ (0.10)
Employee Stock Options
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of APB 25." As required, the Company
adopted the Interpretation on July 1, 2000. The Interpretation requires that
stock
Page 7 of 15
options that have been modified to reduce the exercise price be accounted
for as variable. Prior to release of FIN 44, in December 1998 the Company re-
priced previously issued stock options. By adopting the Interpretation, the
Company now applies variable accounting for these options. Consequently, if the
market price of the Company's stock increases, the Company will recognize
additional non-cash compensation expense that it otherwise would not have
incurred. For the quarter ended September 30, 2001, the effect of adopting the
Interpretation was a decrease in net income of $13,000, with no impact on
earnings per share. For the quarter ended September 30, 2000, the effect of
adopting the Interpretation was an increase in the net loss of $545,000, or
$0.03 per share.
New Accounting Standards
Effective July 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The adoption of SFAS No. 133 did
not have an impact on the Company's results of operations or financial
condition, as the Company holds no derivative financial instruments and does not
currently invest in derivative instruments or engage in hedging activities.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually, or more
frequently if impairment indicators arise, for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives, but with no maximum life. The amortization
provisions of SFAS 142 apply immediately to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company is required to adopt SFAS 142
effective July 1, 2002. As of June 30, 2001, the Company did not have any
recorded goodwill or unamortized intangible assets.
Note 2 -- Research and License Agreement with NV Organon
In January 1999, the Company entered into a research collaboration and exclusive
worldwide license agreement with NV Organon ("Organon"), a pharmaceutical
business unit of Akzo Nobel (The Netherlands). The agreement will enable Organon
to develop and commercialize the Company's proprietary Ampakine technology for
the treatment of schizophrenia and depression.
In connection with the agreement, the Company received an up-front license
payment of $2,000,000 and research support payments of up to $3,000,000 per year
for two years. During the three months ended September 30, 2000, the Company
received the remaining scheduled research support payments from Organon of
$1,287,000.
The Company achieved its first milestone from the agreement in May 2000, when
Organon selected a candidate Ampakine compound to pursue in Phase I clinical
testing. Achieving this milestone triggered a $2,000,000 payment to Cortex from
Organon. In September 2001, Cortex triggered its second milestone payment of
$2,000,000 when Organon elected to continue developing the compound by entering
Phase II clinical testing. Payment of this milestone was received in October
2001. Cortex remains eligible for additional milestone payments based upon
further clinical development, and ultimately, royalties on worldwide sales.
Page 8 of 15
Note 3 -- Option Agreement with Shire Pharmaceuticals Group, plc
In April 2000, the Company entered into an option agreement with Shire
Pharmaceuticals Group, plc ("Shire") under which Shire will evaluate the use of
the Company's Ampakine CX516 for the treatment of Attention Deficit
Hyperactivity Disorder ("ADHD"). In exchange for the option, Cortex received
$130,000; Shire also purchased 254,353 shares of Cortex common stock for
$870,000. Shire will be responsible for all costs associated with the clinical
trial, which will consist of a double-blind, placebo-controlled evaluation of
CX516 in ADHD patients.
If the study proves effective, Shire has the right to convert its option into an
exclusive worldwide license for the Ampakine technology for ADHD under a
development and licensing agreement. Should Shire elect to execute this
agreement, Shire will bear all future developmental costs. Cortex would receive
an up-front fee, milestone payments based on successful clinical and commercial
development, research support for additional Ampakine compounds and royalties on
sales.
Note 4 -- Research and License Agreement with Les Laboratoires Servier
In October 2000, the Company entered into a research collaboration and exclusive
license agreement with Les Laboratoires Servier. The agreement will enable
Servier to develop and commercialize Cortex's proprietary Ampakine technology
for the treatment of declines in cognitive performance associated with aging and
neurodegenerative diseases. The indications covered include, but are not limited
to, Alzheimer's disease, Mild Cognitive Impairment, sexual dysfunction, and the
dementia associated with multiple sclerosis and Lou Gehrig's disease. The
territory covered by the exclusive license excludes North America, allowing
Cortex to retain commercialization rights in its domestic market. The territory
covered by the agreement also excludes South America (except Argentina, Brazil
and Venezuela), Australia and New Zealand. The agreement includes an up-front
payment by Servier of $5,000,000, research support payments of up to $2,025,000
per year for three years (subject to Cortex providing agreed-upon levels of
research) and milestone payments, plus royalty payments on sales in licensed
territories.
Note 5 -- Advance from the Institute for the Study of Aging
In June 2000, the Company received $247,300 from the Institute for the Study of
Aging (the "Institute") to fund testing of the Company's Ampakine CX516 in
patients with mild cognitive impairment ("MCI"). Patients with MCI represent the
earliest clinically-defined group with memory impairment beyond that expected
for normal individuals of the same age and education, but such patients do not
meet the clinical criteria for Alzheimer's disease. The Institute is a non-
profit foundation based in New York City and dedicated to the improvement in
quality of life for the elderly.
As the funding from the Institute must be used solely for the planned clinical
trials in MCI patients, Cortex has recorded the amounts received as restricted
cash in the Company's balance sheet. Provided that Cortex complies with the
conditions of the funding agreement, including the restricted use of the amounts
received, repayment of the advance shall be forgiven unless Cortex enters an
Ampakine compound into Phase III clinical trials for Alzheimer's disease. Upon
such potential clinical trials, repayment would include interest computed at a
rate equal to one-half of the prime lending rate. In lieu of cash, in the event
of repayment the Institute may elect to receive the balance of outstanding
principal and accrued interest as shares of Cortex common stock. The conversion
price for such form of repayment shall initially equal $4.50 per share, subject
to adjustment under certain circumstances.
Page 9 of 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this report and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations; Plan of Operation" presented in the Company's 2001 Annual Report on
Form 10-KSB.
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 and Section 21E
of the Securities Exchange Act of 1934 and the Company intends that such forward
looking statements be subject to the safe harbors created thereby. These
forward-looking statements relate to (i) future research plans, expenditures and
results, (ii) potential collaborative arrangements, (iii) the potential utility
of the Company's proposed products and (iv) the need for, and availability of,
additional financing.
The forward-looking statements included herein are based on current
expectations, which involve a number of risks and uncertainties and assumptions
regarding the Company's 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 the
control of the Company. Although the Company believes 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 the Company or
any other person that the objectives or plans of the Company will be achieved.
Results of Operations
In January 1999, the Company entered into a research collaboration and exclusive
worldwide license agreement with NV Organon ("Organon"), a pharmaceutical
business unit of Akzo Nobel (The Netherlands). The agreement will allow Organon
to develop and commercialize the Company's proprietary Ampakine/(R)/ technology
for the treatment of schizophrenia and depression. In connection with the
agreement, the Company received a $2,000,000 up-front licensing payment and
research support payments of up to $3,000,000 per year for two years. During the
three months ended September 30, 2000, the Company received the remaining
scheduled research support from the agreement of $1,287,000.
The agreement with Organon also includes milestone payments based upon clinical
development, plus royalty payments on worldwide sales. Cortex achieved its first
milestone under the agreement in May 2000, when Organon selected a candidate
compound to pursue in Phase I clinical testing as a potential treatment for
schizophrenia. Achieving this milestone triggered a $2,000,000 payment to Cortex
from Organon.
Cortex achieved its second milestone under the agreement in September 2001, when
Organon elected to continue development of the selected compound in Phase II
clinical testing. Achieving the second
Page 10 of 15
milestone triggered another $2,000,000 payment to Cortex from Organon. The
revenue related to this milestone produced the net income for the three months
ended September 30, 2001.
In October 2000, the Company entered into a research collaboration and exclusive
license agreement with Les Laboratoires Servier ("Servier"). The agreement will
allow Servier to develop and commercialize the Company's Ampakine technology for
the treatment of declines in cognitive performance associated with aging and
neurodegenerative diseases. The indications covered include, but are not limited
to, Alzheimer's disease, Mild Cognitive Impairment, sexual dysfunction, and the
dementia associated with multiple sclerosis and Lou Gehrig's disease. The
agreement includes an up-front payment by Servier of $5,000,000 and research
support payments of up to $2,025,000 per year for three years (subject to Cortex
providing agreed-upon levels of research personnel). The agreement also includes
milestone payments, plus royalty payments on sales in licensed territories.
From inception (February 10, 1987) through September 30, 2001, the Company has
sustained losses aggregating $38,704,000. Continuing losses are anticipated over
the next several years. During that time, the Company's ongoing operating
expenses will only be offset, if at all, by research support payments from its
collaboration with Servier, by possible milestone payments from Organon and
Servier and by possible payments on exercise of its option agreement with Shire.
Ongoing operating expenses may also be offset by payments under planned
strategic alliances that the Company is seeking with other pharmaceutical
companies for the clinical development, manufacturing and marketing of its
products. The nature and timing of payments to Cortex under the Organon, Shire
and Servier agreements or other planned strategic alliances, if and when entered
into, are likely to significantly affect the Company's operations and financing
activities and to produce substantial period-to-period fluctuations in reported
financial results. Over the longer term, the Company will require successful
commercial development of its products by Organon, Shire, Servier or its other
prospective partners to attain profitable operations from royalties or other
product-based revenues.
Net income for the three-month period ended September 30, 2001 of $1,196,000
compares with a net loss of $1,591,000 for the corresponding prior year period.
Results for the current year period include the earlier mentioned $2,000,000
milestone from the Company's agreement with Organon, triggered when Organon
elected to continue development of an Ampakine compound by entering Phase II
clinical studies.
For the three-month period ended September 30, 2000, the Company recorded a
charge of $530,000 to reflect the cumulative effect of a change in accounting
principle related to the required adoption of Staff Accounting Bulletin No. 101
("SAB 101") issued by the Securities and Exchange Commission (Note 1 to the
Financial Statements). SAB 101 required the Company to change its accounting
method for the up-front payment received from the agreement with Organon in 1999
(Note 2 to the Financial Statements). Instead of recording the revenue from the
up-front payment when it was received, under SAB 101 Cortex is restating the
revenue ratably over the contract period. As a result, revenues for the three-
month period ended September 30, 2000 have been increased to include $250,000
originally recorded when the payment was received. The net impact of adopting
SAB 101 was an increase in the net loss for the three-month period ended
September 30, 2000 of $280,000.
The net loss for the prior year period also includes $545,000 of non-cash
charges for stock options that were repriced in 1998. In accordance with
Accounting Principles Board Opinion No. 25, at the time of repricing, these
options were recorded as fixed and no expense was recorded. As required, during
the quarter ended September 30, 2000, the Company adopted FASB Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB 25."
Page 11 of 15
Under the Interpretation, the repriced options are accounted for as variable
from July 1, 2000 until the options are exercised, forfeited or expire
unexercised (Note 1 to the Financial Statements).
Research and development expenses increased from $1,231,000 to $1,366,000, or by
11%, during the three-month period ended September 30, 2001 compared to the
corresponding prior year period. The increase primarily represents technology
access payments related to the Organon milestone. In 1993, Cortex licensed the
Ampakine technology from the University of California. Under the related
agreement, Cortex is required to remit a portion of certain remuneration
received in connection with sublicensing agreements. When Cortex triggered its
second milestone under its agreement with Organon, a technology access payment
to the University of California became due.
For the three-month period ended September 30, 2001, general and administrative
expenses decreased from $844,000 to $542,000, or by 36%, compared to the
corresponding prior year period. The decrease primarily represents non-cash
charges recorded in the prior year period in connection with earlier repriced
stock options.
The Company believes that inflation and changing prices have not had a material
impact on its ongoing operations to date.
Liquidity and Capital Resources
From inception (February 10, 1987) through September 30, 2001, Cortex has funded
its organizational and research and development activities primarily from the
issuance of equity securities, with net proceeds aggregating $38,542,000. Net
interest income from inception through September 30, 2001 was $1,996,000.
Research and licensing payments received in connection with the agreement with
Organon (Note 2 to the Financial Statements) totaled $9,880,000 through
September 30, 2001. Of this amount, Cortex received $1,287,000 during the
quarter ended September 30, 2000, which represented the agreement's remaining
scheduled research support. An additional $2,000,000 was received in October
2001, representing the second milestone payment from the agreement. As stated
earlier, this milestone was triggered in September 2001 when Organon elected to
continue development of an Ampakine compound by entering Phase II clinical
testing. Under the terms of the agreement, the Company may receive additional
milestone payments based on further clinical development of the licensed
technology and, ultimately, royalties on worldwide sales.
Under the agreement with Servier signed in October 2000, Cortex received
research and licensing payments of $6,654,000 during the year ended June 30,
2001. This amount included a $5,000,000 nonrefundable, upfront fee and research
support of $1,654,000, including $506,000 of support received in advance for the
quarter ended September 30, 2001. The agreement provides research support of up
to $2,025,000 per year for three years, plus milestone payments based upon
successful clinical development, and royalties on sales in licensed territories.
In October 2000, the Company received notice of a Phase II Small Business
Innovative Research award from the National Institutes of Health. The award will
provide up to $1,074,000 over a three-year period and will support the Company's
research of its Ampakine compounds as a potential new therapy for stroke.
Page 12 of 15
As of September 30, 2001, the Company had cash and cash equivalents totaling
$3,152,000, which excludes the $2,000,000 Organon milestone payment received
shortly after the end of the quarter. Working capital as of September 30, 2001
amounted to $2,816,000. In comparison, as of June 30, 2001, the Company had cash
and cash equivalents of $4,558,000 and working capital of $1,984,000, which
amounts included $506,000 of quarterly research support from Servier received in
advance.
In October 2001, the Company received notice of a second Phase II Small Business
Innovative Research award from the National Institutes of Health. This award
will provide up to $770,000 over a two-year period. The award will allow Cortex
to follow-up on previously reported clinical tests of the Ampakine CX516 as a
combination therapy for schizophrenia. Earlier tests were encouraging, with
Ampakine-treated patients showing improvement in a number of clinical and
neurocognitive scores.
The Company leases approximately 32,000 square feet of research laboratory,
office and expansion space under an operating lease that expires May 31, 2004.
The commitments under the lease agreement for the years ending June 30, 2002,
2003 and 2004 total $206,000, $358,000 and $343,000, respectively.
The Company is committed to $1,232,000 for sponsored research and other
remuneration to academic institutions, of which $853,000 is payable over the
next twelve months. Remaining Cortex commitments for Phase I/IIa clinical
studies of the Ampakine compounds are not significant.
In connection with an option agreement entered into in April 2000 with Shire
Pharmaceuticals Group, plc ("Shire"), during the quarter ended September 30,
2001, Shire began enrollment in a Phase IIb study of the Ampakine technology as
a potential treatment for Attention Deficit Hyperactivity Disorder ("ADHD").
Shire is responsible for all costs associated with the clinical trial.
If the study proves effective, Shire has the right to convert its option into an
exclusive worldwide license for the Ampakine technology for ADHD under a
development and licensing agreement. Should Shire elect to execute this
agreement, Shire will bear all future developmental costs. Cortex would receive
an up-front fee, milestone payments based upon successful clinical and
commercial development, research support for additional Ampakine compounds and
royalties on sales.
Together with its corporate partner, Servier, the Company is planning to conduct
a cross-national clinical study with the Ampakine CX516 in patients with Mild
Cognitive Impairment (MCI). Servier has agreed to incur the bulk of the costs
for this study, which is anticipated to begin in early 2002.
In June 2000, the Company received $247,300 from the Institute for the Study of
Aging (the "Institute"), which will partially offset the Company's costs for the
planned testing in patients with MCI. Given that Cortex must use the funding
from the Institute solely for the planned clinical trials, the Company has
recorded the amounts received as restricted cash in its balance sheet. Provided
that Cortex complies with the conditions of the funding agreement, including the
restricted use of the amounts received, repayment of the advance shall not be
required unless Cortex enters an Ampakine compound into Phase III clinical
trials for Alzheimer's disease. Upon such potential clinical trials, repayment
would include interest computed at a rate equal to one-half of the prime lending
rate. In lieu of cash, in the event of repayment the Institute may elect to
receive the balance of outstanding principal and accrued interest as shares of
Cortex common stock. The conversion price for such form of repayment shall
initially equal $4.50 per share, subject to adjustment under certain
circumstances.
Page 13 of 15
As of September 30, 2001, Cortex had a total of 29 full-time research and
administrative employees. Neither significant increases to staffing nor
significant investments in plant or equipment are planned for the upcoming year.
Cortex anticipates that its cash and cash equivalents -- and the Organon
milestone payment and scheduled research support payments from its agreement
with Servier -- will be sufficient to satisfy its capital requirements through
at least June 30, 2002. Additional funds will be required to continue operations
beyond that time. Should Shire elect to exercise its option to license the
Ampakine technology for the treatment of ADHD, the negotiated agreement includes
an up-front fee, research support payments, milestone payments and royalties on
sales. Cortex may also receive milestone payments from the Organon and Servier
agreements. There is no assurance that Shire will exercise its license option or
that the Company will receive additional milestone payments from Organon or
Servier within the desired timeframe, or at all.
In order to provide for both its immediate and longer-term spending
requirements, the Company is presently seeking additional collaborative or other
arrangements with larger pharmaceutical companies. Under these agreements, it is
intended that such companies would provide capital to the Company in exchange
for exclusive or non-exclusive license or other rights to certain of the
technologies and products that the Company is developing. Competition for such
arrangements is intense, however, with a large number of biopharmaceutical
companies attempting to secure alliances with more established pharmaceutical
companies. Although the Company has been engaged in discussions with candidate
companies, there is no assurance that an agreement or agreements will arise from
these discussions in a timely manner, or at all, or that revenues that may be
generated thereby will offset operating expenses sufficiently to reduce the
Company's short and longer-term funding requirements.
Because there is no assurance that the Company will secure additional corporate
partnerships, the Company is likely to raise additional capital through the sale
of debt or equity securities. There is no assurance that funds will be available
on favorable terms, or at all. If equity securities are issued to raise
additional funds, dilution to existing shareholders is likely to result.
The Company's proposed products are in the preclinical or early clinical stage
of development and will require significant further research, development,
clinical testing and regulatory clearances. They are subject to the risks of
failure inherent in the development of products based on innovative
technologies. These risks include the possibilities that any or all of the
proposed products will be found to be ineffective or unsafe, or otherwise fail
to receive necessary regulatory clearances; that the proposed products, although
effective, will be uneconomical to market; that third parties may now or in the
future hold proprietary rights that preclude the Company from marketing them; or
that third parties will market superior or equivalent products. Accordingly, the
Company is unable to predict whether its research and development activities
will result in any commercially viable products or applications. Further, due to
the extended testing and regulatory review process required before marketing
clearance can be obtained, the Company does not expect to be able to
commercialize any therapeutic drug for at least five years, either directly or
through its current or prospective corporate partners or licensees. There can be
no assurance that the Company's proposed products will prove to be safe or
effective or receive regulatory approvals that are required for commercial sale.
Page 14 of 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain market risks associated with interest rate
fluctuations on its marketable securities and borrowing arrangement. All
investments in marketable securities are entered into for purposes other than
trading. The Company is not subject to risks from currency rate fluctuations. In
addition, the Company does not utilize hedging contracts or similar instruments.
The Company's exposure to interest rate risk arises from financial instruments
entered into in the normal course of business. Certain of the Company's
financial instruments are fixed rate, short-term investments in government and
corporate notes and bonds, which are available for sale (and have been marked to
market in the accompanying financial statements). Changes in interest rates
generally affect the fair value of the investments, however, because these
financial instruments are considered "available for sale," all such changes are
reflected in the financial statements in the period affected. The Company
manages interest rate risk on its investment portfolio by matching scheduled
investment maturities with its cash requirements.
The Company's borrowing consists solely of its advance from the Institute for
the Study of Aging (Note 5 to the Financial Statements), which is subject to
potential repayment in the event that Cortex enters an Ampakine compound into
Phase III clinical testing as a potential treatment for Alzheimer's disease.
Potential repayment would include interest accruing at a discount to the prime
lending rate. Changes in interest rates generally affect the fair value of such
debt, but, based upon historical activity, such changes are not expected to have
a material impact on earnings or cash flows.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 2001.
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.
CORTEX PHARMACEUTICALS, INC.
November 13, 2001 By: /s/ Maria S. Messinger
----------------------
Maria S. Messinger
Vice President and Chief Financial Officer;
Corporate Secretary
(Chief Accounting Officer)
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