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 December 31, 2001
---------------------
_____ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ______________
Commission file number 0-17951
Cortex Pharmaceuticals, Inc.
(Exact name of 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.
16,801,053 shares of Common Stock as of February 7, 2002
Page 1 of 17
CORTEX PHARMACEUTICALS, INC.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets-- December 31, 2001 and June 30, 2001 ............................. 3
Statements of Operations -- Three months ended December 31,
2001 and 2000 and six months ended
December 31, 2001 and 2000 ....................................................... 4
Statements of Cash Flows -- Six months ended
December 31, 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 4. Submission of Matters to a Vote of Security Holders .............................. 16
Item 6. Exhibits and Reports on Form 8-K ................................................. 16
SIGNATURES ..................................................................................... 17
Page 2 of 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Cortex Pharmaceuticals, Inc.
Balance Sheets
(Unaudited) (Note)
December 31, 2001 June 30, 2001
- ---------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,252,868 $ 4,557,516
Restricted cash 180,886 192,300
Accounts receivable 91,351 --
Other current assets 383,893 260,679
------------- -------------
Total current assets 3,908,998 5,010,495
Furniture, equipment and leasehold improvements, net 472,768 496,586
Other 33,407 33,407
------------- -------------
$ 4,415,173 $ 5,540,488
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 178,968 $ 391,784
Accrued wages, salaries and related expenses 158,750 146,676
Unearned revenue 1,692,667 2,230,117
Advance for Alzheimer's project 261,735 258,110
------------- -------------
Total current liabilities 2,292,120 3,026,687
Unearned revenue, net of current portion 1,560,185 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; common shares issuable
upon conversion: 2,000 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; common shares issuable
upon conversion: 3,679 21,703 21,703
Common stock, $0.001 par value; shares authorized:
30,000,000; shares issued and outstanding:
16,629,887 16,629 16,629
Additional paid-in capital 42,201,629 41,998,545
Accumulated deficit (41,692,093) (41,931,594)
------------- -------------
Total stockholders' equity 562,868 120,283
------------- -------------
$ 4,415,173 $ 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 17
Cortex Pharmaceuticals, Inc.
Statements of Operations
(Unaudited)
Three months ended Six months ended
December 31, December 31,
------------------------------- -------------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Revenues:
Research and license revenue $ 938,517 $ 1,071,905 3,877,033 2,027,729
Grant revenue 164,381 14,475 295,241 25,225
------------- ------------- ------------- -------------
Total revenues 1,102,898 1,086,380 4,172,274 2,052,954
Operating expenses:
Research and development 1,238,985 948,715 2,605,254 2,179,447
General and administrative 838,016 339,063 1,379,710 1,182,669
------------- ------------- ------------- -------------
Total operating expenses 2,077,001 1,287,778 3,984,964 3,362,116
------------- ------------- ------------- -------------
Income (loss) from operations (974,103) (201,398) 187,310 (1,309,162)
Interest income, net 17,697 79,710 52,191 125,977
------------- ------------- ------------- -------------
Income (loss) before cumulative effect of
change in accounting principle (956,406) (121,688) 239,501 (1,183,185)
------------- ------------- ------------- -------------
Cumulative effect of change in
accounting principle -- -- -- (530,000)
------------- ------------- ------------- -------------
Net income (loss) $ (956,406) $ (121,688) $ 239,501 $ (1,713,185)
============= ============= ============= =============
Net income (loss) per share-- basic and diluted:
Net income (loss) per share before cumulative
effect of change in accounting principle $ (0.06) $ (0.01) $ 0.01 $ (0.07)
Cumulative effect of change in accounting
principle -- -- -- (0.03)
------------- ------------- ------------- -------------
Net income (loss) per share $ (0.06) $ (0.01) $ 0.01 $ (0.10)
============= ============= ============= =============
Shares used in calculating per share amounts:
Basic 16,629,887 16,583,156 16,629,887 16,581,737
Diluted 16,629,887 16,583,156 18,012,218 16,581,737
See accompanying notes.
Page 4 of 17
Cortex Pharmaceuticals, Inc.
Statements of Cash Flows
(Unaudited)
Six months ended
December 31,
-----------------------------
2001 2000
- ---------------------------------------------------------------------------------------------
(Restated)
Cash flows from operating activities:
Net income (loss) $ 239,501 $ (1,713,185)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 77,449 70,342
Stock option compensation expense 203,759 325,149
Changes in operating assets/liabilities:
Accounts receivable (91,351) --
Accounts payable and accrued expenses (200,742) (115,740)
Unearned revenue (1,370,783) 4,822,871
Restricted cash 11,414 --
Other current assets (123,214) (324,661)
Changes in other assets and other liabilities 3,625 5,873
------------ ------------
Net cash provided by (used in) operating activities (1,250,342) 3,070,649
------------- ------------
Cash flows from investing activities:
Purchase of fixed assets (53,631) (97,501)
------------- ------------
Net cash used in investing activities (53,631) (97,501)
------------- -------------
Cash flows from financing activities:
Payment of 9% preferred stock dividends (675) --
Proceeds from issuance of common stock -- 15,171
------------ ------------
Net cash provided by (used in) financing activities (675) 15,171
------------- ------------
Increase (decrease) in cash and cash equivalents (1,304,648) 2,988,319
Cash and cash equivalents, beginning of period 4,557,516 2,704,961
------------ ------------
Cash and cash equivalents, end of period $ 3,252,868 $ 5,693,280
============ ============
See accompanying notes.
Page 5 of 17
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 six-month
period ended December 31, 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 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 seeking 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
Page 6 of 17
at a comparable level to before the milestone achievement. If both of these
criteria are not met, the 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 three-month period ended December 31,
2000, the Company restated revenues to include $250,000 of revenues originally
recorded when the up-front payment was received in 1999. This restatement
decreased the net loss per share from $0.02 to $0.01 for the three-month period
ended December 31, 2000.
For the six-month period ended December 31, 2000, the Company restated revenues
to include $500,000 of revenues originally recorded when it received the Organon
up-front payment in 1999. The restatement decreased the net loss per share
(before the cumulative effect of the change in accounting principle) from $0.10
to $0.07, or by $0.03. For the same period, the cumulative effect of the change
in accounting principle of $530,000 was retroactively recorded as of July 1,
2000, increasing the net loss by $0.03 per share. The net impact of the restated
revenues and cumulative effect of the change in accounting principle was an
unchanged net loss for the six-month period ended December 31, 2000 of $0.10 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. For the
six months ended December 31, 2001 and 2000, the calculations of basic and
diluted weighted average shares outstanding are as follows:
Six months ended
December 31,
-------------------------------
2001 2000
------------- -------------
Numerator:
Net income (loss) $ 239,501 $ (1,713,185)
Dividends on 9% Cumulative Convertible
Preferred Stock 675 1,238
------------- -------------
Net income (loss) applicable to common shares 238,826 (1,714,423)
============= =============
Page 7 of 17
Denominator:
Weighted average common shares -- basic 16,629,887 16,581,737
Net effect of dilutive securities:
Stock options 1,263,190 --
Warrants 119,141 --
------------- -------------
Weighted average common shares -- diluted 18,012,218 16,581,737
============= =============
Earnings (loss) per share -- basic and diluted $ 0.01 $ (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 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 three-months ended December 31, 2001, the effect of applying the
Interpretation was an increase in the net loss of $141,000, or $0.01 per share.
Due to fluctuations in the market price of the Company's common stock, for the
three-months ended December 31, 2000, the effect of applying the Interpretation
was a decrease in the net loss of $372,000, or $0.02 per share.
For the six months ended December 31, 2001, the effect of applying the
Interpretation was a decrease in net income of $187,000, or $0.01 per share. For
the six months ended December 31, 2000, the effect of applying the
Interpretation was an increase in the net loss of $173,000, or $0.01 per share.
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, the second milestone payment of $2,000,000 was
triggered 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 17
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. Enrollment for this study is currently underway.
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, which is being amortized into revenue over the
three year collaborative research phase that began in December 2000. The
agreement also includes 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.
The funding from the Institute must be used solely for the planned clinical
trials in MCI patients. As a result, 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 17
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, among other things, (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.
The Company undertakes 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 the Company files from time to time with the
Securities and Exchange Commission, including Quarterly Reports on Form 10-Q,
Annual Reports on Form 10-K and subsequent Current Reports on Form 8-K.
Results of Operations
General
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.
Page 10 of 17
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, which was recorded as revenue upon achievement.
Cortex achieved its second milestone under the agreement in September 2001, when
Organon elected to continue development of the selected compound in Phase II
clinical testing. Achieving the second milestone triggered another $2,000,000
payment to Cortex from Organon, with the related revenue recorded upon
achievement of the milestone.
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). From inception of the
agreement through December 31, 2001, Cortex has received research support
payments of $2,160,000. The agreement also includes milestone payments, plus
royalty payments on sales in licensed territories.
From inception (February 10, 1987) through December 31, 2001, the Company has
sustained losses aggregating $39,660,000. 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 funded 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.
Comparison of the Three Months and Six Months ended December 31, 2001 and 2000
For the three-month period ended December 31, 2001, the net loss of $956,000
compares with a net loss of $122,000 for the corresponding prior year period.
For the six-month period ended December 31, 2001, net income of $240,000
compared to a net loss of $1,713,000 for the corresponding period year period.
Revenues for the three months ended December 31, 2001 approximated those for the
three months ended December 31, 2000. Increased revenues for the six months
ended December 31, 2001 compared to the six months ended December 31, 2000
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.
Page 11 of 17
Research and development expenses for the three-month period ended December 31,
2001 increased from $949,000 to $1,239,000, or by 31% compared to the
corresponding prior year period. Most of the increase, or $214,000, resulted
from non-cash charges for stock options. The charges include amounts for options
re-priced in 1998, as well as expense for options issued to consultants. The
increase in research and development expenses also reflects a modest (three
employee) increase in scientific personnel.
For the six-month period ended December 31, 2001, research and development
expenses increased from $2,179,000 to $2,605,000, or by 20% compared to the
corresponding prior year period. The increase primarily represents technology
access payments related to the Organon milestone achieved in September 2001. 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. In September
2001, when Cortex achieved its milestone under its agreement with Organon, a
technology access payment to the University of California became due.
General and administrative expenses for the three-month period ended December
31, 2001 increased from $339,000 to $838,000, or by 147%, compared to the
corresponding prior year period. The increase primarily represents non-cash
compensation charges recorded in connection with earlier re-priced stock
options, along with fees and expenses related to exploring a strategic
acquisition of technology. The charges related to the activities stated above
increased general and administrative expenses to $1,380,000 for the six-month
period ended December 31, 2001, compared to $1,183,000 for the corresponding
prior year period.
For the six months ended December 31, 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") (Note 1 to the Financial Statements). Issued by the Securities and
Exchange Commission, SAB 101 required the Company to change its accounting
method for the up-front payment received from the agreement with Organon in 1999
(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 related two-year contract period. As a result, revenues
for the three-month and six-month period ended December 31, 2000 have been
increased to include $250,000 and $500,000, respectively, of revenues originally
recorded when the payment was received. The net impact of adopting SAB 101 was a
decrease in the net loss for the three-month period ended December 31, 2000 of
$250,000, or $0.01 per share. With the cumulative effect of the change in
accounting principle of $530,000, restating revenues increased the net loss by
$30,000 for the six-month period ended December 31, 2000, with no impact on net
loss per share.
The Company believes that inflation and changing prices have not had a material
impact on its ongoing operations to date.
Liquidity and Capital Resources
Sources
From inception (February 10, 1987) through December 31, 2001, Cortex has funded
its organizational and research and development activities primarily from the
issuance of equity
Page 12 of 17
securities, with net proceeds aggregating $38,541,000. Net interest income from
inception through December 31, 2001 was $2,048,000.
Research and licensing payments received in connection with the agreement with
Organon (Note 2 to the Financial Statements) totaled $11,880,000 through
December 31, 2001. Of this amount, Cortex received $2,000,000 in October 2001,
representing the second milestone payment from the agreement. 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, up-front fee and research
support of $1,654,000, including $506,000 of support received in advance for the
quarter ended September 30, 2001. During the three-months ended December 31,
2001, Cortex received an additional $506,000 of quarterly research support. 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. From
October 2000 to date, Cortex has received roughly $280,000 related to this grant
award.
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. From October 2001 to date, Cortex has received $75,000 in
connection with this grant award, all of which was received subsequent to
December 31, 2001.
Cash Proceeds
As of December 31, 2001, the Company had cash and cash equivalents totaling
$3,253,000 and working capital of $1,617,000. 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. The decreases reflect the timing of quarterly support
payments from Servier, as well as amounts required to fund the Company's
operations.
Commitments
The Company leases approximately 32,000 square feet of research laboratory,
office and expansion space under an operating lease that expires May 31, 2004.
The commitments under the lease agreement for the years ending June 30, 2002,
2003 and 2004 total $139,000, $358,000 and $343,000, respectively.
Page 13 of 17
The Company is committed to $512,000 for sponsored research and other
remuneration to academic institutions, of which $456,000 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.
Staffing
As of December 31, 2001, Cortex had a total of 28 full-time research and
administrative employees. Neither significant increases to staffing nor
significant investments in plant or equipment are planned for the upcoming year.
Outlook
Cortex anticipates that its cash and cash equivalents -- and the scheduled
research support payments from its agreement with Servier -- will be sufficient
to satisfy its capital requirements through at least September 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
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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 seeking 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.
Additional Risks and Uncertainties
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, 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 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.
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.
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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 4. Submission of Matters to a Vote of Security Holders
On December 11, 2001, the Company held its Annual Meeting of Stockholders, with
stockholders holding 15,160,026 shares of common stock (representing 91% of the
total number of shares outstanding and entitled to vote) present in person or by
proxy at the meeting. Proxies for the meeting were solicited pursuant to
Regulation 14A of the Securities Exchange Act of 1934. Robert F. Allnutt,
Charles J. Casamento, Carl W. Cotman, Ph.D., Vincent F. Simmon, Ph.D. and Davis
L. Temple, Jr., Ph.D. were listed as management's nominees in the Proxy
Statement. Subsequent to the solicitation of proxies, Dr. Temple informed the
Company that he would not stand for re-election and would resign from his
position as director at the Annual Meeting of Stockholders due to personal
health considerations. Aside from Dr. Temple, all of the nominees were elected
as directors at the meeting. The votes for each nominee were as follows:
Number
Number of Number of Votes of Broker
Name Affirmative Votes Negative Votes Withheld "Non-votes"
---- ----------------- -------------- -------- -----------
Robert F. Allnutt 14,993,125 166,901 -- --
Charles J. Casamento 15,071,325 88,701 -- --
Carl W. Cotman, Ph.D. 14,993,225 166,801 -- --
Vincent F. Simmon, Ph.D. 15,071,225 88,801 -- --
At the meeting, the Company also sought the ratification of the appointment of
Ernst & Young LLP as independent auditors of the Company for the fiscal year
ending June 30, 2002. This proposal was approved by 15,098,490 affirmative
votes. There were 47,581 negative votes and 13,955 abstentions.
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
December 31, 2001.
Page 16 of 17
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.
February 11, 2002 By: /s/ Maria S. Messinger
--------------------------------------------
Maria S. Messinger
Vice President and Chief Financial
Officer;
Corporate Secretary
(Chief Accounting Officer)
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