Back to GetFilings.com

Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED September 30, 2004

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 is an accelerated filer (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.

28,455,303 shares of Common Stock as of November 9, 2004

Table of Contents

CORTEX PHARMACEUTICALS, INC.

INDEX

Page 2 of 19

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Cortex Pharmaceuticals, Inc.

Balance Sheets

See accompanying notes.

Note: The balance sheet as of June 30, 2004 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

Page 3 of 19

Table of Contents

Cortex Pharmaceuticals, Inc.

Statements of Operations

(Unaudited)

See accompanying notes.

Page 4 of 19

Table of Contents

Cortex Pharmaceuticals, Inc.

Statements of Cash Flows

(Unaudited)

See accompanying notes.

Page 5 of 19

Table of Contents

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, 2004 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 2004 Annual Report on Form 10-K.

In January 1999, Cortex Pharmaceuticals, Inc. (“Cortex” or the “Company”) entered into a research collaboration and exclusive worldwide license agreement with NV Organon (“Organon”). The agreement will enable Organon to develop and commercialize the Company’s AMPAKINE^® technology for the treatment of schizophrenia and depression. In October 2000, the Company entered into a research collaboration and exclusive license agreement with Les Laboratories Servier (“Servier”), in defined territories. 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. In October 2002, the agreement was amended to also include rights to the AMPAKINE technology for the treatment of anxiety disorders (Note 2).

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, in addition to seeking licensing arrangements with other pharmaceutical companies, the Company may seek to raise additional capital through the sale of debt or equity. There can be no assurance that such capital will be available on favorable terms, or at all. If additional funds are raised by issuing equity securities, dilution to existing stockholders is likely to result.

Revenue Recognition

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

The Company recognizes research revenue from its collaboration with Servier (Note 2) as services are performed under the agreement. 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.

Page 6 of 19

Table of Contents

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 that before the milestone achievement. If both of these criteria are not met, the milestone payment is recognized over the remaining period of the Company’s performance obligations under the arrangement.

If a collaborator develops and markets a product that utilizes the Company’s technology, the Company will be eligible to receive royalties on net sales of the product, as defined by the relative agreement. The Company will recognize such royalties, if any, at the time that the royalties become payable to the Company from the collaborator.

In November 2002, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board reached consensus on Issue 00-21. EITF Issue 00-21 addresses the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. As required, the Company will apply the principles of Issue 00-21 to multiple element research and licensing agreements that it may enter into after July 1, 2003.

In accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101 (“SAB 101”), amounts received for upfront technology license fees under multiple-element arrangements are deferred and recognized over the period of committed services or performance, if such arrangements require the Company’s on-going services or performance.

Employee Stock Options and Stock-based Compensation

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”), which is effective for fiscal years ending after December 15, 2002. SFAS 148 provides alternative methods of transition to the fair value method of accounting for stock-based employee compensation under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 148 also requires disclosure of the effects of stock-based employee compensation on reported net income or loss and earnings or loss per share in annual and interim financial statements.

As permitted under SFAS 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), in accounting for its employee stock options, given that the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. According to APB 25, no compensation expense is recognized since the exercise price of the Company’s stock options generally equals the market price of the underlying stock on the date of grant.

Adoption of SFAS 123 for options issued to employees would require recognition of employee compensation expense based on the computed “fair value” of the options on the date of grant. In accordance with SFAS 123 and EITF Issue 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The Company recognizes this expense over the period in which the services are provided.

Pro forma information regarding net loss and net loss per share has been determined as if the Company had accounted for its employee stock plans under the fair value method. The fair value was estimated at the date of grant using the Black-Scholes option pricing model and the following assumptions for the three-month periods ended September 30, 2004 and 2003, respectively: weighted average risk-free interest rates of 3.3% and 2.1%; dividend yields of 0%; volatility factors of the expected market price of the Company’s common stock of 69% and 106%; and a weighted average life of 4.9 years and 2.8 years.

Page 7 of 19

Table of Contents

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not provide a reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized as expense over the vesting period of the options, resulting in the following pro forma information for the three-month periods ended September 30, 2004 and 2003:

Stock-based employee compensation included in net loss, as detailed above, primarily represents recorded charges for previously re-priced stock options held by employees. The accounting for these re-priced stock options is described more fully immediately below.

In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 (“FIN 44” or “the Interpretation”), “Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB 25.” As required, the Company adopted FIN 44 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 to purchase approximately 970,000 shares of common stock to a price of $0.375 per share, which represented the fair market value of the common stock on the date of the re-pricing. Of the options re-priced in December 1998, as of September 30, 2004 options to purchase approximately 245,000 shares of the Company’s common stock remained outstanding.

By adopting the Interpretation, the Company now applies variable accounting for these options until such options are exercised or forfeited. Consequently, if the market price of the Company’s stock increases above $2.50 per share, the fair market value of the Company’s common stock on the date that it adopted FIN 44, the Company will recognize additional compensation expense that it otherwise would not have incurred.

For the three months ended September 30, 2004, the effect of applying FIN 44 was a decrease in the net loss of $12,000, with no impact on net loss per share. For the three months ended September 30, 2003, the effect of applying FIN 44 was an increase in the Company’s net loss of $235,000, or $0.01 per share. These amounts include charges for previously re-priced options held by employees, as well as directors and consultants.

Page 8 of 19

Table of Contents

Note 2 — Research and License Agreement with Les Laboratories Servier

In October 2000, the Company entered into a research collaboration and exclusive license agreement with 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 (“MCI”), sexual dysfunction, and the dementia associated with multiple sclerosis and amyotrophic lateral sclerosis. 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, as amended to date, includes an up-front payment by Servier of $5,000,000 and research support payments of approximately $2,000,000 per year through early December 2005 (subject to Cortex providing agreed-upon levels of research personnel and subject to annual adjustment based upon the increase in the U.S. Department of Labor’s Consumer Price Index). Cortex is eligible to receive milestone payments, based upon successful clinical development, plus royalty payments on sales in licensed territories.

Under the October 2002 amendment, Servier provided Cortex with $4,000,000 of additional research support, in exchange for rights to the Company’s AMPAKINE compounds as a potential treatment for anxiety disorders in Servier’s licensed territories. The $4,000,000 was paid in quarterly installments of $500,000 over a two-year period, beginning in October 2002. Cortex received the final quarterly installment from this amendment during the quarter ended September 30, 2004.

Cortex had been recording revenue from Servier’s earlier $5,000,000 up-front payment over the three-year collaborative research phase included in the October 2000 agreement. With the subsequent amendments to the agreement, Cortex adjusted the period that the Company records the Servier licensing revenue to include the extended research term that ends in early December 2005.

Page 9 of 19

Table of Contents

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 relating thereto appearing elsewhere in this report and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in the Company’s 2004 Annual Report on Form 10-K.

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, and Section 21E of the Securities Exchange Act of 1934, as amended, 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.

About Cortex Pharmaceuticals

Cortex is engaged in the discovery and development of innovative pharmaceuticals for the treatment of neurodegenerative diseases and other neurological and psychiatric disorders. Since 1993, the Company’s primary efforts have been to develop products that affect the AMPA-type glutamate receptor, a complex of proteins that is involved in communication between nerve cells in the human brain. The Company is developing a family of chemical compounds, known as AMPAKINE^® compounds, which enhance the activity of this receptor. The Company believes that AMPAKINE compounds hold promise for correcting deficits brought on by a variety of diseases and disorders that are known, or thought, to involve depressed functioning of pathways in the brain that use glutamate as a neurotransmitter.

Page 10 of 19

Table of Contents

The AMPAKINE program addresses large potential markets. The Company’s commercial development plan involves partnering with larger pharmaceutical companies for research, development, clinical testing, manufacturing and global marketing of AMPAKINE products for those indications that require sizable, expensive clinical trials and very large sales forces to achieve significant market penetration. At the same time, the Company plans to develop internally a selected set of indications, eligible for orphan drug status. These indications typically require more modest investment in the development stages, and involve a more concentrated sales force to reach selected medical centers and a limited number of medical specialists in the United States. If the Company is successful in the pursuit of this operating strategy, the Company may be in a position to contain its costs over the next few years, to maintain its focus on the research and early development of novel pharmaceuticals (where the Company believes that it has the ability to compete) and eventually to participate more fully in the commercial development of AMPAKINE products in the United States.

Critical Accounting Policies and Management Estimates

The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the Company’s financial condition and results of operations and most demanding of its judgment. The Company’s discussion and analysis of its financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.

The Company bases its 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

The Company’s revenue recognition policies are in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition” (“SAB 101”). SAB 101 provides guidance in applying accounting principles generally accepted in the United States to revenue recognition issues, and specifically addresses revenue recognition for up-front, nonrefundable fees received in connection with research collaboration arrangements.

In accordance with SAB 101, revenues from up-front fees from the Company’s collaborators are deferred and recorded over the term that it provides ongoing services. Similarly, research support payments are recorded as revenue as it performs the research under the related agreements. The Company records grant revenues as it incurs expenses related to the grant projects. 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 acknowledgment from the Company’s 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 its collaborator at a comparable level to that before the milestone achievement. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of the Company’s performance obligations under the agreement.

Page 11 of 19

Table of Contents

In November 2002, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board reached consensus on Issue 00-21. EITF Issue 00-21 addresses the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. As required, the Company will apply the principles of Issue 00-21 to multiple element agreements that it may enter into after July 1, 2003.

The Company’s revenue recognition policies, although critical in management’s view, are not the sole accounting policies that it has adopted. 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 management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Results of Operations

General

In January 1999, the Company entered into a research collaboration and exclusive worldwide license agreement with NV Organon (“Organon”). The agreement will allow 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 a $2,000,000 up-front licensing payment and research support payments of approximately $3,000,000 per year for the two years ended in mid-January 2001.

The agreement with Organon also includes milestone payments based upon clinical development, plus royalty payments on worldwide sales. To date, Cortex has received milestone payments from Organon totaling $6,000,000, including a $2,000,000 milestone paid to Cortex in late December 2003 in order for Organon to retain its rights to the AMPAKINE technology in the field of depression. For each milestone payment, Cortex recorded the related revenue 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 (“MCI”), sexual dysfunction, and the dementia associated with multiple sclerosis and amyotrophic lateral sclerosis. The agreement, as amended, includes an up-front payment by Servier of $5,000,000 and research support payments of approximately $2,000,000 per year through early December 2005 (subject to Cortex providing agreed-upon levels of research personnel). The agreement also includes milestone payments, plus royalty payments on sales in licensed territories.

In October 2002, in exchange for an additional $4,000,000 of research support, Servier expanded its rights to the AMPAKINE compounds to include the field of anxiety disorders, in its licensed territories. The $4,000,000 was paid in quarterly installments of $500,000 over a two-year period, with the final installment being received during the quarter ended September 30, 2004.

Page 12 of 19

Table of Contents

From inception (February 10, 1987) through September 30, 2004, the Company has sustained losses aggregating $49,563,000. 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 proceeds from Small Business Innovative Research (“SBIR”) grants, research support payments from the collaboration with Servier and by possible milestone payments from Organon and Servier. 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 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 be dependent upon the successful introduction of a new product into the North American market from its internal development, as well as the successful commercial development of its products by Organon, Servier or its other prospective partners to attain profitable operations from royalties or other product-based revenues.

Comparison of the Three Months ended September 30, 2004 and 2003

For the three months ended September 30, 2004, the net loss of $1,511,000 compares with a net loss of $4,319,000 for the corresponding prior year period, a decrease of 65% due primarily to non-cash charges of $3,844,000 related to warrants issued in the Company’s private placement of common stock in August 2003.

Revenues for the three months ended September 30, 2004 decreased from $1,337,000 to $1,175,000, or by 12%, compared to the three months ended September 30, 2003, due to decreased licensing revenues from the agreement with Servier.

With the amendments to the related collaborative research agreement, Cortex extended the period that it amortizes licensing revenues from Servier’s earlier up-front fee. Under the original October 2000 agreement, Cortex received a $5,000,000 licensing fee, which Cortex was recording as revenue over that agreement’s three-year collaborative research phase.

After amending the agreement, most recently in December 2003, Cortex began amortizing the remaining unearned licensing revenues over the extended term of the research phase that now ends in early December 2005. Compared to the corresponding prior year period, licensing revenues for the three months ended September 30, 2004 decreased by $144,000 as a result of this change.

Research and development expenses for the three-month period ended September 30, 2004 increased from $1,033,000 to $2,041,000, or by 98% from the corresponding prior year period, with most of the increase reflecting expenses related to advancing the second generation AMPAKINE CX717 in Phase I human clinical trials.

General and administrative expenses for the three-month period ended September 30, 2004 increased from $460,000 to $664,000, or by 44% compared to the corresponding prior year period. Expenses for the current year period mostly resulted from increased insurance premiums, management fees for the Company’s increased investment portfolio and cost reductions from the prior year period in an effort to conserve cash prior to the private placement of common stock in August 2003.

Specifically, these cost reductions included the acceptance of stock options in lieu of a portion of base salary by three executive officers during the months of July and August 2003, as initially implemented in February 2003. Additionally, in September 2003, the Chief Executive Officer

Page 13 of 19

Table of Contents

accepted stock options in lieu of his entire base salary, as previously reduced, for the months of May through August 2003. Resultant salary expenses during the quarter ended September 30, 2003 reflected the non-payment of his salary for the months of July and August and the reversal of his earlier accrued salary expenses for the months of May and June 2003. Options to purchase an aggregate of 22,729 shares of common stock were issued to the executive officers in connection with the waived amounts during July and August, and the waived salary for the Chief Executive Officer from May through August 2003.

The Board of Directors also waived all cash payments of director compensation for Board meetings held during calendar year 2003, which contributed to the decreased administrative expenses for the prior year period. In lieu of those payments, options to purchase an aggregate of 120,000 shares of the Company’s common stock were issued to non-employee directors as of the date of the 2002 Annual Meeting of Stockholders.

Liquidity and Capital Resources

Sources and Uses of Our Cash

From inception (February 10, 1987) through September 30, 2004, Cortex has funded its organizational and research and development activities primarily through the issuance of equity securities, funding related to collaborative agreements and net interest income.

Under the agreement with Servier signed in October 2000 and amended, Cortex has received research and licensing payments of $16,954,000 through September 30, 2004, including $1,041,000 during the quarter ended September 30, 2004. The October 2000 agreement, as amended, currently provides research support of approximately $2,165,000 per year through early December 2005, subject to annual adjustment based on the U.S. Department of Labor’s Consumer Price Index. Beginning in October 2002, Servier agreed to provide the Company an additional $4,000,000 of research support, which was paid in quarterly installments of $500,000 over a two-year period with the last installment received during the quarter ended September 30, 2004. The agreement also includes milestone payments based upon successful clinical development and royalties on sales in licensed territories.

Research and licensing payments received in connection with the January 1999 agreement with Organon totaled $13,880,000 as of September 30, 2004, including $6,000,000 for milestone payments. 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.

In August 2003, the Company completed a private placement of an aggregate of 3,333,334 shares of its common stock at $1.50 per share and five-year warrants to purchase up to an additional aggregate of 3,333,334 shares at an exercise price of $2.55 per share. The Company received approximately $4,500,000 in net proceeds from the private placement. As of September 30, 2004, warrants to purchase up to 2,993,337 shares remained outstanding. If these warrants are fully exercised, of which there can be no assurance, such exercise would provide approximately $7,630,000 of additional capital. The warrants are subject to a call right in favor of the Company to the extent that the closing price of the Company’s common stock exceeds $6.00 per share for any 13 consecutive trading day period following December 8, 2005.

Page 14 of 19

Table of Contents

In January 2004, the Company completed a private placement of an aggregate of 6,909,091 shares of its common stock at $2.75 per share and five-year warrants to purchase up to an additional aggregate of 4,490,910 shares at an exercise price of $3.25 per share. The Company received approximately $17,500,000 in net proceeds from the private placement. If the warrants are fully exercised, of which there can be no assurance, these warrants would provide approximately $14,600,000 of additional capital. The warrants are subject to a call right in favor of the Company to the extent that the closing price of the Company’s common stock exceeds $7.50 per share for any 13 consecutive trading day period following March 18, 2005.

As of September 30, 2004, the Company had cash, cash equivalents and marketable securities totaling $20,114,000 and working capital of $18,750,000. In comparison, as of June 30, 2004, the Company had cash and cash equivalents of $22,188,000 and working capital of $20,567,000. The decreases in cash and working capital reflect amounts required to fund the Company’s operations, including the clinical development of AMPAKINE CX717.

Net cash used in operating activities was $1,938,000 during the three months ended September 30, 2004, and included the Company’s net loss for the period of $1,511,000, adjusted for non-cash expenses for depreciation and stock compensation aggregating $81,000, and changes in operating assets and liabilities. For the three months ended September 30, 2003, net cash used in operating activities approximated $1,069,000, reflecting the Company’s net loss of $4,319,000 for the period, adjusted for non-cash expenses for stock compensation (including the change in fair value of common stock warrants) of $4,156,000, depreciation and amortization charges aggregating $40,000, and changes in operating assets and liabilities.

Net cash provided by investing activities approximated $3,375,000 during the three months ended September 30, 2004, and primarily resulted from the maturity of short-term investments of $4,000,000, offset by the purchase of marketable securities of $527,000 and of fixed assets of $98,000. For the three months ended September 30, 2003, net cash used in investing activities approximated $208,000, and mostly included $200,000 for the purchase of short-term investments.

Net cash provided by financing activities were minimal for the three months ended September 30, 2004 and resulted from the exercise of options to purchase shares of the Company’s common stock. For the three months ended September 30, 2003, net cash provided by financing activities approximated $4,620,000, representing net proceeds of $4,505,000 from the private placement of the Company’s common stock in August 2003, along with proceeds of $115,000 from the exercise of stock options.

Commitments

The Company leases approximately 32,000 square feet of research laboratory, office and expansion space under an operating lease that expires May 31, 2009. The commitments under the lease agreement for the years ending June 30, 2005, 2006, 2007, 2008 and 2009 are $330,000, $459,000, $478,000, $498,000 and $472,000, respectively.

Remaining commitments for the Phase I clinical study of CX717 and other preclinical expenses amount to approximately $1,100,000. Separately, the Company is committed to approximately $1,300,000 for sponsored research at academic institutions, of which $879,000 is payable over the next twelve months.

Page 15 of 19

Table of Contents

In June 2000, the Company received $247,000 from the Institute for the Study of Aging (the “Institute”), a non-profit foundation supported by the Estee Lauder Trust. The advance partially offset the Company’s limited costs for its testing in patients with mild cognitive impairment and conducted with its partner, Servier. 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 September 30, 2004, Cortex had a total of 22 full-time research and administrative employees. The Company anticipates modest increases in staffing and investments in plant or equipment through the next twelve months.

Outlook

Cortex anticipates that its cash, cash equivalents and marketable securities, and the scheduled research support payments from its agreements with Servier will be sufficient to satisfy its capital requirements into mid-calendar year 2006. Additional funds will be required to continue operations beyond that time. Cortex may receive additional milestone payments from the Organon and Servier agreements. However, there is no assurance that the Company will receive such milestone payments from Organon or Servier within the desired timeframe, or at all.

In order to provide for its longer-term capital 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 an 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 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 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 stockholders is likely to result. Such additional capital would, more importantly, enhance the ability of Cortex to achieve significant milestones in its efforts to develop the AMPAKINE technology.

Page 16 of 19

Table of Contents

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.

Off-Balance Sheet Arrangements

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

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 as it does not typically conduct transactions in foreign currencies. 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. 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. As of September 30, 2004, the Company’s investment portfolio had a fair value and carrying amount of approximately $8,700,000. If market interest rates were to increase immediately and uniformly by 10% from levels as of September 30, 2004, the resulting decline in the fair value of fixed rate bonds held within the portfolio would not be material to the Company’s financial position, results of operations and cash flows.

The Company’s borrowing consists of its advance from the Institute for the Study of Aging, 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 rate equal to one-half of the prime lending rate. Changes in interest rates generally affect the fair value of such debt, but, based upon historical activity, such changes are not expected to have a material impact on earnings or cash flows. As of September 30, 2004, the principal and accrued interest of the advance amounted to $276,000.

Page 17 of 19

Table of Contents

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), as appropriate, to allow timely decisions regarding required disclosure.

The Company performed an evaluation, under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s 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 the Company’s 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 the Company’s periodic filings under the Exchange Act.

There has been no change in the Company’s 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, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2004, in connection with the earlier engagement of a consultant for investor relations purposes, the Company issued warrants to purchase an aggregate of 12,000 shares of the Company’s common stock to such consultant. The warrants have a weighted average exercise price of $2.08 and a five-year term.

The issuances of the foregoing were made in reliance upon the exemption from the registration provisions of the Securities Act of 1933, as amended, set forth in Section 4(2) thereof as transactions by an issuer not involving any public offering. The warrants contain representations to support the Company’s reasonable belief that the purchaser is familiar with or has access to information concerning the operations and financial condition of the Company, and the purchaser is acquiring the securities for investment and not with a view to the distribution thereof. At the time of their issuance, the warrants were deemed to be restricted securities for purposes of the Securities Act of 1933, as amended, and the warrants (and the shares issued upon exercise will) bear legends to that effect.

Page 18 of 19

Table of Contents

During the three months ended September 30, 2004, the Company did not repurchase any of its securities.

Item 5. Other Information

On November 10, 2004, the Company entered into a Second Amendment to the Employment Agreement with its Chief Executive Officer, Roger G. Stoll, Ph.D. (the “Amendment”). The Amendment provides that in the event of a termination without “Cause” (as defined in the original Employment Agreement filed as Exhibit 10.74 to the Company’s Quarterly Report on Form 10-Q as filed on November 12, 2002) or for “Good Reason” (as defined in the original Employment Agreement), Dr. Stoll shall be entitled to termination pay equal to twelve months of his then current salary paid in accordance with normal payroll practices.

Item 6. Exhibits

Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Page 19 of 19