-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RvH0FIhPlewfrzYUYy/DLkhVivLJvr1soPNOzkEcFnRpGub9HU5g5ls/fIxhYMue EbD+9aR3K5a9gWotLjHbXg== 0000898430-00-000314.txt : 20000209 0000898430-00-000314.hdr.sgml : 20000209 ACCESSION NUMBER: 0000898430-00-000314 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20000208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORTEX PHARMACEUTICALS INC/DE/ CENTRAL INDEX KEY: 0000849636 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 330303583 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: POS AM SEC ACT: SEC FILE NUMBER: 333-29493 FILM NUMBER: 527642 BUSINESS ADDRESS: STREET 1: 15241 BARRANCA PKWY CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7147273157 MAIL ADDRESS: STREET 2: 15241 BARRANCA PARKWAY CITY: IRVINE STATE: CA ZIP: 92718 POS AM 1 CORTEX FORM SB-2 POST EFFECTIVE AMENDMENT #3 As filed with the Securities and Exchange Commission on February 8, 2000 Registration No. 333-29493 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------- POST-EFFECTIVE AMENDMENT NO. 3 TO FORM SB-2 REGISTRATION STATEMENT under the Securities Act of 1933 -------- CORTEX PHARMACEUTICALS, INC. (Name of small business issuer in its charter) Delaware 2834 33-0303583 (State or jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Classification Identification No.) organization) Code Number) 15241 Barranca Parkway, Irvine, California 92618 (949) 727-3157 (Address and telephone number of principal executive offices and principal place of business) Vincent F. Simmon, Ph.D., President and Chief Executive Officer 15241 Barranca Parkway, Irvine, California 92618 (949) 727-3157 (Name, address and telephone number of agent for service) Copies to: Nick E. Yocca, Esq. Lawrence B. Cohn, Esq. Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, California 92660 (949) 725-4000 -------- Approximate date of proposed sale to the public: From time to time after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:__________. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration for the same offering:__________. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_]. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X]. CALCULATION OF REGISTRATION FEE
=================================================================================================================================== Proposed Maximum Proposed Maximum Title of Each Class of Amount to be Aggregate Offering Aggregate Offering Amount of Securities to be Registered Registered (1) Price(2) Price Registration Fee - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.001 per share 4,600,537 shares $2.937 $13,511,777 $4,095* ===================================================================================================================================
(1) The number of shares of Common Stock registered hereunder represents the Company's good faith estimate of the number of shares which may be issuable upon conversion of the Company's Series A Preferred Stock, the additional purchase rights or upon the exercise of warrants, as the case may be. Pursuant to Rule 416, the Registration Statement also covers an indeterminate number of additional shares of Common Stock which may become issuable upon conversion of the Series A Preferred Stock and the additional purchase rights by reason of reductions of the conversion price in accordance with the terms of the Certificate of Designation of Series A Preferred Stock. (2) The offering price is estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c), using the average of the high and low bid price for the Common Stock as reported on the Nasdaq SmallCap Market on June 16, 1997, which was $2.937 per share. * Previously paid. ================================================================================ PROSPECTUS [LOGO OF CORTEX APPEARS HERE] CORTEX PHARMACEUTICALS, INC. 963,388 Shares of Common Stock (Par Value $0.001 Per Share) The stockholders listed in this Prospectus under the section entitled "Selling Stockholders" may offer and sell a total of 963,388 shares of our company's common stock, par value $0.001 per share (the "Common Stock"), which they own or have the right to acquire from time to time. The shares of Common Stock included in this offering consist of shares of Common Stock issuable upon exercise of warrants. -------------------- The Selling Stockholders may sell the shares of Common Stock described in this Prospectus in public or private transactions, on or off the OTC Bulletin Board, at prevailing market prices, or at privately negotiated prices. The Selling Stockholders may sell shares directly to purchasers or through brokers or dealers. Brokers or dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders. We will not receive any proceeds from the Selling Stockholders' sale of the shares of Common Stock. More information is provided in the section titled "Plan of Distribution." -------------------- Our Common Stock is currently traded on the OTC Bulletin Board under the symbol "CORX." --------------------- Investing in the Common Stock involves a high degree of risk. See "Risk Factors" beginning on page 5 of this Prospectus. --------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. --------------------- The date of this Prospectus is ________ __, 2000. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549, 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC- 0330 for further information on the operation of the public reference facilities. We "incorporate by reference" into this Prospectus the information we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this Prospectus and information that we file subsequently with the SEC will automatically update this Prospectus. We incorporate by reference the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934: - Annual Report on Form 10-K, as amended, for the year ended June 30, 1999; and - Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. You may request a copy of these filings (other than an exhibit to a filing unless that exhibit is specifically incorporated by reference into that filing) at no cost, by writing to or telephoning us at the following address: Investor Relations Cortex Pharmaceuticals, Inc. 15241 Barranca Parkway Irvine, California 92618 (949) 727-3157 This Prospectus constitutes part of a Registration Statement we filed with the SEC. You should rely only on the information incorporated by reference or provided in this Prospectus. We have not authorized anyone else to provide you with different information. You should not assume that the information in this Prospectus is accurate as of any date other than the date on the front of the document. FORWARD-LOOKING STATEMENTS This Prospectus contains 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, including statements regarding the Company's capital needs, drug development programs, clinical trials, receipt of regulatory approval, intellectual property, expectations and intentions. Forward-looking statements necessarily involve risks and uncertainties, and the Company's actual results could differ materially from those anticipated in the forward-looking statements due to a number of factors, including those set forth under the section entitled "Risk Factors" and elsewhere in this Prospectus. You should carefully read the factors set forth in the section entitled "Risk Factors" and other cautionary statements made in this Prospectus and understand that those factors and statements are applicable to all related forward-looking statements wherever they appear in this Prospectus. 2 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that you should consider before investing in the Common Stock. You should read the entire prospectus carefully. Cortex Pharmaceuticals, Inc. We are a biopharmaceutical company located in Irvine, California. Our goal is to develop proprietary drugs designed to treat neurodegenerative diseases and other neurological and psychiatric disorders. We were formed in Delaware in 1987 and since that date, we have devoted our resources to research and development activities relating to several products that are at various developmental stages. We have several license agreements with various research institutions, which own approved and pending patents covering certain drugs and therapeutic technologies. Since 1993, we have focused our research and development on the AMPA receptor, a complex of proteins that is involved in most "excitatory" communication between nerve cells in the human brain. We are developing several chemical compounds, known as Ampakines(R), to enhance the activity of the AMPA receptor. We believe that Ampakines may effectively treat deficiencies brought on by a variety of diseases and disorders. In October 1994, we initiated human safety studies with CX516 (Ampalex(R)). CX516 is a drug that has shown potential for treating deficits of memory and cognition. These studies have involved healthy young adult and elderly volunteers and, more recently, patients with Alzheimer's disease and with schizophrenia. We are also investigating the use of Ampakines to treat other disorders, such as depression. We believe that the quality of our science and technology provides us with an advantage over our competitors in the discovery of innovative pharmaceuticals. We do not, however, have the resources or expertise for later- stage clinical development, manufacturing and worldwide marketing. Our commercial development plans therefore involve partnering with larger pharmaceutical companies for later-stage clinical testing, manufacturing and global marketing of our proposed products. If we are successful in the pursuit of this business strategy, we should be able to cover our costs over the next few years, to maintain our focus on the research and development of innovative pharmaceuticals and to eventually participate directly in the commercial development of our products in the United States. Currently, we are seeking collaborative or licensing arrangements with larger pharmaceutical companies that will permit our proprietary products to complete clinical development and that will provide access to the clinical trials management, manufacturing and marketing expertise of those companies. In January 1999, we entered an exclusive license agreement with NV Organon ("Organon") of the Netherlands. In return for an upfront payment, we issued Organon a license to develop and commercialize our proprietary Ampakine technology for the treatment of schizophrenia. We also issued Organon a license to explore the use of our Ampakines as a treatment for depression. We are entitled to receive up to $3,000,000 per year for two years from the agreement date, as long as we provide the agreed-upon levels of research. Additionally, we are entitled to receive milestone payments and royalty payments on any worldwide sales by Organon. Our offices and laboratories are located at 15241 Barranca Parkway, Irvine, California, 92618 and our telephone number is (949) 727-3157. We hold registered trademarks on the names Ampalex and Ampakine. This Prospectus also includes registered trademarks of other companies. Risk Factors An investment in the shares of Common Stock being offered by the Selling Stockholders is very risky. Information regarding the risks involved is provided in the section titled "Risk Factors." 3 Selected Financial Information The following table depicts selected financial information concerning our business and operations and should be read in conjunction with the more detailed financial statements (including the notes thereto) appearing elsewhere in this Prospectus.
Statements of Operations Data: Period from Period from inception inception (February 10, (February 10, Three months ended 1987) through 1987 through September 30, September 30, Years ended June 30, June 30, 1999 1998 1999 1999 1998 1999 -------------------------- ------------ --------------------------- ------------ Total revenues $ 834,556 $ - $ 7,810,680 $ 3,151,407 $ 130,000 $ 6,976,124 Total operating expenses 1,119,180 1,193,974 46,825,601 4,781,334 5,591,835 45,706,421 ----------- ------------- ----------- ----------- ----------- ------------ Loss from operations (284,624) (1,193,974) (39,014,921) (1,629,927) (5,461,835) (38,730,297) Interest income, net (6,559) 7,616 1,694,724 8,477 203,875 1,701,283 ----------- ----------- ------------ ----------- ----------- ------------ Net loss $ (291,183) $(1,186,358) $(37,320,197) $(1,621,450) $(5,257,960) $(37,029,014) =========== =========== ============ =========== =========== ============ Weighted average common shares outstanding 15,522,252 10,237,126 13,407,945 9,575,663 =========== ========== =========== =========== Net loss per share $ (0.02) $ (0.12) $ (0.12) $ (0.55) =========== =========== =========== ===========
Balance Sheet Data:
June 30, ----------------------------- September 30, 1999 1999 1998 ------------------- ------------- ------------- Total current assets $ 320,772 $ 970,314 $ 2,195,574 Total assets 856,887 1,549,021 2,874,846 Total current liabilities 1,308,098 1,712,350 497,297 Deficit accumulated during the development stage (39,352,036) (39,060,853) (37,439,403) Total stockholders' equity $ (451,211) $ (163,329) $ (1,031,154) Common shares outstanding 15,528,182 15,519,382 10,237,126
4 RISK FACTORS Investing in the Common Stock being offered by the Selling Stockholders is very risky. You should be able to bear a complete loss of your investment. You should carefully consider the following factors, in addition to the other information contained in this Prospectus before making an investment decision. Need for Additional Funds. Without further injections of capital, we anticipate that we have sufficient funds to maintain our operations into May 2000. We will require additional funds to continue our operations beyond that time. We cannot say with any amount of certainty that we will be able to obtain the additional needed funds on reasonable terms, or at all. If we decide to raise additional funds by issuing more of our securities, stockholders at the time of issuance will experience a dilution to the value of their securities. We anticipate receiving the first milestone from our agreement with Organon during fiscal 2000. If we receive this milestone payment in or before May 2000, we expect that we may sustain operations through December 2000. We cannot give any assurance that the Company will receive the milestone during this timeframe, or at all. If we are unable to obtain additional funds, we could lose our key employees and could be required to abandon one or more of our product development programs. In addition, we may be unable to meet our research spending obligations under existing licensing agreements and may be unable to continue our business operations. In addition to our agreement with Organon, we are presently seeking collaborative or other arrangements with larger pharmaceutical companies to provide for both our immediate and longer-term funding requirements. These agreements would potentially provide us with additional funds in exchange for exclusive or non-exclusive license or other rights to the technologies and products that we are currently developing. Competition between biopharmaceutical companies for these types of arrangements is intense. Although we have been engaged in discussions with candidate companies for some time, we cannot give any assurance that these discussions will result in an agreement or agreements in a timely manner, or at all. Additionally, we cannot assure you that any resulting agreement will generate sufficient revenues to offset our operating expenses and longer-term funding requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Reliance on N.V. Organon We are dependent on future payments from Organon to continue the development and commercialization of our Ampakine technology. Under the agreement with Organon that we entered into in January 1999, we share the research efforts. Organon has primary responsibility for developing and commercializing Ampakines for use in the treatment of schizophrenia, with an option to extend the rights to the treatment of depression. The agreement provides for an up-front payment by Organon of $2,000,000 and research support payments of up to $3,000,000 per year for two years (subject to us providing agreed-upon levels of research). The agreement also includes milestone payments, plus royalty payments on a worldwide basis. Under the terms of the agreement, Organon has the right at any time to terminate the agreement upon four months' prior notice. In addition, Organon has the right to terminate the research and development related to the agreement upon 30 days' prior notice in the event that we materially breach the agreement and do not cure the breach within 60 days of receipt of a notice of breach from Organon. If Organon were to discontinue its financial support, we might not be able to continue the development of our Ampakine technology, and our financial condition would be seriously impaired. See "Business;" "Management's Discussion and Analysis of Financial Condition and Results of Operations." 5 Development Stage Company; History of Losses. We are considered a "development stage" company because, since our formation on February 10, 1987 through September 30, 1999, we have generated only modest operating revenues and we have incurred net losses aggregating $37,320,197. As of September 30, 1999, we had an accumulated deficit of $39,352,036. We will require substantial additional funds to advance our research and development programs, particularly if we decide to independently conduct later-stage clinical testing and apply for regulatory approval of any of our proposed products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Dependence on Strategic Alliances and Third Parties for Clinical Testing, Manufacturing and Marketing. We do not have the resources, and do not presently intend, to conduct later-stage human clinical trials or to manufacture our proposed products. We are therefore seeking larger pharmaceutical company partners to conduct such activities for most or all of our proposed products. In connection with our efforts to secure additional corporate partners, we will seek to retain certain co-promotional rights to our proposed products. These co-promotional rights will allow us to market our products to selected medical specialists while our corporate partner markets our products to the general medical market. We cannot assure you that we will be able to enter into any partnering arrangements on this or any other basis. In addition, we cannot assure you that we, or our prospective corporate partners, can successfully introduce our proposed products. We also face the risks that our products will be rejected by patients, health care providers or insurance companies, or that our products cannot be manufactured and marketed at prices that would permit us to operate profitably. See "Business." Technological Uncertainty; Early Stage of Product Development; No Assurance of Regulatory Approvals. We cannot assure you that our research and development activities will enable us to produce any products able to withstand competition. Our development of each product is subject to the risks of failure commonly experienced in the development of products based upon innovative technologies and the expense and difficulty of obtaining approvals from regulatory agencies. All of our proposed products are in the preclinical or early clinical stage of development and will require significant additional funding for research, development and clinical testing before we are able to submit them to any of the regulatory agencies for clearances for commercial use. We cannot assure you that we will be able to license any technologies or proposed products or to complete successfully any of our research and development activities. Even if we do complete them, we cannot assure you that we will be able to market successfully any of the products or that we will be able to obtain the necessary regulatory approvals or that customers will like our products. We also face the risk that any or all of our products will not work as intended or that they will be toxic, or that, even if they do work and are safe, that our products will be uneconomical to manufacture and market on a large scale. We also face the risk that the rights of other persons or entities will stop us from marketing any of our products or that other persons or entities might develop and market a superior or equivalent product. Due to the extended testing and regulatory review process required before we can obtain marketing clearance, we do not expect to be able to commercialize any therapeutic drug for at least five years, either directly or through our corporate partners or licensees. See "Business." Limited Proprietary Rights; Uncertainty Associated With Patent Protection. Under our agreements with the Regents of the University of California, we have exclusive rights to our Ampakine compounds for specified applications. These rights are secured by patents or patent applications owned wholly by others or by others as co-owners with us. Our existing agreements require us to make certain minimum annual payments, meet certain milestones or diligently seek to commercialize the underlying technology. Our failure to meet any of these requirements could allow the other party to terminate that particular agreement. 6 Our success will depend, in part, on our ability to get patent protection for our products and processes in the United States and elsewhere. We have filed and intend to continue to file patent applications as we need them. We cannot assure you, however, that any additional patents will issue from any of these applications or, if patents do issue, that the claims allowed will be sufficiently broad to protect our technology. Also, we cannot assure you that any patents issued to us or licensed by us can withstand challenges made by others or that we will be able to protect our rights. If we are unable to obtain sufficient protection of our proprietary rights in our products or processes prior to or after obtaining regulatory clearances, our competitors may be able to obtain regulatory clearance and market competing products by demonstrating the equivalency of their products to our products. If they are successful at demonstrating the equivalency between the products, our competitors would not have to conduct the same lengthy clinical tests that we have conducted. We also rely on trade secrets and confidential information that we try to protect by entering into confidentiality agreements with other parties. We cannot assure you that any of the confidentiality agreements will be honored, or, if breached, that we would have enough remedies to protect the confidential information. Further, we cannot assure you that our competitors will not independently learn our trade secrets or develop similar or superior technologies. To the extent that our consultants, key employees or others apply technological information independently developed by them or by others to our projects, disputes may arise regarding the proprietary rights to such information. We cannot assure you that such disputes will be resolved in favor of the Company. See "Business -- Patents and Proprietary Rights." Shares Eligible for Future Sale; Dilution. If all outstanding warrants and options are exercised prior to their expiration, approximately 2.5 million additional shares of Common Stock could become freely tradable without restriction. An aggregate of 11,025 shares of Common Stock are issuable upon conversion of currently outstanding 9% Preferred Stock and Series B Preferred Stock. On issuance such shares will be freely tradable. All shares of Common Stock issuable upon exercise of the outstanding warrants will be freely tradable under the Registration Statement of which this Prospectus is part. Sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price of the Common Stock. See "Description of Securities." Intense Competition. Our business is characterized by intensive research efforts. Our competitors include many companies, research institutes and universities that are working in a number of pharmaceutical or biotechnology disciplines to develop therapeutic products similar to those we are currently investigating. Most of these competitors have substantially greater financial, technical, manufacturing, marketing, distribution and/or other resources than us. In addition, many of our competitors have experience in performing human clinical trials of new or improved therapeutic products and obtaining approvals from the FDA and other regulatory agencies. We have no experience in conducting and managing later-stage clinical testing or in preparing applications necessary to obtain regulatory approvals. Accordingly, it is possible that our competitors may succeed in developing products that are safer or more effective than those that we are developing and may obtain FDA approvals for their products faster than we can. We expect that competition in this field will continue to intensify. See "Business--Competition." Dependence Upon Key Personnel. We are highly dependent upon key management and technical personnel. Competition for qualified employees among pharmaceutical and biotechnology companies is intense. The loss of any of our key management or technical personnel, or our inability to attract, retain and motivate the additional highly-skilled employees and consultants that our business requires, could substantially hurt our business and prospects. We cannot assure you that we will be able to retain our existing personnel or attract additional qualified employees when we need them. See "Business" and "Management." 7 Dependence on Relationships with Consultants and the University of California, Irvine. We depend upon our relationships with a number of academic consultants, particularly Drs. Carl W. Cotman and Gary S. Lynch of the University of California, Irvine ("UCI"). Drs. Cotman and Lynch play a role in guiding our internal research. In addition, we sponsor preclinical research in Dr Lynch's laboratories at UCI that is part of our product development and corporate partnering profile. If our relationships with Dr. Lynch or UCI are disrupted, our AMPA receptor research program could be adversely affected. We cannot assure you that we would be able to conduct the sponsored research internally at reasonable cost, or at all. Our agreements with our consultants, including those with Drs. Cotman and Lynch, are generally terminable by the consultant on short notice. See "Management." Government Regulation. The FDA and other similar agencies in foreign countries have substantial requirements for therapeutic products. Such requirements often involve lengthy and detailed laboratory, clinical and post-clinical testing procedures. It often takes companies many years to satisfy these requirements, depending on the complexity and novelty of the product. The review process is also extensive which may delay the approval process even more. As yet, we have not obtained any approvals to market our products. Further, we cannot assure you that the FDA or other regulatory agency will grant us approval for any of our products on a timely basis, if at all. Even if regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems may result in restrictions on marketing or withdrawal of the product from the market. See "Business--Government Regulation." Lack of Listing on an Exchange or on the Nasdaq System; Restrictions on Our Stock Our Common Stock is not listed on any exchange or on the Nasdaq System. Our Common Stock is reported on the OTC Bulletin Board. Because our shares are not listed on any exchange or on the Nasdaq System, they are subject to the regulations regarding trading in "penny stocks," which are those securities trading for less than $5.00 per share. The following is a list of the restrictions on the sale of penny stocks: . Prior to the sale of penny stock by a broker-dealer to a new purchaser, the broker-dealer must determine whether the purchaser is suitable to invest in penny stocks. To make that determination, a broker-dealer must obtain, from a prospective investor, information regarding the purchaser's financial condition and investment experience and objectives. Subsequently, the broker-dealer must deliver to the purchaser a written statement setting forth the basis of the suitability finding. . A broker-dealer must obtain from the purchaser a written agreement to purchase the securities. This agreement must be obtained for every purchase until the purchaser becomes an "established customer." . The Exchange Act requires that prior to effecting any transaction in any penny stock, a broker-dealer must provide the purchaser with a "risk disclosure document" that contains, among other things, a description of the penny stock market and how it functions and the risks associated with such investment. These disclosure rules are applicable to both purchases and sales by investors. . A dealer that sells penny stock must send to the purchaser, within ten days after the end of each calendar month, a written account statement including prescribed information relating to the security. As a result of our securities not being listed on an exchange or the Nasdaq System and the rules regarding penny stock transactions, your ability to sell to a third party may be limited. We make no guarantee that our current market-makers will continue to make a market in our securities, or that any market for our securities will continue. 8 Product Liability and Insurance. Clinical testing, manufacturing and marketing of our products may expose us to product liability claims. Although we have never been subject to a product liability claim, we cannot assure you that there will not be any claims brought against us in the future. Further, we cannot assure you that the coverage limits of our insurance policies will be adequate or that one or more successful claims brought against us would not have a material adverse effect upon our business, financial condition and results of operations. Volatility of Stock Price. We are in the biopharmaceutical industry and the market price of securities of life sciences companies in general has been very unpredictable. See "Price Range of Common Stock." Announcements by us or our competitors concerning technological innovations, new products, proposed governmental regulations or actions, developments or disputes relating to patents or proprietary rights, public concern over the safety of therapeutic products and other factors that affect the market generally could significantly impact our business and the market price of our securities. Dividends. Since our formation in 1987, we have not paid cash dividends on our Common Stock. We do not anticipate paying any dividends on our Common Stock in the future. Furthermore, the terms of the 9% Preferred Stock do not allow for the payment of cash dividends unless we have paid the accrued and unpaid dividends on the 9% Preferred Stock in full. As of September 30, 1999, accrued and unpaid dividends on the 9% Preferred Stock were $23,513. See "Dividend Policy." Anti-Takeover Provisions. Certain provisions of our Certificate of Incorporation could make it more difficult for a third party to acquire control of our business, even if such change in control would be beneficial to our stockholders. Our Certificate of Incorporation allows our Board of Directors to issue up to 549,100 shares of preferred stock without stockholder approval. Any such issuance could make it more difficult for a third party to acquire our business and may adversely affect the rights of our stockholders. See "Description of Securities." USE OF PROCEEDS We will not receive any of the proceeds from the Selling Stockholder's sale of their shares of Common Stock. 9 PRICE RANGE OF COMMON STOCK The Company's Common Stock (OTC symbol: CORX) is not currently listed on any exchange or on the Nasdaq System, but is reported on the OTC Bulletin Board. Prior to March 17, 1999, the Company's Common Stock was listed on the Nasdaq SmallCap Market. The following table presents quarterly information on the high and low sale prices of the Common Stock for the fiscal years ended June 30, 1999 and 1998.
High Low ------- --- Fiscal Year ending June 30, 2000 Third Quarter (through January 31, 2000)... $3-21/32 $ 23/32 Second Quarter............................. 7/8 21/32 First Quarter.............................. 1-1/64 41/64 Fiscal Year ending June 30, 1999 Fourth Quarter............................. $1-27/32 $ 9/32 Third Quarter.............................. 15/16 1/4 Second Quarter............................. 1-3/8 9/32 First Quarter.............................. 2-1/8 1 Fiscal Year ended June 30, 1998 Fourth Quarter............................. $ 3-1/2 $1-11/16 Third Quarter.............................. 1-29/32 1-3/8 Second Quarter............................. 3-1/8 1-3/8 First Quarter.............................. 3-1/4 2-5/8
Information for the periods referenced above has been furnished by Nasdaq and the OTC Bulletin Board. The quotations furnished by the OTC Bulletin Board reflect inter-dealer prices, without mark-up, mark-down or commission and may not represent actual transactions. As of September 30, 1999, there were 641 stockholders of record of the Company's Common Stock, and approximately 9,500 beneficial owners. The high and low bids for the Company's Common Stock on January 31, 2000, as reported by the OTC Bulletin Board, were $2-5/8 and $2-1/2, respectively. 10 DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock and does not anticipate paying such dividends in the foreseeable future. The Company currently intends to retain any future earnings for use in the Company's business. The outstanding shares of 9% Preferred Stock bear a fixed dividend of $0.09 per share per annum, which accrues in equal semi-annual installments on June 15th and December 15th of each year, which dividends must be paid in full before any dividends can be paid on the Common Stock. As of September 30, 1999, accrued and unpaid dividends on the 9% Preferred Stock were $23,513. The payment of future dividends, if any, will be determined by the Board of Directors in light of conditions then existing, including the Company's financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors. CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1999. The figures are unaudited, and this table should be read in conjunction with the financial statements (including the notes thereto) appearing elsewhere in this Prospectus.
September 30, 1999(1) Note payable to Alkermes, Inc. (current portion) $ 664,472 Stockholders' equity: 9% cumulative convertible preferred stock, $0.001 par value; $1.00 per share liquidation preference; authorized: 1,250,000 shares; issued and outstanding: 27,500 shares 27,500 Series B convertible preferred stock, $0.001 par value; $0.6667 per share liquidation preference; authorized: 3,200,000 shares; issued and outstanding: 75,000 shares 43,405 Common stock, $0.001 par value; authorized 30,000,000 shares; issued and outstanding: 15,528,182 shares 15,528 Additional paid-in capital 38,814,392 Deficit accumulated during the development stage (39,352,036) ------------ Total stockholders' equity (451,211) ------------ Total capitalization $ 213,261 ============
- --------------------- (1) Excludes an aggregate of approximately 2.5 million shares of Common Stock reserved for issuance upon possible exercise of outstanding warrants and options and an aggregate of 11,025 shares of Common Stock reserved for issuance upon conversion of outstanding 9% Cumulative Convertible Preferred Stock and Series B Convertible Preferred Stock. See "Description of Securities" and Notes 3, 4 and 6 of Notes to Financial Statements. 11 SELECTED FINANCIAL DATA The selected financial data presented below for the fiscal years ended and as of June 30, 1999 and 1998 and for the period from inception (February 10, 1987) through June 30, 1999 are derived from and should be read in conjunction with the more detailed financial statements (including the notes thereto) of the Company, which have been audited by Ernst & Young LLP, independent auditors, whose report thereon is included elsewhere herein and in the Registration Statement. The selected financial data for the years ended and as of June 30, 1997, 1996 and 1995 are derived from audited financial statements that are not included in this Prospectus. The selected financial data for the three-month periods ended September 30, 1999 and 1998, for the period from inception (February 10, 1987) through September 30, 1999 and at September 30, 1999 are derived from unaudited interim financial statements. The unaudited interim financial statements include all adjustments (consisting only of normally recurring accruals) that management considers necessary for a fair presentation of the Company's financial position and results of operations for the periods presented. Operating results for the three-month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2000. Statements of Operations Data:
Period from inception (February 10, Years ended June 30, 1987) through ------------------------------------------------------------------------------ June 30, 1999 1998 1997 1996 1995 1999 ----------------------------------------------------------------------------------------------- Operating revenues: Research/license revenue (1) $ 3,051,406 $ 130,000 $ -- $ -- $ -- $ 6,781,406 Grant revenue 100,001 -- -- -- -- 194,718 ----------- ----------- ------------ ------------ ------------ ------------ Total operating revenues 3,151,407 130,000 -- -- -- 6,976,124 ----------- ----------- ------------ ------------ ------------ ----------- Operating expenses: Research & development 3,379,732 4,007,466 3,376,284 2,677,577 4,138,731 29,732,594 General & administrative 1,401,602 1,584,369 1,709,320 1,643,732 1,665,134 14,745,850 Settlement with Alkermes, Inc. -- -- -- -- 1,227,977 1,227,977 ----------- ------------ ------------ ----------- ------------ ------------ Total operating expenses 4,781,334 5,591,835 5,085,604 4,321,309 7,031,842 45,706,421 ----------- ------------ ------------ ------------ ------------ ------------ Loss from operations (1,629,927) (5,461,835) (5,085,604) (4,321,309) (7,031,842) (38,730,297) Interest income, net 8,477 203,875 155,624 163,062 196,310 1,701,283 ----------- ------------ ------------ ------------ ------------ ------------ Net loss $(1,621,450) $ (5,257,960) $ (4,929,980) $(4,158,247) $ (6,835,532) $(37,029,014) =========== ============ ============ =========== ============ ============ Weighted average common shares outstanding 13,407,945) 9,575,663 8,252,047 6,532,884 6,075,454 =========== ============ ============ =========== ============ Net loss per share $ (0.12) $ (0.55) $ (0.83) $ (0.64) $ (1.13) =========== ============ ============ =========== ============
Period from inception Three months ended (February 10, September 30, 1987) through --------------------------- September 30, 1999 1998 1999 --------------------------------------------- Operating revenues: Research/license revenue (1) $ 767,889 $ -- $ 7,549,295 Grant revenue 66,667 -- 261,385 ----------- ------------ ------------ Total operating revenues 834,556 -- 7,810,680 ----------- ------------ ------------ Operating expenses: Research & development 751,800 839,281 30,484,394 General & administrative 367,380 354,693 15,113,230 Settlement with Alkermes, Inc. -- -- 1,227,977 ------------ ------------ ----------- Total operating expenses 1,119,180 1,193,974 46,825,601 ----------- ------------ ------------ Loss from operations (284,624) (1,193,974) (39,014,921) Interest income, net (6,559) 7,616 1,694,724 ----------- ------------ ------------ Net loss $ (291,183) $ (1,186,358) $(37,320,197) =========== ============ ============ Weighted average common shares outstanding 15,522,252 10,237,126 =========== ============ Net loss per share $ (0.02) $ (0.12) =========== ============
- -------------------- (1) Includes $3.6 million received under an agreement with Alkermes, Inc. 12 Balance Sheet Data:
June 30, ---------------------------------------------------------------------------- September 30, 1999 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Working capital $ (987,326) $ (742,036) $ 1,698,277 $ 7,004,298 $ 3,849,649 $ 3,327,788 Total assets 856,887 1,549,021 2,874,846 8,333,307 5,013,920 4,886,372 Total liabilities 1,308,098 1,712,350 1,445,550 1,728,300 1,369,157 1,613,676 Redeemable preferred stock -- -- 2,460,450 3,936,720 -- -- Deficit accumulated during the development stage (39,352,036) (39,060,853) (37,439,403) (32,181,443) (25,359,298) (21,201,051) Stockholders' equity $ (451,211) $ (163,329) $ (1,031,154) $ 2,668,287 $ 3,644,763 $ 3,272,696 Common shares outstanding 15,528,182 15,519,382 10,237,126 9,394,249 7,495,576 6,085,201
13 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1999 Annual Report on Form 10-KSB. Introductory Note This discussion and analysis contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements relate to (i) future research plans and expenditures, (ii) potential collaborative arrangements, and (iii) the need for, and availability of, additional financing. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward- looking statements are based on assumptions regarding the Company's business and technology, which 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 is no assurance that the results contemplated in forward-looking statements will be realized and actual results may differ materially. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. Results of Operations From inception (February 10, 1987) through September 30, 1999, the Company's revenue has consisted of (i) $7,549,000 of license fees and research and development funding, (ii) net interest income aggregating $1,695,000, and (iii) $261,000 of grant revenue. 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 technology for the treatment of schizophrenia and, upon Organon's election, for the treatment of depression. In connection with the agreement, the Company received a $2,000,000 upfront licensing payment. The agreement includes research support payments of up to $3,000,000 per year for two years (subject to Cortex providing agreed-upon levels of research) and milestone payments, plus royalty payments on worldwide sales. Subsequent to September 30, 1999, the Company received a quarterly research support payment of $893,000. This amount exceeds the payments received for prior quarters, reflecting the increase in the Company's staff dedicated to the alliance. Future quarterly research support is expected to average $750,000. From inception (February 10, 1987) through September 30, 1999, the Company has sustained losses aggregating $37,320,000. Continuing losses are anticipated over the next several years, as the Company's ongoing operating expenses will only be offset, if at all, by research support payments and possible milestone payments from its research collaboration with Organon, or 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 agreement 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 14 period-to-period fluctuations in reported financial results. Over the longer term, the Company will require successful commercial development of its products by Organon or its other prospective partners to attain profitable operations from royalties or other product-based revenues. The Company believes that inflation and changing prices have not had a material impact on its ongoing operations to date. Fiscal Years ended June 30, 1999 and 1998 For the year ended June 30, 1999, the Company's loss from operations was $1,630,000 compared to a loss from operations of $5,462,000 for the prior year, with the improvement attributable to revenues from the license and research collaboration with Organon. Research and development expenses decreased to $3,380,000, or by 16%, during the year ended June 30, 1999 compared to the prior year. Most of the decrease related to the timing of Phase I/IIa human clinical testing of the Company's lead compound, Ampalex, in patients with Alzheimer's disease and in patients with schizophrenia. General and administrative expenses were $1,401,000 for the year ended June 30, 1999, decreasing 12% from the prior year. Most of this decrease represents reduced spending for office supplies, travel and the annual report. The decrease also reflects the prior year expense for the estimated value of a warrant issued to Alkermes in connection with the restructured note payable agreement. Three-month periods ended September 30, 1999 and 1998 The net loss for the three-month period ended September 30, 1999 of $291,000 compares with a net loss of $1,186,000 for the corresponding prior year period. Revenues from the license and research collaboration with Organon were responsible for the improvements in the current year period (See Note 5 of Notes to Financial Statements). Research and development expenses decreased from $839,000 to $752,000, or by 10%, during the three-month period ended September 30, 1999 compared to the corresponding prior year period. The decrease reflects lower spending for sponsored research and the timing of both technology access payments and Phase I/IIa human clinical testing of Ampalex(R). Future costs for the clinical testing of Ampakines in patients with schizophrenia will be borne by Organon. For the three-month period ended September 30, 1999, general and administrative expenses of $367,000 were materially consistent with expenses of $355,000 for the corresponding prior year period. Liquidity and Capital Resources; Plan of Operation From inception (February 10, 1987) through September 30, 1999, Cortex has funded its organizational and research and development activities primarily from the issuance of equity securities, with net proceeds aggregating $35,749,000. An additional $3,600,000 in research and license payments was received from Alkermes, Inc. ("Alkermes") in 1992 and 1993 in connection with a development and license agreement with that firm. Net interest income from inception through September 30, 1999 was $1,695,000. Research and licensing payments received in connection with the agreement with Organon (See Note 5 of Notes to Financial Statements) totaled $3,819,000 through September 30, 1999. The agreement includes research support payments of up to $3,000,000 per year for two years (subject to Cortex providing agreed-upon levels of research), milestone payments based on clinical development of the licensed technology and royalties on worldwide sales. 15 As of September 30, 1999, the Company had cash and cash equivalents totaling $289,000 and a working capital deficit of $987,000. In comparison, as of June 30, 1999, the Company had cash and cash equivalents of $909,000 and a working capital deficit of $742,000. The decreases represent amounts required to fund operating losses. Subsequent to September 30, 1999, the Company received quarterly research support of $893,000 related to its agreement with Organon. The Company leases approximately 30,000 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, 2000, 2001, 2002, 2003 and 2004 total $255,000, $310,000, $353,000, $368,000 and $356,000, respectively. From inception (February 10, 1987) through September 30, 1999, expenditures for furniture, equipment and leasehold improvements aggregated $2,214,000. In connection with the settlement in October 1995 of a license dispute with Alkermes, the Company issued to Alkermes a $1,000,000 three-year promissory note accruing interest semi-annually at the then federal funds rate. In February 1998, the terms of the note were restructured to include a principal payment of $200,000 upon signing of the restructuring agreement. The balance of the note and accrued interest were payable in October 1999 or upon the consummation of a corporate partnership between Cortex and a larger pharmaceutical company, whichever was earlier. With the signing of the license agreement with Organon, the note and accrued interest became due and payable. In July 1999, the terms of the note were restructured to include a principal and interest payment of $250,000 and monthly payments of $50,000 from August 1999 through January 2000. The balance of the note and accrued interest are payable on or before February 28, 2000. The Company is currently in advanced discussions with potential corporate partners. Based upon the anticipated timing of a resulting strategic alliance, the Company may be able to pay Alkermes the balance of the note and accrued interest due by the end of February, as agreed. Because there is no assurance that a partnership will be completed prior to the note's due date, or at all, the Company contacted Alkermes regarding a possible extension of the terms of the note. In February 2000, Alkermes agreed to extend the note's payment terms, if necessary. If the Company needs to extend the note, the Company has agreed to continue to pay Alkermes $50,000 per month with the balance of the note and accrued interest due on May 31, 2000. Additionally, if the terms are extended, the Company has agreed to issue to Alkermes a five-year warrant to purchase 50,000 shares of Cortex common stock, at a price derived from the fair market value of the stock as of February 28, 2000. As of September 30, 1999, Cortex had 27,500 outstanding shares of 9% cumulative convertible preferred stock, which accrue cumulative semi-annual dividends at an annual rate of $0.09 per share. To conserve capital for operations, the Company has elected not to distribute the dividends that have accrued from June 1990. Accrued and unpaid dividends as of September 30, 1999 were $23,513. Over the next twelve months the Company is committed to $603,000 of funding for sponsored research in academic laboratories. Remaining commitments for current Phase I/IIa clinical studies on the Company's Ampakine compounds are not significant. As of September 30, 1999, Cortex had a total of 22 full-time research and administrative employees. Neither significant increases to staffing nor significant investments in plant or equipment are planned for the upcoming year. Assuming that the Company extends the terms of the note payable to Alkermes, Cortex anticipates that its existing cash and cash equivalents and the expected research support payments from Organon will be sufficient to satisfy its capital requirements into May 2000. Without any payments from additional corporate partnerships or milestone payments from the Organon agreement, additional funds will be required to continue op erations beyond that time. The Company is in advanced discussions with potential corporate partners and anticipates that an alliance from these discussion may be completed before May 2000. The Company anticipates receiving its first milestone payment from its existing corporate partner, Organon, in before May 2000. With receipt of the projected Organon quarterly research support and the milestone payment during the estimated timeframe, the Company expects to have sufficient cash to fund operations through calendar 2000. With the additional funds from an anticipated upfront payment from a potential corporate partnership, the Company expects to have sufficient cash to fund operations into early calendar 2001. Because there is no assurance that the milestone will be received as estimated, or at all, or that the Company will secure additional corporate partnerships, the Company may raise additional capital through the sale of debt or equity securities. Given the current adverse market conditions for biopharmaceutical companies, there is no assurance that funds will be available on favorable terms, or at all. If equity securities are issued to raise additional funds, dilution to existing shareholders is likely to result. The Company's Common Stock previously traded on the Nasdaq SmallCap Market under the symbol "CORX." Because the Company did not meet certain of the standards for continued listing, the Company's Common 16 Stock was delisted from Nasdaq on March 17, 1999. As a result, effective March 18, 1999, the Company's Common Stock began trading in the over-the-counter market on the OTC "Electronic Bulletin Board." In order to provide for both its immediate and longer-term spending requirements, the Company is presently seeking additional collaborative or other arrangements with larger pharmaceutical companies. Under these agreements, it is intended that such companies would provide capital to the Company in exchange for exclusive or non-exclusive license or other rights to certain of the technologies and products that the Company is developing. Competition for such arrangements is intense, however, with a large number of biopharmaceutical companies attempting to secure alliances with more established pharmaceutical companies. Although the Company is in advanced 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. The Company's proposed products are in the preclinical or early clinical stage of development and will require significant further research, development, clinical testing and regulatory clearances. They are subject to the risks of failure inherent in the development of products based on innovative technologies. These risks include the possibilities that any or all of the proposed products will be found to be ineffective or toxic, 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. See "Risk Factors." 17 BUSINESS Overview Cortex Pharmaceuticals, Inc. ("Cortex" or the "Company") is a development stage enterprise that was organized in 1987 to engage in the discovery, development and commercialization of innovative pharmaceuticals for the treatment of neurodegenerative diseases and other neurological and psychiatric disorders. Since 1993, the primary effort at Cortex has been centered on developing products that affect the AMPA-type glutamate receptor, a complex of proteins that is involved in most "excitatory" communication between nerve cells in the human brain. Cortex is developing a family of chemical compounds, known as Ampakines, that enhance the activity of this receptor. Cortex believes that Ampakines 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. The Ampakine program addresses large potential markets. Accordingly, the Company's commercial development plan involves partnering with larger pharmaceutical companies for research, development, clinical testing, manufacturing and global marketing of its proposed products. The Company may retain the right to eventually co-promote Ampakines for selected indications in the United States. If the Company is successful in the pursuit of this partnering strategy, it 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 it believes that it has the ability to compete) and eventually to participate more fully in the commercial development of its proposed products in the United States. In January 1999, the Company entered a research collaboration and exclusive worldwide license agreement with NV Organon ("Organon"), a subsidiary of Akzo Nobel (The Netherlands). The agreement will enable Organon to develop and commercialize the Company's Ampakine technology for the treatment of schizophrenia and, upon Organon's election, for the treatment of depression. Cortex continues to seek collaborative or licensing arrangements with other pharmaceutical companies. These arrangements may permit other applications of the Ampakines to be advanced into later stages of clinical development and may provide access to the extensive clinical trials management, manufacturing and marketing expertise of such companies. The Company may not be able to secure such arrangements on favorable terms, or at all, and its products may not be successfully developed and approved for marketing by government regulatory agencies. In the fiscal years ended June 30, 1999 and 1998, the Company's expenditures on research and development were $3,380,000 and $4,007,000, respectively, with the decrease attributable to the timing of Phase I/IIa human clinical testing of CX516 (Ampalex) in patients with schizophrenia and in patients with Alzheimer's disease. AMPA Receptor Program - --------------------- In June 1993, Cortex licensed a new class of compounds -- the Ampakines -- from the University of California. Ampakines facilitate the activity of the AMPA receptor, which binds the neurotransmitter glutamate. The Ampakines interact in a highly specific manner with the AMPA receptor in the brain, lowering the amount of neurotransmitter required to generate a response, and increasing the magnitude of the response to any given amount of glutamate. It is hoped that this selective amplification of the normal glutamate signal will eventually find utility in the treatment of neurological diseases and disorders characterized by depressed functioning of brain pathways that utilize glutamate as a neurotransmitter. It is well known that synaptic connections, including those that utilize glutamate, decline with age. Thus, disorders such as mild cognitive impairment associated with aging may be amenable to treatment with Ampakines. Two prominent diseases that may benefit from AMPA receptor-directed therapeutics are schizophrenia and Alzheimer's disease. The Company and its collaborators have also obtained encouraging preliminary results in animal models of depression, sexual dysfunction and depressed endocrine function. 18 Schizophrenia Schizophrenia is a major health care problem. The worldwide incidence of the disease is approximately one percent, regardless of ethnic, cultural or socioeconomic status. On any given day, approximately 100,000 of the estimated two million U.S. patients with schizophrenia are in public mental hospitals. Schizophrenia typically develops in late adolescence or early adulthood and is best understood as a syndrome, or collection of symptoms. These are generally characterized as positive symptoms (delusions and hallucinations), negative symptoms (social withdrawal and loss of emotional responsiveness) and cognitive symptoms (disordered thought and attention deficits). The first "wonder drugs" for schizophrenia, the so-called neuroleptics or conventional anti-psychotics, were developed in the 1950s and 1960s. These drugs, such as chlorpromazine and haloperidol, helped to reduce the positive symptoms of the disease and greatly reduced the need for chronic hospitalization. However, these drugs, which are still in use today, are characterized by troublesome and occasionally life-threatening side effects. One of the most common side effects of conventional anti-psychotics is EPS or "extrapyramidal signs," which include restlessness and tremors. EPS side effects have a strongly negative impact on quality of life and tend to lead to poor patient compliance with medication. More recently, a new type of anti-psychotic agent, referred to as atypical due to the virtual lack of EPS side effects, has been developed. Clozapine was the first such drug. It was initially studied in the 1970s, but clinical trials were halted due to the risk of a fatal blood disorder known as agranulocytosis and a dose-dependent risk of seizures. Clozapine was reintroduced in the 1980s, with approval by the FDA for use in patients who cannot be adequately treated with typical neuroleptics, either because of lack of efficacy or side effects. Risperidone and olanzapine are other recent clozapine-like anti-psychotics without agranulocytosis side effects. The newer atypical agents achieve good control of positive symptoms, partial control of negative symptoms and better patient compliance with medication due to lower levels of EPS side effects. However, schizophrenia clinicians agree that there are still substantial side effects and that the cognitive symptoms of schizophrenia are not greatly improved by any available agent. The persistence of cognitive symptoms prevents all but a few patients with schizophrenia from successfully reintegrating into society. Schizophrenia has long been thought to have its biochemical basis in an overactivity of dopamine pathways projecting into an area of the brain known as the striatum. More recently, a developing body of evidence suggests that schizophrenia also involves an underactivity of glutamate pathways projecting into the same area. Cortex is therefore studying whether Ampakines, which increase current flow through the AMPA subtype of glutamate receptor, might have relevance to the treatment of schizophrenia. In late 1995, Cortex announced the discovery that an Ampakine reduced stereotypic behavior (mechanical repetition of posture or movement) in rats that had been injected with methamphetamine. Reduction of methamphetamine-induced stereotypic behavior is widely used for initial screening of anti-psychotic drugs. Scientists at both the University of California, Irvine and Cortex have since extended this finding to include additional Ampakines. Further, Cortex scientists have demonstrated that Ampakines in combination with either conventional or atypical anti-psychotic drugs have additive or synergistic effects in this model system. In January 1999, the Company entered into an exclusive worldwide license agreement with Organon. The agreement will enable Organon to develop and commercialize Cortex's proprietary Ampakine technology for the treatment of schizophrenia and to explore it in the area of depression. The agreement includes an upfront payment of $2,000,000, research and development payments of up to $3,000,000 per year for two years, and milestone payments, plus royalty payments on worldwide sales. The Company hopes that the agreement with Organon will provide an accelerated program to bring the Ampakines to market for schizophrenia and possibly depression, if proven safe and effective in clinical trials. 19 Shortly thereafter, in April 1999 the Company reported preliminary results from a study with CX516 in patients with schizophrenia being treated with clozapine. This Phase I/IIa clinical trial, conducted at Massachusetts General Hospital, was designed primarily as a safety study. Clinical and psychological testing was also included in an attempt to obtain a preliminary indication that CX516 may effect the psychological parameters that likely contribute to symptoms of the disease, particularly the cognitive symptoms that have thus far been resistant to treatment. Preliminary results indicate that CX516 is reasonably safe in combination with clozapine and improves performance on several tests of verbal learning, memory, problem solving and distractability. The improvements noted in CX516-treated patients appeared to persist for a period of time after cessation of treatment. A second similar study to assess the affect of CX516 as a `mono' therapy in patients with schizophrenia was initiated at the National Institutes of Health in Bethesda, Maryland. Because of slow patient enrollment, the Company has since elected to discontinue this study. The Company intends that further clinical testing of the Ampakines in patients with schizophrenia will be conducted by its corporate partner, Organon. Data obtained from the testing performed at Massachusetts General Hospital should be very helpful in the design of such trials. Cortex is pleased with the progress of the Organon research collaboration and anticipates receiving its first milestone payment from the agreement before the end of 1999. Deficits of Memory and Cognition -- Alzheimer's Disease Impairment of memory and cognition is a serious health care problem that is growing as the elderly population continues to increase. While not fatal (except when associated with diseases such as Alzheimer's disease), the incidence and prevalence of cognitive deficits increase inexorably with age. Many elderly individuals are confined to nursing homes because of psychological disorientation and functional difficulties. Pharmaceuticals to alleviate deficits in memory and cognition could potentially enable these elderly individuals to remain independent longer. Although disease and physiological malfunctions are thought to be the fundamental cause of severe mental decline, age itself is a contributory factor, with the human brain losing about 10% of its weight over a normal life span. In the cerebral cortex, a great deal of the communication between neurons is mediated by receptors for the neurotransmitter glutamate, including a subtype known as the AMPA receptor. AMPA receptors and synapses decline in number with aging, on average by 25-30% between the ages of 25 and 65, making it more difficult for information to pass through and between areas of the cerebral cortex. Therefore a potential corrective approach to alleviate age-related cognitive deficits is to enhance the activity of the remaining functional AMPA receptors. Alzheimer's disease is the best known destroyer of memory, currently afflicting some four million Americans. With the aging of our population, the number of people in the U.S. with Alzheimer's disease is expected to double over the next two decades unless a treatment is found. According to the Alzheimer's Association, Alzheimer's disease is already the third most expensive disease in the U.S. (after heart disease and cancer), with an estimated annual cost to society of $100 billion and a lifetime cost per patient of $174,000. The impact of an effective treatment, even a symptomatic one, would be enormous. It is in the early stages of Alzheimer's disease -- the first few years -- that Cortex believes Ampakines may play a valuable role, enhancing the effectiveness of the brain cells that have not yet succumbed to the disease. This may help to alleviate the memory and cognitive deficits that make up the early symptoms. There is also a possibility that treatment with Ampakines may slow the progression of Alzheimer's disease. The reason for this is that brain cells, or neurons, require continued input from other brain cells to remain alive. As neurons die, other neurons begin to lose their inputs, hastening their own death. Ampakines may slow the rate at which functional levels of input from other neurons are lost. Research also suggests that Ampakines may increase the production of neurotrophic factors that are known to be protective for nerve cells. One of the most compelling of the animal studies conducted to date with the Ampakines involved an assessment of the effects on memory performance in middle- aged rats. A number of researchers have demonstrated that 20 healthy middle-aged rats have significant deficits in memory performance when compared to younger animals. This provides an animal model for age-associated memory impairment in humans. In a study published in Synapse, the authors conducted research involving a maze task with middle-aged and young adult rats. The middle-aged rats showed striking deficits in performance when compared with the young adult animals. When given an Ampakine, the performance of the middle- aged rats improved to levels equivalent to those found in young animals. Three human clinical safety studies have been completed with CX516 ("Ampalex") in healthy volunteers. In all three studies, CX516 was safe and well-tolerated on acute oral administration and, importantly, statistically- significant positive effects on memory performance were seen in healthy volunteers. The initial study, conducted by AFB Parexel in Berlin involved single administrations of drug or placebo to a total of 48 healthy young adult volunteers, ranging in age from 18 to 35. The trial was double-blinded and placebo-controlled, and involved administering a single dose of drug, in capsule form, to each volunteer. Several dosages of drug were tested and at all dosage levels, the drug was safe and well-tolerated. In addition, analysis of psychological data that was collected revealed a highly statistically significant positive effect on a test of memory performance that involved recall of a list of nonsense syllables. The second trial, at the same clinical site in Berlin, involved 30 healthy elderly volunteers, aged 65 to 76, each of whom was administered a single oral dose of drug or placebo. In this double-blinded trial, Ampalex was again found to be safe and well-tolerated. The elderly volunteers were also given the same nonsense syllable memory test that had been given to the young volunteers in the first study. In the absence of drug, the elderly volunteers' memory was substantially worse than that of the young volunteers. In the presence of drug, a statistically significant positive effect on memory performance was observed. Several of the elderly volunteers receiving the highest dosage of Ampalex scored at or above the average score achieved by the young volunteers in the earlier study. The third study, at the Karolinska Hospital in Stockholm, Sweden, involved administration of CX516 to healthy young adults under double-blind, placebo- controlled conditions. This five-day study involved administration of placebo on days 1, 4 and 5 and drug on days 2 and 3, with psychological testing conducted on each day. Ampalex was safe and well-tolerated by all volunteers receiving drug, with no adverse events reported. Statistically significant improvements in performance on several measures of learning and memory were noted in the group that received CX516. After these encouraging results, Cortex initiated a Phase I/IIa study in patients experiencing deficits of memory and cognition due to Alzheimer's disease. The double-blind, placebo-controlled dose escalation study, which is being conducted at the National Institutes of Health in Bethesda, Maryland, involves administration of CX516 to an eventual total of 16 to 20 patients for up to 28 consecutive days. To date, 15 patients have been enrolled in this study, with enrollment of an additional five patients anticipated. While preliminary indications of desired effects on memory and cognition may be obtained from this study, psychological testing of patients with Alzheimer's disease is subject to a high level of variability. Full-scale Phase II studies designed to achieve significance on broad psychological scales will require larger numbers of patients. Cortex is seeking a larger pharmaceutical company partner for further development of Ampakines for the potential treatment of Alzheimer's disease. Calpain Inhibitor Program Calpain is a protease, a protein that digests other proteins. It is involved in a variety of biological processes throughout the body and has been implicated in the pathology of several diseases and disorders. The Company's first target for calpain inhibitor therapeutics was brain damage following stroke. A stroke is a vascular event causing localized damage to the brain. There are two general categories of stroke: ischemic stroke, 21 which is due to a blockage of blood flow, and hemorrhagic stroke, which involves a blood vessel bursting in the brain. In either case, the insult to the brain is often immediately life-threatening and initiates a cascade of molecular events that may lead to permanent brain damage. In 1990 and 1991, Cortex established laboratory models of ischemia and used them to identify a range of calpain inhibitor compounds that appeared to have the potential to block brain damage due to stroke and other ischemic events. In January 1992, Cortex entered into a Development and License Agreement, amended in October 1992, (the "Alkermes Agreement") with Alkermes, Inc. ("Alkermes"), a larger neuroscience company. Cortex granted to Alkermes an exclusive worldwide license, with a right to of acute and chronic neurodegenerative diseases and disorders of the nervous system. Subsequently, Cortex shifted its emphasis to calpain inhibitor research outside the nervous system. The Cortex 1993 annual report included a discussion of the Company's research in cerebral vasospasm, which involved reversal of an existing spasm of blood vessels in the brain. In October 1993, Alkermes notified the Company that Alkermes believed that it had rights to this indication under the Alkermes Agreement. In November 1993, Alkermes filed an action in U.S. District Court in Massachusetts alleging that the Company had breached the Alkermes Agreement by developing calpain inhibitors for cerebral vasospasm. In October 1995, the Company and Alkermes agreed to a settlement of the dispute. Alkermes agreed to dismiss its action against Cortex and to relinquish all rights previously granted them by the Company, as well as rights to related technologies developed by Alkermes. In connection with the settlement, the Company issued to Alkermes a $1,000,000 non-transferable, three-year promissory note accruing interest semi-annually at the federal funds rate. The Company also committed to pay Alkermes a graduated royalty on calpain inhibitor development proceeds, as defined and subject to certain limitations. In February 1998, the terms of the note were restructured to include a principal payment of $200,000 upon signing of the new agreement. The balance of the note and accrued interest was payable in October 1999 or upon consummation of a corporate partnership between Cortex and a larger pharmaceutical company, whichever was earlier. In connection with the restructuring agreement, the Company issued to Alkermes a five-year warrant to purchase 75,000 shares of Common Stock at an exercise price of $1.55 per share. With the signing of the license agreement with Organon (see Note 5 of Notes to Financial Statements), the note became due and payable. In July 1999, the terms of the note were restructured to include a principal and interest payment of $250,000 and monthly payments of $50,000 from August 1999 to January 2000. The balance of the note and accrued interest is due and payable by February 28, 2000. In connection with this restructuring agreement, the Company agreed to issue to Alkermes a five-year warrant to purchase 100,000 shares of Common Stock at an exercise price derived from the fair market value of the Company's Common Stock. As part of the restructuring agreement, because the balance was not paid by December 31, 1999, the Company agreed to issue to Alkermes another five-year warrant to purchase 50,000 shares of the Common Stock at $0.76 per share. The exercise price for this warrant represents the average of the closing prices of the Company's Common Stock for the 30 trading days preceding December 31, 1999. If necessary, the Company may extend the due date of the note by issuing to Alkermes another five-year warrant to purchase 50,000 shares of Cortex common stock. The exercise price for this warrant will be derived from the fair market value of the stock as of February 28, 2000. If the due date is extended, the Company agrees to continue to pay Alkermes $50,000 per month, with the balance of the note and accrued interest due May 31, 2000. Cortex has subsequently shifted more of its resources from its calpain inhibitor program to its Ampakine technology platform. As part of the Company's emphasis on its Ampakine program, Cortex canceled its licensing agreement with Georgia Tech Research Corporation related to the Company's calpain inhibitor technology during the year ended June 30, 1999. Manufacturing Cortex has no experience in manufacturing pharmaceutical products and relies, and presently intends to rely, on the manufacturing and quality control expertise of contract manufacturing organizations or prospective corporate partners. There is no assurance that the Company will be able to enter arrangements for manufacturing of its proposed products on favorable terms. 22 Marketing The Company has no experience in the marketing of pharmaceutical products and does not anticipate having the resources to distribute and broadly market any products that it may develop. The Company will therefore continue to seek commercial development arrangements with other pharmaceutical companies for its proposed products. In entering into such arrangements, the Company may seek to retain the right to co-promote products for certain indications in North America. The Company's worldwide licensing agreement with Organon (see Note 5 of Notes to Financial Statements) does not provide Cortex with co-promotional rights. There is no assurance that the Company will be able to enter into co- promotional arrangements in connection with its other licensing activities, or that co-promotional rights will lead to greater revenues for the Company. Technology Rights and Collaborative Agreements AMPA Receptor Modulating Compounds In 1993, Cortex entered into an agreement with the Regents of the University of California, under which Cortex secured exclusive commercial rights to AMPA receptor modulating compounds (Ampakines) for the treatment of deficits of memory and cognition. The agreement was subsequently amended to include additional indications. The Company paid an initial license fee and is obligated to make additional payments, including license maintenance fees and patent expense reimbursements creditable against future royalties, over the course of initiating and conducting human clinical testing and obtaining regulatory approvals. When and if sales of licensed products commence, the Company will pay royalties on net sales. Patents and Proprietary Rights The Company is aggressively pursuing patent protection of its technologies. Cortex owns or has exclusive rights (within its areas of product development) to approximately 15 issued or allowed U.S. patents and a number of additional U.S. patent applications and their international counterparts. In April 1999, Cortex received a patent that covers the Company's Ampakines - -- as well as compounds made by others -- for the treatment of memory and cognition. It allows Cortex and its licensees to exclude others in the United States from making and selling AMPA-receptor modulating compounds for the treatment of memory or dementia, including Alzheimer's disease. The coverage also extends to psychiatric conditions including depression, obsessive compulsive disorder, attention deficit disorder, and phobic disorders. In 1998, Cortex received a United States patent that contained a similarly broad claim for any AMPA-modulating compound to treat schizophrenia. There is no assurance that patents, whether already issued or issuing in the future in connection with current or future patent applications, will afford effective protection against competitors with similar technology. There is also no assurance that any patents issued or licensed to Cortex will not be infringed upon or designed around by others. Further, since issuance of a patent does not guarantee the right to practice the claimed invention, there is no assurance that others will not obtain patents that the Company would then need to license or design around in order to practice its patented technologies, or that Cortex would be able to obtain licenses that might be required to practice these technologies due to patents of others on reasonable terms. Additionally, any unpatented manufacture, use or sale of the Company's technology, processes or products may infringe on patents or proprietary rights of others, and the Company may be unable to obtain licenses or other rights to these other technologies that may be required for commercialization of the Company's proposed products or processes. Cortex relies to a certain extent upon unpatented proprietary technology and may determine in some cases that its interests would be better served by reliance on trade secrets or confidentiality agreements rather than patents. No assurance is made that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose such technology. In addition, there is no assurance that Cortex can 23 meaningfully protect its rights in such unpatented proprietary technology or that others will not wrongfully obtain such technology. If Cortex is unable to obtain strong protection of its proprietary rights in its products or processes prior to or after obtaining regulatory clearance, whether through patents, trade secrets or otherwise, competitors may be able to market competing products by obtaining regulatory clearance through demonstration of equivalency to the Company's products, without being required to conduct the same lengthy clinical tests conducted by the Company. Government Regulation In order to test, produce and market human therapeutic products in the United States, mandatory procedures and safety standards established by the Food and Drug Administration ("FDA") must be satisfied. Obtaining FDA approval is a costly and time-consuming process. Although Cortex has initiated Phase I (safety) testing in Europe, it has not yet filed a Notice of Claimed Investigational Exemption for a New Drug ("IND") with the FDA for testing in the United States. The Company is conducting Phase I/IIa studies in the U.S. with CX516 in Alzheimer's disease patients and in patients with schizophrenia under INDs filed by its clinical collaborators. It is the Company's intent that Organon, or other pharmaceutical company partner or partners that the Company is seeking, will pursue the required regulatory approvals to conduct clinical tests in the United States and elsewhere. Clinical trials are normally conducted in three phases. Phase I trials are concerned primarily with safety of the drug, involve fewer than 100 subjects, and may take from six months to over a year. Phase II trials normally involve a few hundred patients and are designed primarily to demonstrate effectiveness in treating or diagnosing the disease or condition for which the drug is intended, although short-term side effects and risks in people whose health is impaired may also be examined. Phase III trials may involve up to several thousand patients who have the disease or condition for which the drug is intended, to approximate more closely the conditions of ordinary medical practice. Phase III trials are also designed to clarify the drug's benefit-risk relationship, to uncover less common side effects and adverse reactions, and to generate information for proper labeling of the drug. The FDA receives reports on the progress of each phase of clinical testing, and may require the modification, suspension, or termination of clinical trials if an unwarranted risk is presented to patients. The FDA estimates that the clinical trial period of drug development can take up to ten years, and averages five years. With certain exceptions, once clinical testing is completed, the sponsor can submit a New Drug Application ("NDA") for approval to market a drug. The FDA's review of an NDA can also be lengthy. Therapeutic products that may be developed and sold by the Company outside the United States will be subject to regulation by the various countries in which they are to be distributed. In addition, products manufactured in the United States that have not yet been cleared for domestic distribution will require FDA approval in order to be exported to foreign countries for distribution there. There is no assurance that any required FDA or other governmental approval will be granted or, if granted, will not be withdrawn. Governmental regulation may substantially delay or prevent the marketing of the Company's proposed products, or cause the Company to undertake additional procedures, which may be both costly and lengthy, and thereby furnish a competitive advantage to the competitors of the Company or its licensees. Cortex does not have the financial and other resources to conduct the clinical testing and other procedures required to obtain approval to market its products. Accordingly, the Company will be dependent upon entering into partnerships or other collaborative arrangements with third parties with the required resources to obtain the needed approvals. Along with its agreement with Organon, Cortex intends to enter into license or other arrangements with other pharmaceutical companies under which those companies would conduct the required clinical trials and seek FDA approval for most or all of its proposed products. There is no assurance that Cortex will be able to enter into such arrangements on favorable terms, or at all, or that such arrangements will ultimately result in obtaining the necessary governmental approvals. 24 Competition The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. Many companies of all sizes, including both major pharmaceutical companies and specialized biotechnology companies, are engaged in activities similar to those of Cortex. A large number of drugs intended for the treatment of Alzheimer's disease, schizophrenia, depression and other neurological and psychiatric diseases and disorders are on the market or in the later stages of clinical testing. For example, approximately 15 drugs are in development in the U.S. for schizophrenia. In addition, over 25 drugs are under clinical investigation in the U.S. for the treatment of Alzheimer's disease. The Company's competitors have substantially greater financial and other resources and larger research and development staffs. Larger pharmaceutical company competitors also have significant experience in preclinical testing, human clinical trials and regulatory approval procedures. In addition, colleges, universities, governmental agencies and other public and private research organizations will continue to conduct research and are becoming more active in seeking patent protection and licensing arrangements to collect license fees, milestone payments and royalties in exchange for license rights to technology that they have developed, some of which may be directly competitive with that of the Company. These institutions also compete with companies such as Cortex in recruiting highly qualified scientific personnel. The Company expects technological developments in the neuropharmacology field to continue to occur at a rapid rate and expects that competition will remain intense as advances continue to be made. Although the Company believes, based on the technical qualifications, expertise and reputations of its Scientific Directors, consultants and other key scientists, that it will be able to compete in the discovery and early clinical development of therapeutics for neurological and psychiatric disorders, the Company does not have the resources, and does not presently intend, to compete with major pharmaceutical companies in clinical testing, manufacturing and marketing. Product Liability Insurance The clinical testing, manufacturing and marketing of the Company's products may expose the Company to product liability claims, against which the Company maintains liability insurance. Although the Company has never been subject to a product liability claim, there is no assurance that such claims will not be brought in the future, that the coverage limits of the Company's insurance policies will be adequate or that one or more successful claims brought against the Company would not have a material adverse effect upon the Company's business, financial condition and results of operations. Employees As of December 31, 1999, Cortex had 23 full-time employees and had engaged 4 part-time Ph.D.-level scientific consultants. Of the 23 full-time employees, 19 are engaged in research and development and 4 are engaged in management and administrative support. The Company also sponsors a substantial amount of research in academic laboratories. Facilities The Company leases approximately 30,000 square feet of office, research laboratory and expansion space under an operating lease that expires May 31, 2004. Current monthly rent on these facilities is approximately $20,000. The Company believes that this facility will be adequate for its research and development activities for at least the next three years. Legal Proceedings The Company is not a party to any material legal proceedings. 25 MANAGEMENT Directors, Executive Officers and Scientific Directors The directors, executive officers and scientific directors of the Company are as follows:
Name Age Position ---- --- -------- Robert F. Allnutt (2) 64 Chairman of the Board, Director Charles J. Casamento (2) 54 Director Carl W. Cotman, Ph.D. (1) 59 Director, Scientific Director Michael G. Grey (1) 46 Director Gary S. Lynch, Ph.D. 56 Scientific Director Maria S. Messinger 32 Chief Financial Officer Vincent F. Simmon, Ph.D. 56 President and Chief Executive Officer, Director Davis L. Temple Jr., Ph.D. (1) 56 Director
(1) Member of the Compensation/Stock Option Committee. (2) Member of the Audit Committee. Robert F. Allnutt has been a director since December 1995 and Chairman of the Board since February 1999. Since February 1995, Mr. Allnutt has been a senior counselor for APCO Associates, Inc., a public affairs and strategic communications company. Mr. Allnutt was Executive Vice President of the Pharmaceutical Manufacturers Association from May 1985 until February 1995 and was Vice President for Governmental Relations of Communications Satellite Corporation from May 1984 until May 1985. Prior to 1985, Mr. Allnutt held numerous positions in the Federal Government for 25 years, including 15 years at NASA, where his positions included Associate Deputy Administrator, the third ranking position in the agency. Mr. Allnutt is a director of Cypros Pharmaceuticals, Inc., a developer and marketer of prescription pharmaceuticals. He also serves as a member of the Boards of Directors of the Partnership for Caring and of the National Medals of Science and Technology. Mr. Allnutt holds a B.S. in Industrial Engineering from the Virginia Polytechnic Institute and J.D. and L.L.M. degrees from George Washington University. Charles J. Casamento was elected to the Board of Directors of the Company in July 1997. Since June 1993, Mr. Casamento has been Chairman, President and Chief Executive Officer of QuestCor Pharmaceuticals, a biopharmaceutical company based in Hayward, California. Prior to that, he was President and Chief Executive Officer of Interneuron Pharmaceuticals, a neuropharmaceutical company, from its founding in March 1989 until May 1993. From January 1986 to March 1989, he was Senior Vice President and General Manager, Pharmaceuticals & Biochemicals at Genzyme Corp., a biotechnology company. From 1970 through 1985, Mr. Casamento held senior management positions in marketing, finance and business development at Sandoz, Johnson & Johnson and American Hospital Supply Corp., where he was Vice President, Business Development and Strategic Planning for the Critical Care Division. He holds a B.S. in Pharmacy and an M.B.A. from Fordham University and is a licensed pharmacist. Carl W. Cotman, Ph.D. has been a Scientific Director of and consultant to the Company since October 1987, served as a director of the Company from March 1989 to October 1990, and was reelected as a director in November 1991. Dr. Cotman has been a Professor of Psychobiology, Neurology, and Psychiatry at the University of California, Irvine since 1985. He was a Professor of Psychobiology and Neurology at that University from 1983 to 1985, and has held various other teaching and research positions at that University since 1968. He chaired the Scientific Advisory Council of the American Paralysis Association and is a member of numerous professional associations and committees, including the Council of the American Society for Neurochemistry, the National Institute of Aging Task Force, the American Association for the Advancement of Science and the International Society for Neurochemistry. Dr. Cotman 26 has served on the editorial boards of numerous scientific journals and has authored or co-authored seven books and over 400 articles in the fields of neurobiology, memory and cognition, and the recovery of function after brain injury. Dr. Cotman holds a B.A. in Chemistry from Wooster College, an M.A. in Analytical Chemistry from Wesleyan University, and a Ph.D. in Biochemistry from Indiana University. Michael G. Grey has been a director of the Company since September 1994. Since January 1999, Mr. Grey has been President and Chief Executive Officer of Trega Biosciences, Inc., a drug discovery company pursuing the identification and early-stage development of novel, small-molecule drug therapies. From November 1994 until August 1998, Mr. Grey served as President of BioChem Therapeutic Inc., a wholly-owned subsidiary of BioChem Pharma, an international biopharmaceutical company. From January 1994 to October 1994, Mr. Grey was Senior Vice President, Corporate Development of Titan Pharmaceuticals, Inc., a biopharmaceutical holding company and President and Chief Operating Officer at Ansan, Inc., an early stage biopharmaceutical company. From 1991 until 1993, Mr. Grey served as Vice President, Corporate Development of Glaxo, Inc., and from 1989 until 1991, Mr. Grey served as Director of International Licensing of Glaxo Holdings p.l.c., and was responsible for the worldwide licensing activities of Glaxo. Since July 1999, Mr. Grey has also served as a member of the Board of Directors of Epimmune Inc., a developer of vaccines to treat and prevent infectious diseases and cancer. Mr. Grey holds a B.Sc. in Chemistry from the University of Notingham. Gary S. Lynch, Ph.D. has been a Scientific Director of and consultant to the Company since October 1987, and served as a director of the Company from March 1988 to March 1989 and again from December 1994 to December 1995. Dr. Lynch has been a Professor in the Department of Psychobiology at the University of California, Irvine since 1981, and has held various other teaching and research positions at that University since 1969. He is a Professor at the University's Center for the Neurobiology of Learning and Memory. Dr. Lynch is a member of the Neuroscience Society and the International Brain Research Organization. He also serves on the Advisory Board of the Cognitive Neuroscience Institute. Dr. Lynch has authored and co-authored over 400 articles and a number of books in the areas of neurobiology, cognition and memory. Dr. Lynch holds a B.A. in Psychology from the University of Delaware and a Ph.D. in Psychology from Princeton University. Maria S. Messinger was appointed Vice President, Chief Financial Officer and Secretary of the Company in December 1999. She has served as Controller of the Company since September 1994. From August 1989 to September 1994, Ms. Messinger served in a progression of positions at Ernst & Young LLP, including her most recent position as an Audit Manager. She holds a B.A. from the School of Business Administration and Economics at California State University, Fullerton and is a Certified Public Accountant. Vincent F. Simmon, Ph.D. was appointed President and Chief Executive Officer and a director of the Company in May 1996. From October 1998 to December 6, 1999, he was the acting Chief Financial Officer and Secretary of the Company. From November 1994 to December 1995, Dr. Simmon served as Chairman, President and Chief Executive Officer of Prototek, Inc., a privately-held biopharmaceutical company focusing on the development of protease inhibitors. From March 1990 to November 1994, Dr. Simmon served as President, Chief Executive Officer and a director at Alpha I Biomedicals, Inc., a biotechnology company. From February 1985 to March 1990, Dr. Simmon served as Vice President for Biomedical and Biotechnology Research at W. R. Grace and Co. From 1979 to 1985, Dr. Simmon served in varying capacities including Senior Vice President of Research and Development for Genex Corporation, a genetic engineering company, and from 1973 to 1979 in varying capacities including Assistant Director, Department of Technology for SRI International, a consulting company. Dr. Simmon has served as a governor of the Emerging Companies Section of BIO (Biotechnology Industrial Organization) and a director of the Chemical Industries Institute for Toxicology (Research Triangle Park). Dr. Simmon holds a B.A. in Biology and Chemistry from Amherst College, a M.S. from the University of Toledo in Plant Physiology and a Ph.D. in Molecular Biology from Brown University. Dr. Simmon was a post-doctoral fellow from 1971 to 1973 at Stanford University. 27 Davis Temple, Jr., Ph.D. has been a director of and consultant to the Company since March 1994 and served as co-member of the Office of Chief Executive Officer of the Company from October 1995 to May 1996. In April 1997, Dr. Temple was appointed as Chief Executive Officer of Cognetix, a privately held biopharmaceutical drug discovery and development company. Dr. Temple has served as the Chairman of Cognetix since January 1999. From November 1995 until April 1998, he was a Senior Consultant for Kaufman Brothers, a New York investment bank. Prior to that, from January 1994 to November 1995 he was Managing Director at Stover Haley Burns, Inc., a life science advisory group. From 1990 until 1993, Dr. Temple served as Vice President, CNS Drug Discovery, of Bristol-Myers Squibb and from 1984 to 1990 he served as Senior Vice President, CNS Research at Bristol-Myers Company. Dr. Temple holds a B.S. in Pharmacy and a Ph.D. in Medicinal Chemistry and Pharmacology from the University of Mississippi. Dr. Temple completed post-doctorate research at Louisiana State University. All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the Company's Board of Directors. There are no family relationships among any of the directors or officers of the Company. Other Officers Gary A. Rogers, Ph.D. has been Vice President, Pharmaceutical Discovery since June 1995. In February 1994, he founded Ligand Design, a private contract design and synthesis firm located in Santa Barbara. From 1987 to 1994, Dr. Rogers served as an associate research biochemist at the University of California, Santa Barbara. Prior to that, he held a succession of research and faculty positions at universities in the United States and abroad, including three years as an assistant adjunct professor of bio-organic chemistry under Dr. Paul Boyer at the University of California, Los Angeles and four years as an assistant professor at the University of Texas. Dr. Rogers is a co-inventor of the Ampakine family of AMPA receptor modulating compounds. He holds a B.S. degree in organic chemistry from the University of California, Los Angeles and a Ph.D. in bio-organic chemistry from the University of California, Santa Barbara. Ursula V. Staubli, Ph.D. was named Vice President of Biological Research in June 1999. From June 1993 to May 1999, Dr. Staubli was Associate Professor at the Center for Neural Science at New York University ("NYU"). While at NYU, she served as a consultant to the Company. Prior to June 1993, she held teaching and research positions at McGill University and the University of California, Irvine. A recipient of numerous pre- and post-doctoral fellowships and grants, Dr. Staubli has published more than 60 scientific papers. She received her B.S. in Behavioral Sciences and Ph.D. in Neurobiology from ETH-Zurich (Swiss Federal Institute of Technology). 28 Executive Compensation The following table sets forth summary information concerning compensation paid or accrued by the Company for services rendered during the three fiscal years ended June 30, 1999 to the Company's Chief Executive Officer. Summary Compensation Table
Long-Term Annual Compensation Compensation Awards ---------------------------------- -------------------------- Name and Other Annual All Other Principal Position Year Salary Bonus(2) Compensation Options(#) Compensation - ------------------ ---- ------ -------- ------------- ---------- ------------ Vincent F. Simmon, Ph.D.(1) 1999 $211,370 $100,000 $ -- 330,000 (4) $ -- President, Chief 1998 203,178 -- -- -- -- Executive Officer 1997 200,000 53,138 35,307 (3) 180,000 -- and Acting Chief Financial Officer and Secretary
- ------------------- (1) Dr. Simmon was appointed President and Chief Executive Officer on May 15, 1996 and served as the acting Chief Financial Officer and Secretary of the Company from October 13, 1998 to December 6, 1999. (2) According to Dr. Simmon's employment agreement, he is eligible to receive a bonus of between 15% to 50% of his annual base salary. Dr. Simmon voluntarily postponed any bonus for the year ended June 30, 1998. The bonus for the year ended June 30, 1999 includes an amount to adjust for the bonus not paid in fiscal 1998. Of the bonus amount indicated for the year ended June 30, 1999, $20,000 was deferred and paid in fiscal 2000. (3) Represents relocated reimbursements. (4) Includes stock options to purchase 180,000 shares of the Company's Common Stock that were repriced in December 1998 from an exercise price of $5.624 per share to $0.375 per share, which represented the fair market value of the Company's Common Stock at the time of the repricing. Option Matters Option Grants. The following table sets forth certain information concerning grants of stock options to the Company's executive officer named in the Summary Compensation Table during the fiscal year ended June 30, 1999. 29 Option Grants in Last Fiscal Year
Number of % of Total Securities Options Underlying Granted to Options Employees in Exercise Expiration Name Granted(#) Fiscal Year (1) Price($/Sh) Date ---- ---------- --------------- ----------- ---------- Vincent F. Simmon, Ph.D. 150,000 21% $0.469 02/05/09 180,000(2) 25% $0.375 12/22/08
- ------------------- (1) Includes options repriced on December 23, 1998. (2) Represents options originally granted to Dr. Simmon in May 1996, in connection with his employment. On December 23, 1998, these options were repriced from an exercise price of $5.625 per share to $0.375 per share, representing the fair market value of the Company's common stock at the time of repricing. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Value Realized Value of Unexercised (market price Number of Unexercised In-the-Money at exercise Options at FY-End Options at FY-End Shares Acquired less exercise ---------------------------- ---------------------------- Name on Exercise price) Exercisable Unexercisable Exercisable Unexercisable - --------- --------------- ------------- ------------ -------------- ------------ -------------- Vincent F. Simmon, Ph.D. 0 $0 60,000 270,000 $37,500 $154,650
Employment and Consulting Agreements Vincent F. Simmon joined the Company as President and Chief Executive Officer in May 1996. His employment agreement provides for a base salary of $220,000 per year with an annual bonus, at the discretion of the Board of Directors of the Company, in cash and/or equity equal to between 15% and 50% of his base salary, subject to annual review by the Compensation Committee. In connection with his employment, Dr. Simmon was granted options to purchase 180,000 shares of Common Stock at an exercise price of $5.625 per share, representing 100% of the fair market value as of the date of grant. The options vest monthly over a three-year period commencing one month from the date of grant and have a ten-year term. In December 1998, the exercise price of these options was restated to $0.375 per share. Drs. Carl W. Cotman and Gary S. Lynch (both of whom are co-founders and Scientific Directors of the Company) have each entered into a consulting agreement with the Company. Dr. Lynch receives a consulting fee of $30,000 per year and Dr. Cotman receives a consulting fee of $23,000 per year. The term of each consulting agreement commenced in November 1987 and will continue until terminated by the respective parties thereto. The consulting agreements obligate the respective consultants to make themselves available to the Company for consulting and advisory services for an average of three days per month. In addition to his consulting fee, Dr. Lynch will be entitled to option grants in connection with the Company's success in corporate partnering its Ampakine technology. See also "Director Compensation." 30 Director Compensation Each non-employee director (other than the Chairman of the Board or those who join the Board of Directors to oversee an investment in the Company) receives $1,500 at each Board of Directors meeting attended and an additional $750 annual retainer for each committee on which he or she serves. The Chairman of the Board receives $2,500 at each Board of Directors meeting attended and an additional $750 annual retainer for each committee on which he or she serves. Under the Company's 1996 Stock Incentive Plan, each non-employee director (other than those who serve on the Board of Directors to oversee an investment in the Company) is automatically granted options to purchase 15,000 shares of Common Stock upon commencement of service as a director and additional options to purchase 6,000 shares of Common Stock on the date of each Annual Meeting of Stockholders. Non-employee directors who serve on the Board of Directors to oversee an investment in the Company receive options to purchase 7,500 shares of Common Stock upon commencement of service as a director and additional options to purchase 3,000 shares of Common Stock on the date of each Annual Meeting of Stockholders. These nonqualified options have an exercise price equal to 100% of the fair market value of the Common Stock on the date of grant, have a ten-year term and vest in equal increments of 33-1/3% on each anniversary date of the dates of grant, and are otherwise subject to the terms and provisions of the 1996 Stock Incentive Plan. 31 CERTAIN TRANSACTIONS The Company's Restated Certificate of Incorporation provides that, pursuant to Delaware law, directors of the Company shall not be liable for monetary damages for breach of the directors' fiduciary duty of care to the Company and its stockholders. This provision does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctions or other forms of non-monetary relief remain available under Delaware law. In addition, each director continues to be subject to liability for breach of the director's duty of loyalty to the Company, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibility under any other law, such as the federal securities laws. The Company has entered into Indemnification Agreements with each of the officers and directors that obligate the Company to indemnify them as permitted by applicable law. See "Employment and Consulting Agreements" for a description of certain arrangements and transactions with executive officers and directors. 32 PRINCIPAL STOCKHOLDERS The following table sets forth, to the knowledge of the Company, certain information regarding the beneficial ownership of the Company's Common Stock as of December 31, 1999, by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each of the Company's directors, (iii) each of the named executive officers in the Summary Compensation Table and (iv) all of the Company's executive officers and directors as a group. Except as indicated in the footnotes to this table, the Company believes that the persons named in this table have sole voting and investment power with respect to the shares of Common Stock indicated.
Directors, Nominees, Shares Percent of Officers, and 5% Beneficially Common Stock Stockholders Owned Beneficially Owned - --------------------- ------------- ------------------ Robert F. Allnutt 45,500 (1) * Charles J. Casamento 16,000 (2) * Carl W. Cotman, Ph.D. 160,000 (3) 1.0 Michael G. Grey 32,000 (4) * Maria S. Messinger 18,750 (5) * Vincent F. Simmon, Ph.D. 229,500 (6) 1.5 Davis L. Temple, Jr., Ph.D. 54,500 (7) * All officers, directors and nominees as a group (7 persons) 556,250 3.5 ___________________________________
* Less than one percent (1) Includes 29,500 shares that may be purchased upon exercise of options within 60 days of December 31, 1999. (2) Includes 16,000 shares that may be purchased upon exercise of options within 60 days of December 31, 1999. (3) Includes 62,000 shares that may be purchased upon exercise of options within 60 days of December 31, 1999. (4) Includes 32,000 shares that may be purchased upon exercise of options within 60 days of December 31, 1999. (5) Includes 18,750 shares that may be purchased upon exercise of options within 60 days of December 31, 1999. (6) Includes 160,000 shares that may be purchase upon exercise of options within 60 days of December 31, 1999. (7) Includes 54,500 shares that may be purchased upon exercise of options within 60 days of December 31, 1999. The Company is not aware of any arrangements that may at a subsequent date result in a change of control of the Company. 33 DESCRIPTION OF SECURITIES General The authorized capital stock of the Company consists of: 30,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share, of which 1,250,000 shares have been designated as 9% Cumulative Convertible Preferred Stock (the "9% Preferred Stock"), 3,200,000 shares have been designated as Series B Convertible Preferred Stock (the "Series B Preferred Stock"), 500 shares have been designated as Series D Convertible Preferred Stock (the "Series D Preferred Stock") and 400 shares have been designated as Series A Convertible Preferred Stock (the "Series A Preferred Stock"). As of September 30, 1999, there were 15,528,182 shares of Common Stock, 27,500 shares of 9% Preferred Stock, 75,000 shares of Series B Preferred Stock, no shares of Series D Preferred Stock and no shares of Series A Preferred Stock outstanding. As of the same date, investors in the Series A Preferred Stock private placement held warrants to purchase 800,000 shares of Common Stock (the "Series A Warrants"), Vector Securities International, Inc. ("Vector") held warrants to acquire 420,306 shares of Common Stock (the "Vector Warrants") and Swartz Investments, Inc. ("Swartz") and its transferees held warrants to purchase 106,195 shares of Common Stock (the "Swartz Warrants"). Of the Vector Warrants, 363,113 expired unexercised on January 15, 2000. As of September 30, 1999, there were 641 record holders of Common Stock, two record holders of 9% Preferred Stock, two record holders of Series B Preferred Stock, twelve record holders of the Series A Warrants, one record holder of the Vector Warrants and ten record holders of the Swartz Warrants. In addition, as of September 30, 1999 the Company had reserved an aggregate of 1,439,497 shares of Common Stock for issuance upon exercise of outstanding stock options held by employees and officers, directors and consultants to the Company, 3,667 shares for issuance upon conversion of the 9% Preferred Stock, 7,359 shares for issuance upon conversion of the Series B Preferred Stock, 800,000 shares for issuance upon exercise of the Series A Warrants, 420,306 shares for issuance upon exercise of the Vector Warrants and 106,195 shares for issuance upon exercise of the Swartz Warrants. Common Stock Holders of shares of Common Stock are entitled to one vote per share held of record on all matters submitted to a vote of stockholders, including the election of directors. The holders are entitled to receive dividends when, as and if declared by the Board of Directors, in its discretion, out of funds legally available therefor, subject to preferences that may be applicable to any outstanding shares of Preferred Stock. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all of the assets of the Company remaining after payment of liabilities and after payment of any preferential amounts to which holders of shares of the 9% Preferred Stock, the Series B Preferred Stock and any other series of Preferred Stock that may be outstanding in the future, may be entitled. Holders of Common Stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. All of the outstanding shares of Common Stock are, and the shares of Common Stock when issued will be, fully paid and nonassessable. Warrants In December 1993, in connection with the closing of a private placement of 2,750,000 shares of Common Stock, for which Vector acted as placement agent, the Company issued to Vector a warrant to purchase 274,200 shares of Common Stock at a price of $9.375 per share at any time through November 30, 1998. As consideration for Vector's assistance in reaching the settlement with Alkermes, this warrant was canceled and reissued as a new warrant to purchase 363,113 shares of the Company's Common Stock at $3.47 per share, as adjusted and subject to further adjustment, at any time through January 15, 2000. This warrant expired unexercised on January 15, 2000. 34 As consideration for its agreement to provide financial advisory services related to corporate finance transactions and corporate partnering activities, as amended and extended in November 1994, Vector was issued a six-year non- redeemable warrant to purchase 57,193 shares of the Company's Common Stock at $3.06 per share, subject to adjustment under certain circumstances. Warrants to purchase 8,169 shares of the Company's Common Stock vested immediately, and warrants to purchase 24,512 shares of the Company's Common Stock will vest upon the consummation of each strategic alliance, as defined, when and as secured by Vector. In connection with the December 1995 private placement of 160 shares of Series C Preferred Stock, the Company issued to the placement agent for the transaction a five-year non-redeemable warrant to purchase 106,195 shares of Common Stock at a price of $2.825 per share subject to adjustment under certain circumstances. The warrants contain cashless exercise provisions and include piggyback registration rights. In connection with the June 1997 private placement of 400 shares of Series A Preferred Stock, the Company issued to the eleven participating institutional investors four-year non-redeemable warrants to purchase an aggregate of 800,000 shares of Common Stock at a price of $3.08 per share, subject to adjustment under certain circumstances. In connection with the February 1998 restructuring of the note payable to Alkermes, Inc., the Company issued to Alkermes a five-year warrant to purchase 75,000 shares of Common Stock at an exercise price of $1.55 per share, representing the average of the high and low sale prices of Cortex Common Stock as reported on the Nasdaq SmallCap Market on the date of the restructuring. In connection with the July 1999 restructuring of the note payable to Alkermes, Inc., the Company agreed to issue to Alkermes a five-year warrant to purchase 100,000 shares of common stock at an exercise price derived from the fair market value of the Company's common stock. In accordance with the restructured terms, in December 1999 the Company agreed to issue to Alkermes a five-year warrant to purchase 50,000 shares of the Company's common stock. The exercise price for this warrant is $0.76 per share, representing the fair market value of the Company common stock for the 30 trading days preceding the issuance date. Preferred Stock The holders of the 9% Preferred Stock are not entitled to vote for the election of directors or upon any other matter presented to the stockholders, except as and to the extent provided by applicable law. The holders of the 9% Preferred Stock are entitled to receive cumulative dividends, from and after June 15, 1989, at the rate of $.09 per share per annum, out of funds legally available therefor, when and as declared by the Board of Directors. Upon any liquidation, dissolution or winding up of the Company, or any merger or consolidation of the Company or other transaction in which more than 50% of the Company's voting power is transferred (except for an issuance of the Company's securities), the holders of the 9% Preferred Stock are entitled to receive an amount equal to $1.00 per share plus accrued and unpaid dividends. The holders of the 9% Preferred Stock are not entitled to share in assets remaining after such preference is satisfied. The Company has the right at any time to redeem the 9% Preferred Stock, in whole or in part, upon not less than 30 days' nor more than 60 days'written notice, at a price of $1.00 per share. Each share of 9% Preferred Stock is convertible at any time at the option of the holder thereof into approximately 0.1333 shares of Common Stock, at an effective conversion price of $7.50 per share, subject to adjustment under certain circumstances. Upon conversion of 9% Preferred Stock, accrued and unpaid dividends pertaining thereto do not convert to Common Stock, but rather are credited to additional paid-in capital. The holders of Series B Preferred Stock are not entitled to vote for the election of directors or upon any other matter presented to the stockholders, except as and to the extent provided by applicable law. In the event of any liquidation, dissolution, winding-up or other distribution of the assets of the Company, holders of Series B Preferred Stock are entitled to receive, after payment of the full liquidation preference to holders of 9% Preferred Stock, an amount equal to $0.6667 per share of Series B Preferred Stock. The Company has the right to redeem the Series B Preferred Stock for $0.6667 per share. Each share of Series B Preferred Stock is convertible at any time at the option of 35 the holder thereof into approximately 0.09812 shares of Common Stock at an effective conversion price of $6.795 per share, subject to adjustment under certain circumstances. The Restated Certificate of Incorporation of the Company authorizes the issuance of 5,000,000 shares of Preferred Stock, of which 549,100 shares remain undesignated. The Board of Directors, within the limitations and restrictions contained in the Restated Certificate of Incorporation and without further action by the Company's stockholders, has the authority to issue this undesignated Preferred Stock from time to time in one or more series and to fix the number of shares and the relative rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and any other preferences, special rights and qualifications of any such series. If shares of Preferred Stock with voting rights are issued, such issuance could affect the voting rights of the holders of the Company's Common Stock by increasing the number of outstanding shares entitled to vote and by the creation of class or series voting rights. In addition, any further issuance of Preferred Stock could, under certain circumstances, have the effect of delaying or preventing a change in control of the Company and may adversely affect the rights of holders of Common Stock. Other than the shares of 9% Preferred Stock and Series B Preferred Stock, there are no shares of Preferred Stock currently issued and outstanding and the Company has no present plans to issue any additional shares of Preferred Stock or to establish or designate any new series of Preferred Stock. Transfer Agent and Warrant Agent American Stock Transfer and Trust Company, 40 Wall Street, New York, New York, 10005 serves as Transfer Agent for the Common Stock, 9% Preferred Stock and Series B Preferred Stock of the Company. 36 SELLING STOCKHOLDERS The Shares are to be offered by and for the respective accounts of the Selling Stockholders. The number of Shares which each Selling Stockholder may offer is as follows:
Shares offered Owned Before Offering(1) pursuant Owned After Offering ----------------------- to this -------------------- Selling Stockholder Shares Percent Prospectus Shares Percent - ------------------- ------- ------- ---------- ------ ------- Nelson Partners 150,000 1.0 150,000 0 0 Olympus Securities, Ltd. 150,000 1.0 150,000 0 0 Heracles Fund 100,000 * 100,000 0 0 Themis Partners L.P. 100,000 * 100,000 0 0 MichaelAngelo, L.P. 30,000 * 30,000 0 0 Raphael, L.P. 30,000 * 30,000 0 0 Angelo, Gordon & Co. L.P. 22,500 * 22,500 0 0 GAM Arbitrage Investments, Inc. 22,500 * 22,500 0 0 AG Super Fund, L.P. 15,000 * 15,000 0 0 AG Super Fund International Partners, L.P. 15,000 * 15,000 0 0 AG Long Term Super Fund, L.P. 15,000 * 15,000 0 0 Bronnum, Dwight B. 1,500 * 1,500 0 0 Bury, Lance T. 5,000 * 5,000 0 0 Enigma Investments 3,451 * 3,451 0 0 Hale, Joseph H. 13,274 * 13,274 0 0 Hathorn, P. Bradford 5,000 * 5,000 0 0 Hopkins, Robert L. 1,500 * 1,500 0 0 Kendrick Family Partnership L.P. 32,987 * 32,987 0 0 Krusen, Charles 8,496 * 8,496 0 0 Peteler, David K. 2,000 * 2,000 0 0 Swartz Family Partnership, L.P. 32,987 * 32,987 0 0 Vector Securities International, Inc. 57,193 * 57,193 0 0 Promethean Investment Group, L.L.C. (2) 150,000(3) 1.0 150,000 0 0 ____________________________
* Less than one percent (1) Represents shares of Common Stock that may be acquired upon exercise of warrants. (2) The Promethean Investment Group L.L.C. is the general partner of Themis Partners L.P., the investment advisor for Heracles Fund and the investment manager of HFTP Investments L.L.C. (collectively, the "Promethean Entities") and consequently has voting control and investment discretion over securities held by the Promethan Entities. Promethean Investment Group L.L.C and each of the Promethean Entities disclaims beneficial ownership of the Shares beneficially owned by Promethean Investment Group L.L.C. and the Promethean Entities. (3) Acquired upon transfer of warrants originally issued to holders of the Series A Preferred Stock. 37 PLAN OF DISTRIBUTION The Company has been advised by each Selling Stockholder that the Selling Stockholder may sell its Shares from time to time in transactions on the OTC Bulletin Board in negotiated transactions, by writing options on the Shares or by a combination of these methods, at fixed prices that may be changed, at market prices at the time of sale, at prices related to market prices or at negotiated prices. The Selling Stockholders may effect these transactions by selling the Shares to or through broker-dealers, who may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders or the purchasers of the Shares for whom the broker-dealer may act as an agent or to whom they may sell the Shares as a principal, or both. The compensation to a particular broker-dealer may be in excess of customary commissions. The Selling Stockholders and broker-dealers who act in connection with the sale of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any commissions received by such broker-dealers and profits on any resale of the Shares as a principal may be deemed to be underwriting discounts and commissions under the Securities Act. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California. EXPERTS The financial statements of Cortex Pharmaceuticals, Inc. at June 30, 1999 and 1998, for each of the two years in the period ended June 30, 1999, and for the period from inception (February 10, 1987) through June 30, 1999, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon, which contains an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going concern as described in Note 1 to the Financial Statements, appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 38 INDEX TO FINANCIAL STATEMENTS
Page -------- Report of Independent Auditors................................................................. F-2 Balance Sheets - As of September 30, 1999 (unaudited), June 30, 1999 and June 30, 1998............................................................................... F-3 Statements of Operations - For the three-month periods ended September 30, 1999 and 1998 (unaudited), the period from inception (February 10, 1987) through September 30, 1999 (unaudited), the years ended June 30, 1999 and 1998, and the period from inception (February 10, 1987) through June 30, 1999................................................... F-4 Statements of Stockholders' Equity - For the period from inception (February 10, 1987) through September 30, 1999 (unaudited as to the three-month period ended September 30, 1999)............................................................ F-5 Statements of Cash Flows For the three-month periods ended September 30, 1999 and 1998 (unaudited), the period from inception (February 10, 1987) through September 30, 1999 (unaudited), the years ended June 30, 1999 and 1998, and the period from inception (February 10, 1987) through June 30, 1999................................................... F-10 Notes to Financial Statements................................................................. F-11
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Stockholders and Board of Directors Cortex Pharmaceuticals, Inc. We have audited the accompanying balance sheets of Cortex Pharmaceuticals, Inc. (a development stage enterprise) as of June 30, 1999 and 1998, and the related statements of operations, stockholders' equity and cash flows for each of the two years in the period ended June 30, 1999 and for the period from inception (February 10, 1987) through June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cortex Pharmaceuticals, Inc. (a development stage enterprise) at June 30, 1999 and 1998, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 1999 and for the period from inception (February 10, 1987) through June 30, 1999, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company is in the development stage and realization of the Company's assets is dependent upon future events, the outcome of which is indeterminable. Additionally, successful completion of the Company's development program and its transition, ultimately, to attaining profitable operations is dependent upon obtaining additional financing adequate to support the Company's cost structure. Accordingly, these conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP San Diego, California July 22, 1999 F-2 Cortex Pharmaceuticals, Inc. (A development stage enterprise) BALANCE SHEETS
(Unaudited) September 30, 1999 June 30, 1999 June 30, 1998 __________________ _____________ _____________ Assets Current assets: Cash and cash equivalents $ 289,271 $ 909,337 $ 2,124,008 Other current assets 31,501 60,977 71,566 ------------ ------------ ------------ Total current assets 320,772 970,314 2,195,574 Furniture, equipment and leasehold improvements, net 489,378 531,970 655,419 Other 46,737 46,737 23,853 ------------ ------------ ------------ $ 856,887 $ 1,549,021 $ 2,874,846 ============ ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 463,892 $ 523,474 $ 408,047 Accrued dividends 23,513 23,513 26,775 Accrued wages, salaries and related expenses 63,027 67,497 62,475 Unearned revenue 93,194 98,584 -- Current portion of note payable to Alkermes, Inc. 664,472 999,282 -- ------------ ------------ ------------ Total current liabilities 1,308,098 1,712,350 497,297 Note payable to Alkermes, Inc. -- -- 948,253 Redeemable preferred stock: Series A convertible preferred stock, $0.001 par value; $10,000 per share liquidation preference; shares authorized: 400; shares issued and outstanding: 250 (June 30, 1998) -- -- 2,460,450 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: 27,500 (September 30, 1999 and June 30, 1999) and 35,000 (June 30, 1998) 27,500 27,500 35,000 Series B convertible preferred stock, $0.001 par value; $0.6667 per share liquidation preference; shares authorized: 3,200,000; shares issued and outstanding: 75,000 (September 30, 1999 and June 30, 1999) and 150,000 (June 30, 1998) 43,405 43,405 86,810 Common stock, $0.001 par value; shares authorized: 30,000,000; shares issued and outstanding: 15,528,182 (September 30, 1999); 15,519,382 (June 30, 1999) and 10,237,126 (June 30, 1998) 15,528 15,519 10,237 Additional paid-in capital 38,814,392 38,811,100 36,276,202 Deficit accumulated during the development stage (39,352,036) (39,060,853) (37,439,403) ------------ ------------ ------------ Total stockholders' equity (451,211) (163,329) (1,031,154) ------------ ------------ ------------ $ 856,887 $ 1,549,021 $ 2,874,846 =========== ============ ============
See accompanying notes. F-3 Cortex Pharmaceuticals, Inc. (A development stage enterprise) STATEMENTS OF OPERATIONS
(Unaudited) Period from Period from (Unaudited) inception inception Three months ended (February 10, (February 10, September 30 1987) through Years ended June 30, 1987) through ----------------------------- September 30, --------------------------- June 30, 1999 1998 1999 1999 1998 1999 -------------- ----------- ------------- ------------ ----------- ------------- Revenues: Research and license revenue $ 767,889 $ -- $ 7,549,295 $ 3,051,406 $ 130,000 $ 6,781,406 Grant revenue 66,667 -- 261,385 100,001 -- 194,718 ----------- ----------- ------------ ----------- ----------- ------------ Total revenues 834,556 -- 7,810,680 3,151,407 130,000 6,976,124 ----------- ----------- ------------ ----------- ----------- ------------ Operating expenses: Research and development 751,800 839,281 30,484,394 3,379,732 4,007,466 29,732,594 General and administrative 367,380 354,693 15,113,230 1,401,602 1,584,369 14,745,850 Settlement with Alkermes, Inc. -- -- 1,227,977 -- -- 1,227,977 ----------- ----------- ------------ ----------- ----------- ------------ Total operating expenses 1,119,180 1,193,974 46,825,601 4,781,334 5,591,835 45,706,421 ----------- ----------- ------------ ----------- ----------- ------------ Loss from operations (284,624) (1,193,974) (39,014,921) (1,629,927) (5,461,835) (38,730,297) Interest income, net (6,559) 7,616 1,694,724 8,477 203,875 1,701,283 ------------ ----------- ------------ ----------- ----------- ------------ Net loss before preferred stock accretion and dividends $ (291,183) $(1,186,358) $(37,320,197) $(1,621,450) $(5,257,960) $(37,029,014) ----------- ----------- ------------ ----------- ----------- ------------ Preferred stock accretion and dividends: Accretion of and dividends on 9% Cumulative Convertible Preferred Stock -- -- 610,399 2,475 3,150 610,399 Imputed dividends for Series D Convertible Preferred Stock -- -- 879,672 -- -- 879,672 Imputed dividends for Series A Convertible Preferred Stock -- -- 1,012,493 -- -- 1,012,493 ----------- ----------- ------------ ----------- ----------- ------------ Net loss applicable to common stock $ (291,183) $(1,186,358) $(39,822,761) $(1,623,925) $(5,261,110) $(39,531,578) =========== =========== ============ =========== =========== ============ Weighted average common shares outstanding 15,522,252 10,237,126 13,407,945 9,575,663 =========== =========== =========== =========== Net loss per share $ (0.02) $ (0.12) $ (0.12) $ (0.55) =========== =========== =========== ===========
See accompanying notes. F-4 Cortex Pharmaceuticals, Inc. (A development stage enterprise) STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized loss on available Deficit 9% Series B Series C Series D Addi- for accumulated convertible convertible convertible convertible tional Deferred sale U.S. during the preferred preferred preferred preferred Common paid-in compen- Government development stock stock stock stock stock capital sation securities stage Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 10, 1987 (date of inception) $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Sale of 1,420,000 shares of common stock, $0.005 per share -- -- -- -- 1,420 5,680 -- -- -- 7,100 Sale of 500,000 shares of common stock, $2.50 per share, net of expenses -- -- -- -- 500 1,076,089 -- -- -- 1,076,589 Issuance of 11,000 shares of common stock for services, $2.50 per share -- -- -- -- 11 27,489 -- -- -- 27,500 9% preferred stock accretion -- -- -- -- -- -- -- -- (2,560) (2,560) Net loss -- -- -- -- -- -- -- -- (400,193) (400,193) ---------- ----------- ----------- ----------- ------ ---------- --------- --------- ----------- ----------- Balance, June 30, 1988 -- -- -- -- 1,931 1,109,258 -- -- (402,753) 708,436 Conversion of sub- ordinated convert- ible note and interest payable into 83,868 shares of common stock, $2.50 per share -- -- -- -- 84 209,586 -- -- -- 209,670 Issuance of 500 shares of common stock for services, $2.50 per share -- -- -- -- 1 1,249 -- -- -- 1,250 Conversion of 5,000 shares of 9% pre- ferred stock into 3,333 shares of common stock -- -- -- -- 3 22,903 -- -- -- 22,906 9% preferred stock dividends -- -- -- -- -- (55,125) -- -- -- (55,125) 9% preferred stock accretion -- -- -- -- -- -- -- -- (32,733) (32,733) Net loss -- -- -- -- -- -- -- -- (1,222,517) (1,222,517) ---------- ----------- ----------- ----------- ------ ---------- --------- --------- ----------- ----------- Balance, June 30, 1989 -- -- -- -- 2,019 1,287,871 -- -- (1,658,003) (368,113) Initial public offering of 660,000 shares of common stock, $10.00 per share, net of expenses -- -- -- -- 660 5,244,230 -- -- -- 5,244,890 Redemption of 70,000 shares of common stock, $0.005 per share -- -- -- -- (70) (280) -- -- -- (350) 9% preferred stock dividends -- -- -- -- -- (110,250) -- -- -- (110,250) 9% preferred stock accretion -- -- -- -- -- -- -- -- (33,064) (33,064) Net loss -- -- -- -- -- -- -- -- (2,187,870) (2,187,870) ---------- ----------- ----------- ----------- ------ ---------- --------- --------- ----------- ----------- Balance, June 30, 1990 -- -- -- -- 2,609 6,421,571 -- -- (3,878,937) 2,545,243 Sale of 3,181,253 shares of Series B convertible pre- ferred stock, $0.6667 per share, net of expenses -- 1,841,108 -- -- -- -- -- -- -- 1,841,108 Conversion of 182,200 shares of 9% preferred stock into 24,293 shares of common stock -- -- -- -- 24 170,039 -- -- -- 170,063 Issuance of compens- atory stock options -- -- -- -- -- 330,084 (291,938) -- -- 38,146 Amortization of de- ferred compensation -- -- -- -- -- -- 90,016 -- -- 90,016 9% preferred stock dividends -- -- -- -- -- (85,653) -- -- -- (85,653) 9% preferred stock accretion -- -- -- -- -- -- -- -- (32,075) (32,075) Net loss -- -- -- -- -- -- -- -- (2,593,968) (2,593,968) ---------- ----------- ----------- ----------- ------ ---------- --------- --------- ----------- ----------- Balance, June 30, 1991 $ -- $ 1,841,108 $ -- $ -- $2,633 $6,836,041 (201,922) -- (6,504,980) 1,972,880 ---------- ----------- ----------- ----------- ------ ---------- --------- --------- ----------- -----------
Continued... 5 Cortex Pharmaceuticals, Inc. (A development stage enterprise) STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
9% Series B Series C Series D convertible convertible convertible convertible preferred preferred preferred preferred Common stock stock stock stock stock ----------- ----------- ------------ ----------- ----------- Balance, June 30, 1991 $ -- $ 1,841,108 $ -- $ -- $ 2,633 Sale of 150,000 shares of common stock to Alkermes, Inc., $10.00 per share -- -- -- -- 150 Conversion of 306,275 shares of 9% preferred stock into 40,835 shares of common stock -- -- -- -- 40 Conversion of 1,525,003 shares of Series B preferred stock into 149,629 shares of common stock -- (882,576) -- -- 150 Issuance of 73,979 shares of common stock upon exercise of stock options -- -- -- -- 74 Issuance of two shares of common stock upon exercise of warrants -- -- -- -- -- Issuance of compensatory stock options -- -- -- -- Forfeiture of compensatory stock options -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- 9% preferred stock dividends -- -- -- -- -- 9% preferred stock accretion -- -- -- -- -- Net loss -- -- -- -- -- ----------- ----------- ------------ ----------- ----------- Balance, June 30, 1992 -- 958,532 -- -- 3,047 Conversion of 287,150 shares of 9% preferred stock into 38,287 shares of common stock -- -- -- -- 38 Conversion of 1,081,250 shares of Series B preferred stock into 106,088 shares of common stock -- (625,758) -- -- 106 Redemption of 12,627 shares of common stock, $7.65 per share -- -- -- -- (12) Issuance of 30,789 shares of common stock upon exercise of stock options -- -- -- -- 31 Issuance of compensatory stock options -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- 9% preferred stock dividends -- -- -- -- -- 9% preferred stock accretion -- -- -- -- -- Net loss -- -- -- -- -- ----------- ----------- ------------ ----------- ----------- Balance, June 30, 1993 $ -- $ 332,774 $ -- $ -- $ 3,210 ----------- ----------- ------------ ----------- ----------- Unrealized loss on Deficit available for accumulated Additional sale U.S. during the paid-in Deferred Government development capital compensation securities stage Total ------------ ------------ ------------ ------------ ----------- Balance, June 30, 1991 $ 6,836,041 $(201,922) $ -- $ (6,504,980) $ 1,972,880 Sale of 150,000 shares of common stock to Alkermes, Inc., $10.00 per share 1,499,850 -- -- -- 1,500,000 Conversion of 306,275 shares of 9% preferred stock into 40,835 shares of common stock 335,283 -- -- -- 335,323 Conversion of 1,525,003 shares of Series B preferred stock into 149,629 shares of common stock 882,426 -- -- -- -- Issuance of 73,979 shares of common stock upon exercise of stock options 110,313 -- -- -- 110,387 Issuance of two shares of common stock upon exercise of warrants 27 -- -- -- 27 Issuance of compensatory stock options 24,532 (19,375) -- -- 5,157 Forfeiture of compensatory stock options (146,182) 146,182 -- -- -- Amortization of deferred compensation -- 58,567 -- -- 58,567 9% preferred stock dividends (68,906) -- -- -- (68,906) 9% preferred stock accretion -- -- -- (23,242) (23,242) Net loss -- -- -- (2,354,770) (2,354,770) ------------ ----------- ----------- ------------ ----------- Balance, June 30, 1992 9,473,384 (16,548) -- (8,882,992) 1,535,423 Conversion of 287,150 shares of 9% preferred stock into 38,287 shares of common stock 360,398 -- -- -- 360,436 Conversion of 1,081,250 shares of Series B preferred stock into 106,088 shares of common stock 625,652 -- -- -- -- Redemption of 12,627 shares of common stock, $7.65 per share (96,662) -- -- -- (96,674) Issuance of 30,789 shares of common stock upon exercise of stock options 60,915 -- -- -- 60,946 Issuance of compensatory stock options 350,000 (280,000) -- -- 70,000 Amortization of deferred compensation -- 36,897 -- -- 36,897 9% preferred stock dividends (53,028) -- -- -- (53,028) 9% preferred stock accretion -- -- -- (16,000) (16,000) Net loss -- -- -- (761,536) (761,536) ------------ ----------- ----------- ------------ ----------- Balance, June 30, 1993 $ 10,720,659 $(259,651) $ -- $ (9,660,528) $ 1,136,464 ------------ ----------- ----------- ------------ -----------
Continued.............. Cortex Pharmaceuticals, Inc. (A development stage enterprise) STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
9% Series B Series C Series D convertible convertible convertible convertible preferred preferred preferred preferred Common stock stock stock stock stock - ------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1993 $ -- $ 332,774 $ -- $ -- $ 3,210 Sale of 2,750,000 shares of common stock, $5.00 per share, net of expenses -- -- -- -- 2,750 Sale of 103,577 shares of common stock, $6.40 per share, net of expenses -- -- -- -- 104 Conversion of 15,625 shares of 9% preferred stock into 2,083 shares of common stock -- -- -- -- 2 Conversion of 50,000 shares of Series B preferred stock into 4,906 shares of common stock -- (28,937) -- -- 5 Issuance of compensatory stock options -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- Issuance of 3,401 shares of common stock upon exercise of stock options -- -- -- -- 3 9% preferred stock dividends -- -- -- -- -- Unrealized loss on available for sale U.S. Government securities -- -- -- -- -- Net loss -- -- -- -- -- ----------- ----------- ------------ ----------- ----------- Balance, June 30, 1994 -- 303,837 -- -- 6,074 Reclassification of unredeemed 9% preferred stock 370,000 -- -- -- -- Issuance of warrants to purchase 265,000 shares of common stock -- -- -- -- -- Adjustment of accrued dividends for redemption of 9% preferred stock -- -- -- -- -- Issuance of 11,272 shares of common stock upon exercise of stock options -- -- -- -- 11 Amortization of deferred compensation -- -- -- -- -- 9% preferred stock dividends -- -- -- -- -- Decrease in unrealized loss on available for sale U.S. Government securities -- -- -- -- -- Net loss -- -- -- -- -- ----------- ----------- ------------ ----------- ----------- Balance, June 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $ 6,085 ----------- ----------- ------------ ----------- ----------- Unrealized loss on Deficit available for accumulated Additional sale U.S. during the paid-in Deferred Government development capital compensation securities stage Total - -------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1993 $ 10,720,659 $(259,651) $ -- $ (9,660,528) $ 1,136,464 Sale of 2,750,000 shares of common stock, $5.00 per share, net of expenses 12,359,611 -- -- -- 12,362,361 Sale of 103,577 shares of common stock, $6.40 per share, net of expenses 510,707 -- -- -- 510,811 Conversion of 15,625 shares of 9% preferred stock into 2,083 shares of common stock 20,545 -- -- -- 20,547 Conversion of 50,000 shares of Series B preferred stock into 4,906 shares of common stock 28,932 -- -- -- -- Issuance of compensatory stock options 100,625 -- -- -- 100,625 Amortization of deferred compensation -- 58,200 -- -- 58,200 Issuance of 3,401 shares of common stock upon exercise of stock options 6,461 -- -- -- 6,464 9% preferred stock dividends (39,038) -- -- -- (39,038) Unrealized loss on available for sale U.S. Government securities -- -- (163,562) -- (163,562) Net loss -- -- -- (4,704,991) (4,704,991) ------------ ----------- ----------- ------------ ----------- Balance, June 30, 1994 23,708,502 (201,451) (163,562) (14,365,519) 9,287,881 Reclassification of unredeemed 9% preferred stock -- -- -- -- 370,000 Issuance of warrants to purchase 265,000 shares of common stock 232,746 -- -- -- 232,746 Adjustment of accrued dividends for redemption of 9% preferred stock 25,819 -- -- -- 25,819 Issuance of 11,272 shares of common stock upon exercise of stock options 24,023 -- -- -- 24,034 Amortization of deferred compensation -- 56,092 -- -- 56,092 9% preferred stock dividends (33,300) -- -- -- (33,300) Decrease in unrealized loss on available for sale U.S. Government securities -- -- 144,956 -- 144,956 Net loss -- -- -- (6,835,532) (6,835,532) ------------ ----------- ----------- ------------ ----------- Balance, June 30, 1995 $ 23,957,790 $ (145,359) $ (18,606) $(21,201,051) $ 3,272,696 ------------ ----------- ----------- ------------ -----------
Continued... Cortex Pharmaceuticals, Inc. (A development stage enterprise) STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
9% Series B Series C Series D convertible convertible convertible convertible preferred preferred preferred preferred Common stock stock stock stock stock - ------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995 $ 370,000 $ 303,837 $ -- $ -- $ 6,085 Sale of 160 shares of Series C convertible preferred stock, $25,000 per share, net of expenses -- -- 3,576,544 -- -- Issuance of warrants to purchase 106,195 shares of common stock -- -- (136,654) -- -- Conversion of 260,000 shares of 9% preferred stock into 34,667 shares of common stock (260,000) -- -- -- 35 Conversion of 375,000 shares of Series B preferred stock into 36,793 shares of common stock -- (217,027) -- -- 37 Conversion of 125 shares of Series C preferred stock into 1,133,037 shares of common stock -- -- (2,687,414) -- 1,133 Adjustment of accrued dividends for conversion of 9% preferred stock -- -- -- -- -- Issuance of 205,878 shares of common stock upon exercise of stock options -- -- -- -- 206 Amortization of deferred compensation -- -- -- -- -- Reversal of unamortized deferred compensation upon resignation of Chief Executive Officer -- -- -- -- -- 9% preferred stock dividends -- -- -- -- -- Decrease in unrealized loss on available for sale U.S. Government securities -- -- -- -- -- Net loss -- -- -- -- -- ----------- ----------- ------------ ----------- ----------- Balance, June 30, 1996 110,000 86,810 752,476 -- 7,496 Series A preferred stock imputed dividends -- -- -- -- -- Sale of 400 shares of Series D convertible preferred stock, $10,000 per share, net of expenses -- -- -- 3,719,636 -- Series D preferred stock imputed dividends -- -- -- -- -- Conversion of 35 shares of Series C convertible preferred stock into 384,574 shares of common stock -- -- (752,476) -- 384 Conversion of 400 shares of Series D convertible preferred stock into 1,433,437 shares of common stock -- -- -- (3,719,636) 1,433 Issuance of 50,000 shares of common stock upon exercise of warrant -- -- -- -- 50 Issuance of 30,662 shares of common stock upon exercise of stock options -- -- -- -- 31 9% preferred stock dividends -- -- -- -- -- Net loss -- -- -- -- -- ----------- ----------- ------------ ----------- ----------- Balance, June 30, 1997 $ 110,000 $ 86,810 $ -- $ -- $ 9,394 ----------- ----------- ------------ ----------- ----------- Unrealized loss on Deficit available for accumulated Additional sale U.S. during the paid-in Deferred Government development capital compensation securities stage Total - ------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995 $23,957,790 $(145,359) $ (18,606) $(21,201,051) $ 3,272,696 Sale of 160 shares of Series C convertible preferred stock, $25,000 per share, net of expenses -- -- -- -- 3,576,544 Issuance of warrants to purchase 106,195 shares of common stock 136,654 -- -- -- -- Conversion of 260,000 shares of 9% preferred stock into 34,667 shares of common stock 259,965 -- -- -- -- Conversion of 375,000 shares of Series B preferred stock into 36,793 shares of common stock 216,990 -- -- -- -- Conversion of 125 shares of Series C preferred stock into 1,133,037 shares of common stock 2,686,281 -- -- -- -- Adjustment of accrued dividends for conversion of 9% preferred stock 128,700 -- -- -- 128,700 Issuance of 205,878 shares of common stock upon exercise of stock options 774,049 -- -- -- 774,255 Amortization of deferred compensation -- 42,109 -- -- 42,109 Reversal of unamortized deferred compensation upon resignation of Chief Executive Officer (103,250) 103,250 -- -- -- 9% preferred stock dividends (9,900) -- -- -- (9,900) Decrease in unrealized loss on available for sale U.S. Government securities -- -- 18,606 -- 18,606 Net loss -- -- -- (4,158,247) (4,158,247) ----------- ----------- ----------- ------------ ----------- Balance, June 30, 1996 28,047,279 -- -- (25,359,298) 3,644,763 Series A preferred stock imputed dividends 1,012,493 -- -- (1,012,493) -- Sale of 400 shares of Series D convertible preferred stock, $10,000 per share, net of expenses -- -- -- -- 3,719,636 Series D preferred stock imputed dividends 879,672 -- -- (879,672) -- Conversion of 35 shares of Series C convertible preferred stock into 384,574 shares of common stock 752,092 -- -- -- -- Conversion of 400 shares of Series D convertible preferred stock into 1,433,437 shares of common stock 3,718,203 -- -- -- -- Issuance of 50,000 shares of common stock upon exercise of warrant 149,950 -- -- -- 150,000 Issuance of 30,662 shares of common stock upon exercise of stock options 93,737 -- -- -- 93,768 9% preferred stock dividends (9,900) -- -- -- (9,900) Net loss -- -- -- (4,929,980) (4,929,980) ----------- ----------- ----------- ------------ ----------- Balance, June 30, 1997 $34,643,526 $ -- $ -- $(32,181,443) $ 2,668,287 ----------- ----------- ----------- ------------ -----------
Continued.............. Cortex Pharmaceuticals, Inc. (A development stage enterprise) STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
9% Series B Series C Series D convertible convertible convertible convertible preferred preferred preferred preferred Common stock stock stock stock stock - ------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1997 $ 110,000 $ 86,810 $ -- $ -- $ 9,394 Issuance of warrants to purchase 75,000 shares of common stock -- -- -- -- -- Conversion of 75,000 shares of 9% preferred stock into 9,999 shares of common stock (75,000) -- -- -- 10 Conversion of 150 shares of Series A preferred stock into 832,878 shares of common stock -- -- -- -- 833 Adjustment of accrued dividends for conversion of 9% preferred stock -- -- -- -- -- 9% preferred stock dividends -- -- -- -- -- Net loss -- -- -- -- -- ----------- ----------- ------------ ----------- ----------- Balance, June 30, 1998 35,000 86,810 -- -- 10,237 Conversion of 7,500 shares of 9% preferred stock into 999 shares of common stock (7,500) -- -- -- -- Conversion of 75,000 shares of Series B preferred stock into 7,359 shares of common stock -- (43,405) -- -- 7 Conversion of 250 shares of Series A preferred stock into 5,272,398 shares of common stock -- -- -- -- 5,273 Adjustment of accrued dividends for conversion of 9% preferred stock -- -- -- -- -- 9% preferred stock dividends -- -- -- -- -- Issuance of compensatory stock options -- -- -- -- -- Issuance of 1,500 shares of common stock upon exercise of stock options -- -- -- -- 2 Net loss -- -- -- -- -- ----------- ----------- ------------ ----------- ----------- Balance, June 30, 1999 27,500 43,405 -- -- 15,519 ----------- ----------- ------------ ----------- ----------- Issuance of 8,800 shares of common stock upon exercise of stock options -- -- -- -- 9 Net loss -- -- -- -- -- ----------- ----------- ------------ ----------- ----------- Balance, September 30, 1999 $ 27,500 $ 43,405 $ -- $ -- $ 15,528 =========== =========== ============ =========== =========== Unrealized gain on Deficit available for accumulated Additional sale U.S. during the paid-in Deferred Government development capital compensation securities stage Total - ------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1997 $34,643,526 $ -- $ -- $(32,181,443) $ 2,668,287 Issuance of warrants to purchase 75,000 shares of common stock 34,774 -- -- -- 34,774 Conversion of 75,000 shares of 9% preferred stock into 9,999 shares of common stock 74,990 -- -- -- -- Conversion of 150 shares of Series A preferred stock into 832,878 shares of common stock 1,475,437 -- -- -- 1,476,270 Adjustment of accrued dividends for conversion of 9% preferred stock 50,625 -- -- -- 50,625 9% preferred stock dividends (3,150) -- -- -- (3,150) Net loss -- -- -- (5,257,960) (5,257,960) ----------- ----------- ----------- ------------ ----------- Balance, June 30, 1998 36,276,202 -- -- (37,439,403) (1,031,154) Conversion of 7,500 shares of 9% preferred stock into 999 shares of common stock 7,500 -- -- -- -- Conversion of 75,000 shares of Series B preferred stock into 7,359 shares of common stock 43,398 -- -- -- -- Conversion of 250 shares of Series A preferred stock into 5,272,398 shares of common stock 2,455,177 -- -- -- 2,460,450 Adjustment of accrued dividends for conversion of 9% preferred stock 5,737 -- -- -- 5,737 9% preferred stock dividends (2,475) -- -- -- (2,475) Issuance of compensatory stock options 25,000 -- -- -- 25,000 Issuance of 1,500 shares of common stock upon exercise of stock options 561 -- -- -- 563 Net loss -- -- -- (1,621,450) (1,621,450) ----------- ----------- ----------- ------------ ----------- Balance, June 30, 1999 38,811,100 -- -- (39,060,853) (163,329) ----------- ----------- ----------- ------------ ----------- Issuance of 8,800 shares of common stock upon exercise of stock options 3,292 -- -- -- 3,301 Net loss -- -- -- (291,183) (291,183) ----------- ----------- ----------- ------------ ----------- Balance, September 30, 1999 $38,814,392 $ -- $ -- $(39,352,036) $ (451,211) =========== =========== =========== ============ ===========
See accompanying notes. Cortex Pharmaceuticals, Inc. (A development stage enterprise) STATEMENTS OF CASH FLOWS
(Unaudited) Period from Period from (Unaudited) inception inception Three months ended (February 10, (February 10, September 30, 1987) through Years ended June 30, 1987) through ------------------------ September 30, -------------------------- June 30, 1999 1998 1999 1999 1998 1999 ----------- ----------- ------------- ------------ ------------ ------------- Cash flows from operating activities: Net loss $(291,183) $(1,186,358) $(37,320,197) $ (1,621,450) $ (5,257,960) $(37,029,014) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 46,835 52,607 1,753,238 197,662 201,660 1,706,403 Settlement with Alkermes, Inc. -- -- 1,227,977 -- -- 1,227,977 Changes in operating assets/liabilities: Accounts payable and accrued expenses (69,442) 56,273 620,113 219,033 (89,764) 689,555 Accrued interest on U.S. Govt securities -- -- (171,238) -- (8,709) (171,238) Other current assets 29,476 42,564 (31,501) 10,589 (36) (60,977) Interest receivable from former officer -- -- (19,274) -- -- (19,274) Realized loss on sale of U.S. Govt securities -- -- 54,317 -- -- 54,317 Stock option compensation expense -- -- 555,809 -- -- 555,809 Stock issued for services -- -- 28,750 -- -- 28,750 Reduction in note receivable from former officer- compensation expense -- -- 22,600 -- -- 22,600 Other (196,922) 12,906 45,220 53,145 88,743 242,142 ------------ ------------ ------------ ------------ ------------ ------------ Net cash used in operating activities (481,236) (1,022,008) (33,234,186) (1,141,021) (5,066,066) (32,752,950) ------------ ------------ ------------ ------------ ------------ ------------ Cash flows from investing activities: U.S. Government securities-available for sale Purchases -- -- (38,823,738) -- (1,739,995) (38,823,738) Sales -- -- 38,940,820 -- 1,750,000 38,940,820 Purchase of fixed assets (4,243) (2,580) (2,214,092) (74,213) (187,235) (2,209,849) Sale of fixed assets -- -- 10,988 -- -- 10,988 Decrease (increase) in - Other assets -- -- (39,870) -- -- (39,870) Note receivable from former officer -- -- (100,000) -- -- (100,000) ------------ ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities (4,243) (2,580) (2,225,892) (74,213) (177,230) (2,221,649) ------------ ------------ ------------ ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of 9% preferred stock -- -- 1,076,588 -- -- 1,076,588 Redemption of 9% preferred stock -- -- (63,750) -- -- (63,750) Payment of 9% preferred stock dividends -- -- (110,250) -- -- (110,250) Proceeds from issuance of convertible preferred stock -- -- 13,074,007 -- -- 13,074,007 Proceeds from issuance of common stock 3,301 -- 21,926,282 563 -- 21,922,981 Proceeds from subordinated convertible note -- -- 208,333 -- -- 208,333 Principal payments on note payable to Alkermes, Inc. (137,888) -- (337,888) -- (200,000) (200,000) Principal payments on capitalized leases -- -- (23,973) -- (1,499) (23,973) ------------ ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (134,587) -- 35,749,349 563 (201,499) 35,883,936 ------------ ------------ ------------ ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents (620,066) (1,024,588) 289,271 (1,214,671) (5,444,795) 909,337 Cash and cash equivalents, beginning of period 909,337 2,124,008 -- 2,124,008 7,568,803 -- ------------ ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 289,271 $ 1,099,420 $ 289,271 $ 909,337 $ 2,124,008 $ 909,337 ============ ============ ============ ============ ============ ============ See accompanying notes.
F-10 Cortex Pharmaceuticals, Inc. (A development stage enterprise) NOTES TO FINANCIAL STATEMENTS Period from inception (February 10, 1987) through September 30, 1999 All information as of September 30, 1999, for the three-month periods ended September 30, 1999 and 1998, and for the period from inception (February 10, 1987) through September 30, 1999 is unaudited. 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, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2000. Note 1 -- Business and Summary of Significant Accounting Policies Business -- Cortex Pharmaceuticals, Inc. (the "Company") was formed to engage in the discovery, development and commercialization of innovative pharmaceuticals for the treatment of neurodegenerative diseases and other neurological and psychiatric disorders. Since its formation in 1987, the Company has been engaged in research and early clinical development activities. Basis of Presentation; Development Stage Enterprise -- The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of business. As of September 30, 1999, the Company had an accumulated deficit of $39,352,036, net capital deficiency of $451,211 and negative working capital of $987,326. Due to the Company's recurring losses and net capital deficiency, there can be no assurance that the Company will be able to obtain additional operating capital, which may impact the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets of the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. From inception through September 30, 1999, the Company has generated only modest operating revenues and has incurred losses aggregating $37,320,197. Successful completion of the Company's development program and its transition, ultimately, to attaining profitable operations is dependent upon obtaining additional financing adequate to fulfill its research and development activities, and achieving a level of revenue adequate to support the Company's cost structure. There is no assurance that the Company will be successful in these areas. 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 5). The agreement will enable Organon to develop or commercialize the Company's Ampakine(R) technology for the treatment of schizophrenia and, at Organon's election, for the treatment of depression. 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 certain of the technologies and products that the Company is developing. Competition for corporate partnering arrangements 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 any 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 may need to raise additional capital through the sale of debt or equity. There is no assurance that such funds will be available on favorable terms, or at all and if additional funds are raised by issuing equity securities, dilution to existing stockholders is likely to result. F-11 Cash Equivalents -- The Company considers all highly liquid short-term investments with maturities of less than three months when acquired to be cash equivalents. Furniture, Equipment and Leasehold Improvements -- Furniture, equipment and leasehold improvements are recorded at cost and are being depreciated on a straight-line basis over the lesser of their estimated useful lives, ranging from five to ten years, or the life of the lease, as appropriate. Net Loss per Share -- Net loss per share is computed based on the weighted average number of common shares outstanding and includes preferred stock dividends. Shares issuable upon conversion of preferred stock and upon exercise of outstanding stock options and warrants are not included since the effects would be anti-dilutive. For purposes of computing net loss per share, preferred stock dividends include dividends that actually accrued and `imputed dividends' for preferred stock issued with a nondetachable beneficial conversion feature near the date of issuance. Imputed dividend represents the aggregate difference between the conversion price and the fair market value of the common stock as of the date of issuance of the preferred stock, without regard to the actual date upon which the preferred stock may be converted. New Accounting Standard -- In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. SFAS No. 130 requires the reporting of all components of comprehensive income, including net income, in the financial statements in the period in which the components are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments and unrealized gains and losses on investments, shall be reported net of their related tax effect to arrive at comprehensive income. Because comprehensive loss was not different than net loss, adoption of SFAS No. 130 did not have an impact on the Company's financial statements. Employee Stock Options -- The Company has elected to follow Accounting Principles Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), in accounting for its employee stock options because the alternative fair value accounting provided under Statement of Financial Accounting Standards No. 123, "Accounting for Stock -Based Compensation" (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 equals the market price of the underlying stock on the date of grant. Research and Development Costs -- All costs related to research and development activities are treated as expenses in the period incurred. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications -- Certain previously reported amounts have been reclassified to conform with the June 30, 1999 presentation. F-12 Note 2 -- Furniture, Equipment and Leasehold Improvements Furniture, equipment and leasehold improvements consist of the following:
(Unaudited) September 30, 1999 June 30, 1999 June 30, 1998 ------------------------------------------------ Laboratory equipment $ 1,217,994 $ 1,216,266 $ 1,168,958 Leasehold improvements 622,036 622,036 622,036 Furniture and equipment 112,129 112,129 112,129 Computers and software 265,428 262,913 236,008 ----------- ----------- ----------- 2,217,587 2,213,344 2,139,131 Accumulated depreciation (1,728,209) (1,681,374) (1,483,712) ----------- ----------- ----------- $ 489,378 $ 531,970 $ 665,419 =========== =========== ===========
Note 3 -- Redeemable Preferred Stock Series A Convertible Preferred Stock ("Series A Preferred") at June 30, 1998 consisted of 250 shares of 400 shares originally issued in a two-tranche private placement in June 1997. The Series A Preferred was convertible at an effective conversion price derived from the lowest of the dollar volume weighted average trading prices of the Company's common stock for each of the five trading days immediately preceding the conversion date ("Average Stock Price"). The effective conversion price was equal to 80% of the Average Stock Price if the Average Stock Price was greater than $2.50 per share at the time of conversion; $2.00 per share if the Average Stock Price was less than $2.50 but greater than $2.10 per share; or 95% of the Average Stock Price if the Average Stock Price was less than or equal to $2.10 per share. The conversion rate was subject to adjustment at the rate of six percent per annum based on the length of the period from issuance of the Series A Preferred until its conversion. As of June 30, 1999, all outstanding shares of Series A Preferred had been converted into an aggregate of 6,105,276 shares of the Company's common stock at effective conversion prices ranging from $0.30 to $2.17 per share of common stock. Imputed dividends of $1,012,493 related to the private placement were recorded for the year ended June 30, 1997. Note 4 -- Stockholders' Equity Preferred Stock The Company has authorized a total of 5,000,000 shares of preferred stock, par value $0.001 per share, of which 1,250,000 shares have been designated as 9% Cumulative Convertible Preferred Stock (non-voting, "9% Preferred"); 3,200,000 shares have been designated as Series B Convertible Preferred Stock (non-voting, "Series B Preferred"); 500 shares have been designated as Series D Convertible Preferred Stock (non-voting, "Series D Preferred"); 400 shares have been designated as Series A Convertible Preferred Stock (non-voting, "Series A Preferred"); and 549,100 shares are presently undesignated and may be issued with such rights and powers as the Board of Directors may designate. The 9% Cumulative Convertible Preferred Stock as of September 30, 1999, June 30, 1999 and June 30, 1998 consisted of 27,500, 27,500 and 35,000 shares, respectively, of an original 1,250,000 shares of 9% Preferred issued in a 1988 private placement. Each share of 9% Preferred is convertible into approximately 0.1333 shares of common stock at an effective conversion price of $7.50 per share of common stock, subject to adjustment under certain circumstances, such as stock splits or stock dividends. Cash dividends on the 9% Preferred accrue semi-annually on June 15th and December 15th at the rate of $0.09 per share per annum. In order to conserve capital for operations, the Company has elected not to distribute the dividends that have accrued from June 15, 1990. Upon conversion of 9% Preferred, accrued and unpaid dividends are credited to additional paid-in capital. Accrued and unpaid dividends as of September 30, 1999, June 30, 1999 and June 30, 1998 were $23,513, $23,513, and F-13 $26,775, respectively. The Company may redeem the 9% Preferred at any time at a price of $1.00 per share, an amount equal to its liquidation preference, upon not less than 30 nor more than 60 days' notice. Series B Convertible Preferred Stock as of September 30, 1999, June 30, 1999 and June 30, 1998 consisted of 75,000, 75,000 and 150,000 shares, respectively, of Series B Preferred issued in a May 1991 private placement. Each share of Series B Preferred is convertible into approximately 0.09812 shares of common stock at an effective conversion price of $6.795 per share of common stock, subject to adjustment under certain circumstances such as stock splits or stock dividends. The Series B Preferred may be redeemed by the Company at a price of $0.6667 per share, an amount equal to its liquidation preference, at any time upon 30 days' notice. The liquidation preference of the Series B Preferred is subordinate to that of the 9% Preferred. Series C Convertible Preferred Stock originally consisted of 160 shares issued in a private placement in December 1995. As of June 30, 1997, all outstanding shares of Series C Preferred had been converted into 1,517,611 shares of common stock. The relative effective conversion prices ranged from $2.33 to $2.83, as computed in accordance with a formula that was indexed to the average bid price of the Company's common shares. Series D Convertible Preferred Stock originally consisted of 400 shares issued in a three-tranche private placement initiated in October 1996 and completed in February 1997. As of June 30, 1997, all outstanding shares of Series D Preferred had been converted into an aggregate of 1,433,437 shares of the Company's common stock. The effective conversion prices ranged from $2.06 to $3.35 per share, as computed in accordance with a formula that was indexed to the average bid price of the Company's common shares. During the year ended June 30, 1997, imputed dividends aggregating $879,672 were recorded in connection with the three tranches. Common Stock and Common Stock Purchase Warrants In connection with the December 1995 private placement of 160 shares of Series C Preferred Stock, the Company issued the placement agent for the transaction a five-year non-redeemable warrant to purchase 106,195 shares of common stock at a price of $2.825 per share, subject to adjustment under certain circumstances. The warrants contain cashless exercise provisions and include piggyback registration rights. In connection with the June 1997 private placement of 400 shares of Series A Preferred Stock, the Company issued to the eleven participating institutional investors four-year non-redeemable warrants to purchase an aggregate of 800,000 shares of common stock at a price of $3.08 per share, subject to adjustment under certain circumstances. In connection with the restructuring of the note payable to Alkermes, Inc. (Note 6) in February 1998, the Company issued to Alkermes a five-year warrant to purchase 75,000 share of common stock at an exercise price of $1.547 per share, representing the average of the high and low sale prices of Cortex common stock as of the date of the restructuring. In connection with the restructuring of the note payable to Alkermes, Inc. (Note 6) in July 1999, the Company agreed to issued to Alkermes a five-year warrant to purchase 100,000 shares of common stock at an exercise price derived from the fair market value of the Company's common stock. In accordance with the restructuring agreement, because the balance of the note and accrued interest were not paid by December 31, 1999, the Company agreed to issue to Alkermes an additional five-year warrant to purchase 50,000 shares of common stock at an exercise price of $0.76 per share. The exercise price for this warrant represents the average of the closing prices reported for the Company's common stock for the 30 trading days preceding December 31, 1999. As of September 30, 1999, the Company had reserved an aggregate of 3,667 shares of common stock for issuance upon conversion of the outstanding 9% Preferred Stock; 7,359 shares for issuance upon conversion of the Series B Preferred Stock; 1,401,501 shares for issuance upon exercise of warrants; and 1,439,497 shares for issuance upon exercise of outstanding stock options. F-14 Stock Option and Stock Purchase Plans Employee/Director Option Plan -- The Company's 1989 Incentive Stock Option, Nonqualified Stock Option and Stock Purchase Plan provided for the granting by the Company of options and rights to purchase up to an aggregate of 700,000 shares of the Company's authorized but unissued common stock (subject to adjustment under certain circumstances, such as stock splits, recapitalizations and reorganizations) to directors, officers and other employees of the Company. The exercise price of nonqualified stock options and the purchase price of stock offered under this plan, which terminated February 2, 1999, was at least 85% of the fair market value of the common stock on the date of grant. The exercise price of incentive stock options was at least equal to the fair market value of the common stock on the date of grant. As of September 30, 1999 and June 30, 1999, there were no options outstanding under this plan. Consultant Plan -- The Company's 1989 Special Nonqualified Stock Option and Stock Purchase Plan provided for the granting by the Company of options and rights to purchase up to an aggregate of 400,000 shares of the Company's authorized but unissued common stock (subject to adjustment under certain circumstances, such as stock splits, recapitalizations and reorganizations) to consultants to the Company. The exercise price of nonqualified stock options and the purchase price of stock offered under this plan, which terminated February 2, 1999, was at least 50% of the fair market value of the common stock on the date of grant. As of September 30, 1999 and June 30, 1999, options to purchase an aggregate of 2,000 shares of common stock were outstanding under this plan. 1996 Stock Incentive Plan -- The Company's 1996 Stock Incentive Plan ("1996 Plan") provides for the granting of options and rights to purchase up to an aggregate of 3,298,058 shares of the Company's authorized but unissued common stock (subject to adjustment under certain circumstances, such as stock splits, recapitalizations and reorganizations) to qualified employees, officers, directors, consultants and other service providers. No further options will be granted under the Company's earlier stock option and stock purchase plans. The exercise price of nonqualified stock options and the purchase price of stock offered under the 1996 Plan, which terminates October 25, 2006, must be at least 85% of the fair market value of the common stock of the date of grant. The exercise price of incentive stock options must be at least equal to the fair market value of the common stock on the date of grant. Each non-employee director (other than those who serve on the Board of Directors to oversee an investment in the Company) is automatically granted options to purchase 15,000 shares of common stock upon commencement of service as a director and additional options to purchase 6,000 shares of common stock on the date of each Annual Meeting of Stockholders. Non-employee directors who serve on the Board of Directors to oversee an investment in the Company receive options to purchase 7,500 shares of common stock upon commencement of service as a director and additional options to purchase 3,000 shares of common stock on the date of each Annual Meeting of Stockholders. These nonqualified options have an exercise price equal to 100% of the fair market value of the common stock on the date of grant, have a ten-year term and vest in equal increments of 33-1/3% on the anniversary dates of the dates of grant. As of September 30, 1999 and June 30, 1999, options to purchase an aggregate of 1,437,497 and 1,440,796 shares of common stock, respectively, were outstanding under the 1996 Plan, and an additional 1,858,561 and 807,611 shares of common stock, respectively, were reserved for future option grants. During the year ended June 30, 1999, the Company restated the exercise price of stock options previously granted to employees, directors and some consultants to the Company. Options to purchase a total of 892,456 shares of the Company's common stock were repriced from a weighted average of $3.88 per share to $0.375 per share, representing the fair market value of the Company's common stock as of the date of the repricing. In accordance with APB 25, no expense was recorded as a result of this repricing. The Financial Accounting Standards Board is currently deliberating the accounting for stock option repricings, and is expected to issue new guidance for such transactions. If new guidance is issued, it may require the Company to record additional expense related to the repricing in prospective financial statements. As of September 30, 1999 and June 30, 1999, options to purchase an aggregate of 791,117 and 797,417 shares of common stock, respectively, were exercisable under the Company's stock option plans. During the years ended June 30, 1999 and 1998 and the period from inception (February 10, 1987) through June 30, 1999, options to F-15 purchase 0, 0, and 261,289 shares of common stock, respectively, were issued to certain directors and officers of the Company with exercise prices below the fair market value of the common stock on the dates of grant. The aggregate difference between the fair market value on the date of grant and the exercise price of the options granted has been recorded as compensation expense over the vesting period of the options. Stock option compensation expense related to these transactions, aggregating $0, $0, $555,809, $0, $0 and $555,809 for the three-month periods ended September 30, 1999 and 1998, and the period from inception (February 10, 1987) through September 30, 1999, the years ended June 30, 1999 and 1998 and the period from inception (February 10, 1987) through June 30, 1999, respectively, has been recorded in the accompanying statements of operations. Stock option transactions under the Company's stock option plans for each of the two years in the period ended June 30, 1999 are summarized below:
Weighted average Number exercise price of shares per share ----------------------------- Outstanding as of June 30, 1997 969,179 $ 4.25 Granted 142,029 2.42 Exercised 0 -- Forfeited (116,562) 5.00 ---------- ------------ Outstanding as of June 30, 1998 994,646 $ 3.90 Granted 1,545,896 0.45 Exercised (1,500) 0.38 Forfeited (1,096,246) 3.63 ---------- ------------ Outstanding as of June 30, 1999 1,442,796 $ 0.42 ========== ============ Available for future grant 807,611 ==========
Pro-Forma Information -- The Company has elected to continue accounting for its employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price of the Company's employee stock options is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net loss and net loss per share is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and 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 years ended June 30, 1999 and 1998, respectively: weighted average risk-free interest rates of 5.5% and 5.4%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock of 186% and 90%; and a weighted average life of 3.0 years and 3.3 years. The estimated weighted average fair value of options granted during the years ended June 30, 1999 and 1998 was $0.40 and $1.48, respectively. 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 necessarily provide a reliable single measure of the fair value of its employee stock options. F-16 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 years ended June 30, 1999 and 1998:
June 30, 1999 1998 ------------------------ Pro forma net loss before preferred stock accretion and dividends $1,945,558 $5,567,617 Pro forma net loss applicable to common stock 1,948,033 5,570,767 Pro forma net loss per share $ (0.15) $ (0.58)
The results above are not necessarily indicative of the effects of SFAS 123 on reported net income or loss for future periods as these amounts reflect the related expense for only two years of stock option vesting. Information regarding stock options outstanding at June 30, 1999 is as follows:
Options Outstanding Options Exercisable ---------------------------------------------------- --------------------------------- Weighted Number average Weighted Number Weighted Range of outstanding remaining average exercisable average exercise prices at June 30, 1999 contractual life exercise price at June 30, 1999 exercise price - ---------------------------------------------------------------------------------------------------------- $0.34 - 0.38 984,600 7.3 years $0.37 640,417 $0.38 0.47 - 4.50 458,196 9.6 years 0.58 157,000 0.58 ---------------- ---------------- 1,442,796 797,417 ================ ================
Note 5 -- 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, 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, upon Organon's election, for the treatment of depression. In connection with the agreement with Organon, during the year ended June 30, 1999, the Company received an up-front payment of $2,000,000 and research support payments of $1,150,000. In July 1999, the Company received further research support of $762,500. The agreement includes research support payments of up to $3,000,000 per year for two years (subject to Cortex providing agreed- upon levels of research), milestone payments, plus royalty payments on worldwide sales. Note 6 -- Note Payable to Alkermes, Inc. In January 1992, the Company entered into an agreement with Alkermes, Inc. ("Alkermes") for the development, clinical testing and commercialization of the Company's calpain inhibitor products (the "Alkermes Agreement"). In connection with the Alkermes Agreement, the Company granted Alkermes an exclusive worldwide license to commercialize calpain inhibitor products for the prevention and treatment of acute and chronic neurodegenerative diseases and disorders of the central and peripheral nervous systems. The Company received an aggregate of $3,600,000 in research payments under the Alkermes Agreement during the fiscal years ended June 30, 1992 and 1993. F-17 In November 1993, Alkermes filed an action alleging that the Company had breached the Alkermes Agreement by developing calpain inhibitors for cerebral vasospasm. In October 1995, the Company and Alkermes agreed to a settlement of the dispute. Alkermes agreed to dismiss its action against the Company and to relinquish all rights previously granted them by the Company, as well as rights to related technologies developed by Alkermes. In connection with the settlement, the Company issued to Alkermes a $1,000,000 three-year promissory note accruing interest semi-annually at the federal funds rate. The Company also committed to pay Alkermes a graduated royalty on calpain inhibitor development proceeds, as defined and subject to certain limitations. In February 1998, the terms of the note were restructured to include a principal payment of $200,000 upon signing of the new agreement. The balance of the note and accrued interest was payable in October 1999 or upon the consummation of a corporate partnership between Cortex and a larger pharmaceutical company, whichever was earlier. In connection with the restructuring agreement, the Company issued to Alkermes a five-year warrant to purchase 75,000 shares of common stock at an exercise price of $1.55 per share, representing the average of the high and low sale prices of Cortex common stock as of the date of the restructuring. With the signing of the license agreement with NV Organon (Note 5), the note and accrued interest became due and payable. In July 1999, Alkermes agreed to restructure the terms of the note to include a principal and interest payment of $250,000 and monthly payments of $50,000 from August 1999 through January 2000. The balance of the note and accrued interest are due and payable on or before February 28, 2000. Interest on the unpaid balance accrues at a 1% to 3% premium to the prime lending rate, based upon the date of payment. In connection with this restructuring agreement, the Company agreed to issue to Alkermes a five-year warrant to purchase 100,000 shares of common stock at an exercise price derived from the fair market value of the Company's common stock. In accordance with the restructuring agreement, because the balance of principal and accrued interest was not paid by December 31, 1999, Cortex has agreed to issue to Alkermes another five-year warrant to purchase 50,000 shares of common stock at a price per share of $0.76. This exercise price is derived from the average of the closing sale prices reported for the Company's common stock for the 30 trading days preceding December 31, 1999. If the Company needs to extend the due date of the note, it has agreed to issue to Alkermes another five-year warrant to purchase 50,000 shares of Cortex common stock. The exercise price for this warrant will be derived from the fair market value of the stock as of February 28, 2000. If the due date is extended, the Company agrees to continue to pay Alkermes $50,000 per month, with the balance of the note and accrued interest due May 31, 2000. Note 7 -- Commitments The Company leases its offices and research laboratories under an operating lease that expires May 31, 2004. Rent expense under this lease for the three- month periods ended September 30, 1999 and 1998, the period from inception (February 10, 1987) through September 30, 1999, the years ended June 30, 1999 and 1998 and the period from inception (February 10, 1987) through June 30, 1999 was $58,000, $55,000, $2,191,000, $260,000, $234,000 and $2,133,000, respectively. Commitments under the lease for the years ending June 30, 2000, 2001, 2002, 2003 and 2004 are $255,000, $310,000, $353,000, $368,000 and $356,000, respectively. As of June 30, 1999, the Company was obligated to an executive officer under an employment agreement expiring in May 2000. The agreement involves annual salary payments aggregating $220,000 and provides for bonuses under certain circumstances. Additionally, in the event that the Company commercializes a compound developed by or under the supervision of one of its senior scientific employees, the Company may be obligated to pay the employee a royalty based on net sales, as defined and subject to adjustment, of products containing the compound. As of June 30, 1999, the Company was committed under scientific consulting and external research agreements to annual payments aggregating approximately $672,000. The Company has entered agreements with an academic institution that provide the Company exclusive rights to certain of the technologies that the Company is developing. Under the terms of the agreements, the Company is committed to royalty payments. These payments include minimum annual royalties of $90,000 for the year ending June 30, 2000 and for each year thereafter for the remaining life of the patents covering the subject technologies. The agreements also commit the Company to pay up to an additional $875,000 upon achieving certain clinical testing and regulatory approval milestones, as well as a portion of certain remuneration received by the Company in connection with sublicensing agreements that the Company may enter into. F-18 Note 8 -- Related Party Transactions During the years ended June 30, 1999 and 1998, and the period from inception (February 10, 1987) through June 30, 1999, the Company paid or accrued scientific and other consulting fees to stockholders aggregating $78,417, $88,000 and $1,184,974, respectively. Under certain circumstances, the Company is obligated to make royalty payments to certain of its scientific consultants, some of whom are stockholders, and to one employee, upon successful commercialization of certain of its products by the Company or its licensees. In connection with its services as placement agent in the 1993 private placement of 2,750,000 shares of common stock, Vector was paid a fee of $1,096,800 and was issued a five-year non-redeemable warrant to purchase 274,200 shares of the Company's common stock at $9.375 per share. In connection with Vector's assistance in reaching the settlement with Alkermes (Note 6), this warrant was canceled and reissued as a new warrant to purchase 363,113 shares of the Company's common stock at $3.47 per share, as adjusted and subject to further adjustment, at any time through January 15, 2000. The value of this new warrant was computed utilizing the Black-Scholes option pricing model, and was recorded with the expense of the settlement with Alkermes in the accompanying statement of operations. This warrant expired unexercised. As consideration for its agreement to provide financial advisory services, as amended and extended in November 1994, Vector was paid a retainer of $50,000 and was issued a six-year non-redeemable warrant to purchase 57,193 shares of the Company's common stock at $3.06 per share, subject to adjustment under certain circumstances. Warrants to purchase 8,169 shares of the Company's common stock vested immediately, and warrants to purchase 24,512 shares of the Company's common stock vest upon the consummation of each strategic alliance when and as secured by Vector. Note 9 -- Income Taxes The Company uses the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the liability method, deferred taxes are determined based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. As of June 30, 1999, the Company had federal and California tax net operating loss carryforwards of approximately $34,459,000 and $4,131,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California franchise tax purposes and the fifty percent limitation on California loss carryforwards. The California tax loss carryforwards will continue to expire in 1999 (approximately $701,000 expired in 1998), while the federal carryforwards begin expiring in 2004. The Company also has federal and California research and development tax credit carryforwards totaling $1,154,000 and $440,000, respectively, which will begin to expire in 2004. Utilization of the net operating loss and tax credit carryforwards from the tax years ended on or before June 30, 1992 is subject to an annual limitation of approximately $1,500,000, due to ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. If there should be future changes of ownership, these annual limitations for utilization of net operating loss and tax credit carryforwards may become more restrictive. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's net operating loss carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within any three-year period since the last ownership change. Significant components of the Company's deferred tax assets as of June 30, 1999 and June 30, 1998 are shown below. The valuation allowance related to deferred tax assets is $15,629,000 and $15,413,000 for the years ended June 30, 1999 and 1998, respectively. The increase in the valuation allowance for the year ended June 30, 1999 of $216,000 is primarily due to additional reserves required for new deferred tax assets. F-19 Deferred tax assets:
June 30, 1999 1998 ---------------------------- Net operating loss carryforwards $ 12,299,000 $ 11,727,000 Capital loss carryforwards 22,000 23,000 Research and development credits 1,436,000 1,336,000 Capitalized research and development costs 1,309,000 1,801,000 Settlement with Alkermes, Inc. 407,000 406,000 Depreciation 88,000 83,000 Other-net 68,000 37,000 ------------ ------------ Net deferred tax assets 15,629,000 15,413,000 ------------ ------------ Valuation allowance for deferred tax assets (15,629,000) (15,413,000) ------------ ------------ Total deferred tax assets $ -- $ -- ============ ============
F-20 No person has been authorized in connection with the offering made hereby to give any information or to make any representation not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Selling Stockholders. This Prospectus does not constitute any offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person or by anyone in any jurisdiction in which it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any date subsequent to the date hereof. =============== TABLE OF CONTENTS Page Prospectus Summary............................................. 3 Risk Factors................................................... 5 Use of Proceeds................................................ 9 Price Range of Common Stock.................................... 10 Dividend Policy................................................ 11 Capitalization................................................. 11 Selected Financial Data........................................ 12 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 14 Business....................................................... 18 Management..................................................... 26 Certain Transactions........................................... 32 Principal Stockholders......................................... 33 Description of Securities...................................... 34 Selling Stockholders........................................... 37 Plan of Distribution........................................... 38 Legal Matters.................................................. 38 Experts........................................................ 38 Index to Financial Statements.................................. F-1 Report of Independent Auditors................................. F-2 Financial Statements........................................... F-3 =============== ____ SHARES CORTEX PHARMACEUTICALS, INC. COMMON STOCK =============== PROSPECTUS =============== __________, 2000 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law makes provision for the indemnification of officers and directors in terms sufficiently broad as to include indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). The Restated Certificate of Incorporation of the Company provides that the Company shall indemnify officers and directors to the fullest extent permitted by statute. In addition, as permitted by Section 102(b)(7) of the Delaware Corporation Law, the Restated Certificate of Incorporation of the Company provides that a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of the director's fiduciary duty of care. However, as provided by Delaware law, such limitation of liability will not act to limit liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for any acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) arising under the provision of the Delaware General Corporation Law relating to unlawful distributions, or (iv) for any transaction from which the director derived an improper benefit. The Company has entered into indemnification agreements with each of its directors and its officers, which provide for the indemnification of directors and the officers of the Company against any and all expenses, judgements, fines, penalties and amounts paid in settlement, to the fullest extent permitted by law. Item 25. Other Expenses of Issuance and Distribution The following table sets forth the estimated expenses of this offering (excluding commissions), none of which expenses are being paid by the security holders. All of the amounts shown are estimates except the Securities and Exchange Commission registration fee.
Amount ------- SEC Registration Fee $ 4,095 Accounting Fees and Expenses 20,000 Legal Fees and Expenses 25,000 Miscellaneous 25,000 ------- $74,095 =======
Item 26. Recent Sales of Unregistered Securities The following consists of information relating to unregistered securities sold by the Company during the past three years. 1. On February 12, 1997, the Company sold 150 shares of Series D Preferred Stock to one accredited investor for gross proceeds of $1,500,000. 2. On June 5, 1997, the Company sold 200 shares of Series A Preferred Stock and issued warrants to purchase 400,000 shares of Common Stock to eleven accredited investors for gross proceeds of $2,000,000. II-1 3. On June 30, 1997, the Company sold 200 shares of Series A Preferred Stock and issued warrants to purchase 400,000 shares of Common Stock to eleven accredited investors for gross proceeds of $2,000,000. 4. In February 1998, the Company issued a warrant to purchase 75,000 shares of Common Stock to Alkermes, Inc. in connection with the restructuring of a promissory note. 5. In July 1999, the Company issued a warrant to purchase 100,000 shares of Common Stock to Alkermes, Inc. in connection with the restructuring of a promissory note. 6. In December 1999, the Company issued a warrant to purchase 50,000 shares of Common Stock to Alkermes, Inc. in connection with the restructuring of a promissory note. The foregoing sales of securities described above were made in reliance upon the exemption from the registration provisions of the Securities Act of 1933 set forth in Section 4(2) thereof as transactions by an issuer not involving any public offering. The Company has reason to believe that all of the foregoing purchasers were familiar with or had access to information concerning the operations and financial condition of the Company, and each of the purchasers acquiring securities in exchange for cash consideration represented that it was acquiring the shares for investment and not with a view to the distribution thereof. At the time of issuance, all of the foregoing shares of Common Stock were deemed to be restricted securities for purposes of the Securities Act of 1933 and the certificates representing such securities bear legends to that effect. Item 27. Exhibits
Exhibit Number Description - -------------------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation dated April 11, 1989, as amended by Certificate of Amendment on June 27, 1989, by Certificate of Designation filed April 29, 1991, by Certificate of Correction filed May 1, 1991, by Certificate of Amendment of Certificate of Designation filed June 13, 1991, by Certificate of Amendment of Certificate of Incorporation filed November 12, 1992, by Certificate of Amendment of Restated Certificate of Incorporation filed January 11, 1995, by Certificate of Designation filed December 8, 1995, by Certificate of Designation filed October 15, 1996, and by Certificate of Designation filed June 4, 1997, and by Certificate of Amendment filed December 21, 1998. 3.2 By-Laws of the Company, as adopted March 4, 1987, and amended through October 8, 1996, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-KSB filed October 15, 1996. 5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional Corporation, Counsel to the Registrant, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, Number 333-29493, filed June 18, 1997. 10.2 Consulting Agreement, dated October 30, 1987, between the Company and Carl W. Cotman, Ph.D.* 10.3 Consulting Agreement, dated as October 30, 1987, between the Company and Gary S. Lynch, Ph.D.* 10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan.* 10.19 License Agreement dated March 27, 1991 between the Company and the Regents of the University of California, incorporated by reference to Exhibit 10.19 of the Company's Amendment on Form 8 filed November 27, 1991 to the Company's Annual Report on Form 10-K filed September 30, 1991. (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934).
II-2
Exhibit Number Description - -------------------------------------------------------------------------------- 10.31 License Agreement dated June 25, 1993 between the Company and the Regents of the University of California, incorporated by reference to the Company's Amendment of Annual Report on Form 10-KSB/A filed November 26, 1993. (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company's application requesting confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934). 10.42 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase Plan adopted December 13, 1993, incorporated by reference to Exhibit 4.8 of the Company's Registration Statement on Form S-8 filed January 28, 1994. 10.44 Lease Agreement, dated January 31, 1994, for the Company's facilities in Irvine, California, incorporated by reference to Exhibit 10.44 of the Company's Quarterly Report on Form 10-QSB filed May 16, 1994. 10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase Plan adopted December 1994, incorporated by reference to Exhibit 4.9 of the Company's Registration Statement on Form S-8 filed February 8, 1995. 10.48 Amendment to the Non-Employee Director Formula Grant Plan, adopted December 15, 1994, incorporated by reference to the same numbered Exhibit to the Company's Annual Report on Form 10-KSB filed October 13, 1995.* 10.49 Settlement Agreement between the Company and Alkermes, Inc., dated October 5, 1995, incorporated by reference to the same numbered Exhibit to the Company's Annual Report on Form 10-KSB filed October 13, 1995. (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company's Application requesting confidential treatment under Rule 406 of the Securities Act of 1933). 10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued to Swartz Investments, Inc., incorporated by reference to Exhibit 4.3 of the Company's Current Report on Form 8-K filed December 22, 1995. 10.52 Registration Rights Agreement dated December 8, 1995, entered into with purchasers of Series C Preferred Stock and Swartz Investments, Inc., incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K filed December 22, 1995. 10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued to Vector Securities International, Inc., incorporated by reference to the same numbered Exhibit to the Company's Pre-Effective Amendment No. 1 to Post Effective Amendment No. 2 to Registration Statement on Form SB-2, No. 33-71894, filed January 26, 1996. 10.55 Warrant dated November 30, 1995, to purchase 210,000 shares issued to Vector Securities International, Inc., incorporated by reference to the same numbered Exhibit to the Company's Pre-Effective Amendment No. 1 to Post Effective Amendment No. 2 to Registration Statement on Form SB-2, No. 33-71894, filed January 26, 1996. 10.56 Employment Agreement dated May 15, 1996, between the Company and Vincent F. Simmon, Ph.D., incorporated by reference to the same numbered Exhibit to the Company's Current Report on Form 8-K filed June 4, 1996. 10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase Plan adopted December 12, 1995, incorporated by reference to Exhibit 4.10 of the Company's Registration Statement on Form S-8 filed September 13, 1996. 10.60 1996 Stock Incentive Plan, incorporated by reference to the same numbered Exhibit to the Company's Quarterly Report on Form 10-QSB filed November 12, 1996. 10.61 Form of Subscription Agreement with each purchaser of Series A Preferred Stock, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, No. 333- 29493, filed June 18, 1997. 10.62 Form of Warrant issued to each purchaser of Series A Preferred Stock, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, No. 333-29493, filed June 18, 1997.
II-3
Exhibit Number Description - -------------------------------------------------------------------------------- 10.63 Registration Rights Agreement with holders of Series A Preferred Stock, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, No. 333-29493, filed June 18, 1997. 10.64 Research and Collaboration and License Agreement between the Company and N.V. Organon, dated January 13, 1999, incorporated by reference to Exhibit 10.64 of the Company's quarterly report on Form 10-QSB as filed on February 16, 1999. (Portions of this Exhibit were omitted and filed separately with the Secretary of the Commission pursuant to the Company's application requesting confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934.) 10.65 Amendment No. 1 to the Lease Agreement for the Company's facilities in Irvine, California, dated February 1, 1999.** 21 Subsidiaries of the Registrant, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, No. 333-29493, filed June 18, 1997. 23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional Corporation (included in the Opinion filed as Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors. 24 Power of Attorney (included on Signature page). 27 Financial Data Schedule.
- ------------- * Incorporated by reference to the same numbered exhibit of the Company's Registration Statement on Form S-1, No. 33-28284, effective on July 18, 1989. ** Previously filed. II-4 Item 28. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. For purposes of determining any liability under the Securities Act, the Registrant will treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective; and will treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorizes this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on the 8th day of February, 2000. CORTEX PHARMACEUTICALS, INC. By: /s/ Vincent F. Simmon, Ph.D. -------------------------------------------- Vincent F. Simmon, Ph.D. President and Chief Executive Officer We, the undersigned directors officers of Cortex Pharmaceuticals, Inc., do hereby constitute and appoint Vincent F. Simmon, Ph.D. as our true and lawful attorney and agent, to do any and all acts and things in our name and behalf in our capacities as directors and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent may deem necessary or advisable to enable said corporation to comply with the Securities Act of 1933, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but without limitation, power and attorney to sign for us or any of us in our names and in the capacities indicated below, any and all amendments (including post-effective amendments) hereto or any related registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended; and we do hereby ratify and confirm all that the said attorney and agent shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- * Chairman of the Board February 8, 2000 - -------------------------------- and Director Robert F. Allnutt * Director February 8, 2000 - -------------------------------- Charles J. Casamento * Director February 8, 2000 - -------------------------------- Carl W. Cotman, Ph.D.
S-1
Signature Title Date --------- ----- ---- * Director February 8, 2000 - ------------------------------- Michael G. Grey /s/ Maria S. Messinger Chief Financial Officer February 8, 2000 - ------------------------------- Maria S. Messinger /s/ Vincent F. Simmon, Ph.D. President and Chief February 8, 2000 - ------------------------------- Executive Officer, Director Vincent F. Simmon, Ph.D. (Principal Executive Officer) * Director February 8, 2000 - ------------------------------- Davis L. Temple, Jr., Ph.D. /s/ Vincent F. Simmon, Ph.D. - ------------------------------- * Vincent F. Simmon, Ph.D., Attorney-in-fact
S-2 Exhibit Number Description - -------------------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation dated April 11, 1989, as amended by Certificate of Amendment of June 27, 1989, by Certificate of Designation filed April 29, 1991, by Certificate of Correction filed May 1, 1991, by Certificate of Amendment of Certificate of Designation filed June 13, 1991, by Certificate of Amendment of Certificate of Incorporation filed November 12, 1992, by Certificate of Amendment of Restated Certificate of Incorporation filed January 11, 1995, by Certificate of Designation filed December 8, 1995, by Certificate of Designation filed October 15, 1996, by Certificate of Designation filed June 4, 1997 and by Certificate of Amendment filed December 21, 1998. 3.2 By-Laws of the Company, as adopted March 4, 1987, and amended through October 8, 1996, incorporated by reference to the Company's Annual Report on Form 10-KSB filed October 15, 1996. 5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional Corporation, Counsel to Registrant, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, No. 333-29493, filed June 18, 1997. 10.2 Consulting Agreement, dated October 30, 1987, between the Company and Carl W. Cotman, Ph.D. * 10.3 Consulting Agreement, dated as October 30, 1987, between the Company and Gary S. Lynch, Ph.D. * 10.9 1989 Special Nonqualified Stock Option and Stock Purchase Plan. * 10.19 License Agreement dated March 27, 1991 between the Company and the Regents of the University of California, incorporated by reference to Exhibit 10.19 of the Company's Amendment on Form 8 filed November 27, 1991 to the Company's Annual Report on Form 10-K filed September 30, 1991. (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934). 10.31 License Agreement dated June 25, 1993 between the Company and the Regents of the University of California, incorporated by reference to the Company's Amendment of Annual Report on Form 10-KSB/A filed November 26, 1993. (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company's application requesting confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934). 10.42 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase Plan adopted December 13, 1993, incorporated by reference to Exhibit 4.8 of the Company's Registration Statement on Form S-8 filed January 28, 1994. 10.44 Lease Agreement, dated January 31, 1994, for the Company's facilities in Irvine, California, incorporated by reference to Exhibit 10.44 of the Company's Quarterly Report on Form 10-QSB filed May 16, 1994. 10.46 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase Plan adopted December 1994, incorporated by reference to Exhibit 4.9 of the Company's Registration Statement on Form S-8 filed February 8, 1995. 10.48 Amendment to the Non-Employee Director Formula Grant Plan, adopted December 15, 1994, incorporated by reference to the same numbered Exhibit to the Company's Annual Report on Form 10-KSB filed October 13, 1995 * EXH-1
Exhibit Number Description - ------------------------------------------------------------------------------- 10.49 Settlement Agreement between the Company and Alkermes, Inc., dated October 5, 1995, incorporated by reference to the same numbered Exhibit to the Company's Annual Report on Form 10-KSB filed October 13, 1995. (Portions of this Exhibit are omitted and were filed separately with the Secretary of the Commission pursuant to the Company's Application requesting confidential treatment under Rule 406 of the Securities Act of 1933). 10.51 Warrant dated December 8, 1995, to purchase 106,195 shares issued to Swartz Investments, Inc., incorporated by reference to Exhibit 4.3 of the Company's Current Report on Form 8-K filed December 22, 1995. 10.52 Registration Rights Agreement dated December 8, 1995, entered into with purchasers of Series C Preferred Stock and Swartz Investments, Inc., incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K filed December 22, 1995. 10.53 Warrant dated November 29, 1994, to purchase 35,000 shares issued to Vector Securities International, Inc., incorporated by reference to the same numbered Exhibit to the Company's Pre-Effective Amendment No. 1 to Post Effective Amendment No. 2 to Registration Statement on Form SB-2, No. 33-71894, filed January 26, 1996. 10.55 Warrant dated November 30, 1995, to purchase 210,000 shares issued to Vector Securities International, Inc., incorporated by reference to the same numbered Exhibit to the Company's Pre-Effective Amendment No. 1 to Post Effective Amendment No. 2 to Registration Statement on Form SB-2, No. 33-71894, filed January 26, 1996. 10.56 Employment Agreement dated May 15, 1996, between the Company and Vincent F. Simmon, Ph.D., incorporated by reference to the same numbered Exhibit to the Company's Current Report on Form 8-K filed June 4, 1996. 10.58 Amendment to 1989 Special Nonqualified Stock Option and Stock Purchase Plan adopted December 12, 1995, incorporated by reference to Exhibit 4.10 of the Company's Registration Statement on Form S-8 filed September 13, 1996. 10.60 1996 Stock Incentive Plan, incorporated by reference to the same numbered Exhibit to the Company's Quarterly Report on Form 10-QSB filed November 12, 1996. 10.61 Form of Subscription Agreement with each purchaser of Series A Preferred Stock, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, No. 333-29492, filed June 18, 1997. 10.62 Form of Warrant issued to each purchaser of Series A Preferred Stock, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, No. 333-29492, filed June 18, 1997. 10.63 Registration Rights Agreement with holders of Series A Preferred Stock, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, No. 333-29492, filed June 18, 1997. 10.64 Research and Collaboration and License Agreement between the Company and N.V. Organon, dated January 13, 1999, incorporated by reference to Exhibit 10.64 of the Company's quarterly report on Form 10-QSB as filed on February 16, 1999. (Portions of this Exhibit were omitted and filed separately with the Secretary of the Commission pursuant to the Company's application requesting confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934.) 10.65 Amendment No. 1 to the Lease Agreement for the Company's facilities in Irvine, California, dated February 1, 1999.** 21 Subsidiaries of the Registrant, incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2, No. 333-29493, filed June 18, 1997. 23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional Corporation (included in the Opinion filed as Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors.
EXH-2
Exhibit Number Description - -------------------------------------------------------------------------------- 24 Power of Attorney (included on signature page). 27 Financial Data Schedule.
____________________ * Incorporated by reference to the same numbered exhibit of the Company's Registration Statement on Form S-1, No. 33-28284, effective on July 18, 1989. ** Previously filed. EXH-3 EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION OF CORTEX PHARMACEUTICALS, INC., a Delaware corporation CORTEX PHARMACEUTICALS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that: (1) The name of the corporation is Cortex Pharmaceuticals, Inc. (the "Corporation"). The Corporation was originally incorporated under the name X-Age, Inc., and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on February 10, 1987. (2) This Restated Certificate of Incorporation restates and integrates and does not further amend the provisions of the Certificate of Incorporation of the Corporation, as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. (3) The text of the Restated Certificate of Incorporation, as heretofore amended or supplemented, is hereby restated to read in its entirety as follows: "FIRST: The name of this corporation is Cortex Pharmaceuticals, Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: (A) (1) The aggregate number of shares which the Corporation shall have authority to issue is 35,000,000, of which 5,000,000 shares of the par value of $.001 per share shall be designated "Preferred Stock" and 30,000,000 shares of the par value of $.001 per share shall be designated "Common Stock." (2) Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock as Preferred Stock of any series and, in connection with the creation of each such series, to fix by the resolution or resolutions providing for the issue of shares thereof, the number of shares of such series and the designations, powers, preferences, rights, qualifications, limitations, and restrictions of such series, to the full extent now or hereafter permitted by the laws of the State of Delaware. (B) 9% CUMULATIVE CONVERTIBLE PREFERRED STOCK A series of Preferred Stock, consisting of 1,250,000 shares of the authorized but unissued Preferred Stock of the Corporation is hereby created. The designation, powers, preferences, rights, qualifications, limitations, and restrictions of this series, are as follows: (1) DESIGNATION OF SERIES. The designation of the series of preferred stock created hereby shall be 9% Cumulative Convertible Preferred Stock, par value .001 per share (the "9% Preferred Stock"). The shares of the 9% Preferred Stock shall be fully-paid and nonassessable. The number of shares of 9% Preferred Stock may be decreased (but not below the number of shares then outstanding) or increased by a certificate executed, acknowledged, filed, and recorded in accordance with the General Corporation Law of the State of Delaware setting forth a statement that a specified decrease or increase, as the case may be, thereof had been authorized and directed by a resolution or resolutions adopted by the Board of Directors pursuant to authority expressly vested in it by the provisions of the certificate of incorporation of the Corporation. (2) DIVIDENDS. The fixed dividend rate for the 9% Preferred Stock shall be $.09 per share per annum, and no more, and dividends shall be cumulative from June 15, 1989 payable in equal semiannual amounts on the fifteenth day of June and December in each year for the semiannual dividend periods ending respectively on the dates immediately preceding such dates, commencing on June 15, 1989. (3) CONVERSION. The holders of shares of 9% Preferred Stock shall have the right, at their option, to convert such shares into shares of Common Stock at any time on the following terms and conditions: (a) Each share of 9% Preferred Stock shall be convertible at the option of the holder thereof at the office of the Corporation or at the office of the transfer agent, if any, for the 9% Preferred Stock into shares of duly authorized, fully paid, and non-assessable shares of Common Stock at the conversion price of $1.50 per share of Common Stock (the "Conversion Rate"), subject to adjustment as provided in Section (B)(3)(c) of this Article FOURTH. The number of shares of Common Stock to be delivered upon conversion of the 9% Preferred Stock shall be determined by dividing the liquidation amount ($1.00 per share) of the shares surrendered by the Conversion Rate at the time of surrender, calculated to the nearest 1/100th of a share (fractions of less than 1/100 being disregarded). The Corporation shall make no payment or adjustment on the account of any unpaid cumulative dividends on the shares of 9% Preferred Stock surrendered for conversion or on account of any dividends on the Common Stock. In case of the call for redemption by the Corporation of any shares of 9% Preferred Stock, such right of conversion shall cease and terminate, as to the shares designated for redemption, from and after the dates specified for redemption pursuant to the provisions of Section (B)(5) of this Article FOURTH. (b) Before any holder of shares of 9% Preferred Stock shall be entitled to convert the same into Common Stock, he shall surrender the certificate or certificates therefor, 2 duly endorsed, at the office of the Corporation or the transfer agent therefor, if any, and shall give written notice to the Corporation that he elects to convert all or part of the shares represented by the certificate or certificates and shall state in writing therein the name or names in which he wishes the certificate or certificates for Common Stock to be issued. The Corporation will, as soon as practicable thereafter, issue and deliver to such holder of shares of 9% Preferred Stock, or to his nominee or nominees, certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid, together with cash in lieu of any fraction of a share as hereinafter provided. If surrendered certificates for 9% Preferred Stock are converted only in part, the Corporation will issue and deliver to the holder, or to his nominee or nominees, a new certificate or certificates representing the aggregate of the unconverted shares of 9% Preferred Stock. Shares of 9% Preferred Stock shall be deemed to have been converted as of the date of the surrender of such shares for conversion as provided above, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on such date. (c) The Conversion Rate shall be subject to adjustment as follows: (i) In case the Corporation shall (w) pay a dividend or make a distribution on its outstanding shares of Common Stock in shares of its capital stock (whether shares of its Common Stock or of capital stock of any other class), (x) subdivide its outstanding shares of Common Stock, (y) combine its outstanding shares of Common Stock into a smaller number of shares, or (z) issue by reclassification of its shares of Common Stock any shares of capital stock of the Corporation, the Conversion Rate in effect immediately prior to such action shall be adjusted so that the holder of any shares of 9% Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of capital stock of the Corporation which he would have owned immediately following such action had such shares of 9% Preferred Stock been converted immediately prior thereto. An adjustment made pursuant to this subsection (i) shall become effective retroactively immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination, or reclassification. (ii) In case the Corporation shall issue to holders of shares of its outstanding Common Stock generally any rights, options, or warrants entitling them to subscribe for or purchase (w) shares of its Common Stock, (x) any assets of the Corporation, (y) any securities of the Corporation (except its Common Stock) or of any corporation other than the Corporation, or (z) any rights, options, or warrants entitling them to subscribe for or to purchase any of the foregoing securities, whether or not such rights, options, or warrants are immediately exercisable (hereinafter collectively called a "Distribution on Common Stock"), the Corporation shall issue to the holders of outstanding shares of 9% Preferred Stock the Distribution on Common Stock to which they would have been entitled if they had converted the shares of 9% Preferred Stock held by them into Common Stock immediately prior to the record date for the purpose of determining stockholders entitled to receive such Distribution on Common Stock. (d) DE MINIMUS CHANGES. No adjustment in the Conversion Rate shall be required unless such adjustment would require an increase or decrease of at least 1% in the 3 Conversion Rate; provided, however, that any adjustments which by reason of this Section (B)(3)(d) of this Article FOURTH are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under Section (B)(3)(c) of this Article FOURTH shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be. (e) NOTICE OF ADJUSTMENT. Whenever the Conversion Rate is adjusted, as herein provided, the Corporation shall promptly cause a notice setting forth the adjusted Conversion Rate to be mailed to the holders of the 9% Preferred Stock. (f) NO FRACTIONAL SHARES TO BE ISSUED. No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon conversion of 9% Preferred Stock. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of 9% Preferred Stock (or specified portions thereof), the Corporation shall pay in cash to the holders of such 9% Preferred Stock in respect of such fraction of a share an amount equal to the same fraction of the fair market value per share of Common Stock as determined by the Board of Directors in its sole discretion. (g) EFFECT OF SALE, MERGER, OR CONSOLIDATION. In the event of any capital reorganization of the Corporation, or of any reclassification (other than a change in par value) of the Common Stock, or of any conversion of the Common Stock into securities of another corporation, or the consolidation of the Corporation with, or the merger of the Corporation into, any other corporation where the Corporation is not the surviving corporation or in the event of the sale of all or substantially all of the properties and assets of the Corporation to any other corporation (each such event hereinafter being referred to as a "Capital Change"), a share of 9% Preferred Stock shall be convertible after such Capital Change, upon the terms and conditions herein specified, for the number of shares of stock or other securities or property of the Corporation, or of the corporation into which shares of Common Stock are converted or resulting from such consolidation or surviving such merger or to which such sale shall be made, as the case may be, to which the shares of Common Stock issuable (at the time of such Capital Change) upon conversion of such share of 9% Preferred Stock would have been entitled upon such Capital Change. In any such case, if necessary, the provisions set forth in this Section (B)(3) of Article FOURTH with respect to the rights and interests thereafter of the holders of the 9% Preferred Stock shall be appropriately adjusted so as to be reasonably applicable to any shares of stock or other securities or property thereafter deliverable on the conversion of the 9% Preferred Stock. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock shall not be deemed to be a reclassification of the Common Stock for the purpose of this Section (B)(3)(g) of this Article FOURTH. The Corporation shall not effect any consolidation, merger, or sale resulting in a Capital Change, unless prior to or simultaneously with the consummation thereof, any successor corporation or corporation purchasing such assets shall assume, by written instrument, the obligation to deliver to the holder of each share of 9% Preferred Stock such shares of stock, securities, or assets as the holders of 9% Preferred Stock may be entitled to receive upon exercise of the 9% Preferred Stock in accordance with the foregoing provisions, and the other obligations of the Corporation hereunder. 4 (h) NOTICE OF RECLASSIFICATION OR RECAPITALIZATION, ETC. In case: (i) the Corporation shall authorize the issuance to all holders of Common Stock of rights or warrants to subscribe for or purchase shares of its capital stock or of any other right; (ii) the Corporation shall authorize the distribution to all holders of Common Stock of evidences of its indebtedness or assets or the change or adoption of a dividend policy; (iii) of any subdivision, combination, or reclassification of Common Stock, or of any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or of the sale or transfer of all or substantially all of the assets of the Corporation; or (iv) of the voluntary or involuntary dissolution, liquidation, or winding up of the Corporation; then the Corporation shall mail to the holders of 9% Preferred Stock at least 10 days prior to the applicable record date hereinafter specified in clauses (x) and (y) below, a notice stating (x) the date as of which the holders of Common Stock of record to be entitled to receive any such rights, warrants, or distribution are to be determined, or (y) the date on which any such subdivision, combination, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, or other action is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property, if any, deliverable upon such subdivision, combination, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, or other action. The failure to give the notice required by this Section (B)(3)(h) of this Article FOURTH or any defect therein shall not affect the legality or validity of any distribution, right, warrant, subdivision, combination, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, or other action, or the vote upon any of the foregoing. (i) RESERVATION OF SHARES FOR ISSUANCE UPON CONVERSION. The Corporation covenants that it will at all times reserve and keep available out of its authorized Common Stock, free from preemptive rights, solely for the purpose of issuance upon conversion of the 9% Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of the 9% Preferred Stock. The Corporation covenants that all shares of Common Stock which shall be so issuable upon conversion of the 9% Preferred Stock as herein provided shall, when issued, be duly authorized, validly issued, and fully paid and nonassessable, free of all liens and charges and not subject to preemptive rights and that, upon conversion of the 9% Preferred Stock, the appropriate capital stock accounts of the Corporation shall be duly credited. (j) PAYMENT OF TAXES ON SHARES ISSUED UPON CONVERSION. The issuance of certificates for shares of Common Stock upon the conversion of shares of the 9% 5 Preferred Stock shall be made without charge to the converting holders for any tax in respect of the issuance of such certificates and such certificates shall be issued in the respective names of, or in such names as may be directed by, the holders of the shares of the 9% Preferred Stock converted; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the shares of the 9% Preferred Stock converted, and the Corporation shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (4) REDEMPTION OF 9% PREFERRED STOCK BY HOLDERS (a) RIGHT TO REDEEM 9% PREFERRED STOCK. Subject to and upon compliance with the provisions of this Section (B)(4) of this Article FOURTH, at any time during the six-month period following the date of the written notice referred to in Section (B)(4)(c) of this Article FOURTH, the holder of shares of 9% Preferred Stock shall have the option, but not the obligation, to require the Corporation to redeem his shares of 9% Preferred Stock at a price of $1.00 per share of 9% Preferred Stock to be redeemed. A holder of shares of 9% Preferred Stock wishing to require the Corporation to redeem such shares shall surrender the shares which are to be so redeemed to the Corporation or to such agent as may be appointed by the Corporation for such purpose at any time during such six-month period during usual business hours accompanied by a written notice of election to redeem and, if so required by the Corporation, by a written instrument or instruments of transfer in form satisfactory to the Corporation duly executed by the holder or his attorney duly authorized in writing. (b) PAYMENT OF REDEMPTION PRICE. As promptly as practicable after the surrender, as herein provided, of shares of 9% Preferred Stock for redemption, the Corporation shall pay or cause to be paid to or upon the written order of the holder of the shares of 9% Preferred Stock so surrendered an amount equal to $1.00 multiplied by the number of shares so surrendered in accordance with the provisions of Section (B)(4)(a) of this Article FOURTH. Such redemption shall be deemed to have occurred at the time that such shares of 9% Preferred Stock shall have been surrendered for redemption in accordance herewith and the rights of the holder of such shares of 9% Preferred Stock as a holder of 9% Preferred Stock shall cease at such time. In the case of any shares of 9% Preferred Stock which are redeemed in part only, upon such redemption the Corporation shall execute and deliver to the holder thereof, as requested by such holder, a new certificate for shares of 9% Preferred Stock of authorized denominations equal to the unredeemed portion of such shares of 9% Preferred Stock. (c) NOTICE OF RIGHT OF REDEMPTION. Within 30 days after the Corporation determines that, as of the last day of any calendar quarter, the total stockholders' equity of the Corporation exceeds $5,000,000 (as determined in accordance with generally accepted accounting principles applied in a consistent manner with prior periods), the Corporation shall give notice thereof to the holders of the 9% Preferred Stock. Such notice shall specify the redemption price and the period of time during which holders of 9% Preferred Stock may cause such shares to be redeemed by the Corporation as described in Section (B)(4) of this Article FOURTH. 6 (5) REDEMPTION OF 9% PREFERRED STOCK BY THE CORPORATION (a) RIGHT TO REDEEM 9% PREFERRED STOCK. The 9% Preferred Stock may be redeemed, at the option of the Corporation, in whole or in part, at any time at a price of $1.00 per share. If the Corporation desires to redeem the shares of 9% Preferred Stock, the Corporation shall give the holders thereof notice of such redemption, which notice shall set forth the number of shares to be redeemed and the place and date fixed for redemption, which date shall be not less than 30 nor more than 60 days after the date of such notice. On the date fixed for redemption, the holders of shares of 9% Preferred Stock shall surrender the certificates therefor against payment of the redemption amount. If the shares of 9% Preferred Stock are to be redeemed in part, each such redemption shall be applied pro rata to the shares of 9% Preferred Stock then outstanding. (b) PAYMENT OF REDEMPTION PRICE. As promptly as practicable after the surrender, as herein provided, of shares of 9% Preferred Stock for redemption, the Corporation shall pay or cause to be paid to or upon the written order of the holder of the shares of 9% Preferred Stock so surrendered an amount equal to $1.00 multiplied by the number of shares so surrendered in accordance with the provisions of Section (B)(5)(a) of this Article FOURTH. Such redemption shall be deemed to have occurred at the time that such shares of 9% Preferred Stock shall have been surrendered for redemption in accordance herewith and the rights of the holder of such shares of 9% Preferred Stock as a holder of 9% Preferred Stock shall cease at such time. In the case of any shares of 9% Preferred Stock which are redeemed in part only, upon such redemption the Corporation shall execute and deliver to the holder thereof, as requested by such holder, a new certificate for shares of 9% Preferred Stock of authorized denominations equal to the unredeemed portion of such shares of 9% Preferred Stock. (6) VOTING. Other than any voting rights created by applicable law, the holders of shares of 9% Preferred Stock shall not be entitled to vote at any election of directors or any other matter upon which holders of the Common Stock have the right to vote or to receive notice of any meeting of stockholders. (7) PREFERENCE ON LIQUIDATION, ETC. In the event of any voluntary or involuntary liquidation, distribution of all or substantially all of the assets, dissolution, or winding-up of the Corporation (any such event being hereinafter referred to as a "Liquidation Transaction"), any payment or distribution of the assets of the Corporation (whether capital or surplus), or the proceeds thereof, shall be made to or set apart in the following order of preference: (i) the holders of shares of 9% Preferred Stock shall be entitled to receive payment of $1.00 per share of 9% Preferred Stock held by them, plus any accrued and unpaid dividends on the 9% Preferred Stock, if any (and no more), and, if the assets of the Corporation shall be insufficient to pay in full the preferential amounts set forth in this clause (i), then such assets shall be distributed among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full; and (ii) after payment in full of the preferential amounts set forth in clause (i) above, the holders of shares of Common Stock shall be entitled to receive ratably payment or distribution of the remaining assets per share of Common Stock. FIFTH: Election of directors need not be by written ballot. 7 SIXTH: The Board of Directors is authorized to adopt, amend, or repeal By-Laws of the Corporation, except as and to the extent provided in the By-Laws. SEVENTH: Any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (whether or not by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, incorporator, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, incorporator, employee, partner, trustee, or agent of another corporation, partnership, joint venture, trust, or other enterprise (including an employee benefit plan), shall be entitled to be indemnified by the Corporation to the full extent then permitted by law against expenses (including attorneys' fees), judgments, fines (including excise taxes assessed on a person with respect to an employee benefit plan), and amounts paid in settlement incurred by him in connection with such action, suit, or proceeding. Such right of indemnification shall inure whether or not the claim asserted is based on matters which antedate the adoption of this Article SEVENTH. Such right of indemnification shall continue as to a person who has ceased to be a director, officer, incorporator, employee, partner, trustee, or agent and shall inure to the benefit of the heirs and personal representatives of such a person. The indemnification provided by this Article SEVENTH shall not be deemed exclusive of any other rights which may be provided now or in the future under any provision currently in effect or hereafter adopted by the By-Laws, by any agreement, by vote of stockholders, by resolution of disinterested directors, by provision of law, or otherwise. EIGHTH: No director of the Corporation shall be liable to the Corporation or any of its stockholders for monetary damages, for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. NINTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, 8 be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation." (4) The foregoing Restated Certificate of Incorporation has been duly adopted in accordance with the applicable provisions of Section 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed under the seal of the Corporation by Harold R. Hutchings, M.D., its President and Chief Executive Officer, and attested to by D. Scott Hagen, its Assistant Secretary, this 7th day of April, 1989. CORTEX PHARMACEUTICALS, INC. By: /s/ HAROLD R. HUTCHINGS ----------------------------------- Harold R. Hutchings, M.D., [SEAL] President and Chief Executive Officer ATTEST: By: /s/ D. SCOTT HAGEN ------------------------ D. Scott Hagen, Assistant Secretary 9 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CORTEX PHARMACEUTICALS, INC. (Pursuant to Sections 228 and 242 of the General Corporation Law of the State of Delaware) CORTEX PHARMACEUTICALS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify: FIRST: That the Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on February 10, 1987 and was amended on March 17, 1988, May 11, 1988, August 30, 1988 and April 5, 1989, respectively, and was restated on April 11, 1989. SECOND: That at a meeting of the Board of Directors of the Corporation resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and directing said amendment to be submitted to the stockholders of the Corporation entitled to vote thereon for adoption by written consent. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of the corporation be amended by changing paragraph (B)(4) of Article FOURTH so that, as amended, paragraph (B)(4) of Article FOURTH shall read as follows: (4) REDEMPTION OF 9% PREFERRED STOCK BY HOLDERS (a) RIGHT TO REDEEM 9% PREFERRED STOCK. Subject to and upon compliance with the provisions of this Section (B)(4) of this Article FOURTH, during the six-month period (the "Election Period") following the date of the Notice (as defined in Section (B)(4)(c) of this Article FOURTH) each holder of shares of 9% Preferred Stock shall have the option, but not the obligation, to require the Corporation to redeem his shares of 9% Preferred Stock at a price of $1.00 per share (the "Redemption Price"). A holder of shares of 9% Preferred Stock wishing to require the Corporation to redeem such shares shall surrender the shares which are to be so redeemed to the Corporation or to such agent as may be appointed by the Corporation for such purpose at any time during the Election Period during usual business hours accompanied by a written notice of election to redeem and, if so required by the Corporation, by a written instrument or instruments of transfer in form satisfactory to the Corporation duly executed by the holder or his attorney duly authorized in writing. (b) REDEMPTION PROCEDURE; PAYMENT OF REDEMPTION PRICE. Within ten (10) business days after the expiration of the Election Period, the Corporation shall pay or cause to be paid to or upon the written order of each holder of shares of 9% Preferred Stock surrendered for redemption in accordance with the provisions of Section (B)(4)(a) of this Article FOURTH an amount equal to the Redemption Price multiplied by the number of shares so surrendered. If the funds of the Corporation legally available for redemption of shares of 9% Preferred Stock as of the last day of the Election Period are insufficient to redeem the total number of shares of 9% Preferred Stock surrendered for redemption as provided herein, those funds which are legally available shall be used to redeem the maximum possible number of shares of 9% Preferred Stock which are so surrendered for redemption. In the event a greater number of shares of 9% Preferred Stock are surrendered for redemption according to Section (B)(4) of this Article FOURTH than may lawfully be purchased by the Corporation on the last day of the Election Period, the shares of 9% Preferred Stock so surrendered for redemption shall be redeemed pro rata, according to the number of shares of 9% Preferred Stock duly surrendered for redemption by each holder of shares of 9% Preferred Stock. Such redemption shall be deemed to have occurred as of the last day of the Election Period, and from and after such date the shares of 9% Preferred Stock so redeemed shall be deemed to be no longer outstanding, each surrendered certificate shall be cancelled and retired, and the holders thereof shall cease to be stockholders with respect to such shares and shall have no rights with respect thereto, except the rights to receive from the Corporation payment of the Redemption Price of such shares, without interest. In the case of any shares of 9% Preferred Stock which are redeemed in part only, upon such redemption the Corporation shall execute and deliver to the holder thereof, as requested by such holder, a new certificate for shares of 9% Preferred Stock of authorized denominations equal to the unredeemed portion of such shares of 9% Preferred Stock. (c) NOTICE OF RIGHT OF REDEMPTION. Within thirty (30) days after the last day of the first calendar quarter with respect to which the Corporation determines that, as of the last day of such calendar quarter, the total stockholders' equity of the Corporation exceeds $5,000,000 (as determined in accordance with generally accepted accounting principles applied in a consistent manner with prior periods), the Corporation shall give a notice (the "Notice") thereof to the holders of the 9% Preferred Stock. Such Notice shall state the Redemption Price and the period of time during which holders of shares of 9% Preferred Stock may elect to have such shares redeemed by the Corporation as described in Section (B)(4) of this Article FOURTH. (d) WITHDRAWAL RIGHTS. Any holder of 9% Preferred Stock who, during the Election Period, duly elects to require the Corporation to redeem some or all of his shares of 9% Preferred Stock and surrenders the certificate or certificates representing such shares for redemption may withdraw such election at any time during the Election Period by giving written notice by mail, postage-prepaid, to the Corporation at its principal executive office. The Corporation shall, as soon as practicable thereafter, return the certificate or certificates representing the shares of 9% Preferred Stock which such holder shall have surrendered for redemption to the holder at his address as it appears on the records of the Corporation, and such shares shall remain outstanding and entitled to all the rights and preferences provided herein. THIRD: The foregoing amendment to the Certificate of Incorporation was duly adopted by the stockholders of the Corporation by written consent given in accordance with the applicable provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware and written notice of such action has been given as provided in Section 228 of the General Corporation Law of the State of Delaware. 2 FOURTH: This amendment to the Certificate of Incorporation shall be effective on and as of the date of filing of this Certificate of Amendment with the Office of the Secretary of State of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed by Harold R. Hutchings, M.D., its President, and attested to by D. Scott Hagen, its Assistant Secretary, this 26th day of June, 1989. CORTEX PHARMACEUTICALS, INC. [SEAL] By: /s/ HAROLD R. HUTCHINGS ------------------------------------ Harold R. Hutchings, President ATTEST: By: /s/ D. SCOTT HAGEN -------------------------- D. Scott Hagen, Assistant Secretary 3 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK OF CORTEX PHARMACEUTICALS, INC. (Pursuant to Section 151 of the General Corporation Law of the State of Delaware) CORTEX PHARMACEUTICALS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies that, pursuant to the authority contained in Article Fourth, Section (A)(2) of its Restated Certificate of Incorporation, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, its Board of Directors has adopted the following resolution creating a series of its Preferred Stock designated as Series B Convertible Preferred Stock: RESOLVED, that a series of the class of authorized Preferred Stock of the Corporation be, and hereby is, created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof, are as follows: (1) DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series B Convertible Preferred Stock" (the "Series B Preferred Stock") and the number of shares constituting such series shall be 3,750,000. The number of shares of Series B Preferred Stock may be decreased (but not below the number of shares then outstanding) or increased by a certificate executed, acknowledged, filed, and recorded in accordance with the General Corporation Law of the State of Delaware setting forth a statement that a specified decrease or increase, as the case may be, thereof had been authorized and directed by a resolution or resolutions adopted by the Board of Directors pursuant to authority expressly vested in it by the provisions of the Certificate of Incorporation of the Corporation. (2) CONVERSION. The holders of shares of Series B Preferred Stock shall have the right, at their option, to convert such shares into shares of Common Stock at any time on the following terms and conditions: (a) Each share of Series B Preferred Stock shall be convertible at the option of the holder thereof at the office of the Corporation or at the office of the transfer agent, if any, for the Series B Preferred Stock into shares of duly authorized, fully paid, and non-assessable shares of Common Stock at the conversion price of $1.345 per share of Common Stock (the "Conversion Rate"), subject to adjustment as provided in subsection (2)(c) below. The number of shares of Common Stock to be delivered upon conversion of the Series B Preferred Stock shall be determined by dividing the liquidation amount ($0.6667 per share) of the shares surrendered by the Conversion Rate at the time of surrender, calculated to the nearest 1/100th of a share (fractions of less than 1/100 being disregarded). The Corporation shall make no payment or adjustment on the account of any declared but unpaid dividends on the shares of Series B Preferred Stock surrendered for conversion or on account of any dividends on the Common Stock. (b) Before any holder of shares of Series B Preferred Stock shall be entitled to convert the same into Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or the transfer agent therefor, if any, and shall give written notice to the Corporation that he elects to convert all or part of the shares represented by the certificate or certificates and shall state in writing therein the name or names in which he wishes the certificate or certificates for Common Stock to be issued. The Corporation will, as soon as practicable thereafter, issue and deliver to such holder of shares of Series B Preferred Stock, or to his nominee or nominees, certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid, together with cash in lieu of any fraction of a share as hereinafter provided. If surrendered certificates for Series B Preferred Stock are converted only in part, the Corporation will issue and deliver to the holder, or to his nominee or nominees, a new certificate or certificates representing the aggregate of the unconverted shares of Series B Preferred Stock. Shares of Series B Preferred Stock shall be deemed to have been converted as of the date of the surrender of such shares for conversion as provided above, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on such date. (c) The Conversion Rate shall be subject to adjustment as follows: (i) In case the Corporation shall (w) pay a dividend or make a distribution on its outstanding shares of Common Stock in shares of its capital stock (whether shares of its Common Stock or of capital stock of any other class), (x) subdivide its outstanding shares of Common Stock, (y) combine its outstanding shares of Common Stock into a smaller number of shares, or (z) issue by reclassification of its shares of Common Stock any shares of capital stock of the Corporation, the Conversion Rate in effect immediately prior to such action shall be adjusted so that the holder of any shares of Series B Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of capital stock of the Corporation which he would have owned immediately following such action had such shares of Series B Preferred Stock been converted immediately prior thereto. An adjustment made pursuant to this subsection (i) shall become effective retroactively immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination, or reclassification. (ii) In case the Corporation shall issue to holders of shares of its outstanding Common Stock generally any rights, options, or warrants entitling them to subscribe for or purchase (w) shares of its Common Stock, (x) any assets of the Corporation, (y) any securities of the Corporation (except its Common Stock) or of any corporation other than the Corporation, or (z) any rights, options, or warrants entitling them to subscribe for or to purchase any of the foregoing securities, whether or not such rights, options, or warrants are immediately exercisable (hereinafter collectively called a "Distribution on Common Stock"), the Corporation shall issue to the holders of 2 outstanding shares of Series B Preferred Stock the Distribution on Common Stock to which they would have been entitled if they had converted the shares of Series B Preferred Stock held by them into Common Stock immediately prior to the record date for the purpose of determining stockholders entitled to receive such Distribution on Common Stock. (d) DE MINIMUS CHANGES. No adjustment in the Conversion Rate shall be required unless such adjustment would require an increase or decrease of at least 1% in the Conversion Rate; provided, however, that any adjustments which by reason of this subsection (2)(d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under subsection (2)(c) above shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be. (e) NOTICE OF ADJUSTMENT. Whenever the Conversion Rate is adjusted, as herein provided, the Corporation shall promptly cause a notice setting forth the adjusted Conversion Rate to be mailed to the holders of the Series B Preferred Stock. (f) NO FRACTIONAL SHARES TO BE ISSUED. No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon conversion of Series B Preferred Stock. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of Series B Preferred Stock (or specified portions thereof), the Corporation shall pay in cash to the holders of such Series B Preferred Stock in respect of such fraction of a share an amount equal to the same fraction of the fair market value per share of Common Stock as determined by the Board of Directors in its sole discretion. (g) EFFECT OF SALE, MERGER, OR CONSOLIDATION. In the event of any capital reorganization of the Corporation, or of any reclassification (other than a change in par value) of the Common Stock, or of any conversion of the Common Stock into securities of another corporation, or the consolidation of the Corporation with, or the merger of the Corporation into, any other corporation where the Corporation is not the surviving corporation or in the event of the sale of all or substantially all of the properties and assets of the Corporation to any other corporation (each such event hereinafter being referred to as a "Capital Change"), a share of Series B Preferred Stock shall be convertible after such Capital Change, upon the terms and conditions herein specified, for the number of shares of stock or other securities or property of the Corporation, or of the corporation into which shares of Common Stock are converted or resulting from such consolidation or surviving such merger or to which such sale shall be made, as the case may be, to which the shares of Common Stock issuable (at the time of such Capital Change) upon conversion of such share of Series B Preferred Stock would have been entitled upon such Capital Change. In any such case, if necessary, the provisions set forth in this subsection (2) with respect to the rights and interests thereafter of the holders of the Series B Preferred Stock shall be appropriately adjusted so as to be reasonably applicable to any shares of stock or other securities or property thereafter deliverable on the conversion of the Series B Preferred Stock. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock shall not be deemed to be a reclassification of the Common Stock for the purpose of this subsection (2)(g). The Corporation shall not effect any consolidation, merger, or sale resulting in a Capital Change, unless prior to or simultaneously with the consummation thereof, any successor corporation or 3 corporation purchasing such assets shall assume, by written instrument, the obligation to deliver to the holder of each share of Series B Preferred Stock such shares of stock, securities, or assets as the holders of Series B Preferred Stock may be entitled to receive upon exercise of the Series B Preferred Stock in accordance with the foregoing provisions, and the other obligations of the Corporation hereunder. (h) NOTICE OF RECLASSIFICATION OR RECAPITALIZATION, ETC. In case: (i) the Corporation shall authorize the issuance to all holders of Common Stock of rights or warrants to subscribe for or purchase shares of its capital stock or of any other right; (ii) the Corporation shall authorize the distribution to all holders of Common Stock of evidences of its indebtedness or assets or the change or adoption of a dividend policy; (iii) of any subdivision, combination, or reclassification of Common Stock, or of any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or of the sale or transfer of all or substantially all of the assets of the Corporation; or (iv) of the voluntary or involuntary dissolution, liquidation, or winding up of the Corporation; then the Corporation shall mail to the holders of Series B Preferred Stock at least 10 days prior to the applicable record date hereinafter specified in clauses (x) and (y) below, a notice stating (x) the date as of which the holders of Common Stock of record to be entitled to receive any such rights, warrants, or distribution are to be determined, or (y) the date on which any such subdivision, combination, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, or other action is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property, if any, deliverable upon such subdivision, combination, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, or other action. The failure to give the notice required by this subsection (2)(h) or any defect therein shall not affect the legality or validity of any distribution, right, warrant, subdivision, combination, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, or other action, or the vote upon any of the foregoing. (i) RESERVATION OF SHARES FOR ISSUANCE UPON CONVERSION. The Corporation covenants that it will at all times reserve and keep available out of its authorized Common Stock, free from preemptive rights, solely for the purpose of issuance upon conversion of the Series B Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of the Series B Preferred Stock. The Corporation covenants that all shares of Common Stock which shall be so issuable upon conversion of the Series B Preferred Stock as herein provided shall, when issued, be duly 4 authorized, validly issued, and fully paid and nonassessable, free of all liens and charges and not subject to preemptive rights and that, upon conversion of the Series B Preferred Stock, the appropriate capital stock accounts of the Corporation shall be duly credited. (j) PAYMENT OF TAXES ON SHARES ISSUED UPON CONVERSION. The issuance of certificates for shares of Common Stock upon the conversion of shares of the Series B Preferred Stock shall be made without charge to the converting holders for any tax in respect of the issuance of such certificates and such certificates shall be issued in the respective names of, or in such names as may be directed by, the holders of the shares of the Series B Preferred Stock converted; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the shares of the Series B Preferred Stock converted, and the Corporation shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (3) VOTING. Other than any voting rights created by applicable law, the holders of shares of Series B Preferred Stock shall not be entitled to vote at any election of directors or any other matter upon which holders of the Common Stock have the right to vote or to receive notice of any meeting of stockholders. (4) PREFERENCE ON LIQUIDATION, ETC. In the event of any voluntary or involuntary liquidation, distribution of all or substantially all of the assets, dissolution, or winding-up of the Corporation (any such event being hereinafter referred to as a "Liquidation Transaction"), any payment or distribution of the assets of the Corporation (whether capital or surplus), or the proceeds thereof, shall be made to or set apart in the following order of preference: (i) the holders of shares of 9% Cumulative Convertible Preferred Stock of the Corporation shall be entitled to receive the preferential amounts set forth in Article Fourth, Section (B)(7) of the Corporation's Restated Certificate of Incorporation; (ii) after payment in full of the preferential amounts with respect to the 9% Cumulative Convertible Preferred Stock and prior to and in preference to any distribution of any assets of the Corporation to the holders of the Common Stock, the holders of shares of Series B Preferred Stock shall be entitled to be paid, by reason of their ownership thereof, the amount of $0.6667 per share of Series B Preferred Stock, plus any declared and unpaid dividends on the Series B Preferred Stock, if any (and no more), and, if the assets of the Corporation then available for distribution shall be insufficient to pay in full the preferential amounts set forth in this clause (ii), then such assets shall be distributed ratably among the holders of Series B Preferred Stock in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full; and (iii) after payment in full of the preferential amounts set forth in clauses (i) and (ii) above, the holders of shares of Common Stock shall be entitled to receive ratably payment or distribution of the remaining assets of the Corporation available for distribution. (5) DIVIDENDS. Subject to the provisions of Article Fourth, Section (B)(2), of the Corporation's Restated Certificate of Incorporation with respect to the 9% Cumulative Convertible Preferred Stock, the holders of shares of Series B Preferred Stock shall be entitled to 5 receive cash dividends as, if and when declared by the Board of Directors of the Corporation, out of any assets of the Corporation legally available therefor. (6) REDEMPTION BY THE CORPORATION. (a) RIGHT TO REDEEM. The Series B Preferred Stock may be redeemed, at the option of the Corporation, in whole or in part, at any time after the fifth anniversary date of the Original Issue Date (as such term is defined below) of the Series B Preferred Stock at a price of $0.6667 per share. If the Corporation desires to redeem the shares of Series B Preferred Stock, the Corporation shall give the holders thereof notice of such redemption, which notice shall set forth the number of shares to be redeemed and the place and date fixed for redemption, which date shall be not less than 30 nor more than 60 days after the date of such notice. On the date fixed for redemption, the holders of shares of Series B Preferred Stock shall surrender the certificates therefor against payment of the redemption amount. If the shares of Series B Preferred Stock are to be redeemed in part, each such redemption shall be applied pro rata to the shares of Series B Preferred Stock then outstanding. As used in this Section (6)(a), the term "Original Issue Date" shall refer to the first date on which any shares of Series B Preferred Stock are issued by the Corporation. (b) PAYMENT OF REDEMPTION PRICE. As promptly as practicable after the surrender, as herein provided, of shares of Series B Preferred Stock for redemption, the Corporation shall pay or cause to be paid to or upon the written order of the holder of the shares of Series B Preferred Stock so surrendered an amount equal to $0.6667 multiplied by the number of shares so surrendered in accordance with the provisions of Section (6)(a)above. Such redemption shall be deemed to have occurred at the time that such shares of Series B Preferred Stock shall have been surrendered for redemption in accordance herewith and the rights of the holder of such shares of Series B Preferred Stock as a holder of Series B Preferred Stock shall cease at such time. In the case of any shares of Series B Preferred Stock which are redeemed in part only, upon such redemption the Corporation shall execute and deliver to the holder thereof, as requested by such holder, a new certificate for shares of Series B Preferred Stock of authorized denominations equal to the unredeemed portion of such shares of Series B Preferred Stock. 6 IN WITNESS WHEREOF, CORTEX PHARMACEUTICALS, INC. has caused this Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock to be duly executed by its President and Chief Executive Officer and attested to by its Assistant Secretary and has caused its corporate seal to be affixed hereto this 29th day of April, 1991. CORTEX PHARMACEUTICALS, INC. By: /S/ VAUGHAN H. J. SHALSON ------------------------------------------ Vaughan H. J. Shalson, President and Chief Executive Officer (Corporate Seal) ATTEST: /S/ D. SCOTT HAGEN - ------------------------------ D. Scott Hagen Assistant Secretary 7 CERTIFICATE OF CORRECTION OF CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK OF CORTEX PHARMACEUTICALS, INC. It is hereby certified that: 1. The name of the corporation (hereinafter called the "corporation") is CORTEX PHARMACEUTICALS, INC. 2. The Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock of the corporation, which was filed by the Secretary of State of Delaware on April 29, 1991, is hereby corrected. 3. The defect to be corrected in said instrument is as follows: The conversion price of $1.345 per share listed at line 6 of subparagraph (a) of paragraph (2), CONVERSION, at page 2 of the Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock shall be corrected to read as follows: $1.359. 4. Subparagraph (a) of paragraph (2) in corrected form is as follows: " (a) Each share of Series B Preferred Stock shall be convertible at the option of the holder thereof at the office of the Corporation or at the office of the transfer agent, if any, for the Series B Preferred Stock into shares of duly authorized, fully paid, and non-assessable shares of Common Stock at the conversion price of $1.359 per share of Common Stock (the "Conversion Rate"), subject to adjustment as provided in subsection (2)(c) below. The number of shares of Common Stock to be delivered upon conversion of the Series B Preferred Stock shall be determined by dividing the liquidation amount ($0.6667 per share) of the shares surrendered by the Conversion Rate at the time of surrender, calculated to the nearest 1/100th of a share (fractions of less than 1/100 being disregarded). The Corporation shall make no payment or adjustment on the account of any declared but unpaid dividends on the shares of Series B Preferred Stock surrendered for conversion or on account of any dividends on the Common Stock." Signed and attested to on April 30, 1991. /s/ VAUGHAN H. J. SHALSON ---------------------------------------- Vaughan H. J. Shalson, President and Chief Executive Officer /s/ D. SCOTT HAGEN - ---------------------------------- D. Scott Hagen, Assistant Secretary 2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK OF CORTEX PHARMACEUTICALS, INC. (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware) CORTEX PHARMACEUTICALS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies that, pursuant to the authority contained in Article Fourth, Section (A)(2) of its Restated Certificate of Incorporation, Paragraph (1) of its Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock and in accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, its Board of Directors has duly adopted the following resolution decreasing the number of shares of the Series B Convertible Preferred Stock from 3,750,000 to 3,200,000: RESOLVED, that the number of shares constituting the Series B Convertible Preferred Stock be decreased from 3,750,000 to 3,200,000. IN WITNESS WHEREOF, CORTEX PHARMACEUTICALS, INC. has caused this Certificate of Decrease of Number of Shares of Series B Convertible Preferred Stock to be duly executed by its President and Chief Executive Officer and attested to by its Assistant Secretary and has caused its corporate seal to be affixed hereto this 22nd day of May, 1991. CORTEX PHARMACEUTICALS, INC. By: /s/ VAUGHAN H. J. SHALSON --------------------------------------- Vaughan H. J. Shalson, President and Chief Executive Officer [Corporate Seal] ATTEST: /s/ D. SCOTT HAGEN - ----------------------------- D. Scott Hagen, Assistant Secretary CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CORTEX PHARMACEUTICALS, INC. CORTEX PHARMACEUTICALS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify: FIRST: That at a meeting of the Board of Directors of the Corporation resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and directing said amendment to be submitted to the stockholders of the Corporation at its Annual Meeting. The resolution setting forth the proposed amendment is as follows: RESOLVED, that Article Fourth, paragraph (A)(1) of the Certificate of Incorporation of the Corporation be amended to read in its entirety: The aggregate number of shares which the Corporation shall have the authority to issue is 55,000,000, of which 5,000,000 shares of the par value of $.001 per share shall be designated "Preferred Stock" and 50,000,000 of the par value $.001 per share shall be designated "Common Stock." SECOND: That thereafter, pursuant to resolution of the Board of Directors, the Annual Meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the Delaware General Corporation Law, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed by Jay D. Glass, Ph.D., its President, and attested to by D. Scott Hagen, its Secretary, this 30th day of October, 1992. CORTEX PHARMACEUTICALS, INC. [SEAL] By: /s/ JAY D. GLASS -------------------------------------- Jay D. Glass, President ATTEST: By: /s/ D. SCOTT HAGEN ---------------------------------- D. Scott Hagen, Secretary CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF CORTEX PHARMACEUTICALS, INC., A DELAWARE CORPORATION (Pursuant to Section 242 of the Delaware General Corporation Law) CORTEX PHARMACEUTICALS, INC., a corporation organized and existing under and by virtue of the Delaware General Corporation Law (the "Corporation"), does hereby certify that: FIRST: At a duly held meeting of the Board of Directors of the Corporation, the Board of Directors of the Corporation duly adopted resolutions setting forth amendments to the Restated Certificate of Incorporation of the Corporation, declaring said amendments to be advisable and directing that said amendments be submitted to the stockholders of the Corporation for consideration thereof. The resolutions setting forth the proposed amendments are as follows: "RESOLVED, that the Restated Certificate of Incorporation of the Corporation be amended to add ARTICLE TENTH, which shall read in its entirety as follows: `TENTH--REVERSE SPLIT. On the effective date of this amendment to the Restated Certificate of Incorporation (the "Effective Date"), the Common Stock of the Corporation will be reverse split on a one-for-five basis so that each authorized share of Common Stock immediately prior to the Effective Date shall automatically be converted into and reconstituted as one-fifth of a share of Common Stock (the "Reverse Split"). No fractional shares will be issued by the Corporation as a result of the Reverse Split. In lieu thereof, each Stockholder whose shares of Common Stock are not evenly divisible by five will receive a cash payment to be calculated by multiplying the fraction of a share by the equivalent of the average of the last sale prices for one share of the Common Stock, as reported by Nasdaq, for the ten (10) trading days immediately preceding the Effective Date.' RESOLVED, that ARTICLE FOURTH (A)(1) of the Restated Certificate of Incorporation of the Corporation be amended and restated in its entirety to read as follows: `FOURTH: (A)(1)-AUTHORIZED CAPITAL. (A) The total number of shares of capital stock which the Company has the authority to issue is 25,000,000 consisting of 20,000,000 shares of Common Stock, $0.001 par value per share (the "Common Stock"), and 5,000,000 shares of Preferred Stock, $0.001 par value per share (the "Preferred Stock").' " SECOND: That thereafter, pursuant to resolution of its Board of Directors, the Annual Meeting of the Stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: Said amendments were duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. IN WITNESS WHEREOF, CORTEX PHARMACEUTICALS, INC. has caused this Certificate of Amendment to be signed by D. Scott Hagen, its duly authorized Vice President and Chief Financial Officer, this 5th day of January, 1995. CORTEX PHARMACEUTICALS, INC., a Delaware corporation By: /s/ D. SCOTT HAGEN ------------------------------------- D. Scott Hagen, Vice President and Chief Financial Officer 2 CERTIFICATE OF DESIGNATION, NUMBER, POWERS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL, AND OTHER SPECIAL RIGHTS AND THE QUALIFICATIONS, LIMITATIONS, RESTRICTIONS, AND OTHER DISTINGUISHING CHARACTERISTICS OF SERIES C PREFERRED STOCK OF CORTEX PHARMACEUTICALS, INC. It is hereby certified that: 1. The name of the Corporation (hereinafter called the "Corporation") is Cortex Pharmaceuticals, Inc., a Delaware corporation. 2. The articles of incorporation of the Corporation authorizes the issuance of Five Million (5,000,000) shares of Preferred Stock of a par value of one one-hundredths of one cent ($.001) each and expressly vests in the Board of Directors of the Corporation the authority provided therein to issue any or all of said shares in one or more Series and by resolution or resolutions to establish the designation, number, full or limited voting powers, or the denial of voting powers, preferences and relative, participating, optional, and other special rights and the qualifications, limitations, restrictions, and other distinguishing characteristics of each Series to be issued. 3. The Board of Directors of the Corporation, pursuant to the authority expressly vested in it as aforesaid, has adopted the following resolutions creating a Series C issue of Preferred Stock: RESOLVED, that One Hundred Sixty (160) of the Five Million (5,000,000) authorized shares of Preferred Stock of the Corporation shall be designated Series C Preferred Stock, $.001 per share, and shall possess the rights and privileges set forth below: Section 1. DESIGNATION AND AMOUNT. The shares of such Series shall be designated as "Series C Preferred Stock" (the "Series C Preferred Stock") and the number of shares constituting the Series C Preferred Stock shall be 160. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series C Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants to acquired shares of Series C Preferred Stock or upon the conversion of any outstanding securities issued by the Corporation convertible into Series C Preferred Stock. Section 2. RANK. The Series C Preferred Stock shall rank: (i) on parity with all of the Corporation's Series B Convertible Preferred Stock, (ii) junior to all of the Corporation's 9% Cumulative Convertible Preferred Stock, and any other class or series of capital stock of the Corporation hereafter created specifically ranking by its terms senior to the Series C Preferred Stock (collectively, the "Senior Securities"); (iii) prior to all of the Corporation's Common Stock par value $.001 per share ("Common Stock"); (iv) prior to any class or series of capital stock of the Corporation hereafter created specifically ranking by its terms junior to any Series C Preferred Stock of whatever subdivision (collectively, with the Common Stock, "Junior Securities"); (v) on parity with any class or series of capital stock of the Corporation hereafter created specifically ranking by its terms on parity with the Series C Preferred Stock ("Parity Securities") in each case as to distributions of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). Section 3. DIVIDENDS. The Series C Preferred Stock will bear no dividends, and the holders of the Series C Preferred Stock ("Holders") shall not be entitled to receive dividends on the Series C Preferred Stock. Section 4. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the Holders of shares of Series C Preferred Stock shall be entitled to receive, immediately after any distributions to Senior Securities required by the Corporation's Certificate of Incorporation or any certificate of designation of preferences, and prior and in preference to any distribution to Junior Securities but in parity with any distribution of Parity Securities, an amount per share equal to the sum of (i) $25,000 for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price") and (ii) an amount equal to 10% of the Original Series C Issue Price per annum for the period that has passed since the date of issuance of any Series C Preferred Stock (such amount being referred to herein as the "Premium"). If upon the occurrence of such event, and after payment in full of the preferential amounts with respect to the Senior Securities, the assets and funds thus distributed among the Holders of the Series C Preferred Stock and Parity Securities shall be insufficient to permit the payment to such Holders of the full preferential amounts due to the Holders of the Series C Preferred Stock and the Parity Securities, respectively, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the Holders of the Series C Preferred Stock and the Parity Securities, pro rata, based on the respective liquidation amounts to which each such series of stock is entitled by the Corporation's Certificate of Incorporation and any certificate of designation of preferences. (b) Upon the completion of the distribution required by subsection 4(a), if assets remain in this Corporation, they shall be distributed to holders of Junior Securities in accordance with the Corporation's Certificate of Incorporation including any duly adopted certificate(s) of designation of preferences. (c) A sale, conveyance or disposition of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 4; provided that, a consolidation or merger of the Corporation with or into any other corporation or corporations shall not be treated as a liquidation, dissolution or winding up within the meaning of this Section 4, but instead shall be treated pursuant to Section 5 hereof. Section 5. CONVERSION. The record Holders of this Series C Preferred Stock shall have conversion rights as follow (the "Conversion Rights"): (a) RIGHT TO CONVERT. Each record Holder of Series C Preferred Stock shall be entitled, commencing on the date of the last closing of a purchase and sale of Series C Preferred Stock that occurs pursuant to the offering of the Series C Preferred Stock by the Corporation (the 2 "Last Closing Date"), which is expected to be December 6, 1995, but in no event later than December 15, 1995 and at any time thereafter, subject to the Corporation's right of redemption set forth in Section 6(a) and Section 6(b), at the option of the Holder, at the office of the Corporation or any transfer agent for the Series C Preferred Stock, to convert shares of Series C Preferred Stock held by such Holder (but only in multiples of $25,000), into that number of fully-paid and non-assessable shares of Common Stock at the Conversion Rate, as defined below. Each record Holder of Series C Preferred Stock additionally shall be entitled (at the times and in the amounts set forth below), and, subject to the Corporation's right of redemption set forth in Section 6(a) and Section 6(b), at the office of the transfer agent for the Series C Preferred Stock (the "Transfer Agent"), to convert portions of the Series C Preferred Stock held by such Holder (but only in multiples of $25,000) into that number of fully-paid and non-assessable shares of Common Stock at the Conversion Rate, as defined below. Each record Holder of Series C Preferred Stock shall be entitled to convert up to one-third of the shares of Series C Preferred Stock held by such Holder beginning 45 days following the Last Closing Date and an additional one-third of the shares of Series C Preferred Stock held by such Holder beginning 75 days following the Last Closing Date, and may convert any remaining Series C Preferred Stock beginning 105 days following the Last Closing Date, at the office of the Corporation or any Transfer Agent for the Series C Preferred Stock, into that number of fully-paid and non-assessable shares of Common Stock of the Corporation calculated in accordance with the following formula (the "Conversion Rate"): Number of shares issued upon conversion of one share of Series C Preferred Stock =((.10) (N/365) (25,000) + (25,000) DIVIDED BY Conversion Price where, DEG. N = the number of days between (i) the Last Closing Date, as defined herein, and (ii) the applicable date of conversion for the shares of Series C Preferred Stock for which conversion is being elected, and DEG. CONVERSION PRICE = the lesser of (x) the average Closing Bid Price, as that term is defined below, for the five trading days ending on December 1, 1995, which amounts to $2.8250 (the "Fixed Conversion Price"), or (y) X times the average Closing Bid Price, as that term is defined below, of the Corporation's Common Stock for the five (5) trading days immediately preceding the Date of Conversion, as defined below, where X shall equal .85 + (1- (the average Closing Bid Price of the Corporation's Common Stock for the five (5) trading days immediately preceding the Date of Conversion, as that term is defined below, divided by the average Closing Bid Price of the Corporation's Common Stock for the ten (10) trading days immediately preceding the Date of Conversion)); provided that, in no event shall X be less than .85 or greater than 1.0. For purposes thereof, the term "Closing Bid Price" shall mean the closing bid price on the over-the-counter market as reported by NASDAQ, or if then traded on a national securities exchange or the National Market System, the mean of the high and low prices on the principal national securities exchange or the National Market System on which it is so traded. 3 (b) MECHANICS OF CONVERSION. In order to convert Series C Preferred Stock into full shares of Common Stock, the Holder shall (i) fax a copy of the fully executed notice of conversion the form attached hereto ("Notice of Conversion") to the Corporation at such office that he elects to convert the same, which notice shall specify the number of shares of Series C Preferred Stock to be converted and shall contain a calculation of the Conversion Rate (together with a copy of the first page of each certificate to be converted) to the Corporation or its designated transfer agent prior to Midnight, New York City time (the "Conversion Notice Deadline") on the date of conversion specified on the Notice of Conversion and (ii) surrender the original certificate or certificates therefor, duly endorsed, and the original Notice of Conversion by either overnight courier or 2-day courier, to the office of the Corporation or of any transfer agent for the Series C Preferred Stock; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the certificates evidencing such Series C Preferred Stock are delivered to the Corporation or its transfer agent as provided above, or the Holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed. Upon receipt by the Corporation of evidence of the loss, theft, destruction or mutilation of this a certificate of certificates ("Stock Certificates") representing shares of Series C Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Corporation, and upon surrender and cancellation of the Stock Certificate(s), if mutilated, the Corporation shall execute and deliver new Stock Certificate(s) of like tenor and date. No fractional shares of Common Stock shall be issued upon conversion of this Series C Preferred Stock. If any conversion of the Series C Preferred Stock would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion shall be the next higher number of shares. In the case of a dispute as to the calculation of the Conversion Rate, the Corporation's calculation shall be deemed conclusive absent manifest error. The Corporation shall use all reasonable efforts to issue and deliver within three (3) business days after delivery to the Corporation of such certificates, or after such agreement and indemnification, to such Holder of Series C Preferred Stock at the address of the Holder on the books of the Corporation, a certificate or certificates for the number of shares of Common Stock to which the Holder shall be entitled as aforesaid. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date set forth in such Notice of Conversion, provided (i) that the advance copy of the Notice of Conversion is faxed to the Corporation before midnight, New York City time, on the Date of Conversion, and (ii) that the original Stock Certificates representing the shares of Series C Preferred Stock to be converted are surrendered by depositing such certificates by either overnight courier or 2-day courier, as provided above, and received by the transfer agent or the Corporation within five business days thereafter. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Sock on such date. If the original Stock Certificates representing the Series C Preferred Stock to be converted are not received by the transfer agent or the Corporation within five business days after the Date of Conversion or if the facsimile of the Notice of Conversion is not received by the Corporation or its designated transfer agent prior to the Conversion Notice Deadline, the Notice of Conversion, at the Corporation's option, may be declared null and void. Following conversion of shares of Series C Preferred Stock, such shares of Series C Preferred Stock will no longer be outstanding. 4 (c) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series C Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding Series C Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series C Preferred Stock, the Corporation will use its best efforts to take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (d) AUTOMATIC CONVERSION. Each share of Class C Preferred Stock outstanding on December 6, 1997 automatically shall be converted into Common Stock on such date at the Conversion Price then in effect (calculated in accordance with the formula in Section 5(a) above) and December 6, 1997 shall be deemed the Date of Conversion with respect to such conversion. (e) ADJUSTMENT TO CONVERSION RATE. (i) If, prior to the conversion of all the Series C Preferred Stock, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, or other similar event, the Conversion Rate shall be proportionately adjusted, or if the number of outstanding shares of Common Stock is decreased by a combination or reclassification of shares, or other similar event, the Conversion Rate shall be proportionately adjusted. (ii) If, prior to the conversion of all Series C Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Corporation shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Corporation or another entity, or other property then the Holders of Series C Preferred Stock shall thereafter have the right to purchase and receive upon conversion of Series C Preferred Stock, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such shares of stock and/or securities or other property as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore purchasable and receivable upon the conversion of Series C Preferred Stock held by such Holders had such merger, consolidation, exchange of share, recapitalization or reorganization not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holders of the Series C Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Rate and the number of shares issuable upon conversion of the Series C Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock or securities thereafter deliverable upon the exercise hereof. The Corporation shall not effect any transaction described in this subsection 5(e) unless the resulting successor or acquiring entity (if not the Corporation) assumes by written instrument the obligation to deliver to the Holders of the Series C Preferred Stock such shares of stock and/or securities or other property as, in accordance with the foregoing provisions, the Holders of the Series C Preferred Stock may be entitled to receive upon conversion of the Series C Preferred Stock. (iii) If any adjustment under this Section 5(a) would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall 5 be disregarded and the number of shares of Common Stock issuable upon conversion shall be the next higher number of shares. Section 6. CASH REDEMPTION BY CORPORATION. (a) CORPORATION'S RIGHT TO REDEEM UPON RECEIPT OF NOTICE OF CONVERSION. The Corporation shall have the right, in its sole discretion, upon receipt of a Notice of Conversion pursuant to Section 5, to redeem in whole or in part any Series C Preferred Stock submitted for conversion, immediately prior to conversion. If the Corporation elects to redeem some, but not all, of the Series C Preferred Stock submitted for conversion, the Corporation shall redeem from among the Series C Preferred Stock submitted by the various Holders thereof for conversion on the applicable date, a pro-rata amount from each Holder so submitting Series C Preferred Stock for conversion. The Corporation shall effect each such redemption by giving notice ("Notice of Redemption Upon Receipt of Notice of Conversion") of its election to redeem, by facsimile within one business day following receipt of a Notice of Conversion from a Holder, with a copy by 2-day courier, to the Holders of Series C Preferred Stock selected for redemption, at the address and facsimile number of such Holder appearing in the Corporation's register for the Series C Preferred Stock and (B) the Corporation's transfer agent. Such Notice of Redemption Upon Receipt of Notice of Conversion shall indicate the number of shares of Holder's Series C Preferred Stock that have been selected for redemption, the Date of Redemption Upon Receipt of Notice of Conversion (as defined below) and the applicable Redemption Price Upon Receipt of Notice of Conversion, as defined below. If the Notice of Redemption Upon Receipt of Notice of Conversion is not received within the times specified above or does not meet the conditions specified above, the Notice of Redemption Upon Receipt of Notice of Conversion shall become null and void (unless otherwise agreed in writing by the Holder). The Corporation shall not be entitled to send any Notice of Redemption Upon Receipt of Notice of Conversion and begin the redemption procedure unless it has (x) the full amount of the Redemption Price Upon Receipt of Notice of Conversion, in cash, available in a demand or other immediately available account in a bank or similar financial institution or (y) immediately available credit facilities, in the full amount of the Redemption Price Upon Receipt of Notice of Conversion, with a bank or similar financial institution on the date the Notice of Redemption Upon Receipt of Notice of Conversion is sent to the applicable Holder. The Redemption Price Upon Receipt of Notice of Conversion per share of Series C Preferred Stock shall equal the Closing Bid Price on the Date of Conversion, multiplied by the number of shares of Common Stock that would otherwise have been issuable had the shares of Series C Preferred Stock redeemed been converted on the Date of Conversion as to such shares. For the purposes of the above formula, "N," "Closing Bid Price" and "Conversion Price" shall have the meanings set forth in Section 5(a) and "Date of Redemption Upon Notice of Conversion" shall be deemed to be the Conversion Date (as that term is defined in Section 5(b) above). The Redemption Price Upon Receipt of Notice of Conversion shall be paid to the Holder of Series C Preferred Stock redeemed within 10 business days of the delivery of the Notice of Redemption Upon Receipt of Notice of Conversion to such Holder; provided, however, that the Corporation shall not be obligated to deliver any portion of the Redemption Price Upon Receipt of Notice of Conversion unless either the certificates evidencing the Series C Preferred Stock redeemed are delivered to the Transfer 6 Agent as provided in Section 5(b), or the Holder notifies the Transfer Agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Notwithstanding the foregoing, in the event that the certificates evidencing the Series C Preferred Stock redeemed are not delivered to the Transfer Agent as provided in Section 5(b), the redemption of the Series C Preferred Stock pursuant to this Section 6(a) shall still be deemed effective as of the Date of Redemption Upon Receipt of Notice of Conversion. (b) CORPORATION'S RIGHT TO REDEEM AT ITS ELECTION. Commencing 45 days after the Last Closing Date, the Corporation shall have the right in its sole discretion, to redeem from time to time, any or all of the Series C Preferred Stock; provided that, the Corporation shall only be entitled to redeem shares of Series C Preferred Stock with an aggregate Stated Value (as defined below) of at least One Million Dollars ($1,000,000) on the first such redemption. If the Corporation elects to redeem some, but not all, of the Series C Preferred Stock, the Corporation shall redeem a pro-rata amount from each Holder of Series C Preferred Stock. The Corporation shall effect each such redemption by giving at least 30 days prior written notice ("Notice of Redemption At Corporation's Election") to (A) the Holders of Series C Preferred Stock selected for redemption, at the address and facsimile number of such Holder appearing in the Corporation's register for the Series C Preferred Stock and (B) the Transfer Agent, which Notice of Redemption At Corporation's Election shall be deemed to have been delivered three (3) business days after the Corporation's mailing (by overnight courier, with a copy by facsimile) of such Notice of Redemption At Corporation's Election. Such Notice of Redemption At Corporation's Election shall indicate the number of shares of Holder's Series C Preferred Stock that have been selected for redemption, the date which such redemption is to become effective (the "Date of Redemption At Corporation's Election") and the applicable Redemption Price At Corporation's Election, as defined below. The Corporation shall not be entitled to send any Notice of Redemption At Corporation's Election and begin the redemption procedure unless it has (x) the full amount of the Redemption Price At Corporation's Election, in cash, available in a demand or other immediately available account in a bank or similar financial institution or (y) immediately available credit facilities, in the full amount of Redemption At Corporation's Election, with a bank or similar financial institution on the date the Notice of Redemption At Corporation's Election is delivered to the applicable Holder. Notwithstanding the above, the Holder may convert any or all of its Series C Preferred Stock that is eligible for conversion, which would otherwise be subject to redemption under this Section 6(b), by submitting a Notice of Conversion prior to the Date of Redemption At Corporation's Election. For purposes of this Section 6(b), "Stated Value" shall mean the Original Series C Issue Price of the shares of Series C Preferred Stock redeemed pursuant to this Section 6(b), as defined in Section 4(a), together with the accrued but unpaid Premium (as defined in Section 4(a)), on such shares of Series C Preferred Stock, as of the Date of Redemption At Corporation's Election. The Redemption Price At Corporation's Election shall be calculated as a percentage of Stated Value of the shares of Series C Preferred Stock redeemed pursuant to this Section 6(b), which percentage shall vary depending on the date of Delivery of the Notice of Redemption at Corporation's Election, and shall be determined as follows: 7 Date of Delivery of Notice of Redemption at Corporation's Election % of Stated Value ------------------------------------ ----------------- 45 days to 6 months following Last Closing Date 130% 6 months and 1 day to 12 months following Last Closing Date 125% 12 months and 1 day to 18 months following Last Closing Date 120% 18 months and 1 day to 24 months following Last Closing Date 115% The Redemption Price At Corporation's Election shall be paid to the Holder of Series C Preferred Stock redeemed within 10 business days of the Date of Redemption At Corporation's Election; provided, however, that the Corporation shall not be obligated to deliver any portion of the Redemption Price At Corporation's Election unless either the certificates evidencing the Series C Preferred Stock redeemed are delivered to the Transfer Agent prior to the 10th business day following the Date of Redemption At Corporation's Election, or the Holder notifies the Transfer Agent that such certificates have been lost, stolen or destroyed and executed an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Notwithstanding the foregoing, in the event that the certificates evidencing the Series C Preferred Stock redeemed are not delivered to the Transfer Agent prior to the 10th business day following the Date of Redemption At Corporation's Election, the redemption of the Series C Preferred Stock pursuant to this Section 6(b) shall still be deemed effective as of the Date of Redemption At Corporation's Election and the Redemption Price At Corporation's Election shall be paid to the Holder of Series C Preferred Stock redeemed within 5 business days of the date the certificates evidencing the Series C Preferred Stock redeemed are actually delivered to the Transfer Agent. Section 7. ADVANCE NOTICE OF REDEMPTION (a) HOLDER'S RIGHT TO ELECT TO RECEIVE NOTICE OF CASH REDEMPTION BY CORPORATION. Holder shall have the right to require Corporation to provide advance notice stating whether Corporation will elect to redeem Holder's shares in cash, pursuant to Corporation's redemption rights discussed in Section 6. (b) MECHANICS OF HOLDER'S ELECTION NOTICE. Holder shall send notice ("Election Notice") to Corporation and such other person(s) as the Corporation may designate, by facsimile, stating Holder's intention to require Corporation to disclose that if Holder were to exercise his, her or its right of conversion (pursuant to section 5) whether Corporation would elect to redeem Holder's convertible Security for cash in lieu of issuing Common Stock. Corporation is required to disclose to Holder what action Corporation would take over the subsequent five ten day period, including the date Corporation receives such Election Notice. (c) CORPORATION'S RESPONSE. Corporation must respond within one business day of receipt of Holder's Election Notice (1) via facsimile and (2) via overnight courier. If Corporation does not respond to Holder within one business day via facsimile and overnight courier, Corporation shall be required to issue to Holder Common Stock upon Holder's conversion within the subsequent five day period. Section 8. VOTING RIGHTS. Except as otherwise provided by the Delaware Business Corporation Act ("Delaware Law"), the holders of the Series C Preferred Stock shall have no voting 8 power whatsoever, and no holder of Series C Preferred Stock shall vote or otherwise participate in any proceeding in which actions shall be taken by the Corporation or the stockholders thereof or be entitled to notification as to any meeting of the stockholders. To the extent that under Delaware Law the vote of the holders of the Series C Preferred Stock, voting separately as a class, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the shares of the Series C Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the shares of Series C Preferred Stock (except as otherwise may be required under Delaware Law) shall constitute the approval of such action by the class. To the extent that under Delaware Law the holders of the Series C Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series C Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders as the date as of which the Conversion Price is calculated. Holders of the Series C Preferred Stock shall be entitled to notice of all stockholder meetings or written consents with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's by-laws and applicable statutes. Section 9. PROTECTIVE PROVISIONS. So long as shares of Series C Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by Delaware Law) of the holders of at least a majority of the then outstanding shares of Series C Preferred Stock: (a) alter or change the rights, preferences or privileges of the shares of Series C Preferred Stock or any Senior Securities so as to affect adversely the Series C Preferred Stock; (b) create any new class or series of stock having a preference over the Series C Preferred Stock with respect to Distributions (as defined in Section 2 above); or (c) do any act or thing not authorized or contemplated by this Designation which would result in taxation of the holders of shares of the Series C Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). Section 10. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares of Series C Preferred Stock shall be redeemed or converted pursuant to Section 5 or Section 6 hereof, the shares so converted or redeemed shall be canceled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be issuable by the Corporation as Series C Preferred Stock. Section 11. PREFERENCE RIGHTS. Nothing contained herein shall be construed to prevent the Board of Directors of the Corporation from issuing one or more series of Preferred Stock with dividend and/or liquidation preferences equal to or junior to the dividend and liquidation preferences of the Series C Preferred Stock. FURTHER RESOLVED, that the statements contained in the foregoing resolutions creating and designating the said Series C Preferred Stock and fixing the number, powers, preferences and 9 relative, optional, participating, and other special rights and the qualifications, limitations, restrictions, and other distinguishing characteristics thereof shall, upon the effective date of said Series, be deemed to be included in and be a part of the certificate of incorporation of the Corporation pursuant to the provisions of the Delaware Business Corporation Act. Signed on December 7, 1995 /s/ D. Scott Hagen -------------------------------------- D. Scott Hagen, Acting President Attest: /s/ D. Scott Hagen - -------------------------------- D. Scott Hagen, Secretary 10 NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Preferred Stock) The undersigned hereby irrevocably elects to convert _______shares of Series C Preferred Stock, represented by stock certificate No(s). (the "Preferred Stock Certificates") into shares of common stock ("Common Stock") of Cortex Pharmaceuticals, Inc. (the "Corporation"), according to the conditions of the Certificate of Designation of Series C Preferred Stock, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any. The undersigned represents and warrants that all offers and sales by the undersigned of the shares of Common Stock issuable to the undersigned upon conversion of the Series C Preferred Stock shall be made in compliance with Regulation S, pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Act") or pursuant to an exemption from registration under the Act. Date of Conversion: ---------------------- Applicable Conversion Price: -------------- Signature: -------------------------------- Name: ------------------------------------- Address: ---------------------------------- * No shares of Common Stock will be issued until the original Series C Preferred Stock Certificate(s) to be converted and the Notice of Conversion are received by the Transfer Agent. CERTIFICATE OF DESIGNATION OF CORTEX PHARMACEUTICALS, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware -------------------- CORTEX PHARMACEUTICALS, INC., a Delaware corporation (the "Corporation"), hereby certifies that the following resolution has been duly adopted by a duly authorized committee of the Board of Directors of the Corporation: RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation (the "Board") by the provisions of the Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), there hereby is created, out of the 5,000,000 shares of Preferred Stock, par value $.001 per share, of the Corporation authorized in Article FOURTH of the Restated Certificate of Incorporation (the "Preferred Stock"), a series of the Preferred Stock of the Corporation consisting of 500 shares, which series shall have the following powers, designations, preferences and relative, participating, optional and other rights, and the following qualifications, limitations and restrictions: a. DESIGNATION. The designation of the series of Preferred Stock fixed by this resolution shall be "Series D Convertible Preferred Stock" (hereinafter referred to as the "Series D Preferred Stock"). b. CONVERSION RIGHTS. i. RIGHT TO CONVERT. The total number of original shares of Series D Preferred Stock acquired by any holder may be converted, at the option of the holder thereof, at any time after the earlier to occur of (i) date that the Registration Statement (referred to in and defined in Section 4(c) of the Securities Subscription Agreement, dated October 15, 1996, between the Corporation and the initial holder of the Series D Preferred Stock) is declared effective by the Securities and Exchange Commission or (ii) 180 days from the date of original issuance of the Series D Preferred Stock, without the payment of any additional consideration therefor, into that number of fully paid and nonassessable shares of common stock, $.001 par value per share, of the Corporation (the "Common Stock") determined as follows. The number of shares issuable upon conversion of one share of Series D Preferred Stock shall be: X = ((0.06)(N/365)($10,000) + $10,000)/Conversion Price where N is the number of calendar days between the applicable closing date and the applicable conversion date. The "Conversion Price" shall be equal to the lower of (i) 110% of the five day average closing bid price of the Common Stock for the five trading days immediately preceding the date of original issuance of Series D Preferred Stock or (ii) eighty-two percent (82%) of the average closing bid price of a share of Common Stock as reported on the NASDAQ Small Cap Market (or, in the event that such security is not traded on the NASDAQ Small Cap Market, such other national or regional securities exchange or automated quotations system upon which the Common Stock is listed and principally traded or, in the event that the Common Stock is not listed on any exchange or quoted on the NASDAQ Stock Market, any trading market in which quotes can be obtained) over the five consecutive trading days immediately preceding the date of the Conversion Notice (as defined in Section 2(b) hereof). ii. MECHANICS OF CONVERSION. No fractional shares of Common Stock shall be issued upon conversion of Series D Preferred Stock. If upon conversion of shares of Series D Preferred Stock held by a registered holder which are being converted, such registered holder would, but for the provisions of this Section 2(b), receive a fraction of a share of Common Stock thereon, then in lieu of any such fractional share to which such holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Price. Before any holder of Series D Preferred Stock shall be entitled to convert the same into full shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series D Preferred Stock, and shall give written notice (the "Conversion Notice") to the Corporation at such office that such holder elects to convert the same and shall state therein such holder's name or the name or names of its nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, but in any event within three business days of the date of its receipt of the original Conversion Notice and the certificate or certificates representing the shares of Series D Preferred Stock to be converted, issue and deliver or cause to be issued and delivered to such holder of Series D Preferred Stock, or to its nominee or nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. Such conversion shall be deemed to have been made on the date that the Corporation first receives the Conversion Notice, by telecopier or otherwise, and the person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. Upon the conversion of any shares of Series D Preferred Stock, such shares shall be restored to the status of authorized but unissued shares of Series D Preferred Stock and may be reissued by the Corporation at any time. iii. NOTICES OF RECORD DATE. In the event of (i) any declaration by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or (ii) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other Corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series D Preferred Stock at least twenty (20) days prior to the record date specified therein, a notice specifying (A) the date on which any such record is to be declared for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (C) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution or winding up. iv. STOCK DIVIDENDS; STOCK SPLITS; ETC. In the event that the Corporation shall (i) take a record of holders of shares of the Common Stock for the purpose of determining the holders entitled to receive a dividend payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, (iii) combine the outstanding shares of Common Stock into a smaller number of shares or (iv) issue, by reclassification of the Common Stock, any other securities of the Corporation, then, in each such case, the Conversion Price then in effect shall be adjusted so that upon the conversion of each share of Series D Preferred Stock then outstanding the number of shares of Common Stock into which such shares of Series D Preferred Stock are convertible immediately after the happening of any of the events described in clauses (i) through (iv) above shall be the number of such shares of Common Stock that would have been held by the holder had such shares of Series D Preferred Stock been converted immediately prior to the happening of such event or any record date with respect thereto. v. MANDATORY CONVERSION. If not sooner converted, all outstanding shares of Series D Preferred Stock shall be subject to mandatory conversion on the second anniversary of the date of original issuance thereof. For purposes of clause (b) above, such second anniversary date shall be deemed to be the date on which the Corporation receives a Conversion Notice with respect to the then outstanding shares of Series D Preferred Stock. vi. COMMON STOCK RESERVED. The Corporation shall reserve and keep available out of its authorized but unissued Common Stock such number of shares of Common Stock as shall from time to time be sufficient to effect conversion of all of the then outstanding shares of Series D Preferred Stock. c. VOTING RIGHTS OF SERIES D PREFERRED STOCK. Except as otherwise required by law, the holders of outstanding shares of Series D Preferred Stock shall not be entitled to vote on any matters submitted to the stockholders of the Corporation. d. PREFERENCE ON LIQUIDATION. Subject to the liquidation preferences of any series of Preferred Stock other than the Series D Preferred Stock, including, without limitation, any liquidation preferences that provides for payments to any series of Preferred Stock or the Common Stock prior to or on a parity with any payment to holders of the Series D Preferred Stock provided for below (including any preferences that provide for additional parity or non-parity payments to the holders of the Series D Preferred Stock), in the event of any liquidation, dissolution or winding up of the Corporation, distributions to holders of Series D Preferred Stock, and holders of Common Stock shall be made in the following manner: i. The holders of Series D Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, the amount of $10,000 plus (0.06)(N/365)($10,000), where N is the number of calendar days since the issuance of such share of Series D Preferred Stock, per share of each share of Series D Preferred Stock then held by them, adjusted for any stock split, stock combination, stock distribution or stock dividend with respect to such shares. The Series D Preferred Stock shall rank junior to the 9% Cumulative Preferred Stock, Series B Preferred Stock and Series C Preferred Stock of the Corporation, but senior to any other series of preferred stock hereinafter designated by the Corporation, as to the distribution of assets and funds upon dissolution, liquidation or winding up of the Corporation. ii. After payment in full to (i) the holders of Series D Preferred Stock of all amounts exclusively payable on or with respect to said shares pursuant to Section 5(a) above, the holders of the Common Stock shall be entitled to receive the remaining assets of the Corporation available for distribution to the stockholders upon the dissolution, liquidation or winding up of the Corporation. If the assets and funds available for distribution among the holders of the Common Stock or of any other series of Preferred Stock ranking on a parity with the Common Stock with respect to this Section 5(b) as to the distribution of assets upon such dissolution, liquidation or winding up shall be insufficient to permit the payment to such holders of their full liquidation payments, then the entire remaining assets and funds of the Corporation legally available for such distribution shall be distributed ratably among such holders in proportion to their aggregate preferential amounts. iii. A consolidation or merger of the Corporation with or into another corporation or entity in a transaction involving the disposition of more than fifty percent (50%) of other voting power of the Corporation, or a sale of all or substantially all of the assets of the Corporation (a "Sale of the Corporation") shall be regarded as a dissolution, liquidation or winding up of the Corporation within the meaning of this Section 5. The Corporation shall not consummate a Sale of the Corporation before the expiration of ten (10) days after mailing written notice of the proposed Sale of the Corporation to the holders of record of the Series D Preferred Stock. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be signed by its Vice President and Chief Financial Officer, this 15th day of October, 1996. CORTEX PHARMACEUTICALS, INC. By: /s/ D. Scott Hagen ------------------------------------ Name: D. Scott Hagen Title: Vice President and Chief Financial Officer CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES A CONVERTIBLE PREFERRED STOCK CORTEX PHARMACEUTICALS, INC. We, Vincent F. Simmon and D. Scott Hagen, being the President and Secretary, respectively, of Cortex Pharmaceuticals, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), being duly authorized to execute and file this Certificate, do hereby certify and attest that pursuant to authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation and Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation duly adopted the following resolutions providing for the establishment and designation of a series of preferred stock: RESOLVED: That, pursuant to authority vested in the Board of Directors by the Fourth Article of the Certificate of Incorporation of the Corporation, as amended, a new series of preferred stock, $.001 par value, be and hereby is established and designated as Series A Convertible Preferred Stock, consisting of 400 shares, the powers, preferences and relative, participating, optional or other special rights of which, and the qualifications, limitations or restrictions of which, in addition to any set forth in the Corporation's Certificate of Incorporation, shall be as set forth in EXHIBIT A attached hereto. IN WITNESS WHEREOF, we have hereunto set our hands and seals as President and Secretary, respectively, of this Corporation on this 4th day of June 1997, and we hereby affirm that the foregoing Certificate is our act and deed and the act and deed of the Corporation and that the facts stated therein are true. ________________________________________________ Vincent F. Simmon, Ph.D., President and Chief Executive Officer Attest: __________________________ D. Scott Hagen, Secretary CORTEX PHARMACEUTICALS, INC. TERMS, RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES A CONVERTIBLE PREFERRED STOCK, $.001 PAR VALUE SECTION 1. VOTING. The holders of the Series A Convertible Preferred Stock shall have such voting rights only as are set forth below except as otherwise required by law from time to time. The affirmative approval (by vote or written consent as permitted by applicable law) of the holders of at least 66-2/3% of the outstanding shares of the Series A Convertible Preferred Stock, par value $.001 per share (the "Series A Convertible Preferred Stock") consenting or voting (as the case may be) separately as a class, will be required for (i) any amendment, alteration or repeal of the Corporation's Certificate of Incorporation, as amended from time to time, (including any Certificate of Designation of Rights, Preferences and Privileges) if such amendment, alteration or repeal adversely affects the powers, rights, preferences or privileges of the Series A Convertible Preferred Stock (including, without limitation, by creating any class or series of equity securities or issuing any equity securities not outstanding as of June 4, 1997 out of any already existing class or series of equity securities, having a preference over the Series A Convertible Preferred Stock with respect to dividends, redemption, distribution upon liquidation or in any other respect), or (ii) any amendment to or waiver of the terms of the Series A Convertible Preferred Stock or this Certificate. To the extent that under applicable law or under the Corporation's Certificate of Incorporation or By-Laws, each as amended from time to time, the approval of the holders of the Series A Convertible Preferred Stock, voting separately as a class, is required to authorize a given action of the Corporation, the affirmative approval (by vote or written consent as permitted by applicable law) of the holders of a majority of the outstanding shares of the Series A Convertible Preferred Stock shall constitute the approval of such action by the class. To the extent that under applicable law or under the Corporation's Certificate of Incorporation or By-Laws, each as amended from time to time, the holders of the Series A Convertible Preferred Stock are entitled to vote on a matter with holders of any shares of any other series or class of Preferred Stock and/or holders of the Common Stock, voting together as one class, each share of Series A Convertible Preferred Stock shall be entitled to that number of votes as shall be equal to the number of shares of the Corporation's Common Stock, par value $.001 per share (the "COMMON STOCK") into which each share of Series A Convertible Preferred Stock is convertible on the record date for any meeting of stockholders or on the date of any written consent of stockholders, as applicable. Holders of the Series A Convertible Preferred Stock shall be entitled to notice of all stockholder meetings or written consents (whether or not they are entitled to vote thereat), which notice will be provided pursuant to the Corporation's By Laws, as amended from time to time, and applicable statutes. -2- SECTION 2. DIVIDENDS. No dividends will accrue with respect to the Series A Convertible Preferred Stock. SECTION 3. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation, voluntarily or involuntarily (each such date a "LIQUIDATION"), the holders of each share of Series A Convertible Preferred Stock shall be entitled to be paid pro-rata out of the assets of the Corporation available for distribution to its stockholders, whether such assets are capital, surplus, or earnings, after any payment or declaration and setting apart for payment of any preferential amounts owing in respect of the 9% Cumulative Convertible Preferred Stock, par value $.001 per share (the "9% Preferred Stock") and the Series B Preferred Stock, par value $.001 per share (the "Series B Preferred Stock," and together with the 9% Preferred Stock, the "Senior Stock") but before any payment or declaration and setting apart for payment of any amount shall be made in respect of any shares of the Corporation's Common Stock or shares of any other capital stock of the Corporation ranking on liquidation junior to the Series A Convertible Preferred Stock (collectively, "JUNIOR STOCK"), a preferential amount equal to Ten Thousand Dollars ($10,000.00) plus (0.06)(N/365)($10,000), where N is the number of calendar days since the issuance of such share of Series A Preferred Stock, per share (adjusted to reflect any stock split, stock dividend, combination, recapitalization or reorganization affecting the Series A Convertible Preferred Stock) (as so adjusted, the "DESIGNATED VALUE") of Series A Convertible Preferred Stock held by them (such preferential amount being hereinafter referred to as the "SERIES A PREFERRED STOCK LIQUIDATION PREFERENCE"). If upon such liquidation, dissolution or winding-up, the assets of the Corporation are insufficient (after payment of the liquidation preference of any class of preferred stock ranking senior on liquidation to the Series A Convertible Preferred Stock) to provide for the payment in full of the Series A Preferred Stock Liquidation Preference for each share of Series A Convertible Preferred Stock outstanding, such assets as are available shall be paid out pro-rata (determined in accordance with the Series A Preferred Stock Liquidation Preference) to the outstanding shares of Series A Convertible Preferred Stock. For purposes of this paragraph, (i) a sale or other disposition of all or substantially all of the assets of the Corporation, (ii) a consolidation or merger of the Corporation with or into any other corporation or other entity or person (whether or not the Corporation is the surviving corporation) in which in excess of 50% of the Corporation's voting power is transferred and (iii) any other corporate reorganization or transaction or series of related transactions in which in excess of 50% of the Corporation's voting power is transferred, shall be deemed to be a Liquidation. After payment or declaration and setting apart for payment to holders of shares of the Senior Stock and holders of shares of the Series A Convertible Preferred Stock, holders of the Series A Convertible Preferred Stock shall be entitled to no further distribution. SECTION 4. CONVERSION. The holders of the Series A Convertible Preferred Stock shall have conversion rights in accordance with the following provisions: (a) VOLUNTARY CONVERSION. Each holder of one or more shares of Series A Convertible Preferred Stock shall be entitled, at any time and from time to time and at such holder's option, to convert such share or shares into fully paid and nonassessable shares of Common Stock (as such shares of Common Stock may be constituted on the Conversion Date, as defined in Section 4(d) -3- hereof) at the rate specified in Section 4(c) hereof, subject to adjustment in accordance with Section 5 hereof. (b) MANDATORY CONVERSION. On the third anniversary of the first date on which the Corporation issues any shares of Series A Convertible Preferred Stock (the "FIRST DATE OF ISSUANCE"), each outstanding share of Series A Convertible Preferred Stock shall be converted automatically and without further action into fully paid and nonassessable shares of Common Stock (as such shares of Common Stock may be constituted on the Conversion Date) at the rate specified in Section 4(c) hereof, subject to adjustment in accordance with Section 6 hereof, and a Conversion Notice shall be deemed to have been given by the holder of each such outstanding share of Series A Convertible Preferred Stock on such date. (c) CONVERSION RATE. (i) VOLUNTARY CONVERSION. Each share of Series A Convertible Preferred Stock that is converted into shares of Common Stock in accordance with Section 4(a) or Section 4(b) hereof shall convert into such number of whole shares of Common Stock as may be purchased with the Designated Value of each such share of Series A Convertible Preferred Stock at a price (the "EFFECTIVE PRICE") equal to (A) in the event the lowest of the dollar volume weighted average reported sales prices of the Common Stock (as calculated by Bloomberg Financial Markets through its "Volume At Price" function, individually the "Daily Prices") during the five (5) consecutive trading days (the "AVERAGE STOCK PRICE") immediately preceding the Conversion Date (as defined in Section 4(d) hereof) is greater than $2.50 per share, the Applicable X Percentage (as determined in accordance with the following table) of the Average Stock Price (B) in the event the Average Stock Price immediately preceding the Conversion Date (as defined in Section 4(d) hereof) is less than or equal to $2.10 per share, the Applicable Y Percentage (as determined in accordance with the following table) of the Average Stock Price and (C) in the event the Average Stock Price immediately preceding the Conversion Date (as defined in Section 4(d) hereof) is greater than $2.10 but less than or equal to $2.50, $2.00:
DATE OF CONVERSION APPLICABLE APPLICABLE (NUMBER OF DAYS AFTER X Y FIRST DATE OF ISSUANCE) PERCENTAGE PERCENTAGE - ----------------------- ---------- ----------- 1 to 75 100% 100% 76 to maturity 80% 95%
(ii) Upon the occurrence of any of the events described in Section 6 hereof or any dividend on shares of Common Stock payable in shares of Common Stock, the $2.00, $2.10 and $2.50 dollar amounts shall be proportionately increased or decreased, as appropriate. (iii) The number of shares of Common Stock into which each share of Series A Convertible Preferred Stock may be converted pursuant to this Section 4(c), as such may be -4- adjusted from time to time in accordance with Sections 4(c)(ii) and 6 hereof, is hereafter referred to as the "CONVERSION RATE." (d) MECHANICS OF CONVERSION. Unless conversion is mandatory in accordance with Section 4(b) hereof, any or all shares of Series A Convertible Preferred Stock may be converted by the holder thereof by giving written notice (the "CONVERSION NOTICE") to the Corporation, which notice incorporates the holder's calculation of the Effective Price and the number of shares of Common Stock issuable upon conversion, that the holder elects to convert the number of shares specified therein and specifying the number of Additional Shares (as defined in Section 5 hereof) such holder elects to purchase, if any, and by delivering the certificate or certificates representing the Series A Convertible Preferred Stock to be converted, duly endorsed or assigned in blank, to the Corporation or any transfer agent for the Series A Convertible Preferred Stock together with a check or wire transfer in the amount of the total purchase price for the Additional Shares. In the event that such certificate or certificates have been lost, stolen or destroyed, in lieu of delivering such certificate or certificates, the holder may notify the Corporation of such loss, theft or destruction and deliver to the Corporation an instrument reasonably satisfactory to the Corporation indemnifying the Corporation from any loss incurred by the Corporation in connection with such lost, stolen or destroyed certificate or certificates. On the date of receipt by the Corporation of the Conversion Notice (which Notice shall include holder's covenant to use holder's best efforts to promptly deliver the certificate or certificates representing the shares to be converted or a notice of loss, theft or destruction and an indemnification instrument in lieu thereof) the Corporation shall verify the holder's calculation of the Conversion Rate as calculated by the holder and if the Corporation disagrees with the holder's calculation of the Conversion Rate, the Corporation shall deliver to the holder the Corporation's calculation of the Conversion Rate. The Corporation shall use its best efforts to issue and deliver as soon as possible, and in any event within three (3) business days after delivery to the Corporation of any certificate representing one or more shares of Series A Convertible Preferred Stock to be converted (or a notice of loss, theft or destruction and an indemnification instrument in lieu thereof), to such holder of Series A Convertible Preferred Stock, or to its designee, one or more certificates representing that number of shares of Common Stock to which such holder shall be entitled, together with one or more certificates representing any shares of Series A Convertible Preferred Stock represented by the certificate or certificates delivered by such holder but not submitted for conversion. The Corporation shall be deemed to have received the Conversion Notice on the date of its delivery to the Corporation by the holder (the "CONVERSION DATE") and the person or persons entitled to receive the shares of Common Stock issuable upon the conversion specified therein shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date, PROVIDED THAT the certificate or certificates representing the shares of Series A Convertible Preferred Stock to be converted (or a notice of loss, theft or destruction and an indemnification instrument in lieu thereof), are received by the Corporation or any transfer agent for the Series A Convertible Preferred Stock within five (5) business days thereafter. SECTION 5. ADDITIONAL SHARES. If the Effective Price on a Conversion Date is greater than or equal to $2.75 (the "ADDITIONAL SHARE TRIGGER PRICE"), then, at the holder's option, and in addition to and not in lieu of the shares of Common Stock issuable upon conversion of the shares of Series A Convertible Preferred Stock specified in the applicable Conversion Notice, the -5- Corporation shall issue and sell to such holder, at such Effective Price, one (1) share of Common Stock (each an "ADDITIONAL SHARE" and collectively, the "ADDITIONAL SHARES") for each share of Common Stock issuable upon conversion of such specified shares of Series A Convertible Preferred Stock. Any election to exercise the foregoing right to purchase Additional Shares shall be exercised with respect to any given Series A Convertible Preferred Shares at the time of conversion of such shares and is forfeited to the extent it is not fully exercised at such time, as indicated in the Conversion Notice applicable to such shares of Series A Convertible Preferred Stock. SECTION 6. ADJUSTMENTS; REORGANIZATIONS. (a) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If, at any time or times during the relevant calculation period for determining the Average Stock Price in connection with any conversion or redemption, the Corporation effects a subdivision or combination of the outstanding Common Stock into a smaller number of shares (e.g., by reverse stock split or otherwise), the Daily Prices in effect immediately before such subdivision shall be proportionately increased or decreased, as appropriate. (b) [intentionally deleted] (c) ADJUSTMENT FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event that the Corporation, at any time or from time to time after the First Date of Issuance, makes or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable other than in shares of Common Stock (including, without limitation, any buy-back by the Corporation of shares of Common Stock) then, and in each such event, provision shall be made so that the holders of Series A Convertible Preferred Stock shall receive the amount of such dividend or other distribution, payable in the form and on the date such dividend or other distribution is to be paid to holders of Common Stock, to which such holders would be entitled to receive had such holders converted each share of Series A Convertible Preferred Stock then outstanding into Common Stock immediately prior to the record date for the determination of holders of Common Stock entitled to receive such dividend or other distribution. (d) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. In the event that at any time or from time to time after the First Date of Issuance, the Common Stock issuable upon the conversion of the Series A Convertible Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or reorganization provided for elsewhere in this Section 6), then, and in each such event, each holder of shares of Series A Convertible Preferred Stock shall, as of the effectiveness of such change, be entitled to convert each share of Series A Convertible Preferred Stock into the same kind of stock receivable by holders of shares of Common Stock upon such recapitalization, reclassification or other change, all subject to further adjustment as provided herein. In such event, the formula set forth herein for conversion shall be equitably adjusted in a manner reasonably satisfactory to the holders of shares of Series A Convertible Preferred Stock to reflect such change in number of shares or, if shares of a new class of stock are issued, to reflect the market price of the class of classes of stock (applying -6- the same factors used in determining the Conversion Rate) issued in connection with the above described transaction. (e) REORGANIZATION. In the event that at any time or from time to time after the First Date of Issuance, there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification, or exchange of shares provided for elsewhere in this Section 6), then, and in each such event, as a part of such reorganization, provision shall be made so that the holders of the Series A Convertible Preferred Stock shall, as of the effectiveness of such capital reorganization, be entitled to receive upon conversion of any shares of Series A Convertible Preferred Stock the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock deliverable upon such conversion would have been entitled to receive upon effectiveness of such capital reorganization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 6 with respect to the rights of the holders of the Series A Convertible Preferred Stock after the reorganization to the end that the provisions of this Section 6 (including adjustment of the Conversion Rate then in effect and the number of shares issuable upon conversion of shares of the Series A Convertible Preferred Stock) shall be applicable after that event and be as nearly equivalent as may be practicable, including, by way of illustration and not limitation, by equitably adjusting the formula set forth herein for conversion to reflect the market price of the securities or property issued in connection with the above described transaction. SECTION 7. FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares of Common Stock shall be issuable hereunder. The number of shares of Common Stock that are issuable upon any conversion of one or more shares of Series A Convertible Preferred Stock shall be rounded up to the nearest whole share. SECTION 8. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. (a) RESERVATION REQUIREMENT. The Corporation has reserved and the Corporation shall continue to reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Corporation to satisfy any obligation to issue shares of its Common Stock upon conversion of the authorized shares of Series A Convertible Preferred Stock. The number of shares so reserved may be reduced by the number of shares actually delivered pursuant to conversion of shares of Series A Convertible Preferred Stock; PROVIDED THAT in no event shall the number of shares so reserved be less than 125% of the maximum number required to satisfy remaining conversion rights on the unconverted shares of Series A Convertible Preferred Stock. The number of shares so reserved shall be proportionately increased and may be proportionately decreased, to reflect stock splits, subdivisions, combinations and stock dividends and distributions. (b) DEFAULT. If the Corporation does not have a sufficient number of shares of Common Stock available to satisfy the Corporation's obligations to a holder of one or more shares of Series A Convertible Preferred Stock upon receipt of a Conversion Notice, or if the Corporation is otherwise prohibited by applicable law from issuing shares of Common Stock upon receipt of a Conversion Notice (each, a "CONVERSION DEFAULT"), the holder of one or more shares of Series A Convertible Preferred Stock requesting conversion shall have the right to require the Corporation to redeem such shares of Series A Convertible Preferred Stock at a price per share which shall be -7- the greater of (i) 125% of the Designated Value or (ii) the product of the Conversion Rate and the last reported sales price of the Common Stock as of the Conversion Date such redemption amount to be payable in cash. SECTION 9. NO REISSUANCE OF SHARES OF SERIES A PREFERRED STOCK. No share or shares of Series A Convertible Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued as Series A Convertible Preferred Stock, and all such shares shall be retired and shall return to the status of authorized, unissued and retired and undesignated shares of preferred stock of the Corporation. No additional shares of Series A Convertible Preferred Stock shall be authorized or issued without the consent of at least 66-2/3% in interest of the holders of shares of Series A Convertible Preferred Stock outstanding immediately prior thereto. SECTION 10. NO IMPAIRMENT. The Corporation shall not intentionally take any action which would impair the rights and privileges of the shares of Series A Convertible Preferred Stock set forth herein. SECTION 11. HOLDER'S RIGHTS IF SHARES ARE DELISTED OR IF TRADING IN COMMON STOCK IS SUSPENDED. In the event that at any time on or after the date hereof and prior to the third anniversary of the First Date of Issuance, trading in the shares of the Common Stock is suspended on the principal quotation system, market or exchange for such shares, for a period of five (5) consecutive trading days, other than as a result of the suspension of trading in securities in general, or if the Common Stock is delisted, then, at the option of any holder of one or more shares of Series A Convertible Preferred Stock, the Corporation shall redeem that number of such holder's shares of Series A Convertible Preferred Stock as such holder shall designate, on such date as such holder shall designate, and at the price per share which is the greater of (i) 110% of the Designated Value or (ii) the product of the Conversion Rate and the reported closing sales price of the Common Stock on the most recent trading date immediately preceding the designated date of redemption, such redemption amount to be payable in cash. SECTION 12. REDEMPTION. The Corporation shall have no right, at any time, to require redemption of any of the Series A Convertible Preferred Stock and the Corporation shall have no right, at any time, to require redemption of any of the Common Stock into which such Series A Convertible Preferred Stock may be converted. The Corporation may grant redemption rights to the holders of Series A Convertible Preferred Stock either by amendment to this Certificate of Designation, Rights, Preferences and Privileges or by other agreement. SECTION 13. MECHANICS OF REDEMPTION. Any redemption pursuant to Section 8 and 11 hereof of Series A Convertible Preferred Stock shall be in accordance with the following procedure: (a) NOTICE. Any or all shares of Series A Convertible Preferred Stock may be redeemed by the holder thereof by giving written notice (the "REDEMPTION NOTICE") to the Corporation, together with the holder's calculation of the redemption price and specifying wire transfer instructions for receipt of the redemption price, that the holder elects to redeem the -8- number of shares specified therein, and by delivering the certificate or certificates representing the Series A Convertible Preferred Stock to be redeemed, duly endorsed or assigned in blank, to the Corporation, PROVIDED, HOWEVER, in the event that such certificate or certificates have been lost, stolen or destroyed, in lieu of delivering such certificate or certificates, the holder may notify the Corporation of such loss, theft or destruction and deliver to the Corporation an instrument reasonably satisfactory to the Corporation indemnifying the Corporation from any loss incurred by the Corporation in connection with such lost, stolen or destroyed certificate or certificates. (b) RESPONSIBILITY OF CORPORATION. On the date of receipt by the Corporation of the Redemption Notice, the Corporation shall verify the holder's calculation of the total redemption price as calculated by the holder and if the Corporation disagrees with the holder's calculation of the redemption price, the Corporation shall deliver to the holder the Corporation's calculation of the redemption price. The Corporation shall be deemed to have received the Redemption Notice on the date of its delivery to the Corporation by the holder and upon delivery of the certificate or certificates representing the shares of Series A Convertible Preferred Stock to be redeemed (or a notice of loss, theft or destruction and an indemnification instrument in lieu thereof), the redeeming holder shall be entitled to receive payment of the redemption price per share of Series A Convertible Preferred Stock being redeemed. Subject to applicable legal restrictions, the Corporation shall use its best efforts to pay (by wire transfer of immediately available funds) as soon as possible, and in any event within twenty (20) calendar days after delivery to the Corporation of a Redemption Notice, to such holder of Series A Convertible Preferred Stock, or to its designee, the total redemption price to which such holder shall be entitled, and to issue and deliver one or more certificates representing any shares of Series A Convertible Preferred Stock represented by the certificate or certificates delivered by such holder but not submitted for redemption. On the date of initiation of the wire transfer paying the Redemption Price, the Corporation shall give notice to any holder of the shares of Series A Convertible Preferred Stock being so redeemed that such wire has been initiated. If the certificate or certificates (or such notice and indemnification instrument) representing the shares to be redeemed are not received by the Corporation or any transfer agent for the Series A Convertible Preferred Stock within five (5) business days after receipt by the Corporation of the Redemption Notice, the Redemption Notice shall become null and void. (c) EFFECT OF REDEMPTION. From and after receipt by the Corporation of a Redemption Notice, the shares of Series A Convertible Preferred Stock so redeemed shall no longer be outstanding, and the holders thereof shall cease to be shareholders with respect to such shares, and shall have no rights with respect thereto except the right to receive the redemption price. (d) FAILURE TO TIMELY REDEEM. If any share of Series A Convertible Preferred Stock is not redeemed within twenty (20) calendar days after delivery to the Corporation of a Redemption Notice with respect to such share pursuant to this Section 11 then (other than with the consent of the holders of a majority of the outstanding shares of Series A Convertible Preferred Stock) at the holder's election either (i) the numeral "0.06" appearing in the formula for the calculation of Designated Value (as set forth in Section 3 hereof) shall be changed to the numeral "0.15" effective as of the twentieth calendar day after delivery to the Corporation of a Redemption Notice and shall remain so changed until the date on which such shares actually shall be redeemed or (ii) the holder may withdraw the Redemption Notice and upon such withdrawal the Conversion Rate shall be the -9- lesser of (A) that Conversion Rate associated with an Effective Price equal to the Average Stock Price on the twentieth calendar date after delivery of the Redemption Notice and (B) the Conversion Rate (as otherwise determined in accordance with the provisions of Section 4). (e) INSUFFICIENT FUNDS. If the funds of the Corporation legally available for redemption of shares of Series A Convertible Preferred Stock are insufficient to redeem the total number of shares of Series A Convertible Preferred Stock specified to be redeemed in any Redemption Notice within twenty (20) calendar days after delivery to the Corporation of the applicable Redemption Notice, those funds which are legally available will be used to redeem the maximum possible number of shares of Series A Convertible Preferred Stock ratably among the holders of such shares to be redeemed based upon the aggregate Designated Value of such shares held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of Series A Convertible Preferred Stock, such funds will immediately be used to redeem the balance of the shares that the Corporation has become obligated to redeem with respect to any Redemption Notice, but which it has not redeemed. In case fewer than the total number of shares of Series A Convertible Preferred Stock represented by any certificate are redeemed, a new certificate representing the number of unredeemed shares will be issued to the holder thereof without cost to such holder within thirty (30) days of the date of delivery of the applicable Redemption Notice. SECTION 14. OTHER NOTICES. In case at any time: (i) the Corporation shall declare any dividend upon its Common Stock payable in cash, stock or convertible securities or make any other distribution to the holders of its Common Stock; (ii) the Corporation shall offer for subscription PRO RATA to the holders of its Common Stock any additional shares of stock of any class, any convertible securities, or other rights; (iii) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or a consolidation or merger of the Corporation with or into, or a sale of all or substantially all its assets to, another entity or entities; or (iv) there shall be commenced a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in any one or more of said cases, the Corporation shall give notice to each holder of any shares of Series A Convertible Preferred Stock (a) at least twenty (20) days' prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least twenty (20) calendar days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date -10- on which the holders of Common Stock shall be entitled thereto and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. SECTION 15. NOTICES REQUIREMENTS. Unless otherwise provided herein, notices and other deliveries to be made hereunder shall be made by hand or by registered or certified mail (return receipt requested and postage and charges prepaid), by a nationally recognized overnight courier (charges prepaid), or by telecopier (in which case a copy shall also be sent by nationally recognized overnight courier). Such notices and other deliveries shall be addressed, in the case of the Corporation, to the Corporation at its principal place of business, at 15241 Barranca Parkway, Irvine, California 92618, telecopier (714-727-3657), Attention: President and in the case of any holder of one or more shares of Series A Convertible Preferred Stock, to such holder at the address or telecopier number of such holder appearing on the books of the Corporation or given by such holder to the Corporation for the purpose of notice, or, if no such address or telecopier number appears or is so given, at the last known address of such holder, or at such other address as the recipient shall have provided for notices in writing. Such notices and other deliveries shall be deemed delivered and received, if made by hand or telecopier on the date given, if made by overnight courier, on the next business day after the date deposited with such courier with instructions and prepayment for next day delivery, and if sent by registered or certified mail, on the third business day following the mailing thereof. SECTION 16. INDEMNIFICATION. The Corporation shall indemnify the holders of Series A Convertible Preferred Stock against any and all loss, cost, expenses, liabilities, or damages (including reasonable attorneys fees) incurred as a result of the Corporation's breach of any of its obligations set forth in this Certificate of Designation. CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF CORTEX PHARMACEUTICALS, INC., a Delaware corporation (Pursuant to Section 242 of the Delaware General Corporation Law) CORTEX PHARMACEUTICALS, INC., a corporation organized and existing under the Delaware General Corporation Law (the "Corporation"), does hereby certify: FIRST: That the Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on April 11, 1989 and was amended by Certificate of Amendment filed June 27, 1989, by Certificate of Designation filed April 29, 1991, by Certificate of Correction filed May 1, 1991, by Certificate of Amendment of Certificate of Designation filed June 13, 1991, by Certificate of Amendment of Certificate of Incorporation filed November 12, 1992, by Certificate of Amendment of Restated Certificate of Incorporation filed January 11, 1995, by Certificate of Designation filed December 8, 1995, by Certificate of Designation filed October 15, 1996, and by Certificate of Designation filed June 4, 1997. SECOND: That at a meeting of the Board of Directors of the Corporation resolutions were duly adopted setting forth a proposed amendment of the Restated Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and directing said amendment to be submitted to the stockholders of the Corporation at its Annual Meeting. The resolution setting forth the proposed amendment is as follows: RESOLVED, that Article Fourth, paragraph (A)(1) of the Corporation's Restated Certificate of Incorporation be amended to read in its entirety: "FOURTH: (A)(1) - AUTHORIZED CAPITAL. (a) The total number of shares of capital stock which the Company has the authority to issue is 35,000,000 consisting of 30,000,000 shares of Common Stock, $0.001 par value per share (the `Common Stock'), and 5,000,000 shares of Preferred Stock, $0.001 par value per share (the `Preferred Stock')." THIRD: That thereafter, pursuant to resolution of the Board of Directors, the Annual Meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the Delaware General Corporation Law, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. FOURTH: Said amendment was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed by Vincent F. Simmon, Ph.D., its President, and attested to by Vincent F. Simmon, Ph.D., its Secretary, this 15th day of December, 1998. CORTEX PHARMACEUTICALS, INC. [SEAL] By: /s/ Vincent F. Simmon, Ph.D. -------------------------------- Vincent F. Simmon, Ph.D., President ATTEST: By: /s/ Vincent F. Simmon, Ph.D. -------------------------------- Vincent F. Simmon, Ph.D., Secretary EX-23.2 3 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated July 22, 1999 in the Post Effective Amendment No. 3 to the Registration Statement on Form SB-2 and related Prospectus of Cortex Pharmaceuticals, Inc. for the Registration of shares of its common stock /s/ Ernst & Young LLP ERNST & YOUNG LLP San Diego, California February 4, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF SEPTEMBER 30, 1999, AND THE RELATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 289,271 0 0 0 0 320,772 2,217,587 (1,728,209) 856,887 1,308,098 664,472 0 70,905 15,528 (537,644) 856,887 0 834,556 0 0 1,119,180 0 15,190 (291,183) 0 (291,183) 0 0 0 (291,183) (0.02) (0.02) PROMISSORY NOTE PAYABLE TO ALKERMES, INC. THIS AMOUNT IS INCLUDED IN CURRENT LIABILITIES.
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