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| COR > SEC Filings for COR > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
The following discussion and analysis should be read in conjunction with the Financial Statements and Notes relating thereto appearing elsewhere in this report and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Introductory Note
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act, and we intend that such forward looking statements be subject to the safe
harbors created thereby. These forward-looking statements, which may be
identified by words including "anticipates," "believes," "intends," "estimates,"
"expects," "plans," and similar expressions include, but are not limited to,
statements regarding (i) future research plans, expenditures and results,
(ii) potential collaborative arrangements, (iii) the potential utility of our
proposed products and (iv) the need for, and availability of, additional
financing.
The forward-looking statements included herein are based on current expectations, which involve a number of risks and uncertainties and assumptions regarding our business and technology. These assumptions involve judgments with respect to, among other things, future scientific, economic and competitive conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized and actual results may differ materially. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that we file from time to time with the Securities and Exchange Commission, or the SEC, including, without limitation, Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and subsequent Current Reports on Form 8-K.
About Cortex Pharmaceuticals
We are engaged in the discovery and development of innovative pharmaceuticals for the treatment of psychiatric disorders, neurological diseases and brain mediated breathing disorders. Our primary focus is to develop novel small molecule compounds that positively modulate AMPA-type glutamate receptors, a complex of proteins involved in communication between nerve cells in the mammalian brain. These compounds, termed AMPAKINE ® compounds, enhance the activity of the AMPA receptor. These molecules are designed and developed as proprietary pharmaceuticals because we believe that they hold promise for the treatment of neurological and psychiatric diseases and disorders that are known, or thought, to involve depressed functioning of pathways in the brain that use glutamate as a neurotransmitter. Our most advanced clinical compound is CX717, which currently is in Phase II clinical development.
The AMPAKINE program addresses large potential markets. Our business plan involves partnering with larger pharmaceutical companies for research, development, clinical testing, manufacturing and global marketing of AMPAKINE products for those indications that require sizable, expensive Phase III clinical trials and very large sales forces to achieve significant market penetration.
At the same time, we plan to develop compounds internally for a selected set of indications, many of which will allow us to apply for orphan drug status. Such designation by the Food and Drug Administration, or the FDA, is usually applied to products where the number of patients in the United States in the given disease category is typically less than 200,000. These orphan drug indications typically require more modest investment in the development stages, follow a quicker regulatory path to approval, and involve a more concentrated and smaller sales force targeted at selected medical centers and a limited number of medical specialists in the United States.
In our licensing discussions, we seek to reserve rights that may be viewed as a natural expansion beyond some of the orphan drug uses to selected larger areas of therapy to thereby allow us to potentially further develop our compounds for such larger non-orphan drug indications. If we are successful in the pursuit of this operating strategy, we may consequently be in a position to contain our costs over the next few years, to maintain our focus on the research and early development of novel pharmaceuticals (where we believe that we have the ability to compete) and eventually to participate more fully in the commercial development of AMPAKINE products in the United States.
Critical Accounting Policies and Management Estimates
The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. This process forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
In accordance with the SEC's Staff Accounting Bulletin No. 104, "Revenue Recognition," revenues from up-front fees from our collaborators are deferred and recorded over the term that we provide ongoing services. Similarly, research support payments are recorded as revenue as we perform the research under the related agreements. All amounts received under collaborative research agreements or research grants are nonrefundable, regardless of the success of the underlying research.
Revenues from milestone payments are recognized when earned, as evidenced by written acknowledgment from our collaborator, provided that (i) the milestone event is substantive and its achievement was not reasonably assured at the inception of the agreement, and (ii) our performance obligations after the milestone achievement will continue to be funded by its collaborator at a comparable level to that before the milestone achievement. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of our performance obligations under the agreement.
In November 2002, the Emerging Issues Task Force, or EITF, of the Financial Accounting Standards Board reached consensus on Issue 00-21. EITF Issue 00-21 addresses the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. As required, we apply the principles of Issue 00-21 to multiple element agreements that we enter into after July 1, 2003.
Employee Stock Options and Stock-Based Compensation
Under the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), "Share Based Payment," or SFAS 123(R), we measure our share-based compensation cost at the grant date based on the estimated value of the award and recognize it as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.
As of September 30, 2008, there was approximately $1,047,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. These non-cash costs are expected to be recognized over a weighted-average period of 1.1 years.
In accordance with EITF Issue 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services," stock options and warrants issued to our consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. We recognize this expense over the period the services are provided.
Registration Payment Arrangements
In connection with prior private placements of our common stock and warrants to purchase shares of our common stock, we entered into agreements with investors that committed us to timely register the shares of common stock purchased as well as the shares underlying the issued warrants. Those registration agreements specified potential cash penalties if we did not timely register the related shares with the SEC.
In December 2006, the FASB issued FASB Staff Position, or FSP, EITF No. 00-19-2, "Accounting for Registration Payment Arrangements." This FSP specifies that companies that enter into agreements to register securities will be required to recognize a liability if a payment to investors for failing to fulfill the agreement is probable and can be reasonably estimated. This accounting differs from the guidance in EITF 00-19, "Accounting for Derivative Instruments Indexed To, and Potentially Settled In a Company's Own Stock," which required a liability to be recognized and measured at fair value, regardless of probability.
EITF 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that we enter into or modify after the date of issuance of this FSP. For our registration payment arrangements and financial instruments subject to those arrangements that were entered prior to the issuance of this FSP, the guidance was effective beginning January 1, 2007.
Given that we did not deem the transfer of consideration under our existing registration payment arrangements as probable, we have not recorded a related liability or expense for these arrangements in the accompanying financial statements.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for our judgment in their application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result.
Results of Operations
General
In January 1999, we entered into a research collaboration and exclusive worldwide license agreement with NV Organon, or Organon. In November 2007, Organon was acquired by Schering-Plough Corporation. Our agreement with Organon will allow them to develop and commercialize our proprietary AMPAKINE technology for the treatment of schizophrenia and depression. In connection with the agreement, we received $2,000,000 up-front and research support payments of approximately $3,000,000 per year for two years. The agreement with Organon also includes milestone payments based upon clinical development, plus royalty payments on worldwide sales. To date, we have received milestone payments from Organon totaling $6,000,000. For each milestone payment, we recorded the related revenue upon achievement of the milestone.
In October 2000, we entered into a research collaboration agreement and a
license agreement with Les Laboratoires Servier, or Servier. The agreements will
allow Servier to develop and commercialize select AMPAKINE compounds in defined
territories of Europe, Asia the Middle East and certain South American countries
as a treatment for (i) declines in cognitive performance associated with aging,
(ii) neurodegenerative diseases and (iii) anxiety disorders. The indications
covered include, but are not limited to, Alzheimer's disease, MCI, sexual
dysfunction and anxiety disorders. The research collaboration agreement, as
amended, included an up-front payment by Servier of $5,000,000 and research
support payments of approximately $2,025,000 per year through early December
2006 (subject to us providing agreed-upon levels of research personnel). In
early December 2006, we terminated the research collaboration with Servier and
as a result the worldwide rights for the AMPAKINE technology for the treatment
of (a) declines
in cognitive performance associated with aging, (b) neurodegenerative diseases,
(c) anxiety disorders, and (d) sexual dysfunction have been returned to us,
other than three compounds selected by Servier for commercialization in its
territory. Should any of these compounds be successfully commercialized by
Servier, we would receive payments based upon key clinical development
milestones and royalty payments on sales in licensed territories.
From inception (February 10, 1987) through September 30, 2008, we have sustained losses aggregating approximately $104,193,000. Continuing losses are anticipated over the next several years. During that time, our ongoing operating expenses will only be offset, if at all, by proceeds from Small Business Innovative Research grants and by possible milestone payments from Organon and Servier. Ongoing operating expenses may also be funded by payments under planned strategic alliances that we are seeking with other pharmaceutical companies for the clinical development, manufacturing and marketing of our products. The nature and timing of payments to us under the Organon and Servier agreements or other planned strategic alliances, if and when entered into, are likely to significantly affect our operations and financing activities and to produce substantial period-to-period fluctuations in reported financial results. Over the longer term, we will be dependent upon the successful introduction of a new product into the North American market from our internal development, as well as the successful commercial development of our products by Organon, Servier or our other prospective partners to attain profitable operations from royalties or other product-based revenues.
Comparison of the Three Months and Nine Months ended September 30, 2008 and 2007
For the three months ended September 30, 2008, our net loss of approximately $3,148,000 compares with a net loss of approximately $2,962,000 for the corresponding prior year period, an increase of 6%. Our net loss of approximately $11,466,000 for the nine months ended September 30, 2008 compares with a net loss of approximately $9,696,000 for the corresponding prior year period, an increase of 18%. Net losses for both the three and nine months ended September 30, 2008 reflect increased research and development expenses, as explained more fully below.
Our research and development expenses for the three-month period ended September 30, 2008 increased from approximately $1,941,000 to approximately $2,205,000, or by 14%, from the corresponding prior year period. For the nine-month period ended September 30, 2008, our research and development expenses increased from approximately $6,943,000 to approximately $8,759,000, or by 26%, compared to the corresponding prior year period. Results for both the three months and nine months ended September 30, 2008 reflect increased clinical development expenses, including amounts related to our Phase IIa studies of our AMPAKINE CX717 in respiratory depression.
Top-line results from the first reported study demonstrated that a single oral dose of 2100mg of CX717 has positive effects on respiratory depression induced by pain relieving opiates. The primary performance measures for the study were derived from a CO2re-breathing procedure that measured the breathing response of the subject to increased CO2 levels in the presence of alfentanil. The primary measure, the minute expiratory volume (VE) at 55mgHg CO2 (VE55), was reversed by 2100mg of CX717 in comparison to placebo (p<0.03).
A second study evaluated whether CX717 may prevent the respiratory depression induced by alfentanil, while preserving that opiate's desired pain relieving effects. Top-line data from the related study demonstrated that a single oral dose of 1500mg of CX717 achieved statistical significance (p = 0.005) over placebo on the primary endpoint measure of spontaneous basal respiration without affecting the analgesic properties of the opioid, alfentanil. The degree of the reversal of the basal respiratory rate was similar to that obtained with the opioid antagonist, naloxone (Narcan®). The analgesic properties of alfentanil were maintained in an acute pain model in the presence of CX717, whereas alfentanil's pain relieving properties were blocked by naloxone.
Our non-cash stock compensation charges related to research and development for the three months ended September 30, 2008 decreased from approximately $314,000 to approximately $162,000, or by 48%, relative to the corresponding prior year period. For the nine months ended September 30, 2008, the non-cash stock compensation charges for research and development decreased from approximately $1,038,000 to approximately $646,000, or by 38%, compared to the corresponding prior year period, with decreases for the current year periods reflecting fluctuations in our stock price and the vesting schedules of granted stock options.
Our general and administrative expenses for the three-month period ended September 30, 2008 decreased from approximately $1,182,000 to approximately $1,026,000, or by 13%, relative to the corresponding prior year period, mostly due to decreased non-cash stock compensation charges. For the three months ended September 30, 2008, non-cash stock compensation charges decreased from approximately $321,000 to approximately $155,000, or by 52%, relative to the corresponding prior year period.
For the nine-month period ended September 30, 2008 our general and administrative expenses of approximately $3,108,000 decreased slightly, or by 2% from the approximately $3,179,000 of related expenses for the corresponding prior year period, with a decrease in non-cash stock compensation charges, partially offset by an increase in consulting fees. For the nine months ended September 30, 2008, our general and administrative non-cash stock compensation charges decreased from approximately $666,000 to approximately $417,000, or by 37%, compared to the corresponding prior year period, primarily due to fluctuations in our stock price. Increased consulting fees resulted from market research related to respiratory depression, an indication currently being tested with our AMPAKINE CX717, as indicated above.
Liquidity and Capital Resources
Sources and Uses of Cash
From inception (February 10, 1987) through September 30, 2008, we have funded our organizational and research and development activities primarily through the issuance of equity securities, funding related to collaborative agreements, various research grants and net interest income.
Under the agreements signed with Servier in October 2000, as amended to date, Servier has selected three AMPAKINE compounds that it may develop for potential commercialization. We remain eligible to receive payments based upon defined clinical development milestones of the licensed compounds and royalties on sales in licensed territories. Under the terms of the agreement with Organon, we may receive additional milestone payments based on clinical development of the licensed technology and ultimately, royalties on worldwide sales.
In January 2004, we completed a private placement of an aggregate of 6,909,091 shares of our common stock at $2.75 per share and five-year warrants to purchase up to an additional aggregate of 4,490,910 shares at an exercise price of $3.25 per share. We received approximately $17,500,000 in net proceeds from the private placement. In connection with the January 2004 private placement, we also issued two additional warrants to purchase 54,750 and 272,959 shares of our common stock, respectively, to two placement agents. The warrant to purchase 54,750 shares of our common stock has an exercise price of $2.75 per share and a five-year term. The warrant to purchase 272,959 shares of our common stock has an exercise price of $3.48 per share and a three-year term. All of the warrants issued in the January 2004 transaction provide a call right in our favor to the extent that the closing price of our common stock exceeds $7.50 per share for 13 consecutive trading days, subject to certain circumstances. During the year ended December 31, 2007 and the nine months ended September 30, 2008, we did not receive any proceeds from the exercise of related warrants. As of September 30, 2008, related warrants issued to investors to purchase up to 3,969,137 shares remained outstanding and warrants issued to placement agents to purchase up to 4,000 shares remained outstanding. If the remaining warrants are fully exercised, of which there can be no assurance, these warrants would provide us approximately $12,911,000 of additional capital.
In December 2004, we completed a private placement of an aggregate of 4,233,333 shares of our common stock at $2.66 per share and five-year warrants to purchase up to an additional aggregate of 2,116,666 shares at an exercise price of $3.00 per share. We received approximately $10,400,000 in net proceeds from the private placement. In connection with the December 2004 private placement, we also issued three-year warrants to purchase 164,289 shares of our common stock at an exercise price of $3.43 per share to the placement agent for the transaction. The warrants issued to the placement agent expired unexercised. All of the warrants issued in the December 2004 transaction provide a call right in our favor to the extent that the closing price of our common stock exceeds $7.50 per share for 13 consecutive trading days, subject to certain circumstances. During the year ended December 31, 2007 and the nine months ended September 30, 2008, we did not receive any proceeds from the exercise of related warrants. As of September 30, 2008, warrants issued to the investors to purchase up to 1,775,689 shares remained outstanding. If the remaining warrants are fully exercised, of which there can be no assurance, these warrants would provide us approximately $5,327,000 of additional capital.
In January 2007, we completed a registered direct offering with several institutional investors for 5,021,427 shares of our common stock and warrants to purchase 3,263,927 shares of our common stock for an aggregate purchase price of approximately $5,624,000. Net proceeds from the offering were approximately $5,100,000. The warrants have an exercise price of $1.66 per share and, subject to the terms therein, are exercisable at any time on or before January 21, 2012. The warrants are subject to a call right in our favor to the
extent that the closing price of our common stock exceeds $3.35 per share for any 13 consecutive trading days. During the year ended December 31, 2007, we received approximately $443,000 from the exercise of related warrants. During the nine months ended June 30, 2008, we did not receive any proceeds from the exercise of related warrants. As of September 30, 2008, warrants to purchase up to 2,996,927 shares remained outstanding. If the remaining warrants are fully exercised, of which there can be no assurance, these warrants would provide us approximately $4,975,000 of additional capital.
In August 2007, we completed a registered direct offering with several institutional investors for 7,075,000 shares of our common stock and warrants to purchase 2,830,000 shares of our common stock for an aggregate purchase price of $14,150,000. Net proceeds from the offering were approximately $13,135,000. The investors' warrants have an exercise price of $2.64 per share and, subject to the terms therein, are exercisable on or before August 28, 2012. In addition, we issued warrants to purchase up to an aggregate of 176,875 shares of our common stock to the placement agents in the offering. The placement agents' warrants have an exercise price of $3.96 per share and, subject to the terms therein, are exercisable on or before August 28, 2012. During the year ended December 31, 2007 and the nine month period ended September 30, 2008, we did not receive any proceeds from the exercise of related warrants. As of September 30, 2008, warrants to purchase 3,006,875 shares remained outstanding. If the related warrants are fully exercised, of which there can be no assurance, these warrants would provide us approximately $8,172,000 of additional capital.
As of September 30, 2008, we had cash, cash equivalents and marketable securities totaling approximately $6,971,000 and working capital of approximately $5,320,000. In comparison, as of December 31, 2007, we had cash, cash equivalents and marketable securities of approximately $17,284,000 and working capital of approximately $15,805,000. The decreases in cash and working capital reflect amounts required to fund our operations.
Net cash used in operating activities was approximately $10,154,000 during the nine months ended September 30, 2008, and included our net loss for the period of approximately $11,466,000, adjusted for non-cash expenses for depreciation and stock compensation approximating $1,176,000, and changes in operating assets and liabilities. For the nine months ended September 30, 2007, net cash used in operating activities was approximately $7,815,000, and included our net loss for the period of approximately $9,696,000, adjusted for non-cash expenses for depreciation and stock compensation approximating $1,794,000, and changes in operating assets and liabilities.
Net cash provided by investing activities approximated $8,930,000 during the nine months ended September 30, 2008, and primarily resulted from the sales and maturities of marketable securities of approximately $11,391,000, partially . . .
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