UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
COMMISSION FILE NUMBER: 000-13347
NEUROLOGIX, INC.
(Exact name of Small Business Issuer in its charter)
DELAWARE 06-1582875
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(State or other jurisdiction of I.R.S. Employer
Incorporation or organization) Identification No.)
ONE BRIDGE PLAZA, FORT LEE, NEW JERSEY 07024
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(Address of principal executive offices)
(201) 592-6451
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by checkmark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
At May 1, 2006 there were outstanding 26,542,924 shares of the Registrant's
Common Stock, $.001 par value.
Transitional Small Business Disclosure Format: Yes |_| No |X|.
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheet (Unaudited) 1
Condensed Statements of Operations (Unaudited) 2
Condensed Statements of Changes in Stockholders' Equity (Deficiency) (Unaudited) 3
Condensed Statements of Cash Flows (Unaudited) 5
Notes to Condensed Financial Statements (Unaudited) 7
Item 2 - Management's Discussion and Analysis or Plan of Operation 12
Item 3 - Controls and Procedures 19
PART II. OTHER INFORMATION 19
Item 6. - Exhibits 20
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
NEUROLOGIX, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEET
(UNAUDITED)
(Amounts in thousands, except share and per share data)
March 31,
2006
-----------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $2,106
Investments in marketable securities held to maturity 1,201
Prepaid expenses and other current assets 995
-----------------
Total current assets 4,302
Equipment, less accumulated depreciation of $276 133
Intangible assets, less accumulated amortization of $91 439
Other assets 14
-----------------
Total Assets $4,888
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $1,243
Capital lease obligations 9
-----------------
Total liabilities 1,252
-----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Series A - $.06 per share cumulative, convertible 1-for-25 into common stock; $.10 par
value; 5,000,000 shares authorized, 645 shares issued and outstanding with an aggregate
liquidation preference of $1 per share -
Common stock:
$.001 par value; 60,000,000 shares authorized, 26,542,924 issued and outstanding 27
Additional paid-in capital 19,222
Deficit accumulated during the development stage (15,613)
-----------------
Total stockholders' equity 3,636
-----------------
Total Liabilities and Stockholders' Equity $4,888
=================
See accompanying notes to the unaudited condensed financial statements.
-1-
NEUROLOGIX, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except share and per share data)
For the period
February 12, 1999
(inception)
Three Months through
Ended March 31, March 31, 2006
--------------- ---------------- --------------------
2006 2005
--------------- ---------------- --------------------
Operating expenses:
Research and development $547 $478 $8,020
General and administrative expenses 970 453 7,522
--------------- ---------------- --------------------
Loss from operations (1,517) (931) (15,542)
--------------- ---------------- --------------------
Other income (expense):
Dividend, interest and other income 24 35 339
Interest expense (1) (1) (410)
--------------- ---------------- --------------------
Other income (expense), net 23 34 (71)
--------------- ---------------- --------------------
Net loss $(1,494) $(897) $(15,613)
=============== ================ ====================
Basic and diluted net loss per common
share $ (0.06) $(0.04)
=============== ================
Weighted average common shares
outstanding, basic and diluted 26,542,924 23,684,292
=============== ================
See accompanying notes to the unaudited condensed financial statements.
-2-
NEUROLOGIX, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD FROM FEBRUARY 12, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(UNAUDITED)
(Amounts in thousands, except share data)
Deficit
Accumulated
Common Stock Additional During the
-------------------------- Paid-in Unearned Development
Shares Amount Capital Compensation Stage Total
--------------- ---------- ------------ --------------- ---------------- ----------
Sale of common stock to founders 6,004,146 $0 $4 $ - $ - $ 4
Net loss - - - - (328) (328)
--------------- ---------- ------------ --------------- ---------------- ----------
Balance, December 31, 1999 6,004,146 0 4 - (328) (324)
Net loss - - - - (1,055) (1,055)
--------------- ---------- ------------ --------------- ---------------- ----------
Balance, December 31, 2000 6,004,146 0 4 - (1,383) (1,379)
Stock options granted for services - - 9 - - 9
Common stock issued for intangible assets at
$0.09 per share 259,491 - 24 - - 24
Net loss - - - - (870) (870)
--------------- ---------- ------------ --------------- ---------------- ----------
Balance, December 31, 2001 6,263,637 0 37 - (2,253) (2,216)
Retirement of founder shares (33,126) - - - - -
Common Stock issued pursuant to license
agreement at $1.56 per share 368,761 - 577 (577) - -
Private placement of Series B convertible
preferred stock - - 2,613 - - 2,613
Amortization of unearned compensation - - - 24 - 24
Net loss - - - - (1,310) (1,310)
--------------- ---------- ------------ --------------- ---------------- ----------
Balance, December 31, 2002 6,599,272 0 3,227 (553) (3,563) (889)
Sale of Common Stock 276,054 0 90 (89) - 1
Amortization of unearned compensation - - - 164 - 164
Net loss - - - - (2,274) (2,274)
--------------- ---------- ------------ --------------- ---------------- ----------
Balance, December 31, 2003 6,875,326 0 3,317 (478) (5,837) (2,998)
Conversion of note payable to Common Stock at
$2.17 per share 1,091,321 1 2,371 - - 2,372
Conversion of mandatory redeemable preferred
stock to Common Stock 6,086,991 6 494 - - 500
Conversion of Series B convertible preferred
stock to Common Stock 1,354,746 1 (1) - - -
Effects of reverse acquisition 7,103,020 14 5,886 - - 5,900
Amortization of unearned compensation - - - 202 - 202
Stock options granted for services - - 42 (42) - -
Exercise of stock options 10,000 - 15 - - 15
Net loss - - - - (2,937) (2,937)
--------------- ---------- ------------ --------------- ---------------- ----------
Balance, December 31, 2004 22,521,404 22 12,124 (318) (8,774) 3,054
Sale of Common Stock through private placement
at an average price of $1.30 per share
2,473,914 4 3,062 - - 3,066
Sale of Common Stock at an average price of
$1.752 per share and warrants to Medtronic 1,141,552 1 2,794 - - 2,795
Amortization of unearned compensation - - - 825 - 825
Stock options granted for services - - 1,305 (1,305) - -
Exercise of stock options 406,054 - 127 - - 127
Net loss - - - (5,345) (5,345)
--------------- ---------- ------------ --------------- ---------------- ----------
Balance, December 31, 2005 26,542,924 27 19,412 (798) (14,119) 4,522
Share-based compensation expense - - 121 - - 121
Effects of adoption of SFAS 123R - - (311) 798 - 487
Net loss - - - (1,494) (1,494)
--------------- ---------- ------------ --------------- ---------------- ----------
Balance, March 31, 2006 26,542,924 $27 $19,222 $ - $(15,613) $3,636
=============== ========== ============ =============== ================ ==========
-4-
See accompanying notes to the unaudited condensed financial statements.
-5-
NEUROLOGIX, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Three Months For the period
Ended March 31, February 12, 1999
---------------------------------- (inception) through
2006 2005 March 31, 2006
--------------- ------------------ -----------------------
Operating activities:
Net loss $(1,494) $(897) $(15,613)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 15 19 283
Amortization 3 6 104
Stock options granted for services - - 9
Impairment of intangible assets - 89 148
Amortization of unearned compensation 121 70 1,335
Share-based employee compensation 121 - 121
Non-cash interest expense - 1 378
Changes in operating assets and liabilities
(Increase) decrease in prepaid expenses and other current assets 147 (475) (34)
Increase in accounts payable and accrued expenses 360 731 1,182
--------------- ------------------ --------------------
Net cash used in operating activities (727) (456) (12,087)
--------------- ------------------ --------------------
Investing activities:
Security deposits paid - - (7)
Purchases of equipment (4) (17) (302)
Additions to intangible assets (14) (82) (667)
Purchases of marketable securities - (600) (12,673)
Proceeds from sale of marketable securities 1,600 600 11,473
--------------- ------------------ --------------------
Net cash provided by (used in) investing activities 1,582 (99) (2,176)
--------------- ------------------ --------------------
Financing activities:
Proceeds from note payable - - 1,100
Borrowings from related party - - 2,000
Cash acquired in Merger - - 5,413
Merger-related costs - - (375)
Payments of capital lease obligations (4) (9) (96)
Proceeds from exercise of stock options - 90 147
Proceeds from issuance of common stock and warrants - 3,056 5,066
Proceeds from issuance of preferred stock - - 3,114
--------------- ------------------ --------------------
Net cash provided by (used in) financing activities (4) 3,137 16,369
--------------- ------------------ --------------------
Net increase in cash and cash equivalents 851 2,582 2,106
Cash and cash equivalents, beginning of period 1,255 1,122 -
--------------- ------------------ --------------------
Cash and cash equivalents, end of period $2,106 $3,704 $2,106
=============== ================== ====================
See accompanying notes to the unaudited condensed financial statements.
-5-
NEUROLOGIX, INC.
(A Development Stage Company)
Notes to Unaudited Condensed Financial Statements
(In thousands, except for share and per share amounts)
(1) Description of Business
Neurologix, Inc. ("Neurologix" or the "Company"), is engaged in the
research and development of proprietary treatments for disorders of the brain
and central nervous system primarily utilizing gene therapies. These treatments
are designed as alternatives to conventional surgical and pharmacological
treatments. The Company is a developmental stage company and has not generated
any operating revenues.
The Company incurred net losses of $1,494, $897 and $15,613 and
negative cash flows from operating activities of $727, $456 and $12,087 for the
three months ended March 31, 2006 and 2005 and for the period from February 12,
1999 (inception) to March 31, 2006, respectively. The Company expects that it
will continue to incur net losses and cash flow deficiencies from operating
activities for the foreseeable future.
As of March 31, 2006, the Company had cash and cash equivalents and
short-term investments in marketable securities of $3,307. On May 10, 2006, the
Company completed a private placement of a new series of preferred stock,
resulting in gross proceeds to the Company of $12,000 (See Note 4). Management
believes that as a result of this offering, the Company's current resources will
enable it to continue as a going concern through at least September 30, 2007.
Although the Company believes that its resources are sufficient to complete a
Phase I clinical trial and interim trials for Parkinson's disease and to
complete a Phase I clinical trial for epilepsy, the Company's resources are not
sufficient to allow it to perform all of the clinical trials required for drug
approval and marketing. Accordingly, it will, from time to time, continue to
seek additional funds through public or private equity offerings, debt
financings or corporate collaboration and licensing arrangements. The Company
does not know whether additional financing will be available when needed, or if
available, will be on acceptable or favorable terms to it or its stockholders.
(2) Basis of presentation
The accompanying unaudited condensed financial statements of the
Company should be read in conjunction with the audited financial statements and
notes thereto as of and for the year ended December 31, 2005 included in the
Company's Annual Report on Form 10-KSB (the "10-KSB") filed with the Securities
and Exchange Commission (the "SEC") on March 31, 2006. The accompanying
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States ("GAAP") for interim financial
information and in accordance with the instructions to Form 10-QSB. Accordingly,
since they are interim statements, the accompanying financial statements do not
include all of the information and notes required by GAAP for complete financial
statement presentation. In the opinion of management, the interim financial
statements reflect all adjustments consisting of normal, recurring adjustments
that are necessary for a fair presentation of the financial position,
-6-
results of operations and cash flows for the interim periods presented. Interim
results are not necessarily indicative of results for a full year. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
(3) Summary of Significant Accounting Policies
(a) Stock-Based Compensation:
At March 31, 2006, the Company had one active share-based employee
compensation plan. Stock option awards granted from this plan are granted at the
fair market value on the date of grant, and vest over a period determined at the
time the options are granted, ranging from one to five years, and generally have
a maximum term of ten years. Certain options provide for accelerated vesting if
there is a change in control (as defined in the plans). When options are
exercised, new shares of the Company's common stock are issued.
Prior to January 1, 2006, the Company accounted for share-based
employee compensation, including employee stock options, using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations ("APB
Opinion No. 25"). Under APB Opinion No. 25, no compensation cost is recognized
for stock options granted with an exercise price equal to or greater than the
market price and disclosure was made regarding the pro forma effect on net
earnings assuming compensation cost had been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123").
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123R "Share-based Payment" ("SFAS No. 123R") using the
modified prospective method. No share-based employee compensation cost has been
reflected in net loss prior to the adoption of SFAS No. 123R. Results for prior
periods have not been restated.
The total value of the stock options awards is expensed ratably over
the service period of the employees receiving the awards. As of March 31, 2006,
total unrecognized compensation cost related to stock option awards was
approximately $274 and the related weighted-average period over which it is
expected to be recognized is approximately 3.1 years.
A summary of option activity as of March 31, 2006 and changes during
the three months then ended is presented below:
-7-
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Weighed-Average
Weighted- Remaining
Average Contractual Term Aggregate
Options Shares (000) Exercise Price (years) Intrinsic Value
------- ------------ ----- ------- ------
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Outstanding at January 1, 2006 2,225 $1.25
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Granted 180 $1.70
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Exercised - -
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Forfeited or expired - -
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Outstanding at March 31, 2006 2,405 $1.28 5.87 $1,024
===== ===== ==== ======
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Exercisable at March 31, 2006 1,916 $1.26 5.11 $772
===== ===== ==== ====
------------------------------------ -------------------- ----------------- ---------------------- -------------------
The weighted-average grant-date fair value of options granted during
the three months ended March 31, 2006 was $1.22.
The fair value of each stock option award is estimated on the date of
the grant using the Black-Scholes option pricing model based on the assumptions
noted in the following table. Expected volatility is based on historical
volatility of the Company's stock. The Company does not currently anticipate any
exercises or terminations for valuation purposes. The risk-free rate is based on
the five year U.S. treasury security rate. The expected term of the options is
based on historical data and judgment regarding market trends and factors
Three Months Ended March 31,
--------------------------------
2006 2005
------------------ -------------
Expected option term (years) 5 5
Risk-free interest rate (%) 4.07% 3.68%
Expected volatility (%) 90% 111%
Dividend yield (%) 0% 0%
The following table illustrates the pro-forma effect on net loss and
net loss per common share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to all outstanding stock option awards
for the period presented prior to the Company's adoption of SFAS No. 123R:
------------------------------------------------------------------------------------------ ---------------------------
Three Months Ended March
31, 2005
------------------------------------------------------------------------------------------ ---------------------------
------------------------------------------------------------------------------------------ ---------------------------
Net loss, as reported $(897)
------------------------------------------------------------------------------------------ ---------------------------
Deduct: Total stock-based employee compensation expense determined under fair value (76)
based method
------------------------------------------------------------------------------------------ ---------------------------
Pro-forma net loss (973)
------------------------------------------------------------------------------------------ ---------------------------
------------------------------------------------------------------------------------------ ---------------------------
Net loss per common share:
------------------------------------------------------------------------------------------ ---------------------------
Basic and diluted as reported $(0.04)
------------------------------------------------------------------------------------------ ---------------------------
Basic and diluted pro-forma $(0.04)
------------------------------------------------------------------------------------------ ---------------------------
-8-
(b) Basic and Diluted Net Loss Per Common Share:
Basic net loss per common share excludes the effects of potentially
dilutive securities and is computed by dividing net loss applicable to Common
Stockholders by the weighted average number of common shares outstanding for the
period. Diluted net income or loss per share is adjusted for the effects of
convertible securities, options, warrants and other potentially dilutive
financial instruments only in the periods in which such effects would have been
dilutive.
The following securities were not included in the computation of
diluted net loss per share because to do so would have had an anti-dilutive
effect for the periods presented:
March 31,
---------------------------
2006 2005
------------ --------------
Stock options 2,405,220 2,283,459
Warrants 906,867 611,863
Series A Convertible Preferred Stock 645 645
(4) Subsequent Events
On May 10, 2006, the Company issued and sold 342,857 shares of a newly
created series of preferred stock, par value $.10 per share (the "Series C
Preferred Stock"), at a price of $35.00 per share, or a total of approximately
$12 million, to General Electric Pension Trust, DaimlerChrysler Corporation
Master Retirement Trust and certain funds managed by ProMed Management, LLC in
a private placement transaction. The shares of Series C Preferred Stock are
currently convertible into 19.66 shares of Common Stock per share, or 6,741,570
shares of Common Stock in the aggregate. The Series C Preferred Stock is not
redeemable by the Company and will have the same liquidation preference as the
Company's Series A and Series B preferred stock. The Series C Preferred Stock
will accrue cumulative preferred stock dividends at a rate of 9% per annum,
payable in quarterly installments.
The transaction also involved the issuance of warrants to purchase
approximately 2,224,719 shares of Common Stock at an exercise price of $2.05 per
share. The purchasers of the Series C Preferred Stock, among other things, have
certain demand and piggyback registration rights with respect to the Common
Stock underlying the Series C Preferred Stock and warrants and also have certain
anti-dilution protections. Additional information regarding the transaction is
included in the Current Report on Form 8-K filed by the Company on May 10, 2006.
The Company is in the final stages of negotiations and intends to enter
into a Sponsored Research Agreement with The Ohio State University Research
Foundation ("OSURF") which provides for research covering the development of
gene therapy approaches to neurodegenerative disorders, including Parkinson's
disease, epilepsy, Huntington's disease, Alzheimer's disease, as well as gene
therapy approaches to pain, stroke neurovascular diseases and other research
(the "Research Project").
-9-
This sponsored research will be funded by the Company and will be conducted
under the direction of Dr. Matthew J. During, one of the Company's scientific
co-founders. The initial term of this agreement will be 18 months, and may be
extended for additional 18-month periods, subject to mutual agreement of the
parties. The Company will be required to pay OSURF $250 over the initial
18-month term. The Company will have first right to negotiate with OSURF, on
reasonably commercial terms, for an exclusive, worldwide right and license to
make, have made, use and sell commercial products embodying any inventions
conceived under the Research Project with the assistance of employees of OSURF.
On April 18, 2006, the Company entered into a Facility Use Agreement as
well as Visiting Scientist Agreements with The Ohio State University ("OSU"),
all of which allow the Company's scientists to access and use OSU's laboratory
facilities and certain equipment to perform their research. The term of the
Facility Use Agreement is four years, subject to certain earlier termination
provisions. The Company paid OSU an initial amount of $23, representing prepaid
rent for the first year of such Agreement. Unless sooner terminated, the Company
will pay an additional $70 over the remaining three years of such Agreement.
Item 2 - Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's unaudited financial statements and related notes included in this
quarterly report on Form 10-QSB (this "Quarterly Report") and the audited
financial statements and notes thereto as of and for the year ended December 31,
2005 included in the Company's Annual Report on Form 10-KSB filed with the SEC
on March 31, 2005. Operating results are not necessarily indicative of results
that may occur in future periods.
Business Overview
The Company is a development stage company that is engaged in the
research and development of proprietary treatments for disorders of the brain
and central nervous system using gene therapy and other innovative therapies.
These treatments are designed as alternatives to conventional surgical and
pharmacological treatments.
To date, the Company has not generated any operating revenues and has
incurred annual net losses. From inception through March 31, 2006, the Company
had an accumulated deficit of $15,613, and it expects to incur additional losses
in the foreseeable future. The Company recognized net losses of $1,494 for the
three months ended March 31, 2006, and $897 for the three months ended March 31,
2005. The increase in net loss is primarily due to increased expenditures
related to the progression of the Company's research and development programs in
Parkinson's disease and epilepsy and the expanded administrative infrastructure
needed to support that progression, as well as an increase in non-cash
expenditures of approximately $175. The increase in non-cash expense includes
$99 in non-cash research and development expense related to the common stock and
warrants the Company issued to Medtronic in April 2005 and $172 in non-cash
compensation expense, offset by an $89 write off of intangible assets that were
impaired in 2005.
Since its inception, the Company has financed its operations primarily
through sales of its equity and debt securities. From inception through March
31, 2006, the Company
-10-
received net offering proceeds from private sales of equity and debt securities
and from the February 2004 merger (the "Merger") of approximately $16,369 in the
aggregate. On May 10, 2006, the Company completed a private placement of its
preferred stock, resulting in gross proceeds to the Company of approximately
$12,000 (see Note 4 to the financial statements). Although its costs of
administration and public company compliance have increased this year, the
Company has devoted a significant portion of its capital resources to the
research and development of its products.
The Company's primary efforts are directed to develop therapeutic
products (i) to meet the needs of patients suffering from Parkinson's disease
and (ii) the needs of patients suffering from a type of human epilepsy known as
temporal lobe epilepsy or "TLE."
Parkinson's Disease
In September 2005, the Company presented preliminary data on the first
7 subjects in its Phase I clinical trial of gene therapy for Parkinson's
disease, analyzed at one year following their surgery. Based on this preliminary
data, the treatment appears to be safe and well-tolerated in advanced
Parkinson's disease, with no evidence of adverse effects or immunologic reaction
related to the study treatment. The data showed a statistically significant
benefit in both the PET scans and clinical scores for these patients. The
Company will finish its evaluation after May 2006, when all 12 subjects will
have been analyzed at one year following their surgery.
Since the date of the Merger, the Company has maintained the direct
costs associated with its Parkinson's project, including research fees, license
fees and pre-clinical and clinical study costs. For the three months ended March
31, 2006 and 2005, the Company has incurred $33 and $235 of these costs,
respectively. The decrease is primarily due to the winding down of the Company's
Phase I clinical trial in the first quarter of 2006.
Epilepsy
In October 2004, motivated by encouraging rodent studies, the Company
entered into an agreement with Universidad Federal de Sao Paolo to commence a
non-human primate study for evaluating the toxicity of using its NLX technology
in the brain for the treatment of epilepsy. The Company's approach is based on
the use of the non-pathogenic AAV vector, delivered using standard neurosurgical
techniques. All studies were completed in November 2005 and a detailed analysis
of the rodent studies was presented in December 2005. Results showed that
Neuropeptide Y (NPY) gene transfer reduces spontaneous seizures in an in vivo
model of epilepsy and positively influences the fundamental biological process
which leads to a chronically epileptic state.
Since the date of the Merger, the Company has maintained the direct
costs associated with its epilepsy project, including research fees, license
fees and pre-clinical and clinical study costs. For the three months ended March
31, 2006 and 2005, the Company has incurred $1 and $11 of these costs,
respectively. The decrease is primarily due to costs of pre-clinical studies
that took place in 2005 and were completed in fiscal year 2005.
-11-
Other Therapies
The Company will also continue its efforts in developing therapies to
treat Huntington's disease and other neurodegenerative disorders under its
research agreement with Cornell under the direction of Dr. Michael G. Kaplitt,
one of the Company's scientific co-founders, as well as in the new laboratory
facility that it has established in April 2006 at Ohio State University under
the direction of Dr. During and two scientists currently on the Company's staff
(see Note 4 to the financial statements).
Recent Developments
The Company was in negotiations with Diamyd Medical, AB, a company
organized under the laws of Sweden, to obtain a license for the use of a gene
version of glutamic acid decarboxylase (GAD) 65 which was utilized in the
Company's proposed form of gene therapy treatment of Parkinson's disease in its
Phase I clinical trial. The Company has not been able to reach a satisfactory
agreement with Diamyd, and, accordingly, the Company will utilize its
alternative construct in its therapy treatment for Parkinson's disease. The
Company does not believe that the use of its alternative construct will have any
material adverse effect on its therapy treatment of Parkinson's disease or the
trials conducted in connection therewith.
Plan of Operation
Parkinson's Disease
Subject to completion of the evaluations of patients in its Phase I
clinical trial, the Company currently plans to conduct one or more interim
trials prior to conducting a pivotal trial for the treatment of Parkinson's
disease. The Company estimates that the interim trials will be completed in the
second half of 2007 at an estimated cost of approximately $1,200. The scope and
timing of such trials will, in large part, depend upon available funds, FDA
approvals and the successful consummation of certain license arrangements.
The Company will also take steps to move toward a pivotal trial for
treatment of Parkinson's disease, and hopes to be in a position to file its
protocol with the FDA during the second half of 2007. The Company estimates that
the pivotal trial will be completed in 2009 at an estimated cost of between
$15,000 and $20,000.
The Company believes, if the project progresses on or near schedule,
that it can eventually file for FDA approval for its Parkinson's product either
in 2009 or 2010 and the estimated costs to reach that milestone are expected to
be between $15,000 and $25,000.
Epilepsy
The Company also intends to focus its efforts on advancing its product
development for the treatment of epilepsy in order to eventually commence its
Phase I clinical trial, which it has targeted for the fourth quarter of 2006.
The Company estimates this trial will complete patient treatments by the end of
the second half of 2007 at a total cost of approximately $750. The scope and
timing of such trial will, in large part, depend upon available funds, FDA
approvals and the successful completion of certain license arrangements.
-12-
The Company currently expects that, if the project progresses, and
certain other conditions are met, it can file for FDA approval for its epilepsy
product by 2011, and the estimated costs to reach that milestone are currently
expected to be between $15 million and $25 million.
The Company has also recently undertaken efforts to develop gene
therapy for the treatment of Huntington's disease, with a goal of advancing
towards an initial Phase I clinical trial within the next 3 years.
Over the next 12 months, in addition to its normal recurring
expenditures, the Company expects to spend approximately: $2,000 in capital
expenditures and related expenses to scale up its manufacturing capabilities for
the supply of product for its projected Parkinson's pivotal trial; $1,000 in
research and licensing fees; $1,000 in additional Phase I clinical trial
expenses with regard to its Parkinson's treatment; $650 in Phase I clinical
trial expenses with regard to its epilepsy product and $800 in costs associated
with operating as a publicly traded company, such as legal fees, accounting
fees, insurance premiums, stock market listing fees and investor and public
relations fees.
The Company has taken and intends to take steps to improve and increase
its technical and administrative staff. In January 2006, it hired a Chief
Financial Officer ("CFO"). The Company also expects to hire a chief development
officer and additional quality and lab associates during fiscal year 2006 to
direct it through its planned research and development initiatives.
Results of Operations
Three Months Ended March 31, 2006 Compared to the Three Months Ended March
31, 2005
Revenues. The Company did not generate any operating revenues during
the three months ended March 31, 2006 and 2005.
Costs and Expenses.
Research and Development. Research and development expenses increased
by $69 (14%) during the three months ended March 31, 2006 to $547 as compared to
$478 during the same period in 2005. The increase is primarily attributable to
costs incurred by the Company in 2006 in connection with a development agreement
and stock purchase agreement entered into with Medtronic International in April
2005 of $126, license fees of in connection with a license agreement with KEIO
University in April 2005 of $50, fees associated with the Company's research
agreement with Cornell University of $34, and increased costs for the
compensation of Company scientists and scientific consultants of $61, which, in
the aggregate, was offset by a reduction of $186 in costs associated with the
treatment of patients as part of the Company's Phase I clinical for Parkinson's
disease.
General and Administrative. General and administrative expenses
increased by $517 (114%) to $970 during the three months ended March 31, 2006,
as compared to $453 during the comparable period in 2005. The increase in 2006
is primarily related to a $230
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increase in cash and non-cash compensation expenses incurred in connection with
the hiring of the Company's CFO in January 2006, as well as stock options
granted to the Company's employees, consultants and directors. In addition, the
Company incurred increases in professional fees, including legal fees,
accounting fees, recruiting fees and investor relations fees of $267. This
increase is mainly due to increased legal fees associated with the preparation
of the Company's Annual Report on Form 10-KSB for the year ended December 31,
2005, the preparation of the Company's Proxy Statement and the legal review of
the increased business activity the Company.
Other Income (Net). Other income (net) decreased by $11 (32%) during
the three months ended March 31, 2006, over the comparable period of 2005. This
decrease is primarily attributable to a decrease in dividend and interest income
earned on funds received by the Company during the first quarter of 2005 from
its private placements of Common Stock.
Liquidity and Capital Resources.
Cash and cash equivalents were $2,106 and investments in marketable
securities being held to maturity were $1,201 at March 31, 2006.
The Company is still in the development stage and has not generated any
operating revenues as of March 31, 2006. In addition, the Company will continue
to incur net losses and cash flow deficiencies from operating activities for the
foreseeable future. Management believes that, including the additional funds
raised in May 2006 (see Note 4 to the financial statements), the Company's
current resources will enable it to continue as a going concern through at least
September 30, 2007.
Although the Company believes that its resources are sufficient to
complete a Phase I clinical trial for Parkinson's disease and a Phase I clinical
trial for epilepsy, the Company's resources are not sufficient to allow it to
perform all of the clinical trials required for drug approval and marketing,
including a pivotal trial for Parkinson's disease. Accordingly, it will continue
to seek additional funds through public or private equity offerings, debt
financings or corporate collaboration and licensing arrangements. The Company
does not know whether additional financing will be available when needed or, if
available, will be on acceptable or favorable terms to it or its stockholders.
Net cash used in operating activities was $727 for the three months
ended March 31, 2006 as compared to $456 during the same period in 2005. The
$271 increase in net cash used in operations was primarily due to a larger net
loss of approximately $597 for the three months ended March 31, 2006. This
increase was offset by $71 in adjustments to net loss for increased non-cash
expenses, such as stock-based compensation expense, depreciation expense and
amortization expense. The increase was also offset by adjustments to net loss
due a net decrease in operating assets and liabilities in 2005 of $252.
Net cash provided by investing activities during the three month
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period ended March 31, 2006 was $1,582 as compared to net cash used of $99
during the three months ended March 31, 2005. The difference is primarily due to
the Company redeeming short term investments in the amount of $1,600 during the
three months ended March 31, 2006.
Net cash used in financing activities during the three months ended
March 31, 2006 was $4 of capital lease obligations as compared to net cash
provided by financing activities of $3,137 during the three months ended March
31, 2005. During the three months ended March 31, 2005, financing activities
provided $3,137, principally from cash acquired in a private placement of the
Company's common stock to a group of investors led by Merlin Biomed Group.
Recent Accounting Pronouncements
Other than SFAS No. 123R (see Note 3(a) to the financial statments), no
new accounting pronouncement issued or effective during the fiscal quarter has
had or is expected to have a material impact on the financial statements.
FORWARD LOOKING STATEMENTS
This document includes certain statements of the Company that may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and which are made pursuant to the Private Securities
Litigation Reform Act of 1995. These forward-looking statements and other
information relating to the Company are based upon the beliefs of management and
assumptions made by and information currently available to the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events, or performance, as well as underlying
assumptions and statements that are other than statements of historical fact.
When used in this document, the words "expects," "anticipates," "estimates,"
"plans," "intends," "projects," "predicts," "believes," "may" or "should," and
similar expressions, are intended to identify forward-looking statements. These
statements reflect the current view of the Company's management with respect to
future events and are subject to numerous risks, uncertainties, and assumptions.
Many factors could cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance, or
achievements that may be expressed or implied by such forward-looking
statements, including, among other things:
o the inability of the Company to raise additional funds, when
needed, through public or private equity offerings, debt
financings or additional corporate collaboration and
licensing arrangements;
o the inability of the Company to successfully complete the
Phase I clinical trial for Parkinson's disease or to
commence Phase I for temporal lobe epilepsy; and
o the inability of the Company to successfully obtain or
defend the intellectual property of its product candidates
and technologies.
Other factors and assumptions not identified above could also cause the
actual results to differ materially from those set forth in the forward-looking
statements. Additional information regarding factors which could cause results
to differ materially from management's expectations is found in the section
entitled "Risk Factors" contained in the Company's 2005 Annual Report on Form
10-KSB. Although the Company believes these assumptions are reasonable, no
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assurance can be given that they will prove correct. Accordingly, you should not
rely upon forward-looking statements as a prediction of actual results. Further,
the Company undertakes no obligation to update forward-looking statements after
the date they are made or to conform the statements to actual results or changes
in the Company's expectations.
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Item 3 - Controls and Procedures
(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's President and Chief Executive Officer and
Chief Financial Officer, have evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the most recent quarterly
period covered by this report. Based on such evaluation, the Company's President
and Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of such period, the Company's disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Company in the reports that
it files or submits under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting. The Company
has made changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the first quarter of 2006 that materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting. The Company hired a Chief Financial Officer in January 2006, and his
responsibilities include reviewing the accounting for all material matters
affecting the Company, including reporting to its independent registered public
accounting firm. The Company also retains an outside firm to review the
Company's controls and procedures and assist the Company in determining any
deficiencies and the steps needed to remediate such deficiencies.
PART II. OTHER INFORMATION
None
Item 6. Exhibits
See Exhibit Index
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Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEUROLOGIX, INC.
May 15, 2006 /s/ Michael Sorell
----------------------------------------------------
Michael Sorell
President and Chief Executive Officer
(as Principal Executive Officer)
May 15, 2006 /s/ Marc L. Panoff
----------------------------------------------------
Marc L. Panoff
Chief Financial Officer and Treasurer
(as Principal Accounting Officer/
Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No. Exhibit
10.1 Facilities Use Agreement, dated as of April 18, 2006 by and between The Ohio State University
and Neurologix, Inc.**
31.1 Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer (as Principal
Executive Officer).**
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer and Treasurer (as Principal
Accounting Officer/Principal Financial Officer).**
32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer/Treasurer.**
----------
** Filed herewith
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