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 June 30, 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 August 10, 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) 6
Item 2 - Management's Discussion and Analysis or Plan of Operation 12
Item 3 - Controls and Procedures 19
PART II. OTHER INFORMATION 19
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 4. - Submission of Matters to a Vote of Security Holders 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)
June 30,
2006
-----------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $8,746
Investments in marketable securities held to maturity 4,908
Prepaid expenses and other current assets 892
-----------------
Total current assets 14,546
Equipment, less accumulated depreciation of $293 125
Intangible assets, less accumulated amortization of $103 538
Other assets 14
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Total Assets $15,223
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $1,197
Capital lease obligations 4
-----------------
Total liabilities 1,201
-----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized:
Series A - Convertible, $.10 par value; 300,000 shares designated, 645 shares issued and
outstanding with an aggregate liquidation preference of $645 -
Series B - $.10 par value; 4,000,000 shares designated, no shares issued and outstanding -
Series C - Convertible, $.10 par value; 700,000 shares designated, 344,657 shares issued and
outstanding with an aggregate liquidation preference of $12,149,242 34
Common stock:
$.001 par value; 60,000,000 shares authorized, 26,542,924 issued and outstanding 27
Additional paid-in capital 33,850
Deficit accumulated during the development stage (19,889)
-----------------
Total stockholders' equity 14,022
-----------------
Total Liabilities and Stockholders' Equity $15,223
=================
See accompanying notes to the unaudited condensed financial statements.
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
Six Months Three Months (inception) through
Ended June 30, Ended June 30, June 30, 2006
---------------- ---------------- --------------- ---------------- --------------------
2006 2005 2006 2005
---------------- ---------------- --------------- ---------------- --------------------
Operating expenses:
Research and development $1,529 $1,313 $982 $876 $9,002
General and administrative expenses 1,746 1,269 776 775 8,298
---------------- ---------------- --------------- --------------- ---------------------
Loss from operations (3,275) (2,582) (1,758) (1,651) (17,300)
---------------- ---------------- --------------- --------------- ---------------------
Other income (expense):
Dividend, interest and other income 128 93 104 58 443
Interest expense-related parties (2) (2) (1) (1) (411)
---------------- ---------------- --------------- --------------- ---------------------
Other income, net 126 91 103 57 32
---------------- ---------------- --------------- --------------- ---------------------
Net loss (3,149) (2,491) (1,655) (1,594) $(17,268)
=========
Preferred stock dividends and charge
for accretion of beneficial
conversion rights (2,771) - (2,771) -
---------------- ---------------- --------------- ---------------
Net loss applicable to common stock $(5,920) $(2,491) $(4,426) $(1,594)
================ ================ =============== ===============
Net loss applicable to common stock
per share, basic and diluted $ (0.22) $ (0.10) $ (0.17) $ (0.06)
================ ================ =============== ===============
Weighted average common shares
outstanding, basic and diluted 26,542,924 24,839,303 26,542,924 25,980,353
================ ================ =============== ===============
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 JUNE 30, 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
Sale of 342,857 shares of Series C Preferred
Stock with a par value of $34 through private
placement at a price of $35.00 per share - - 11,578 - - 11,612
Fair value of beneficial conversion rights
issued in connection with issuance of Series C
Preferred Stock - - 2,621 - - 2,621
Accretion of fair value of beneficial
conversion charge - - - - (2,621) (2,621)
Share-based compensation expense - - 550 - - 550
Effects of adoption of SFAS 123R - - (311) 798 - 487
Net loss - - - - (3,149) (3,149)
------------ ---------- ----------- -------------- ------------- ----------------
Balance, June 30, 2006 26,542,924 $27 $33,850 $ - $(19,889) $14,022
============ ========== =========== ============== ============= ================
See accompanying notes to the unaudited condensed financial statements.
NEUROLOGIX, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Six Months For the period
Ended June 30, February 12, 1999
------------------------------- (inception) through
2006 2005 June 30, 2006
--------------- --------------- --------------------
Operating activities:
Net loss $(3,149) $(2,491) $(17,268)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 31 39 299
Amortization 21 13 122
Stock options granted for services - - 9
Impairment of intangible assets - 89 148
Amortization of non-employee share-based compensation 289 427 1,503
Share-based employee compensation 362 - 362
Non-cash interest expense - 2 378
Changes in operating assets and liabilities
(Increase) decrease in prepaid expenses and other current assets 270 (42) 89
Increase in accounts payable and accrued expenses 314 - 1,136
--------------- --------------- --------------------
Net cash used in operating activities (1,862) (1,963) (13,222)
--------------- --------------- --------------------
Investing activities:
Security deposits paid - - (7)
Purchases of equipment (12) (32) (310)
Additions to intangible assets (125) (123) (778)
Purchases of marketable securities (4,914) (3,597) (17,587)
Proceeds from maturities of marketable securities 2,800 1,200 12,673
--------------- --------------- --------------------
Net cash used in investing activities (2,251) (2,552) (6,009)
--------------- --------------- --------------------
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 (8) (16) (101)
Proceeds from exercise of stock options - 112 147
Proceeds from issuance of common stock and warrants - 5,066 5,066
Proceeds from issuance of preferred stock 11,612 - 14,727
--------------- --------------- --------------------
Net cash provided by financing activities 11,604 5,162 27,977
--------------- --------------- --------------------
Net increase in cash and cash equivalents 7,491 647 8,746
Cash and cash equivalents, beginning of period 1,255 1,122 -
--------------- --------------- --------------------
Cash and cash equivalents, end of period $8,746 $1,769 $8,746
=============== =============== ====================
See accompanying notes to the unaudited condensed financial statements.
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 $3,149, $2,491 and $17,268
and negative cash flows from operating activities of $1,862, $1,963 and $13,222
for the six months ended June 30, 2006 and 2005 and for the period from February
12, 1999 (inception) to June 30, 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 June 30, 2006, the Company had cash and cash equivalents
and short-term investments in marketable securities of $13,654. 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 follow-on trial 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 included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2005 (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 and the rules and regulations of
the SEC. 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, 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 June 30, 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 (the
"Common Stock") are issued.
At the Company's Annual Meeting of Stockholders held on May 9,
2006, the Company's 2000 Stock Option Plan was amended to increase the number of
shares that may be issued pursuant thereto from 1,300,000 to 3,800,000 shares.
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 was 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 using a fair-value
method 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")
for employee stock options and other share based compensation using the modified
prospective method. No share-based employee compensation cost had been reflected
in net loss prior to the adoption of SFAS No. 123R. Results for prior periods
have not been restated.
Under SFAS 123R, the total value of the stock option awards is
expensed ratably over the service period of the employees receiving the awards.
As of June 30, 2006, total unrecognized compensation cost related to stock
option awards was approximately $460 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 June 30, 2006 and changes
during the six months then ended is presented below:
------------------------------------ -------------------- ----------------- ---------------------- -------------------
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 635 $1.77
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Exercised - -
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Forfeited or expired - -
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Outstanding at June 30, 2006 2,860 $1.36 6.30 $367
===== ===== ==== ====
------------------------------------ -------------------- ----------------- ---------------------- -------------------
Exercisable at June 30, 2006 2,172 $1.31 5.39 $295
===== ===== ==== ====
------------------------------------ -------------------- ----------------- ---------------------- -------------------
The weighted-average grant-date fair value of options granted
during the six months ended June 30, 2006 was $1.77.
The fair value of each stock option award is estimated under
SFAS No. 123R and was estimated under SFAS No. 123 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 Common 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.
Six Months Ended June 30,
--------------------------------
2006 2005
---------------- ---------------
Expected option term (years) 5 5
Risk-free interest rate (%) 5.01% 3.74%
Expected volatility (%) 87% 103%
Dividend yield (%) 0% 0%
The following table illustrates the pro-forma effect on net
loss and net loss applicable to common stock per 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:
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Six Months Ended June Three Months Ended
30, 2005 June 30, 2005
---------------------------------------------------------------------- ----------------------- -----------------------
---------------------------------------------------------------------- ----------------------- -----------------------
Net loss, as reported (2,491) (1,594)
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Add: Total stock-based employee compensation expense included in
reported net loss 272 272
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Deduct: Total stock-based employee compensation expense determined
under fair value based method (701) (625)
---------------------------------------------------------------------- ----------------------- -----------------------
Pro-forma net loss $(2,920) $(1,947)
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Net loss applicable to common stock per share:
---------------------------------------------------------------------- ----------------------- -----------------------
Basic and diluted as reported $(0.10) $(0.06)
---------------------------------------------------------------------- ======================= =======================
Basic and diluted pro-forma $(0.12) $(0.07)
---------------------------------------------------------------------- ======================= =======================
(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 stock by the weighted average number of common shares outstanding for
the period. Net loss applicable to common stock includes the value of dividends
on preferred stock whether or not declared and the amortization of the fair
value of any beneficial conversion rights issued with preferred stock. Diluted
net income or loss per common share is adjusted for the effects of assuming the
conversion or exercise 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:
June 30,
-----------------------------
2006 2005
-------------- --------------
Stock options 2,860,220 2,235,220
Warrants 3,131,985 1,519,056
Series A Convertible Preferred Stock 645 645
Series C Convertible Preferred Stock 344,657 -
(4) Private Placements
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
$12,000, 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 upon a liquidation event (such as a liquidation, a
merger or a sale of substantially all of the Company's assets), the holders of
Series C Stock will be entitled to receive a per share amount equal to the
greater of: (i) $35 plus unpaid dividends or (ii) the amount payable upon
conversion to Common Stock.
The Series C Preferred Stock will accrue cumulative dividends
at a rate of 9% per annum, payable in quarterly installments in shares of
Series C Preferred Stock. As of June 30, 2006, the Company paid dividends by
issuing approximately 1,800 shares of Series C Preferred Stock with a fair
value of $64.
The Series C Preferred Stock will automatically be converted
into shares of Common Stock upon the first public offering of the Company's
securities that results in gross proceeds of at least $50,000,000 or upon the
written consent of holders of at least 70% of the outstanding shares of Series C
Preferred Stock.
Each share of Series C Preferred Stock will be entitled to a
number of votes per share equal to the number of shares of underlying Common
Stock. As long as the Series C Preferred Stock comprises at least 5% of the
Company's outstanding securities, the Company may not create any new class of
stock that is pari passu with or senior to the Series C Preferred Stock without
the consent of the holders of at least 70% of the Series C Preferred Stock.
The Series C Preferred Stock's conversion rate will be
adjusted if the Company issues Common Stock (or convertible securities) at a
price per share that is less than $1.55. There is no termination date for this
anti-dilution protection. The Series C Preferred Stock is also subject to
customary adjustment for stock splits and reverse splits, and corporate
transactions such as mergers and reorganizations.
In connection with the sale of the Series C Preferred Stock,
the Company also issued warrants to purchase approximately 2,224,719 shares of
Common Stock at an exercise price of $2.05 per share that expire on May 10,
2013. The Company initially computed the fair value of the warrants using the
Black-Scholes option pricing model and then used the relative fair value method
to allocate the proceeds from the offering to the warrants and the Series C
Preferred Stock. As a result of that allocation, the value of the common shares
issuable upon the conversion of the Series C Preferred Stock as of the date of
issuance (the amount for which the shares could have been sold) exceeded the
proceeds from the offering allocable to the Series C Preferred Stock by $2,621.
This amount represented the value of beneficial conversion rights which was
immediately accreted. The related charge is reflected in the accompanying
condensed statements of operations for the three and six months ended June 30,
2006 as an increase in the net loss for the purposes of determining the net loss
applicable to common stock in each of those periods.
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.
(5) Other Agreements
The Company expects to enter into a Sponsored Research
Agreement with The Ohio State University Research Foundation ("OSURF") which
will provide 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").
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 is 18 months, and may
be mutually extended for additional 18-month periods. The Company will be
required to pay OSURF a fee of $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 for commercial products embodying
inventions conceived under the Research Project with the assistance of employees
of OSURF. The Company's execution of the Research Agreement is conditioned on
receipt by it of an approval from OSU (as hereafter defined) allowing Dr.
During's services to continue under his consulting agreement with the Company.
On the understanding that OSURF and the Company would execute
the Research Agreement, the Company, on April 18, 2006, entered into a Facility
Use Agreement as well as Visiting Scientist Agreements with The Ohio State
University ("OSU"), all of which allow our 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.
The Company may need to review and change its arrangements
with OSU and OSURF absent consummation of the Research Agreement. Any such
change may have a material adverse impact on the Company.
(6) Subsequent Events
Management Changes
Effective July 10, 2006, Dr. Christine V. Sapan was appointed as
Senior Vice President, Chief Development Officer of the Company. Dr. Sapan's
initial base annual salary is $225 and she is eligible to receive a
discretionary annual bonus, with a target bonus of 40% of her annual salary. On
July 17, 2006, Dr. Sapan received options to purchase 250,000 shares of Common
Stock at an exercise price of $1.20 per share, which vest over three years. The
Company will recognize an annual non-cash compensation charge of $87 as a result
of this option grant.
Effective July 17, 2006, Dr. Michael Sorell resigned as the President
and Chief Executive Officer. In connection with such resignation, the Company
and Dr. Sorell have entered into a Separation Agreement. This agreement provided
for such resignation effective July 17, 2006. Dr. Sorell will continue as a
director of the Company, without further compensation.
The Company will pay Dr. Sorell severance of $185, payable in equal
semi-monthly installments through September 30, 2007.
The agreement provides for the immediate vesting of Dr. Sorell's stock
options. Such options will terminate upon the later of (i) the 15th day
following the date on which Dr. Sorell ceases to be a director of the Company or
(ii) December 31st of the calendar year during which Dr. Sorell ceases to be a
director of the Company. The Company expects to recognize a non-cash
compensation charge of $225 in the third quarter of 2006 as a result of the
accelerated vesting of and the extension of the exercise period for Dr. Sorell's
stock options.
Effective July 17, 2006, John E. Mordock, a director of the Company,
was appointed as the President and Chief Executive Officer. Mr. Mordock is paid
an annual base salary of $200. He is eligible to receive a bonus based upon his
performance and the Company's achievement of its goals, with a target bonus of
25%. On July 19, 2006, Mr. Mordock received options to purchase 250,000 shares
of Common Stock, with an exercise price of $1.30 per share, all of which vested
on the grant date. The Company expects to recognize a non-cash compensation
charge of $283 in the third quarter of 2006 as a result of the option grant.
Sublicense Agreement
The Company entered into a Sublicense Agreement (the "Sublicense
Agreement"), effective as of August 4, 2006, with Diamyd Therapeutics AB, a
subsidiary of Diamyd Medical, AB ("Diamyd"), a company organized under the laws
of Sweden. Pursuant to the Sublicense Agreement, Diamyd granted to the Company a
non-exclusive worldwide license to certain patent rights and technical
information for the use of a gene version of glutamic acid decarboxylase (GAD)
65 in connection with the gene therapy treatment of Parkinson's disease as
conducted by the Company during its Phase I clinical trial. Diamyd is the
exclusive licensee of such patent rights owned by the Regents of the University
of California, Los Angeles, which has approved the Sublicense Agreement.
Pursuant to the Sublicense Agreement, the Company will pay Diamyd an initial fee
of $500 and will pay annual license maintenance fees of $75 beginning on January
1, 2008 through the term of the agreement as provided for in the Sublicense
Agreement. Additionally, the Company will make certain milestone and royalty
payments to Diamyd. The Sublicense Agreement is terminable at any time by the
Company upon 90 days' notice.
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 included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2005 filed with the SEC on March
31, 2005. Operating results are not necessarily indicative of results that may
occur in future periods. All amounts in this Item 2 are in thousands.
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 June 30, 2006 the
Company had an accumulated deficit of $20,057, and it expects to incur
additional losses in the foreseeable future. The Company recognized net losses
of $3,149 for the six months ended June 30, 2006, and $2,491 for the six months
ended June 30, 2005. The increase in net loss is primarily due to increased
expenditures related to the progress of the Company's research and development
programs in Parkinson's disease and epilepsy, and the expanded administrative
infrastructure needed to support that progress.
Since its inception, the Company has financed its operations
primarily through sales of its equity and debt securities. From inception
through June 30, 2006, the Company received net offering proceeds from private
sales of equity and debt securities, proceeds from a reverse merger in February
2004 (the "Merger") and proceeds from certain other financing activities
totaling approximately $27,977 in the aggregate. This aggregate amount includes
the net proceeds of $11,612 received by the Company, on May 10, 2006, from a
private placement of its Series C Preferred Stock (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. In May 2006, all 12 subjects had been monitored for one year following
their surgery. The Company is in the process of completing its evaluation of
such patients, and of filing its results with the FDA. Subject to concurrence by
the FDA, the Company plans to commence a follow-on clinical trial in preparation
for its planned pivotal trial. The trial will be designed, among other things,
to test the treatment bilaterally, determine the proper dosing and test the
catheter system developed by Medtronic pursuant to its development agreement
with the Company. The Company plans to commence the follow-on trial in the first
quarter of 2007 (For further information, see "Plan of Operation" below).
Since February 2005, 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 six months ended June
30, 2006 and 2005, the Company has incurred $326 and $383 of these costs,
respectively. The decrease is primarily due to a reduction in Phase I clinical
trial costs of $312. The Phase I clinical trial was nearing completion during
the first six months of 2006. This decrease was offset by a $255 increase in
costs during the six months ended June 30, 2006, associated with the
manufacturing of product to be used in the Company's planned follow-on and
pivotal trials.
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. The Company
plans to commence a Phase I clinical trial for its epilepsy product in the
fourth quarter of 2006.
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 six months ended
June 30, 2006 and 2005, the Company has incurred $36 and $23 of these costs,
respectively. The increase is primarily due to costs of obtaining and organizing
pre-clinical study data in preparation for the Company's expected IND filing for
a Phase I clinical trial in the fourth quarter of 2006.
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 and one scientist currently on the Company's staff, as well as in the
new laboratory facility that it has established in April 2006 at Ohio State
University under the direction of Dr. Matthew J. During and two scientists
currently on the Company's staff (see Note 5 - Other Agreements).
Recent Developments
Effective July 10, 2006, the Company hired Dr. Christine V. Sapan as
Senior Vice President, Chief Development Officer of the Company. Dr. Sapan's
role will be to lead the Company's clinical, regulatory and manufacturing
efforts. Effective July 17, 2006, Dr. Michael Sorell resigned as the President
and Chief Executive Officer of the Company. Dr. Sorell will continue as a
director of the Company. Effective July 17, 2006, John E. Mordock, a director of
the Company, was appointed as the President and Chief Executive Officer of the
Company (see Note 6 - Subsequent Events; Management Changes).
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
follow-on trials prior to conducting a pivotal trial for the treatment of
Parkinson's disease. The Company estimates that the follow-on trials will be
completed in the second half of 2007 at an estimated cost of approximately
$1,500. The scope and timing of such trials will, in large part, depend upon FDA
concurrence 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 first quarter of 2008. The Company
estimates that the pivotal trial will be completed in 2009 at an estimated cost
of between $15,000 and $20,000.
If the project progresses on or near schedule, the Company
believes that it can eventually file for FDA approval for its Parkinson's
product either in 2010 or 2011 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 and to file an IND for a Phase
I clinical trial in the fourth quarter of 2006. The Company expects the cost of
such trial to amount to approximately $750. The scope and timing of such trial
will, in large part, depend upon, FDA concurrence and the successful completion
of certain license arrangements.
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 $15,000 and $25,000.
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: $2,900 in capital
expenditures and related expenses to scale up its manufacturing capabilities for
the supply of product for its projected Parkinson's pivotal trial; $1,600 in
research and licensing fees; $1,500 in additional follow-on clinical trial
expenses with regard to its Parkinson's treatment; $680 in Phase I clinical
trial expenses with regard to its epilepsy product and $1,500 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 steps to improve and increase its
technical and administrative staff. In January 2006, it hired a Chief Financial
Officer ("CFO") and, in July 2006, it hired a Chief Development Officer.
Results of Operations
Three Months Ended June 30, 2006 Compared to the Three Months Ended
June 30, 2005
Revenues. The Company did not generate any operating revenues
during the three months ended June 30, 2006 and 2005.
Costs and Expenses.
Research and Development. Research and development expenses
increased by $106 during the three months ended June 30, 2006 to $982 as
compared to $876 during the same period in 2005. The increase is due in part to
costs incurred by the Company in 2006 of $255 in connection with the
manufacturing of products to be used in the Company's planned follow-on and
pivotal Parkinson's trials, and due to a $189 increase in costs for the cash and
non-cash compensation and travel of Company scientists and scientific
consultants. These increases were offset by a reduction, from the prior
comparable period, in costs of $135 due to the winding down of the treatment of
patients as part of the Company's Phase I clinical trial for Parkinson's
disease. The Company also benefited by a reduction in or elimination of costs
associated with various development or license agreements which were incurred in
the three months ended June 30, 2005. In such prior period, the Company incurred
costs of $87 related to license fees associated with a development agreement and
stock purchase agreement entered into with Medtronic International, $94 under a
research agreement with Auckland Uniservices, Ltd., and $75 under a license
agreement with KEIO University.
General and Administrative. General and administrative
expenses increased by $1 to $776 during the three months ended June 30, 2006, as
compared to $775 during the comparable period in 2005. The increase in 2006 is
primarily related to a $35 increase in professional fees, including legal fees,
accounting fees, recruiting fees and investor relations fees, offset by a
reduction of $43 in costs for the cash and non-cash compensation and travel of
Company employees, directors and business consultants.
Other Income, Net. Other income, net increased by $46 during
the three months ended June 30, 2006, over the comparable period of 2005. This
increase is primarily attributable to an increase in interest income earned on
funds received by the Company during the second quarter of 2006 from its private
placement of Preferred Stock.
Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005
Revenues. The Company did not generate any operating revenues during
the six months ended June 30, 2006 and 2005.
Costs and Expenses.
Research and Development. Research and development expenses increased
by $179 during the six months ended June 30, 2006 to $1,529 as compared to
$1,313 during the same period in 2005. The increase is, in part, due to $255 in
costs incurred in 2006 associated with the manufacturing of product to be used
in the Company's planned follow-on and pivotal trials. The increase is also due
to $277 in increased costs for the compensation and travel of Company scientists
and scientific consultants, and $40 in increased costs related to license fees
associated with a development agreement and stock purchase agreement entered
into with Medtronic International. These increases were offset by a reduction,
from the prior comparable period of $330 due to the winding down of the
treatment of patients as part of the Company's Phase I clinical trial for
Parkinson's disease. The Company also benefited from the elimination of $94 in
costs, incurred in the six months ended June 30, 2005, under a research
agreement with Auckland Uniservices, Ltd.
General and Administrative. General and administrative expenses
increased by $477 to $1,746 during the six months ended June 30, 2006, as
compared to $1,269 during the comparable period in 2005, in part due to
increased professional fees, including legal fees, accounting fees, recruiting
fees and investor relations fees of $306. This increase is due to increased
recruiting fees associated with the hiring of the Company's Chief Financial
Officer and Chief Development Officer, as well as increased legal and accounting
fees associated with the preparation of the Company's Annual Report on Form
10-KSB for the year ended December 31, 2005 and the preparation of the Company's
annual meeting proxy statement.
In addition, G&A was higher due to increased cash and non-cash
compensation expenses to employees, directors and consultants of $205 during the
six months ended June 30, 2006 as a result of the hiring of the Company's Chief
Financial Officer in January 2006, as well as additional administrative staff
and consultants in the first half of 2005.
Other Income, Net. Other income, net increased by $35 during the six
months ended June 30, 2006 over the comparable period of 2005. This increase is
a result of increased interest income earned on funds received by the Company
during the second half of 2006 from its private placement of Preferred Stock.
Liquidity and Capital Resources.
Cash and cash equivalents were $8,746 and investments in marketable
securities being held to maturity were $4,908 at June 30, 2006.
The Company is still in the development stage and has not generated any
operating revenues as of June 30, 2006. In addition, the Company will continue
to incur net losses and cash flow deficits from operating activities for the
foreseeable future. Management believes that, including the additional funds
raised in May 2006 through the sale of preferred stock and warrants (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 planned follow-on 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 $1,862 for the six months
ended June 30, 2006 as compared to $1,963 during the same period in 2005. The
$101 decrease in net cash used in operations was primarily due to a decrease in
net operating assets of $552, offset by an increase in cash expenses of $451
related to the progress of the Company's research and development programs in
Parkinson's disease and epilepsy and the expanded administrative infrastructure
needed to support that progress.
Net cash used in investing activities during the six months ended June
30, 2006 was $2,251 as compared to net cash used of $2,552 during the six months
ended June 30, 2005. The difference is primarily due to an increase in net
purchases of short-term investments in the amount of $283 during the six months
ended June 30, 2006.
Net cash provided by financing activities during the six months ended
June 30, 2006 was $11,604 as compared to $5,162 during the six months ended June
30, 2005. During the six months ended June 30, 2006, the Company completed a
private placement of its Series C Preferred Stock to investors led by General
Electric Pension Trust and Daimler Chrysler Corporation Master Retirement Trust
that yielded $11,612 in net proceeds (See Note 4). During the six months ended
June 30, 2005, the Company completed a private placement of its Common Stock to
a group of investors led by Merlin Biomed Group that yielded $5,066 in net
proceeds.
Recent Accounting Pronouncements
Other than SFAS No. 123R (see Note 3(a) to the financial statements),
no recently issued accounting pronouncement that became effective during
the six months ended June 30, 2006 or that will become effective in a subsequent
period has had or is expected to have a material impact on the Company's
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
follow-on trials 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
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.
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 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.
There have not been any 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 second quarter of 2006 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on May 9, 2006.
At the meeting, Austin M. Long, III, John E. Mordock and Craig J. Nickels, the
nominees for Class III directors, were re-elected. The number of votes for each
nominee is set forth below:
Number of Shares Number of Shares
Name of Director Nominee Voted For Votes Withheld
---------------------------- -------------------- ---------------------
Austin M. Long, III 21,702,301 47,294
John E. Mordock 21,702,281 47,314
Craig J. Nickels 21,702,221 47,374
In addition, the Company's 2000 Stock Option Plan was amended to
increase the number of shares that may be issued pursuant thereto from 1,300,000
to 3,800,000 shares. The number of votes for the amendment to the 2000 Stock
Option Plan is set forth below:
Number of Shares Number of Shares Number of Shares
Issue Voted For Voted Against Abstained
------------------------ ------------------ ----------------- ------------------
Amendment to the 2000
Stock Option Plan 15,159,640 2,186,951 4,176
Clark A. Johnson, Jeffrey B. Reich and Michael Sorell, M.D., the Class
I directors, and Elliott H. Singer and Martin J. Kaplitt, M.D., the Class II
directors, have terms which expire in 2007 and 2008, respectively. Accordingly,
these directors were not up for re-election at the meeting and their terms of
office continued after the meeting.
Item 6 - Exhibits
-----------------
See Exhibit Index
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.
August 14, 2006 /s/ John E. Mordock
--------------------------------------------------
John E. Mordock
President and Chief Executive Officer
(as Principal Executive Officer)
August 14, 2006 /s/ Marc L. Panoff
--------------------------------------------------
Marc L. Panoff
Chief Financial Officer, Secretary and Treasurer
(as Principal Accounting Officer/Principal
Financial Officer)
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
----------- -------
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, Secretary and Treasurer (as Principal Accounting
Officer/Principal Financial Officer).**
32.1 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer, Secretary and Treasurer.**
----------
** Filed herewith