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 September 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
---------------------------------------------------------------
(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 November 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 20
PART II. OTHER INFORMATION 20
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)
September 30,
2006
-----------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $6,687
Investments in marketable securities held to maturity 4,969
Prepaid expenses and other current assets 561
-----------------
Total current assets 12,217
Equipment, less accumulated depreciation of $310 171
Intangible assets, less accumulated amortization of $116 564
Other assets 11
-----------------
Total Assets $12,963
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $943
Capital lease obligations 1
-----------------
Total liabilities 944
-----------------
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, 353,980 shares issued and
outstanding with an aggregate liquidation preference of $12,426,471 35
Common stock:
$.001 par value; 60,000,000 shares authorized, 26,542,924 issued and outstanding 27
Additional paid-in capital 34,340
Deficit accumulated during the development stage (22,383)
-----------------
Total stockholders' equity 12,019
-----------------
Total Liabilities and Stockholders' Equity $12,963
=================
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
Nine Months Three Months (inception) through
Ended September 30, Ended September 30, September 30, 2006
---------------------------------------------------------------------------------
2006 2005 2006 2005
----------------------------------------------------------------------------------
Operating expenses:
Research and development $2,792 $1,659 $1,263 $300 $10,265
General and administrative expenses 3,141 1,947 1,395 724 9,693
-------------------------------------------------------------------------------------
Loss from operations (5,933) (3,606) (2,658) (1,024) (19,958)
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Other income (expense):
Dividend, interest and other income 292 122 164 29 607
Interest expense-related parties (2) (3) - (1) (411)
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Other income, net 290 119 164 28 196
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Net loss (5,643) (3,487) (2,494) (996) $(19,762)
====================
Charge for accretion of beneficial
conversion rights (2,621) - - -
Preferred stock dividends (427) - (277) -
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Net loss applicable to common stock $(8,691) $(3,487) $(2,771) $(996)
=================================================================
Net loss applicable to common stock
per share, basic and diluted $ (0.33) $ (0.14) $ (0.10) $(0.04)
=================================================================
Weighted average common shares
outstanding, basic and diluted 26,542,924 25,409,082 26,542,924 26,530,061
=================================================================
2
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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 SEPTEMBER 30, 2006
(UNAUDITED)
(Amounts in thousands, except share data)
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Deficit
Accumulated
Additional During the
Series C Preferred Stock Common Stock Paid-in Unearned Development
Shares Amount Shares Amount Capital Compensation Stage Total
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Sale of common stock to founders - $0 6,004,146 $0 $4 $- $ - $4
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Net loss - - - - - - (328) (328)
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Balance, December 31, 1999 - 0 6,004,146 0 4 - (328) (324)
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Net loss - - - - - - (1,055) (1,055)
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Balance, December 31, 2000 - 0 6,004,146 0 4 - (1,383) (1,379)
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Stock options granted for services - - - - 9 - - 9
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Common stock issued for intangible
assets at $0.09 per share - - 259,491 - 24 - - 24
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Net loss - - - - - - (870) (870)
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Balance, December 31, 2001 - 0 6,263,637 0 37 - (2,253) (2,216)
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Retirement of founder shares - - (33,126) - - - - -
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Common Stock issued pursuant to
license agreement at $1.56
per share - - 368,761 - 577 (577) - -
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Private placement of Series B
convertible preferred stock - - - - 2,613 - - 2,613
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Amortization of unearned compensation - - - - - 24 - 24
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Net loss - - - - - - (1,310) (1,310)
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Balance, December 31, 2002 - 0 6,599,272 0 3,227 (553) (3,563) (889)
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Sale of Common Stock - - 276,054 0 90 (89) - 1
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Amortization of unearned compensation - - - - - 164 - 164
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Net loss - - - - - - (2,274) (2,274)
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Balance, December 31, 2003 - 0 6,875,326 0 3,317 (478) (5,837) (2,998)
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Conversion of note payable to Common
Stock at $2.17 per share - - 1,091,321 1 2,371 - - 2,372
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Conversion of mandatory redeemable
preferred stock to Common Stock - - 6,086,991 6 494 - - 500
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Conversion of Series B convertible
preferred stock to Common Stock - - 1,354,746 1 (1) - - -
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3
Effects of reverse acquisition - - 7,103,020 14 5,886 - - 5,900
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Amortization of unearned compensation - - - - - 202 - 202
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Stock options granted for services - - - - 42 (42) - -
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Exercise of stock options - - 10,000 - 15 - - 15
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Net loss - - - - - - (2,937) (2,937)
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Balance, December 31, 2004 - 0 22,521,404 22 12,124 (318) (8,774) 3,054
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Sale of Common Stock through private
placement at an average price of
$1.30 per share - - 2,473,914 4 3,062 - - 3,066
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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
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Amortization of unearned compensation - - - - - 825 - 825
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Stock options granted for services - - - - 1,305 (1,305) - -
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Exercise of stock options - - 406,054 - 127 - - 127
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Net loss - - - - - - (5,345) (5,345)
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Balance, December 31, 2005 - 0 26,542,924 27 19,412 (798) (14,119) 4,522
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Sale of Preferred Stock through
private placement at an average
price of $35.00 per share 342,857 34 - - 11,578 - - 11,612
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Fair value of beneficial conversion
rights issued in connection with
issuance of Series C Preferred Stock - - - - 2,621 - - 2,621
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Preferred Dividend and accretion of
fair value of beneficial conversion
charge 11,123 1 - - (1) - (2,621) (2,621)
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Share-based compensation expense - - - - 1,041 - - 1,041
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Effects of adoption of SFAS 123R - - - - (311) 798 - 487
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Net loss - - - - - - (5,643) (5,643)
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Balance, September 30, 2006 353,980 $35 26,542,924 $27 $34,340 $ - $(22,383) $12,019
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4
NEUROLOGIX, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Nine Months For the period
Ended September 30, February 12, 1999
------------------------- (inception) through
2006 2005 September 30, 2006
------------------------------------------------
Operating activities:
Net loss $(5,643) $(3,487) $(19,762)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 48 59 316
Amortization 34 39 135
Stock options granted for services - - 9
Impairment of intangible assets - 92 148
Amortization of non-employee share-based compensation 360 614 1,574
Share-based employee compensation 940 - 940
Non-cash interest expense - 2 378
Changes in operating assets and liabilities
Decrease in prepaid expenses and other current assets 444 51 263
Increase (decrease) in accounts payable and accrued expenses 59 - 881
---------------------------------------------
Net cash used in operating activities (3,758) (2,630) (15,118)
---------------------------------------------
Investing activities:
Security deposits paid - - (7)
Purchases of equipment (75) (45) (373)
Additions to intangible assets (162) (134) (815)
Purchases of marketable securities (4,974) (3,600) (17,647)
Proceeds from maturities of marketable securities 2,800 2,400 12,673
---------------------------------------------
Net cash used in investing activities (2,411) (1,379) (6,169)
---------------------------------------------
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 (11) (19) (104)
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 11,601 5,159 27,974
---------------------------------------------
Net increase in cash and cash equivalents 5,432 1,150 6,687
Cash and cash equivalents, beginning of period 1,255 1,122 -
---------------------------------------------
Cash and cash equivalents, end of period $6,687 $2,272 $6,687
=============================================
Supplemental disclosures of cash flow information:
Non-cash investing and financing activities
Dividends on Series C Preferred Stock paid in preferred shares 336 - 336
Accrued dividends on Series C Preferred Stock 91 - 91
Accretion of fair value of beneficial conversion on preferred stock 2,621 - 2,621
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 $5,643, $3,487 and $19,762 and
negative cash flows from operating activities of $3,758, $2,630 and $15,118 for
the nine months ended September 30, 2006 and 2005 and for the period from
February 12, 1999 (inception) to September 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 September 30, 2006, the Company had cash and cash equivalents
and short-term investments in marketable securities of $11,656. 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
December 31, 2007. Although the Company believes that its resources are
sufficient to complete one 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
6
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 September 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 September 30, 2006, total unrecognized compensation cost related to stock
option awards was approximately $559 and the related weighted-average period
over which it is expected to be recognized is approximately 1.5 years.
A summary of option activity as of September 30, 2006 and changes
during the nine months then ended is presented below:
7
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Weighed-Average
Weighted- Remaining
Shares Subject to Average Contractual Term Aggregate
Options Option (000) Exercise Price (years) Intrinsic Value
-----------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 2,225 $1.25
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Granted 1,135 1.54
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Exercised - -
-----------------------------------------------------------------------------------------------------------
Forfeited or expired - -
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Outstanding at September 30, 2006 3,360 $1.35 6.61 $341
===== ===== ==== ====
-----------------------------------------------------------------------------------------------------------
Exercisable at September 30, 2006 2,592 $1.27 5.74 $341
===== ===== ==== ====
-----------------------------------------------------------------------------------------------------------
The weighted-average grant-date fair value of options granted during
the nine months ended September 30, 2006 was $1.54.
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.
Nine Months Ended September 30,
-------------------------------
2006 2005
-------------------------------
Expected option term (years) 5 5
Risk-free interest rate (%) 5.01% 3.94%
Expected volatility (%) 87% 99%
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 periods presented prior to the Company's adoption of SFAS
No. 123R:
8
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Nine Months Ended Three Months Ended
September 30, 2005 September 30, 2005
--------------------------------------------------------------------------------------------------------------------
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Net loss applicable to common stock, as reported $(3,487) $(996)
--------------------------------------------------------------------------------------------------------------------
Add: Total stock-based employee compensation expense included in
reported net loss 330 58
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Deduct: Total stock-based employee compensation expense determined (912) (210)
under fair value based method
--------------------------------------------------------------------------------------------------------------------
Pro-forma net loss applicable to common stock $(4,069) $(1,148)
----------------------------------------------------------------------==============================================
Net loss applicable to common stock per share:
--------------------------------------------------------------------------------------------------------------------
Basic and diluted as reported $(0.14) $(0.04)
----------------------------------------------------------------------==============================================
Basic and diluted pro-forma $(0.16) $(0.04)
----------------------------------------------------------------------==============================================
(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:
September 30,
---------------------------
2006 2005
---------------------------
Stock options 3,360,220 2,235,220
Warrants 3,131,985 1,519,056
Common Stock issuable upon conversion of
Series A Convertible Preferred Stock 645 645
Common Stock issuable upon conversion of
Series C Convertible Preferred Stock 6,960,273 -
(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,
including all dividends paid to date, are currently convertible into 19.66
shares of Common Stock per share, or 6,960,273 shares of Common Stock in the
aggregate. The Series C Preferred Stock is not redeemable by the Company. Upon
a liquidation event (such as a liquidation, a merger or a sale of substantially
9
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 September 30, 2006, the Company paid dividends by
issuing approximately 11,123 shares of Series C Preferred Stock with a fair
value of $336.
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 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 nine months ended
September 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) 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
10
discretionary annual bonus, with a target bonus of 40% of her annual salary. On
July 10, 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 $75 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 Company recognized
this amount as compensation expense in the third quarter of 2006.
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 recognized a non-cash compensation
charge of $219 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 recognized a non-cash compensation charge of
$230 in the third quarter of 2006.
(6) Other Agreements
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 paid Diamyd an initial fee of
$500, an amount that was expensed as research and development expense on the
effective date of the Sublicense Agreement. Additionally, the Company will pay
annual license maintenance fees of $75 beginning on January 1, 2008 through the
term of the agreement and will make certain milestone and royalty payments to
Diamyd as provided for in the Sublicense Agreement. The Sublicense Agreement is
11
terminable at any time by the Company upon 90 days' notice. Further information
regarding the Sublicense is included in the Company's Current Report on Form
8-K filed on August 7, 2006.
Agreements with Ohio State University
Effective May 10, 2006, the Company entered 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").
This sponsored research is funded by the Company and will be conducted
under the direction of Dr. Matthew J. During, one of the Company's co-founders
and a member of its Scientific Advisory Board. 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. As of September 30, 2006, the Company had paid OSURF a
total of $83. The Company has 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.
In connection with 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 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 earlier termination under certain circumstances. 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.
(7) Subsequent Event
On November 3, 2006, the Company entered into a lease with Bridge
Plaza Realty Associates, LLC ("BPRA") for an additional 703 square feet of
office space at One Bridge Plaza, Fort Lee, New Jersey 07024. This lease will
commence upon the substantial completion of build out work to be performed by
BPRA and will expire three years thereafter. The lease provides for a base
annual rent of approximately $21 or $2 per month.
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, 2006. Operating results are not necessarily indicative of results that may
occur in future periods. All amounts in this Item 2 are in thousands.
12
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 September 30, 2006 the
Company had an accumulated deficit of $22,383, and it expects to incur
additional losses in the foreseeable future. The Company recognized net losses
of $5,643 for the nine months ended September 30, 2006, and $3,487 for the nine
months ended September 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
September 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 $27,974 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 October 2006, the Company announced that it had completed its Phase
I clinical trial of gene therapy for Parkinson's disease and presented its
results for the 12 treated subjects at the Annual Meeting of the Society of
Neuroscience in Atlanta. The results indicated that the treatment appears to be
safe and well-tolerated in patients with advanced Parkinson's disease, with no
evidence of adverse effects or immunologic reaction related to the study
treatment. The trial also yielded statistically significant clinical efficacy
and neuro-imaging results.
The Company has modified the timing of its Parkinson's disease
clinical program as outlined below, because the Company has learned that the
development of the catheter system to be used to infuse the treatment in future
clinical trials and the transfer of the manufacturing process to a facility
that is compliant with current Good Manufacturing Processes ("cGMP") will taken
longer than previously expected.
Subject to concurrence by the FDA, the Company's ability to
manufacture product on a timely basis, the availability of funding and other
factors, the Company plans to commence one or more follow-on clinical trials in
13
preparation for a pivotal trial. The trials will be designed, among other
things, to test the therapy bilaterally, determine the proper dosing and test
the catheter system developed by Medtronic International Ltd. ("Medtronic")
pursuant to its development agreement with the Company. The Company currently
expects to commence its follow-on trials in the second 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 nine months ended September
30, 2006 and 2005, the Company has incurred $414 and $405 of these costs,
respectively. The increase is primarily due to a $307 increase in costs during
the nine months ended September 30, 2006, associated with the manufacturing of
product to be used in the Company's planned follow-on and pivotal trials. This
increase was offset by a reduction in Phase I clinical trial costs of $312. The
Phase I clinical trial was winding down and completed during the first nine
months 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. The
non-human primate study showed that Neuropeptide Y (rAAV-NPY) did not affect
the general health of the animals and did not cause any detectable alteration
in normal brain pathology. The results of an additional rodent study were
presented in December 2005. The analysis showed that the rAAV-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 currently plans to file an IND for a Phase I
clinical trial for its epilepsy product in the first quarter of 2007.
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 nine months ended
September 30, 2006 and 2005, the Company has incurred $36 and $41 of these
costs, respectively.
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 three scientists
currently on the Company's staff (see Note 6 - Other Agreements).
14
Plan of Operation
Parkinson's Disease
As discussed above under "Business Overview--Parkinson's Disease", in
October 2006, the Company announced that it had completed its Phase I clinical
trial of gene therapy for Parkinson's disease and presented its results for the
12 treated subjects at the Annual Meeting of the Society of Neuroscience in
Atlanta. The results indicated that the treatment appears to be safe and
well-tolerated in patients with advanced Parkinson's disease, with no evidence
of adverse effects or immunologic reaction related to the study treatment. The
trial also yielded statistically significant clinical efficacy and
neuro-imaging results.
The Company has modified the timing of its Parkinson's disease
clinical program as outlined below, because the Company has learned that the
development of the catheter system to be used to infuse the treatment in future
clinical trials and the transfer of the manufacturing process to a facility
that is cGMP compliant will take longer than previously expected. The Company
currently plans to conduct one or more follow-on trials prior to conducting a
pivotal trial for its treatment of Parkinson's disease, commencing in the
second quarter of 2007. The follow-on trials will be designed, among other
things, to test the therapy bilaterally, determine the proper dosing and test
the catheter system developed by Medtronic pursuant to its development
agreement with the Company. The scope and timing of such trials will largely
depend upon FDA concurrence, the ability to manufacture product on a timely
basis, the availability of funding and other factors.
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 in 2009. The Company presently estimates that the pivotal
trial could be completed in 2011 and the estimated costs to reach that
milestone are expected to be between $20,000 and $30,000.
The cost and timing for further trials and FDA approval are subject to
numerous risks, as further described under "Risk Factors" in the Company's 2005
Annual Report on Form 10-KSB filed with the SEC on March 31, 2006.
Epilepsy
The Company also intends to focus its efforts on advancing its product
development for the treatment of epilepsy and currently expects 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: $1,400 in additional
follow-on clinical trial expenses with regard to its Parkinson's treatment;
15
$600 in Phase I clinical trial expenses with regard to its epilepsy product;
$650 in expenditures related to the scale up of its manufacturing capabilities
for the supply of product for its projected Parkinson's clinical trials; $1,200
in research and licensing fees; and $1,100 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 September 30, 2006 Compared to the Three Months
Ended September 30, 2005
Revenues. The Company did not generate any operating revenues during
the three months ended September 30, 2006 and 2005.
Costs and Expenses.
Research and Development. Research and development expenses increased
by $963 during the three months ended September 30, 2006 to $1,263 as compared
to $300 during the same period in 2005. The increase is due mainly to the $500
initial fee paid to Diamyd Medical for the license of their patent rights and
technical information of a gene version of GAD 65 (see Note 6). In addition,
the Company realized increases of $184 in costs for cash and non-cash
compensation and travel of Company scientists and scientific consultants, $99
in costs associated with the development agreement and stock purchase agreement
entered into with Medtronic, $65 in costs associated with the Sponsored
Research Agreement entered into with OSURF (see Note 6) and $52 in connection
with the manufacturing of products to be used in the Company's follow-on and
pivotal Parkinson's trials.
General and Administrative. General and administrative expenses
increased by $671 to $1,395 during the three months ended September 30, 2006,
as compared to $724 during the comparable period in 2005. The increase in 2006
is primarily due to $634 in non-cash compensation charges related to (i) the
accelerated vesting of and the extension of the exercise period for Michael
Sorell's stock options in connection with his termination, and (ii) the option
grant to John E. Mordock in connection with his hiring as the Company's
President and CEO in July 2006 (see Note 5).
Other Income, Net. Other income, net increased by $136 during the
three months ended September 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 third quarter of 2006 from its private
placement of its Series C Preferred Stock.
16
Nine Months Ended September 30, 2006 Compared to the Nine Months Ended
September 30, 2005
Revenues. The Company did not generate any operating revenues during
the nine months ended September 30, 2006 and 2005.
Costs and Expenses.
Research and Development. Research and development expenses increased
by $1,133 during the nine months ended September 30, 2006 to $2,792 as compared
to $1,659 during the same period in 2005. The increase is, in part, due to the
$500 initial fee paid to Diamyd Medical for the license of their patent rights
and technical information of a gene version of GAD 65 (see Note 6). The
increase is also due to $307 in costs incurred in 2006 associated with the
manufacturing of product to be used in the Company's follow-on and pivotal
trials, $450 in increased costs for the compensation and travel of Company
scientists and scientific consultants, $298 in increased costs related to
charges associated with a development agreement and stock purchase agreement
entered into with Medtronic and $65 in costs associated with the Sponsored
Research Agreement entered into with OSURF (see Note 6). These increases were
offset by a reduction, from the prior comparable period of $326 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 nine months ended September 30,
2005, under a research agreement with Auckland Uniservices, Ltd.
General and Administrative. General and administrative expenses
increased by $1,194 to $3,141 during the nine months ended September 30, 2006,
as compared to $1,947 during the comparable period in 2005, in part due to $634
in cash and non-cash compensation charges related to (i) the accelerated
vesting of and the extension of the exercise period for Michael Sorell's stock
options in connection with his termination, (ii) the severance payable to Dr.
Sorell in connection with his termination and (iii) the option grant to John E.
Mordock in connection with his hiring as the Company's President and CEO in
July 2006 (see Note 5). The increase is also due to higher professional fees
for the period, including legal fees, accounting fees, recruiting fees and
investor relations fees of $318. 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 $216 during
the nine months ended September 30, 2006 as a result of stock option grants
issued in May 2006, the hiring of the Company's Chief Financial Officer in
January 2006, as well as additional administrative staff and consultants in the
first nine months of 2005.
Other Income, (Net). Other income, net increased by $171 during the
nine months ended September 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 first nine months of 2006 from its private placement of
its Series C Preferred Stock.
17
Liquidity and Capital Resources.
--------------------------------
The Company is still in the development stage and has not generated
any operating revenues as of September 30, 2006. In addition, the Company will
continue to incur net losses and cash flow deficits from operating activities
for the foreseeable future. Cash, cash equivalents and short-term investments
were $11,656 at September 30, 2006. 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
December 31, 2007.
Although the Company believes that its resources are sufficient to
begin one follow-on trial for Parkinson's disease and 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, 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 $3,758 for the nine months
ended September 30, 2006 as compared to $2,630 during the same period in 2005.
The $1,128 increase in net cash used in operations was primarily due to an
increase in cash expenses of $1,578, 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,
including the $500 initial fee paid to Diamyd Medical for the license of their
patent rights and technical information of a gene version of GAD 65 (see Note
6), offset by a decrease in net operating assets of $452.
Net cash used in investing activities during the nine months ended
September 30, 2006 was $2,411 as compared to net cash used of $1,379 during the
nine months ended September 30, 2005. The difference is primarily due to an
increase in net purchases of short-term investments in the amount of $974
during the nine months ended September 30, 2006.
Net cash provided by financing activities during the nine months ended
September 30, 2006 was $11,601 as compared to $5,159 during the nine months
ended September 30, 2005. During the nine months ended September 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 nine months ended September 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.
18
Recent Accounting Pronouncements
Staff Accounting Bulletin No. 108
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108"), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. SAB 108 must be
applied to annual financial statements for their first fiscal year ending after
November 15, 2006. The Company is currently evaluating the impact that the
adoption of SAB 108 will have, if any, on its consolidated financial statements
and notes thereto.
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.
19
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 third 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 6 - Exhibits
-----------------
See Exhibit Index
20
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.
November 14, 2006 /s/ John E. Mordock
-------------------
John E. Mordock
President and Chief Executive Officer
(as Principal Executive Officer)
November 14, 2006 /s/ Marc L. Panoff
------------------
Marc L. Panoff
Chief Financial Officer, Secretary and
Treasurer
(as Principal Accounting Officer/
Principal Financial Officer)
21
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
22