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, 2005
[ ] 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.
(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) (Zip Code)
(201) 592-6451
---------------------------------------------------------
(Issuer's telephone number, including area code)
N/A
----------------------------------------------------------------
(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 [ ].
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
At November 1, 2005 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 Consolidated Balance Sheet (Unaudited) 1
Condensed Consolidated Statements of Operations (Unaudited) 2
Condensed Consolidated Statements of Changes in Stockholders'
Equity (Deficiency) (Unaudited) 3
Consolidated Statements of Cash Flows (Unaudited) 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5
Item 2 - Management's Discussion and Analysis or Plan of Operation 13
Item 3 - Controls and Procedures 19
PART II. OTHER INFORMATION 20
Item 6. - Exhibits 21
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
-----------------------------
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Amounts in thousands, except share and per share data)
September 30,
2005
-----------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $2,272
Investments being held to maturity 2,781
Prepaid expenses and other current assets 100
-----------------
Total current assets 5,153
Equipment, less accumulated depreciation of $242 163
Intangible assets, less accumulated amortization of $75 406
Investments in unconsolidated affiliates 8
Other assets 6
-----------------
Total Assets $5,736
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $360
Current portion of capital lease obligations 16
-----------------
Total current liabilities 376
Capital lease obligations, net of current portion 1
-----------------
Total Liabilities 377
-----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Series A - $.06 per share cumulative, convertible 1-for-25 into common stock; $.10 par
value; 500,000 shares authorized, 645 shares issued and outstanding with an aggregate
liquidation preference of $1 per share -
Common stock:
$.001 par value; 60,000,000 shares authorized, 26,532,924 issued and outstanding 27
Additional paid-in capital 18,616
Unearned compensation (1,023)
Deficit accumulated during the development stage (12,261)
-----------------
Total stockholders' equity 5,359
-----------------
Total Liabilities and Stockholders' Equity $5,736
=================
See accompanying notes to the unaudited condensed consolidated financial
statements.
- 1 -
NEUROLOGIX, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED 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, 2005
--------------------------------- -------------------------------- --------------------
2005 2004 2005 2004
---------------- ---------------- --------------- ---------------- --------------------
Operating expenses:
Research and development $ 1,613 $ 1,038 $ 300 $ 271 $ 6,596
General and administrative expenses 1,993 1,233 724 432 5,513
---------------- ---------------- --------------- --------------- ---------------------
Loss from operations (3,606) (2,271) (1,024) (703) (12,109)
---------------- ---------------- --------------- --------------- ---------------------
Other income (expense):
Dividend, interest and other income 122 56 29 31 256
Interest expense-related parties (3) (20) (1) (1) (408)
---------------- ---------------- --------------- --------------- ---------------------
Other income (expense), net 119 36 28 30 (152)
---------------- ---------------- --------------- --------------- ---------------------
Net loss $(3,487) $(2,235) $ (996) $ (673) $(12,261)
================ ================ =============== =============== =====================
Basic and diluted net loss per share $ (0.14) $ (0.11) $(0.04) $ (0.03)
================ ================ =============== ===============
Weighted average common shares
outstanding, basic and diluted 25,409,082 20,177,602 26,530,061 22,521,404
================ ================ =============== ===============
See accompanying notes to the unaudited condensed consolidated financial
statements.
- 2 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD FROM FEBRUARY 12, 1999 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
(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 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 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 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
Amortization of unearned compensation - - - 614 - 614
Stock options granted for services - - 1,319 (1,319) - -
Private placement of common stock, net of
expense 3,615,466 5 5,061 - - 5,066
Exercise of stock options 396,054 - 112 - - 112
Net loss - - - (3,487) (3,487)
------------- --------- ----------- -------------- -------------- ------------
Balance, September 30, 2005 26,532,924 $27 $18,616 $(1,023) $(12,261) $5,359
============= ========= =========== ============== ============== ============
See accompanying notes to the unaudited condensed consolidated financial
statements.
- 3 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Nine Months For the period
Ended September 30, February 12, 1999
------------------------------------- (inception) through
2005 2004 September 30, 2005
------------------ ------------------ -----------------------
Operating activities:
Net loss $(3,487) $(2,235) $(12,261)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 59 52 249
Amortization 39 20 108
Stock options granted for services - - 9
Impairment of intangible assets 92 - 143
Amortization of unearned compensation 614 154 1,004
Non-cash interest expense 2 19 378
Changes in operating assets and liabilities 51 (220) (1)
------------------ ------------------ -----------------------
Net cash used in operating activities (2,630) (2,210) (10,371)
------------------ ------------------ -----------------------
Investing activities:
Security deposits paid - - (7)
Purchases of equipment (45) (69) (298)
Development of intangible assets (134) (58) (614)
Purchases of marketable securities (3,600) (3,685) (11,073)
Proceeds from sale of marketable securities 2,400 3,685 8,273
------------------ ------------------ -----------------------
Net cash used in investing activities (1,379) (127) (3,719)
------------------ ------------------ -----------------------
Financing activities:
Proceeds from note payable - - 1,100
Borrowings from related party - - 2,000
Cash acquired in Merger - 5,413 5,413
Merger-related costs - (375) (375)
Payments of capital lease obligations (19) (47) (88)
Stock issuance costs (150) - (150)
Proceeds from exercise of stock options 112 15 132
Proceeds from issuance of common stock 5,216 - 5,216
Proceeds from issuance of preferred stock - - 3,114
------------------ ------------------ -----------------------
Net cash provided by financing activities 5,159 5,006 16,362
------------------ ------------------ -----------------------
Net increase in cash and cash equivalents 1,150 2,669 2,272
Cash and cash equivalents, beginning of period 1,122 755
------------------ ------------------ -----------------------
Cash and cash equivalents, end of period $2,272 $3,424 $2,272
================== ================== =======================
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock to pay debt - $2,372 $2,372
================== ================== =======================
Reverse acquisition - net liabilities assumed, excluding cash - $(214) $(214)
================== ================== =======================
Mandatory redeemable convertible preferred stock converted to - $500 $500
common stock
================== ================== =======================
Common stock issued to acquire intangible assets - - $24
================== ================== =======================
Stock options granted for services $1,319 $42 $1,370
================== ================== =======================
Common stock issued pursuant to license agreement - - $577
================== ================== =======================
Acquisition of equipment through capital leases - $62 $106
================== ================== =======================
See accompanying notes to the unaudited condensed consolidated financial
statements.
- 4 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except for share and per share amounts)
(1) The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information. Accordingly, the
consolidated financial statements do not include all information and notes
required by accounting principles generally accepted in the United States for
complete annual financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, consisting of only normal recurring adjustments, considered
necessary for a fair presentation. These unaudited condensed consolidated
financial statements should be read in conjunction with the Annual Report on
Form 10-KSB of Neurologix, Inc. and its subsidiaries (the "Company") as of and
for the year ended December 31, 2004.
The accompanying unaudited condensed consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
The Company is in the development stage and has not generated any operating
revenues as of September 30, 2005. As a result, the Company has incurred net
losses of $3,487, $2,235 and $12,261 and negative cash flows from operating
activities of $2,630, $2,210 and $10,371 for the nine months ended September 30,
2005 and 2004 and for the period from February 12, 1999 (inception) to September
30, 2005, respectively. In addition, management believes that the Company will
continue to incur net losses and cash flow deficiencies from operating
activities for the foreseeable future.
As of September 30, 2005, the Company had cash and cash equivalents of
$2,272 and investments being held to maturity of $2,781. Management believes
that the Company's current resources will enable it to continue as a going
concern through at least September 30, 2006. Although the Company believes that
its resources are sufficient to complete a Phase I clinical trial for
Parkinson's disease and to initiate 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
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.
On February 10, 2004, pursuant to a Merger Agreement (the "Merger
Agreement"), Neurologix Research, Inc. (formerly known as Neurologix, Inc. and
referred to herein as "NRI") merged (the "Merger") with and into a wholly-owned
subsidiary of Neurologix, Inc. (formerly known as Change Technology Partners,
Inc. and referred to herein individually as "Neurologix" and, together with its
subsidiary, as the "Company") with NRI being the surviving corporation and
becoming a wholly-owned subsidiary of the Company. As a result of the Merger,
stockholders of NRI received an aggregate number of shares of Neurologix common
stock representing approximately 68% of the total number of shares of Neurologix
common stock outstanding after the Merger. Accordingly, the business combination
has been accounted for as a reverse acquisition with NRI being the accounting
parent and Neurologix being the accounting subsidiary. The Company's condensed
consolidated financial statements include the operations of Neurologix, being
the accounting subsidiary, from the date of acquisition.
On September 10, 2004, pursuant to the written consent of stockholders
owning approximately 59% of the Company's common stock, $.001 par value (the
"Common Stock"), the Company amended and restated its Certificate of
Incorporation, as a result of which it effected a reverse stock split of the
shares of Common Stock at a ratio of 1 for 25 and reduced the Company's number
of authorized shares of Common Stock from 750,000,000 to 60,000,000. All
information related to Common Stock, preferred
- 5 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except for share and per share amounts)
stock, options and warrants to purchase Common Stock and earnings per share
included in the accompanying consolidated financial statements has been
retroactively adjusted to give effect to the Company's 1 for 25 reverse stock
split, which became effective on September 10, 2004.
(2) The accounting policies followed by the Company are set forth in Note 2
to the Company's consolidated financial statements included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2004, which are
incorporated herein by reference.
(3) The results of operations for the three and nine month periods ended
September 30, 2005 are not necessarily indicative of the results to be expected
for the full year.
(4) Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), provides for the use of a fair value
based method of accounting for employee stock compensation. However, SFAS 123
also allows an entity to continue to measure compensation cost for stock
options granted to employees using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), which only requires charges to compensation
expense for the excess, if any, of the fair value of the underlying stock at
the date a stock option is granted (or at an appropriate subsequent measurement
date) over the amount the employee must pay to acquire the stock, if such
amounts differ materially from the historical amounts. The Company has elected
to continue to account for employee stock options using the intrinsic value
method under Opinion 25. By making that election, the Company is required by
SFAS 123 and SFAS 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure" to provide pro forma disclosures of net income (loss) and
earnings (loss) per share as if a fair value based method of accounting had
been applied. The Company has used the Black-Scholes option pricing model, as
permitted by SFAS 123, to estimate the fair value of options granted to
employees for such pro forma disclosures and amortized such value over the
vesting period, as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------- --------------------------
2005 2004 2005 2004
------------ --------------- ------------- ------------
Net loss - as reported $(3,487) $(2,235) $(996) $(673)
Add stock-based employee compensation expense
included in reported net loss 330 - 58 -
Deduct total stock-based employee compensation
expense determined under fair value-based method
for all awards (912) (156) (210) (54)
------------ --------------- ------------- ------------
Net loss - pro forma $(4,069) $(2,391) $(1,148) $ (727)
============ =============== ============= ============
Basic/diluted loss per share - as reported $ (0.14) $ (0.11) $ (0.04) $(0.03)
============ =============== ============= ============
Basic/diluted loss per share - pro forma $ (0.16) $ (0.12) $ (0.04) $(0.03)
============ =============== ============= ============
- 6 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except for share and per share amounts)
The following are the weighted-average assumptions used with the
Black-Scholes pricing model:
Nine months ended
September 30,
-----------------------------
2005 2004
--------------- -------------
Expected option term (years) 5 5
Risk-free interest rate (%) 3.70 - 4.18 3.15 - 3.79
Expected volatility (%) 94 - 103 115 - 152
Dividend yield (%) 0 0
As a result of amendments to SFAS 123, the Company will be required to
expense the fair value of options over the service period beginning in the first
quarter of the year ending December 31, 2006.
In accordance with SFAS 123, all other issuances of common stock, stock
options or other equity instruments issued to employees and non-employees as
consideration for goods or services received by the Company are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument, whichever is more readily measurable. Such fair value is
measured at an appropriate date pursuant to the guidance in EITF Issue No. 96-18
and capitalized or expensed as appropriate.
(5) Basic net loss per common share excludes the effect of potentially
dilutive securities and is computed by dividing net income or loss available to
common stockholders by the weighted average number of common shares outstanding
for the period. The Company's dividend requirements on its Series A preferred
stock are not material, and, accordingly, loss applicable to the Common Stock
equaled net loss in each period presented in the accompanying condensed
consolidated statements of operations. Diluted net income or loss per share is
adjusted for the effect of convertible securities, warrants and other
potentially dilutive financial instruments only in the periods in which such
effect 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,
-----------------------------
2005 2004
-------------- --------------
Stock Options 2,235,220 1,715,567
Warrants 1,519,056 828,000
Series A Convertible Preferred Stock 645 645
(6) Related Party Transactions:
Since the Merger, Refac, which is 90% owned by Palisade Concentrated
Equity Partnership, L.P., a private equity partnership managed by Palisade
Capital Management, L.L.C. ("PCM"), has provided consulting services to the
Company at a basic monthly retainer of $5 subject to a quarterly adjustment, by
mutual agreement, at the end of each calendar quarter to reflect the services
rendered during such quarter. Either party has the right to terminate this
agreement at any time without any prior notice. The agreement was terminated as
of August 1, 2005. Under this arrangement, the Company had paid $44 and $80 with
respect to services rendered during the nine-month periods ended September 30,
2005 and 2004, respectively, with $5,000 being paid in the third quarter of
2005.
- 7 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except for share and per share amounts)
Effective with the closing of the Merger, the Company relocated its corporate
offices to One Bridge Plaza, Fort Lee, New Jersey 07024. The Company initially
used these premises on a month-to-month basis under a verbal agreement with
Palisade Capital Securities, LLC ("PCS"), an affiliate of PCM, that did not
require the payment of rent. On August 10, 2004, the Company entered into a
sublease with PCS for the lease of space at One Bridge Plaza, Fort Lee, New
Jersey through January 31, 2008 at a base annual rent of approximately $35. The
rent that the Company pays to PCS is equal to the rental amount that PCS pays
under its master lease for this space.
Effective April 1, 2005, the Company entered into an agreement with PCM
for administrative support services at a rate of $3 per month. Either party has
the right to terminate this agreement at any time upon 30 days prior notice.
Additionally, the Company maintains brokerage accounts with PCS for the
Company's marketable securities.
(7) Employment Agreement with Dr. Michael Sorell
Effective September 21, 2004, the Company entered into an employment
agreement with Michael Sorell, M.D. to serve as the President and Chief
Executive Officer of the Company and NRI for an initial term of employment of 18
months, which will automatically be extended for an additional 18 months absent
notice to the contrary from either party. Dr. Sorell's initial annual base
salary was $150, which was increased to $181 in March 2005 and to $200 in May
2005 based upon the achievement of specified financing objectives of the Company
(see Note 10). In addition to cash compensation, Dr. Sorell's employment
agreement also provides for the grant of options as described in Note 9.
(8) Consulting Agreements
On April 25, 2005 NRI entered into an Amended and Restated Consulting
Agreement (the "Kaplitt Agreement") with Dr. Michael G. Kaplitt, one of NRI's
scientific co-founders. NRI and Dr. Kaplitt had been parties to a Consulting
Agreement, dated October 1, 1999, as amended on October 8, 2003. Pursuant to the
terms of the Kaplitt Agreement, Dr. Kaplitt will continue to provide advice and
consulting services on an exclusive basis in scientific research on human gene
therapy in the nervous system. Dr. Kaplitt will also continue to serve as a
member of NRI's Scientific Advisory Board. Dr. Kaplitt will be paid an annual
retainer of $100 at such time as he determines that his receipt of compensation
from NRI would not be considered to compromise any clinical trial sponsored by
NRI. In connection with the execution of the Kaplitt Agreement, the Company
granted Dr. Kaplitt nonqualified stock options to purchase 160,000 shares of
Common Stock (see Note 9).
On June 20, 2005, the Company executed a Consulting Agreement (the
"Hertzog Agreement") with David B. Hertzog. The Hertzog Agreement became
effective as of May 16, 2005. The Hertzog Agreement provides that Mr. Hertzog
will provide to the Company on a part-time basis independent consulting services
with respect to legal and financial regulatory matters. The term of the Hertzog
Agreement is one year, although the Hertzog Agreement may be earlier terminated
under certain circumstances. The Hertzog Agreement provides that Mr. Hertzog
will receive compensation of $100, payable in equal monthly installments. Mr.
Hertzog received stock options to acquire up to 250,000 shares of Common Stock
(see Note 9). The Company will also reimburse Mr. Hertzog for his reasonable
- 8 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except for share and per share amounts)
expenses and indemnify him for certain losses incurred in connection with the
services performed under the Hertzog Agreement. Mr. Hertzog is required to keep
confidential certain information received from the Company.
(9) Stock Options:
During 2000, the Company approved a stock option plan (the "Plan")
which provides for the granting of stock options and restricted stock to
employees, independent contractors, consultants, directors and other
individuals. A maximum of 800,000 shares of Common Stock were originally
approved for issuance under the Plan by the Board. The Plan was amended by the
Board and the Company's stockholders to increase the number of shares available
for issuance by 500,000 shares. As of September 30, 2005, the Company had 42,108
shares available for issuance under the Plan.
In connection with Dr. Sorell's employment, the Company entered into a
Stock Option Agreement with him pursuant to which it granted Dr. Sorell options
to purchase up to 1,150,000 shares of Common Stock at an exercise price of
$0.75 per share. These options include a base grant and an incentive grant.
Base Stock Option Grant - The base grant consists of an option to
purchase 250,000 shares of Common Stock, 125,000 of which are vested. The
remaining 125,000 shares vest as follows: 100,000 shares on December 31, 2005
and 25,000 shares on March 31, 2006.
Incentive Stock Option Grant - The incentive grant originally
consisted of options to purchase 900,000 shares of Common Stock at an exercise
price of $0.75 per share (the "Incentive Grant"). The ultimate number of shares
issued under the Incentive Grant was 537,815 and was determined by reference to
the amount of gross proceeds raised in equity financings by the Company on or
before September 30, 2005, taking into account the price per share paid for
Common Stock issued in such financings. Through September 30, 2005, the Company
raised gross proceeds of approximately $5,216 at an average price of $1.44 per
share.
One-third (1/3) of the shares covered by the Incentive Grant became
exercisable on April 27, 2005, with the balance of the shares vesting ratably
over a twenty-four (24) month period commencing April 27, 2005. The options
have a maximum ten-year term and are subject to accelerated vesting in the
event that Dr. Sorell's employment by the Company without cause, due to his
death of disability or upon a change in control. If Dr. Sorell's employment is
terminated by the Company for cause or by Dr. Sorrell voluntarily, then the
unvested portion of his options will immediately terminate as of the date of
such termination of employment. Of the total options held by to Dr. Sorell,
273,892 were granted pursuant to the Plan in order to qualify as incentive
stock options, and the remaining 513,923 options were not granted under the
Plan or any other shareholder-approved plan, but are governed by terms
identical to the provisions of the Plan.
For purposes of determining whether there is any compensation expense
incurred with respect to the grant of these options under APB 25, the
measurement date - the date when the number of options was actually
determinable - and not the grant date is used. Since the fair value of the
options on the measurement date in April 2005 exceeded the exercise price, the
difference or intrinsic value must be amortized as compensation expense over
the vesting period of the options. The aggregate compensation expense, under
this valuation, is $699 and represents a non-cash charge in the condensed
consolidated statement of operations of the Company. The expense for the third
quarter of 2005 is $58 and for the nine months' ended September 30, 2005 is
$330 (see Amendment No. 1 to the Company's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 2005).
In connection with the execution of the Kaplitt Agreement, the Company
granted Dr. Kaplitt nonqualified stock options to purchase 160,000 shares of
Common Stock. Although the options were not granted under the Plan, the options
will be governed under the same terms as options granted under the Plan. The
exercise price of the options is $2.05 per share. Twenty percent of the options
became exercisable on the date of the grant, and twenty percent will vest on
each anniversary following the date
- 9 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except for share and per share amounts)
of the grant through 2009. The fair value of these non-employee stock options
are estimated on the balance sheet date for non-vested options and on the
vesting date for the vested options. The fair value of the options is being
amortized to expense over the five-year term of the Kaplitt Agreement.
In connection with the execution of a Scientific Advisory Board
Agreement, dated January 26, 2005 (the "Lowenstein Agreement"), with Daniel
Lowenstein, Mr. Lowenstein received stock options to acquire up to 30,000 shares
of Common Stock pursuant to the Plan, which options will expire on January 26,
2010. The exercise price of the options is $2.10 per share. One-third of the
options vested on January 26, 2005, and one-third will vest on each of January
26, 2006 and January 26, 2007. The fair value of these non-employee stock
options are estimated on the balance sheet date for non-vested options and on
the vesting date for the vested options. The fair value of the options is being
amortized to expense over the three-year term of the Lowenstein Agreement.
Under the terms of the Hertzog Agreement, Mr. Hertzog received stock
options to acquire up to 250,000 shares of Common Stock pursuant to the Plan,
which options will expire on May 16, 2010. The exercise price of the options is
$1.825 per share. One half of such options vested on May 16, 2005 and one
quarter will vest on each of November 16, 2005 and the termination date of the
Hertzog Agreement. The fair value of these non-employee stock options are
estimated on the balance sheet date for non-vested options and on the vesting
date for the vested options. The fair value of the options is being amortized to
expense over the one-year term of the Hertzog Agreement.
The following table summarizes information about stock options
outstanding at September 30, 2005:
Weighted Average
Number of Shares Exercise Price
---------------------- -------------------
January 1, 2005 2,613,459 $0.84
Granted 30,000 2.10
Exercised (120,000) 0.75
Expired (240,000) 0.75
----------------------
March 31, 2005 2,283,459 $0.86
Granted 590,000 1.92
Exercised (276,054) 0.08
Expired (362,185)* 0.75
----------------------
June 30, 2005 2,235,220 $1.25
Granted 0
Exercised 0
Expired 0
----------------------
September 30, 2005 2,235,220 $1.25
======================
*Represents the number of options expiring under the terms of Dr.
Sorell's Incentive Grant. See above.
(10) Private Placements
During the period from February 4, 2005 to April 4, 2005, pursuant to
a Stock Purchase Agreement, as amended, (the "Stock Purchase Agreement") the
Company sold and issued 2,473,914
- 10 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except for share and per share amounts)
shares of Common Stock to investors led by Merlin Biomed Group (the
"Purchasers"), for an aggregate purchase price of $3,216, or $1.30 per share,
resulting in net proceeds after expenses of approximately $3,066. The Purchasers
also received five-year warrants to purchase a total of 618,478 shares of Common
Stock at an exercise price of $1.625 per share. Beginning in August 2007, if the
share price of the Common Stock exceeds $3.25 per share for any ten consecutive
trading day period and certain other conditions are met, the Company may call
any or all of the unexercised warrants by purchasing the warrants at a price of
$0.01 each.
On April 27, 2005, Medtronic International, Ltd. (a wholly-owned
subsidiary of Medtronic, Inc. ("Medtronic") and referred to herein as "Medtronic
International"), in conjunction with a development and manufacturing agreement
(the "Development Agreement"), increased its equity investment in the Company by
$2,000, purchasing 1,141,522 shares of Common Stock at a price of $1.752 per
share, plus a warrant to purchase 285,388 shares of Common Stock at an exercise
price of $2.19 per share (the "Warrant"). The Company has the option to call the
Warrant following the thirtieth month after the date of issuance, provided that
at such time there is a shelf registration statement effective for at least six
months covering the shares of Common Stock underlying the Warrant. If the holder
does not exercise the Warrant once the call option requirements have been met,
the Company may redeem the Warrant at a price of $0.01 per share. Medtronic
International owns approximately 8.7% of the outstanding Common Stock as of
September 30, 2005. See Note 11 for a discussion of the Development Agreement.
(11) Other Agreements
The Company entered into a License Agreement (the "KEIO License
Agreement"), effective as of April 1, 2005, with KEIO University ("KEIO"),
whereby KEIO granted to the Company the sole and exclusive right and license to
certain patent rights and technical information throughout the world with the
exception of Japan. Pursuant to the KEIO License Agreement, the Company paid
KEIO an up front payment of $75 and will pay annual license maintenance fees of
$50 payable on or before January 31 of each calendar year from 2006 to 2011 or
until such time as the Company is actually commercially selling Products (as
such term is defined in the KEIO License Agreement). Additionally, the Company
will make milestone payments and pay royalties as provided for in the KEIO
License Agreement. The KEIO License Agreement is terminable at any time by the
Company upon 90 days' notice.
On April 15, 2005, the Company entered into a Research Agreement with
Auckland Uniservices, Ltd. for a total of $282 to be paid in three equal
installments of $94 over an 18-month period with the first payment due on April
30, 2005. The research activities to be performed will include, but are not
necessarily restricted to, gene therapy research studies on Parkinson's disease.
In addition, the research may include work on gene delivery systems, new viral
and non-viral vectors, animal models of neurological and metabolic diseases and
pre-clinical gene therapy studies on epilepsy and other neurological disorders.
On April 27, 2005, the Company and NRI (the "NRI Entities") entered
into the Development Agreement with Medtronic (see Note 10 above). The
Development Agreement provides that the NRI Entities will use their experience
in technology relating to biologics for the treatment of Parkinson's disease and
temporal lobe epilepsy and Medtronic will use its experience in delivery systems
for biologic and pharmaceutical compositions to collaborate on a project through
which Medtronic will develop a
- 11 -
NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except for share and per share amounts)
system for delivering biologics (the "Product"). The Development Agreement will
be in place for two years and will renew automatically for successive one-year
periods thereafter, unless either party gives the other at least sixty days'
prior written notice of its intent not to renew.
Pursuant to the Development Agreement, the NRI Entities are required to
pay development costs of $850 to Medtronic over the course of the project based
upon development milestones. As of September 30, 2005, the NRI Entities have
paid $213. Following regulatory approval and commercialization of the Product,
Medtronic will pay certain commissions to the NRI Entities with respect to sales
of the Product. Furthermore, the NRI Entities have granted to Medtronic a right
of first offer to negotiate, in good faith, for the right to distribute or
commercialize certain gene therapy products developed by the NRI Entities for
Parkinson's disease or temporal lobe epilepsy.
(12) Pro forma Financial Statements
As described in Note 1 above, NRI merged with and into a wholly-owned
subsidiary of Neurologix on February 10, 2004. The following unaudited pro forma
information summarizes the combined results of Neurologix and NRI for the three
and nine months ended September 30, 2004 as if the merger had occurred at the
beginning of each period.
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2004
------------------- -------------------
Net loss $(2,235) $ (673)
=================== ===================
Basic and diluted net loss per share $ (0.11) $(0.03)
=================== ===================
Weighted average common shares
outstanding, basic and diluted 20,177,602 22,521,404
=================== ===================
- 12 -
Item 2 - Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
Plan of Operation
Effective February 10, 2004, pursuant to a Merger Agreement (the
"Merger Agreement"), Neurologix Research, Inc. (formerly known as Neurologix,
Inc. and referred to herein as "NRI") merged (the "Merger") with and into a
wholly-owned subsidiary of Neurologix, Inc. (formerly known as Change Technology
Partners, Inc. and referred to herein individually as "Neurologix" and, together
with its subsidiary, as the "Company") with NRI being the surviving corporation
and becoming a wholly-owned subsidiary of the Company. As a result of the
Merger, stockholders of NRI received an aggregate number of shares of Neurologix
common stock, $.001 par value (the "Common Stock"), representing approximately
68% of the total number of shares of Common Stock outstanding after the Merger.
Accordingly, the business combination was accounted for as a reverse acquisition
with NRI being the accounting parent and Neurologix being the accounting
subsidiary. The Company's unaudited condensed consolidated financial statements
include the operations of Neurologix, being the accounting subsidiary, from the
date of acquisition.
The Company is in the development stage and is involved in the
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, it has not generated any operating revenues
and has incurred total net losses and aggregate negative cash flows from
operating activities from inception to September 30, 2005 of $12,261 and
$10,371, respectively.
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."
On June 8, 2005, the Company announced the completion of all
neurosurgical gene transfer procedures for the 12 patients in its Phase I
clinical trial of gene therapy for Parkinson's disease. On September 25, 2005,
the Company presented the interim results of this Phase I clinical trial at the
19th Annual Symposia on the Etiology, Pathogenesis and Treatment of Parkinson's
Disease and Other Movement Disorders. The interim results demonstrated safety as
well as efficacy in terms of improvement in motor function and PET scans. Seven
of the 12 patients have been evaluated for the required 12-month period, with
the remaining patients' evaluations expected to be completed by mid-2006.
Based on the results of this Phase I clinical trial evaluated to date,
the Company does not believe that it is necessary, at this juncture, to conduct
an extended study, as part of Phase I, for two-sided brain treatments as
previously contemplated by the Company. Rather, the Company, pending final
results of the 12-patient Phase I clinical trial in mid-2006, expects to move
directly to a pivotal trial for its treatment of Parkinson's disease. In this
regard, the Company expects to formulate and submit to the Food and Drug
Administration (the "FDA") its protocol for such pivotal trial after receipt of
such final results. The timing of the commencement of such pivotal trial will,
among other things, depend on FDA approval and additional funds being available
to the Company (see "Results of Operations -- Liquidity and Capital Resources").
In October 2004, motivated by encouraging rodent studies, the Company
entered into an agreement with Universidade Federal de Sao Paolo to commence a
non-human primate study for evaluating the toxicity and efficacy of using its
technology in the brain for the treatment of TLE. The study has begun and is
expected to be completed in the fourth quarter of 2005. Subject to the
successful completion of this study, the Company plans to submit an
Investigational New Drug application
- 13 -
to the FDA in the first quarter of 2006 for permission to begin a Phase I
clinical trial in TLE. Subject to the FDA's approval, the clinical trial is
expected to begin in the second quarter of 2006. The Company originally had
expected to receive complete results from the primate study so as to be able to
submit to the FDA prior to the end of 2005 and to commence its clinical trial
in the first quarter of 2006. The proposed clinical protocol was presented to
the NIH Recombinant DNA Advisory Committee on September 23, 2004 and was
reviewed favorably.
The Company will also continue its efforts in developing therapies to
treat Huntington's disease and Alzheimer's disease as well as continuing its
work under the Company's research agreement with Cornell University. Under that
agreement the Company funds the development of gene therapy approaches for
neurodegenerative disorders, including Parkinson's disease, Huntington's
disease, Alzheimer's disease and epilepsy.
The Company has taken and intends to take steps to improve and increase
its technical and administrative staff. The Company has, on a part-time basis,
retained a consultant to assist in financial and legal matters. The Company has
also recently hired an administrative assistant to the CEO and plans to hire, by
the end of its fiscal year, a chief administrative officer with accounting and
financial experience. In addition, the Company expects to hire an additional lab
technician during the third quarter of 2005 to assist the research scientists
working at its lab facility.
As of September 30, 2005, the Company had cash and cash equivalents of
$2,272 and investments being held to maturity of $2,781. Management believes
that the Company's current resources will enable it to continue as a going
concern through at least September 30, 2006 and fund the operations described
above. See Results of Operations -- Liquidity and Capital Resources.
Recent Developments
The Company is currently in negotiations with Diamyd Therapeutics AB, a
Sweden corporation ("Diamyd"), in an effort to obtain an exclusive license for
the use of glutamic acid decarboxylase 65 ("GAD 65"), one of the genes used in
the proposed form of gene therapy treatment of Parkinson's disease as conducted
by the Company during its Phase I clinical trial. The license may also cover use
for treatment by the Company of certain other neurologic and neuromuscular
disorders. In connection with any license, the Company expects to make certain
payments and royalties to Diamyd. As part of the negotiations, the Company is
reviewing Diamyd's ownership of, or rights to license, GAD 65. The Company has
previously entered into license and royalty agreements with others as part of
its research and development operations for treatments of Parkinson's disease
and other diseases (see Note 11 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2004).
Although the Company hopes to be able to conclude successful
negotiations with Diamyd and obtain its license, there can be no assurance that
it will be able to do so. If the Company does not obtain the license, it will be
able to carry out its gene therapy programs, including for Parkinson's disease,
without the GAD 65 license by Diamyd, although the Company cannot predict what
costs would be involved in pursuing an alternate gene therapy approach.
The Board of Directors also elected two new directors to serve on the
Board of Directors until their respective terms have expired. Elliott Singer was
elected as a Class II director to fill the vacancy created by the resignation of
Mark S. Hoffman. John Mordock was elected as a new Class III director to fill
the vacancy created by an increase in the size of the Board of Directors. Each
of such directors was recommended to the Company by representatives of Palisade
Private Partnership, L.P. which owns approximately 27% of the Common Stock (see
the Company's Current Report on Form 8-K dated November 14, 2005).
- 14 -
Critical Accounting Policies
The Company's discussion and analysis and plan of operation is based
upon the Company's condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements filed with the
Securities and Exchange Commission. The preparation of these unaudited condensed
consolidated financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related to
fixed assets, intangible assets, stock-based compensation, income taxes and
contingencies. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The accounting policies and estimates used as of December 31, 2004, as
outlined in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2004, have also been applied for the nine months ended September
30, 2005.
Results of Operations
Three Months Ended September 30, 2005 Compared to the Three Months
Ended September 30, 2004
Revenues. The Company did not generate any operating revenues during
the three months ended September 30, 2005 and 2004.
Costs and Expenses.
Research and Development. Research and development expenses
increased by $29 (11%) during the three months ended September 30, 2005 to $300
as compared to $271 during the same period in 2004. The increase is primarily
attributable to costs incurred by the Company in connection with payments due
under certain of its license agreements and costs incurred for laboratory
supplies and operations. Costs associated with the treatment of patients as part
of the Company's Phase I clinical trial for Parkinson's disease during third
quarter of 2005 decreased when compared to such costs for the third quarter of
2004. The Company had completed its gene transfer procedures in patients at the
end of second quarter of 2005.
General and Administrative. General and administrative
expenses increased by $292 (68%) to $724 during the three months ended
September 30, 2005, as compared to $432 during the comparable period in 2004.
The increase in 2005 is primarily related to non-cash compensation expenses
incurred in connection with the stock options granted to Dr. Sorell as the
Incentive Grant (see Note 9) and expenses associated with additional
administrative staff and consultants (see Notes 6 and 8). In addition, the
Company incurred increases in accounting fees and miscellaneous expenses. The
increase in accounting fees is principally related to SEC filings. The increase
in miscellaneous expenses is primarily attributable to the increased efforts of
communicating and meeting with the Company's stockholders and potential
investors as well as attendances at and participations in scientific
conferences.
Other Income (Net). Other income (net) decreased by $2 (6%)
during the three months ended September 30, 2005, over the comparable period of
2004. This decrease is primarily attributable to a decrease in dividend and
interest income earned on funds received by the Company during the third quarter
of 2005 from its private placements of Common Stock (see Note 10).
- 15 -
Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September
30, 2004
Revenues. The Company did not generate any operating revenues during
the nine months ended September 30, 2005 and 2004.
Costs and Expenses.
Research and Development. Research and development expenses
increased by $575 (55%) during the nine months ended September 30, 2005 to
$1,613 as compared to $1,038 during the same period in 2004. The increase is
principally related to costs incurred by the Company in connection with the
Medtronic Development Agreement and with its other license agreements. The
increase also includes increases in the costs of laboratory supplies and
operations. During the nine-month period ended September 30, 2005, the Company's
costs of patient treatments relating to its Phase I clinical trial on
Parkinson's disease did not increase significantly over the comparable period of
2004. In addition, the Company incurred costs associated with impairment on
certain intellectual property of $89.
General and Administrative. General and administrative
expenses increased by $760 (62%) to $1,993 during the nine months ended
September 30, 2005, as compared to $1,233 during the comparable period in 2004.
The increase in 2005 is primarily related to non-cash compensation expenses
incurred in connection with the options granted to Dr. Sorell as the Incentive
Grant (see Note 9) as well as an increase in compensation to Dr. Sorell. In
addition, the increase in 2005 reflects increases in the costs of administrative
staff and consultants retained by the Company as well as increases in legal and
accounting fees and miscellaneous expenses.
Other Income (Net). Other income (net) increased by $83 (231%)
during the nine months ended September 30, 2005 over the comparable period of
2004. This increase is a result of the Merger completed on February 10, 2004,
which enabled the Company to satisfy its loans to related parties, thereby
eliminating the related interest expense and providing it with interest bearing
cash accounts and cash equivalents, as well as the interest earned on private
placement proceeds received during the first nine months of 2005 (see Note 10).
Liquidity and Capital Resources.
--------------------------------
Cash and cash equivalents were $2,272 and investments being held to
maturity were $2,781 at September 30, 2005.
The Company is still in the development stage and has not generated any
operating revenues as of September 30, 2005. In addition, the Company will
continue to incur net losses and cash flow deficiencies from operating
activities for the foreseeable future. Management believes that the Company's
current resources will enable it to continue as a going concern through at least
September 30, 2006.
Although the Company believes that its resources are sufficient to
complete a Phase I clinical trial for Parkinson's disease and to initiate 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.
Operating activities used $2,630 of cash during the nine months ended
September 30, 2005 as compared to $2,210 during the same period in 2004. The
Company used the cash to fund its operating
- 16 -
expenses, which increased over the comparable period in 2004. See Results of
Operations -- Nine Months Ended September 30, 2005 Compared to the Nine Months
Ended September 30, 2004.
Net cash used in investing activities during the nine month periods
ended September 30, 2005 and 2004 were $1,379 and $127, respectively, primarily
for the purchases of marketable securities and development of intangible assets.
Net cash provided by financing activities was $5,159 during the nine
months ended September 30, 2005, principally from the closing of the private
placements described in Note 10. During the nine months ended September 30,
2004, financing activities provided $5,006, principally from cash acquired in
the Merger of $5,413, partially offset by Merger-related costs of $375.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets". This Statement addresses the measurement of exchanges of
nonmonetary assets and is effective for nonmonetary asset exchanges occurring in
fiscal years beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material effect on the Company's financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123(R) - Share-Based
Payment, which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123(R) supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and amends SFAS No. 95, "Statement of Cash Flows".
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. The Company will be required to expense the fair value of
options granted over the service period beginning in the first quarter of the
year ending December 31, 2006. The Company is still evaluating the impact the
adoption of this standard will have on its financial statements.
No other new accounting pronouncement issued or effective during the
fiscal year has had or is expected to have a material impact on the
consolidated 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:
- 17 -
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, and
o the inability of the Company to successfully complete the
Phase I clinical trial for Parkinson's disease or to
commence Phase I for temporal lobe epilepsy.
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 2004 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.
- 18 -
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 (as
Principal Executive Officer and Principal Accounting Officer/Principal
Financial Officer), has 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 Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the quarterly period covered by this report. Based on
such evaluation, the Company's President and Chief Executive Officer (as
Principal Executive Officer and Principal Accounting Officer/Principal
Financial Officer) has 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.
The Company has implemented certain additional control policies and
procedures during the third quarter of 2005 to resolve, among other things, the
material weakness in internal control relating to its accounting treatment of
stock options, including stock options granted to non-employee consultants (see
Item 3--Controls and Procedures to the Company's Quarterly Report on Form
10-QSB/A for the quarter ended June 30, 2005). In this regard, the Company has
assigned additional responsibilities and duties to its outsourced accounting
firm to review the accounting for employee and non-employee stock options,
including reporting to management and its independent registered public
accounting firm. As a result, the Company and its independent registered public
accounting firm identified an additional error in accounting for the stock
options granted to its President and Chief Executive Officer as the Incentive
Grant (see Note 9) which resulted in additional compensation expense being
recorded in the second quarter of 2005 and in the recording of compensation
expense in the current quarter. This error is limited to the financial
statements for the quarter ended June 30, 2005, and does not affect the third
quarter financial statements included in this Quarterly Report. The financial
statements for the three months and six months ended June 30, 2005 were
restated to correct this error as contained in Amendment No. 1 to the Company's
Quarterly Report on Form 10-QSB/A for the quarter ended June 30, 2005.
The Company continues to be committed to the review and evaluation of
the Company's procedures and policies designed to assure effective internal
control over financial reporting.
(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 fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting, except as disclosed in
subparagraph (a) above.
- 19 -
PART II. OTHER INFORMATION
- 20 -
Item 6. Exhibits
-----------------
See Exhibit Index
- 21 -
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, 2005 /s/ Michael Sorell
--------------------------------------------------
Michael Sorell
President and Chief Executive Officer
(as Principal Executive Officer)
November 14, 2005 /s/ Michael Sorell
--------------------------------------------------
Michael Sorell
President and Chief Executive Officer
(as Principal Accounting Officer/Principal
Financial Officer)
- 22 -
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
----------- -------
3.1 Restated Certificate of Incorporation of Neurologix, Inc.
(filed as an exhibit to the Registrant's Report on Form 8-K,
dated September 13, 2004 and incorporated herein by reference).
3.2 Amended and Restated By-laws of Neurologix, Inc. (filed as an
exhibit to the Registrant's Annual Report on Form 10-K dated
April 9, 2004 and incorporated herein by reference).
10.1 License Agreement, dated as of August 1, 2005, between
Neurologix, Inc. and The Trustees of Columbia University in New
York.**
10.2 Letter Agreement, dated November 8, 2005, between Neurologix,
Inc. and Refac.**
31.1 Rule 13a-14(a)/15d-14(a) Certification of President and Chief
Executive Officer (as Principal Executive Officer and Principal
Accounting Officer/Principal Financial Officer).**
32.1 Section 1350 Certification of President and Chief Executive
Officer (as Principal Executive Officer and Principal
Accounting Officer/Principal Financial Officer).**
----------
** Filed herewith