UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

Commission File Number 0-13347

 

NEUROLOGIX, INC.

 

 

 

Registrant’s telephone number, including area code (201) 592-6451

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.001 per share

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ ] No [ ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

 

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates was approximately $12,824,874, computed by reference to the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

As of March 11, 2011, there were outstanding 27,918,148 shares of the registrant’s common stock, par value $0.001 per share.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information required in Part III of this Annual Report on Form 10-K is incorporated herein by reference to the registrant’s Proxy Statement for its 2011 Annual Meeting of Stockholders, which Proxy Statement will be filed within 120 days after the registrant’s fiscal year ended December 31, 2010.

 

TABLE OF CONTENTS

 

 

This document includes certain statements of Neurologix, Inc. (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 (the “Exchange Act”) 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,” “should,” “potential,” “continue” 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:

 

 

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” starting on page 24. 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. In this annual report on Form 10-K, “we”, “our” and “us” refer to Neurologix, Inc., except as otherwise indicated or as the context otherwise requires.

 

 

INTRODUCTION

 

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 transfer and other innovative therapies. The Company’s development efforts are currently focused on gene transfer for treating Parkinson’s disease. The Company’s core technology, which it refers to as “NLX,” is in the clinical development stages and was tested in Phase 1 and Phase 2 clinical trials for the treatment of Parkinson’s disease. Although the Company’s current operations and resources will be primarily concentrated on its investigational Parkinson’s disease therapy, the Company intends to continue its efforts to develop therapies to treat other neurodegenerative and metabolic disorders, including therapies relating to epilepsy, depression and Huntington’s disease. Recent highlights include:

 

 

 

HISTORY

 

Arinco Computer Systems Inc. (formerly known as Change Technology Partners, Inc. and referred to herein as “Arinco”), the predecessor to the Company, was incorporated in New Mexico on March 31, 1978 for the principal purpose of serving its subsidiary operations, which included the sale of telecommunications equipment and services and the retail sales of computers. Arinco, which became a public company in 1982, did not have any business operations from 1985 to March 2000. At that time, an investor group acquired control of Arinco and commenced a new consulting business strategy focusing on internet, e-services and digital media solutions.

Thereafter, until approximately July 2001, the Company provided a broad range of consulting services, including e-services and technology strategy, online branding, web architecture and design, systems integration, systems architecture and outsourcing. However, the Company was not successful with its business strategy and therefore the Board voted to divest the Company of a majority of its then existing operations. On September 30, 2002, the Board adopted a plan of liquidation and dissolution in order to maximize stockholder value.

 

During the period from December 2001 through June 30, 2003, Canned Interactive, which designs and produces interactive media such as digital video discs (DVDs) and web sites, primarily for entertainment, consumer goods, sports and technology companies, was the Company’s sole source of operating revenues. On June 30, 2003, the Company sold all of the issued and outstanding shares of Canned Interactive to a limited partnership of which Canned Interactive’s managing director was the general partner. With the sale of Canned Interactive, the Company ceased to have any continuing operations.

 

On February 10, 2004, the Company completed a merger (the “Merger”) of a wholly-owned subsidiary with Neurologix Research, Inc. (formerly known as “Neurologix, Inc.” and sometimes referred to herein as “NRI”). Following the Merger, NRI became a wholly-owned subsidiary of the Company and stockholders of NRI received an aggregate number of shares of common stock of the Company (the “Common Stock”) representing approximately 68% of the total number shares of Common Stock outstanding after the Merger.

 

Effective December 31, 2005, the Company completed a short-form merger whereby its operating subsidiary, NRI, was merged with and into the Company. Following the merger, NRI no longer existed as a separate corporation. As the surviving corporation in the merger, the Company assumed all of the rights and obligations of NRI. The short-form merger was completed for administrative purposes and did not have any material impact on the Company or its operations or financial statements.

 

BUSINESS OF THE COMPANY

 

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 transfer and other innovative therapies. These treatments are designed as alternatives to conventional surgical and pharmacological treatments.

 

The Company’s scientific co-founders, Dr. Matthew J. During and Dr. Michael G. Kaplitt, have collaborated for more than ten years working with central nervous system disorders. Their research spans from animal studies (for gene transfer in Parkinson’s disease, epilepsy and other disorders of the central nervous system) to the Company’s Phase 2 clinical trial for the treatment of Parkinson’s disease. They both remain as consultants to the Company and serve on the SAB.

 

From 1999 to 2002, the Company, through NRI, conducted its gene transfer research through sponsorship agreements with Thomas Jefferson University (“TJU”), the Rockefeller University (“Rockefeller”) and the University of Auckland in New Zealand (“AUL”). From October 2002 to April 2006, the Company staffed its own laboratory facilities at Columbia University’s Audubon Biomedical Science and Technology Park in New York City to manufacture the gene transfer products required for its preclinical trials and to continue the research and development of additional gene transfer products.

 

Currently, the Company conducts basic and applied gene transfer research through research agreements with Cornell University for and on behalf of its Joan & Sanford I. Weill Medical College (“Cornell”) in a laboratory directed by Dr. Michael Kaplitt and one of the Company’s scientists, and OSURF in a laboratory directed by Dr. During and five of the Company’s scientists.

The Company currently outsources the manufacture of its materials and devices to third parties for use in its clinical trials. These third parties provide such materials and devices pursuant to directives from the Company.

 

Business Strategy

 

The Company’s objective is to develop and commercialize innovative therapeutic treatments for disorders of the brain and central nervous system, primarily gene transfer therapy. Key elements of the Company’s strategy include:

 

 

 

 

In February 2010, the Company retained MTS Health Partners, L.P. (“MTS”) as a strategic advisor to complement and augment the Company’s ongoing business development efforts, including efforts to seek strategic collaborations for the continued development and commercialization of its Parkinson’s product.

 

 

Technology Overview

 

Deoxyribonucleic acid (“DNA”) is organized into segments called genes, with each gene representing the region of DNA that determines the structure of a protein, as well as the timing and location of such protein’s production. Occasionally, the DNA for one or more genes can be defective, resulting in the absence or improper production of a functioning protein in the cell. This improper expression can alter a cell’s normal function and may result in a disease. One goal of gene transfer is to treat these diseases by delivering DNA containing the corrected gene into the affected cells. Also, gene transfer can increase or decrease the synthesis of gene products or introduce new genes into a cell and thus provide new or augmented functions to that cell.

 

There are several different ways of delivering genes into cells. Each of the methods of delivery uses carriers, called “vectors,” to transport the genes into cells. Similar to the relationship between a delivery truck and its cargo, the vector (the “truck”) provides a mode of transport and the therapeutic agent (the “cargo”) provides the disease remedy. These carriers can be either man-made components or modified viruses. The use of viruses takes advantage of their natural ability to introduce DNA into cells. Gene transfer takes advantage of this property by replacing viral DNA with a payload consisting of a specific gene. Once the vector inserts the gene into the cell, the gene acts as a blueprint directing the cell to make the therapeutic protein.

 

For its first generation of products, the Company intends to utilize exclusively the adeno-associated virus (“AAV”) vector. In 1994, Drs. Michael Kaplitt and Matthew During demonstrated that AAV could be a safe and effective vehicle for gene transfer in the brain. Since that time, the AAV vector has been used safely in a variety of clinical gene transfer trials.

 

The Company believes that the benefits of AAV vector gene transfer technology include:

 

 

Parkinson’s Disease

 

General.  Parkinson’s disease is a neurodegenerative disorder; it arises from the gradual death of nerve cells in the brain. Parkinson’s disease is a progressive and debilitating disease that affects the control of bodily movement and is characterized by four principal symptoms:

 

 

Physicians and patients have long recognized that this disease, or treatment complications, can cause a wide spectrum of other symptoms, including dementia, abnormal speech, sleep disturbances, swallowing problems, sexual dysfunction and depression.

 

Rigidity, tremor and bradykinesia result, primarily, from a loss of dopamine in two regions of the brain: the substantia nigra and striatum (caudate and putamen). Dopamine is a neurotransmitter, a chemical released from nerve cells (neurons), which helps regulate the flow of impulses from the substantia nigra to neurons in the caudate and putamen. Standard therapy for Parkinson’s disease often involves use of levodopa, a drug that stimulates production of dopamine. However, over extended periods of time levodopa often declines in its effectiveness. In advanced stages of Parkinson’s disease, as the disease becomes more and more debilitating, it becomes necessary to apply a riskier and potentially more invasive medical procedure to treat the disease. It is at this juncture that surgical procedures, including deep brain stimulators and lesioning, which target an area of the brain called the subthalamic nucleus (“STN”), are commonly advised.

 

The Company believes that the glutamic acid decarboxylase (“GAD”) gene can be used to selectively mimic normal physiology and alter the neural circuitry affected by Parkinson’s disease. The Company’s technology inserts a GAD gene into an AAV vector, and this packaged vector is introduced directly into the STN. The GAD gene is responsible for making gamma aminobutyric acid (“GABA”), which is released by nerve cells to inhibit or dampen activity. The loss of dopamine leads to a change in the activity of several brain structures that control movement. Central to this is the STN, which is overactive and does not receive adequate GABA, as well as targets of the STN, which are also hyperactive and also do not receive enough GABA. The goal of this investigational gene therapy is to deliver GABA to the STN in order to re-establish the normal neurochemical balance and activity among these key structures.

 

The Company’s investigational gene therapy, NLX-P101, is a novel, non-dopaminergic approach that uses GAD to reset the overactive brain cells to inhibit electrical activity and return brain network activity to more normal levels. This in turn reduces symptoms of Parkinson’s disease, including tremors, rigidity and slowness of movement. To the Company’s knowledge, NLX-P101 is the only gene transfer strategy currently in development which bypasses the dopamine system. The investigational gene therapy is designed to be administered without destroying brain tissue and without implanting a permanent medical device.

 

According to the National Parkinson Foundation, there are currently 1 million Parkinson’s disease patients in America, with 50,000-60,000 new cases diagnosed each year.

 

Product Development and Operations.  In October 2006, the Company announced that it had completed its Phase 1 clinical trial of gene transfer for Parkinson’s disease. The results indicated that the treatment, which was confined to only one side of the brain, appeared to be safe and well-tolerated in trial participants 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. Such results were published in 2007 in two leading peer-reviewed medical and scientific journals: The Lancet and Proceedings of the National Academy of Sciences.

 

A Phase 1 clinical trial is primarily designed to test the safety, as opposed to the efficacy, of a proposed treatment. The clinical trial was conducted by Drs. Michael Kaplitt and Matthew During. As part of this clinical trial, twelve patients with Parkinson’s disease underwent surgical gene transfer at The New York Presbyterian Hospital/Weill Medical College of Cornell University. All patients were evaluated both pre- and post-operatively with Positron Emission Tomography (“PET”) scans and with graded neurological evaluations by Drs. Andrew Feigin and David Eidelberg of North Shore University Hospital. The Phase 1 clinical trial was an open-label dose-escalation study with four patients in each of three escalating dose cohorts. The third cohort of four patients received 10 times the dose of the first cohort. The 12 patients who participated in the trial were diagnosed with severe Parkinson’s disease of at least five years duration and were no longer adequately responding to current medical therapies.

 

Following this Phase 1 clinical trial, the Company designed its protocol for a Phase 2 clinical trial. On December 3, 2007, the Company reviewed its Phase 2 protocol with the National Institutes of Health’s Office of Biotechnology Activities Recombinant DNA Advisory Committee (the “RAC”) in a public forum.

 

On December 13, 2007, the Company announced that the U.S. Food and Drug Administration (the “FDA”) granted Fast Track Designation for the Company’s treatment of Parkinson’s disease. Under the FDA Modernization Act of 1997, Fast Track Designation may facilitate the development and expedite the review of a drug candidate that is intended for the treatment of a serious life-threatening condition and demonstrates the potential to address an unmet medical need for such a condition. Fast Track Designation will provide various means to expedite the development and review of the Company’s gene transfer procedure for Parkinson’s disease, including the facilitation of meetings and other correspondence with FDA reviewers, consideration for priority review and the ability to submit portions of a Biologic License Application (“BLA”) early for review as part of a “rolling” submission. The receipt of Fast Track Designation does not, however, assure the approval of any of the Company’s study protocols or the ultimate approval of any BLA that may be submitted by the Company to the FDA for marketing approval.

 

Under a manufacturing and development agreement, the Company and Medtronic, Inc. (“Medtronic”) have co-developed a new catheter infusion device to infuse the Company’s gene transfer product into the brain with respect to the treatment of Parkinson’s disease. (See “– Manufacturing”). The FDA reviewed and approved the use of this device in connection with the Company’s Phase 2 clinical trial for its Parkinson’s disease product under the Company’s investigational new drug application (“IND”). The use of such a catheter facilitates the delivery of the Company’s gene transfer treatment by neurosurgeons and simplifies the procedures for infusing the gene product into the brain. In order for the Company to market its products, Medtronic must obtain the FDA’s approval for the commercialization of such catheter infusion device, and the Company must obtain sufficient quantities of the catheter infusion device whether from Medtronic or another manufacturer. (See Item 1A – “Risk Factors”).

 

The Company initiated its Phase 2 clinical trial for the treatment of advanced Parkinson’s disease in December 2008 and completed all of the planned surgeries associated with the trial in November 2009. The double-blind, multi-center, randomized, sham-procedure-controlled trial was designed to evaluate the safety and efficacy of NLX-P101 in 45 patients with moderate to advanced Parkinson’s disease who were not well-controlled on available medical therapy. Half of the trial participants were randomized to receive an infusion of NLX-P101 bilaterally into each subthalamic nucleus, and the other half were randomized to receive a sham infusion of a sterile saline solution (the “Control Participants”). Each procedure was carried out under local

anesthesia. Trial participants were assessed for safety and for treatment effects by standardized Parkinson’s disease ratings at multiple time points both pre and post-procedure. The primary endpoint for the trial was a clinical assessment of motor function at 6 months using the Unified Parkinson’s Disease Rating Scale (UPDRS). All participants in the trial were evaluated at baseline as well as one, three and six months after undergoing surgery and were monitored for safety for a 12-month period following their surgical procedure. All treated participants will continue to be monitored for safety in a long-term follow-up study.

 

In June 2010, the Company announced positive results from its Phase 2 clinical trial for the treatment of advanced Parkinson’s disease. Trial participants who received NLX-P101 experienced statistically significant and clinically meaningful improvements in off-medication motor scores compared to control subjects who received sham surgery. In the trial, this benefit was seen at one month and continued virtually unchanged throughout the six month blinded study period. The Phase 2 results, which were published in an online-first edition of The Lancet Neurology on March 17, 2011, also demonstrated a positive safety profile for NLX-P101, with no serious adverse events related to the gene transfer or surgical procedure reported in the 12-month period following the surgical procedures. In accordance with the trial’s protocol, treated participants will continue to be monitored for safety for a five-year period following their surgical procedures.

 

Those Control Participants who continue to meet all entry, medical and surgical criteria for the trial will be offered the opportunity to participate in the open-label arm of the trial to receive a bilateral infusion of the gene-based treatment. Subject to adequate funding, the Company expects to commence the open-label arm of the trial in the second or third quarter of the 2011 fiscal year. (See Item 1A – “Risk Factors – The Company Does Not Have Sufficient Funds to Continue its Operations in the Long Run or to Commercialize its Product Candidates,” See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Plan of Operation” and Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”).

 

The Company is currently taking steps to move toward a pivotal trial for the treatment of Parkinson’s disease, and hopes to be in a position to file its protocol with the FDA in 2011. The Company’s conduct of such a trial will require, among other things, approval by the FDA and adequate funding. Currently, the Company estimates that all surgeries conducted in the pivotal trial could be completed in the first half of 2014 and the estimated total direct costs to reach that milestone are expected to be between $30 million and $40 million. (See Item 1A – “Risk Factors” and Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

 

Epilepsy

 

General.  Epilepsy, a group of diseases associated with recurrent seizures, is caused by periodic episodes of repetitive, abnormal electrochemical disturbance in the central nervous system, beginning in the brain. Generalized seizures happen when massive bursts of electrical energy sweep through the entire brain at once, causing loss of consciousness, falls, convulsions or intense muscle spasms. Partial or focal seizures happen when the disturbance occurs in only one part of the brain, affecting the physical or mental activity controlled by that area of the brain. Seizures may also begin as partial or focal seizures and then generalize.

 

According to the Epilepsy Foundation (USA) (the “EF”), epilepsy affects almost 3 million Americans of all ages and backgrounds, making it one of the most common neurological diseases in this country. Approximately 200,000 new cases of seizures and epilepsy occur each year, with approximately 80% of epileptic Americans below age 65. Despite optimal medical (drug) treatment, as many as 30% to 40% of people with epilepsy continue to have seizures and are potential candidates for surgery, including gene transfer.

Product Development and Operations.  Over the past several years, the Company has completed multiple preclinical trials in rodents and two non-human primate studies to evaluate the toxicity and efficacy of using its gene transfer 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. Other studies have demonstrated that NPY, a 36-amino acid peptide which acts to dampen excessive excitatory activity and prevents seizures in multiple animal models, had efficacy in preventing the development of spontaneous seizures that occur after a prolonged episode of status epilepticus, a life-threatening condition in which the brain is in a state of persistent seizure. The Company’s proposed treatment uses gene transfer technology to deliver genes into the brain which restore the chemical balance, but only in the areas in which the disease process is occurring.

 

In December 2006, the Company submitted an IND to the FDA for permission to begin a Phase 1 clinical trial in TLE. The proposed clinical protocol for this study was presented to the RAC on September 23, 2004 and was reviewed favorably.

 

On December 4, 2007, the Company announced the receipt of a grant from the Epilepsy Research Foundation, a joint venture of three non-profit epilepsy organizations – the Epilepsy Therapy Project, EF, and Finding a Cure for Epilepsy and Seizures – formed to identify and accelerate the development of promising epilepsy research. The grant will help fund the Company’s clinical epilepsy research.

 

In January 2008, the Company announced that as a result of comments from, and discussions with, the FDA, the Company would need to conduct an additional preclinical trial in non-human primates prior to commencing a Phase 1 clinical trial. The non-human primate study would be designed to confirm the safety of the administration and use of the AAV containing NPY.

 

In May 2010, the USPTO issued a patent to the Company for intellectual property covering the use of NPY for the treatment of TLE. The Company believes that this patent will protect the Company’s intellectual property rights with respect to the use of NPY for the treatment of TLE.

 

The Company’s timetable for commencement of a Phase 1 clinical trial for its TLE product has been delayed, with any such commencement being subject to, among other things, the successful completion of the additional preclinical trial, the availability of funding, approval by the FDA and procurement of certain intellectual property licenses. Additionally, the Company intends to concentrate its current operations and resources primarily on its investigational Parkinson’s disease gene therapy. (See Item 1A – “Risk Factors”). The Company cannot predict the timing for the conduct of additional trials or for a filing for the FDA’s approval of the epilepsy product.

 

Depression

 

General.  Clinical depression is one of the most common mental illnesses, affecting more than 19 million Americans each year. This includes major depressive disorder, manic depression and dysthymia, a milder, longer-lasting form of depression.

 

Depression causes people to lose pleasure from daily life, can complicate other medical conditions, and can even be serious enough to lead to suicide. Depression can occur to anyone, at any age, and to people of any race or ethnic group. Depression is never a “normal” part of life, no matter what your age, gender or health situation.

 

Depression is treatable with treatments such as therapy, medicine, and lifestyle changes. But it may not always be easily treated. For many people, depression may continue despite treatment. They may have treatment-resistant depression or TRD. This happens when medicine

partly relieves their symptoms or does not help at all. It is at this juncture that surgical intervention is recommended to certain of TRD patients.

 

Neurostimulation is becoming an option for people who have tried a variety of antidepressants that did not work, only partly worked or stopped working. Vagus Nerve Stimulation is one type of neurostimulation that has been approved as an additional treatment for long-term or recurrent depression in adults who have not had success with four or more antidepressant medicines. A device is put into the chest and sends an electrical current to the brain.

 

Electroconvulsive Therapy (“ECT”) is another type of neurostimulation. ECT can be helpful for people whose depression is severe or life-threatening and for people who cannot take antidepressant medicine. Electrodes are placed on the head to deliver electrical impulses. ECT has been controversial, but has improved in recent years. It can help when antidepressant medicines do not work well enough.

 

Serotonin is considered to be a key neurotransmitter in depression-like states. The serotonergic system in the brain is known to modulate mood, emotion, sleep and appetite and thus is implicated in the control of numerous behavioral and physiological functions. Decreased serotonergic neurotransmission has been proposed to play a key role in the cause of depression.

 

The Company believes that a gene called p11 is closely related to serotonin transmission in the brain and may be one of the causes of depression in a subset of patients. Past studies have shown that humans and animals with depression have decreased levels of p11 in an area of the brain called the nucleus accumbens. This brain structure is important for reward, drug addiction and depression. The Company’s technology inserts the p11 gene into an AAV vector, and this packaged vector is introduced directly into the nucleus accumbens in order to normalize depression-like behavior.

 

Product Development and Operations.  On January 13, 2009, the Company entered into a License Agreement with Cornell (the “Cornell License Agreement”) whereby Cornell granted the Company an exclusive license for the worldwide use of p11 gene therapy in the treatment of psychiatric conditions, including depression.

 

In October 2010, the Company announced the publication of a paper in Science Translational Medicine demonstrating the importance of the p11 gene in modulating depression in mice, utilizing the Company’s investigational gene therapy approach. In the study, reduced levels of p11 in the nucleus accumbens were associated with depressive behaviors in mice. An AAV vector was used to deliver the p11 gene back into the nucleus accumbens of mice who were lacking the p11 protein, reversing the depressive behavior and returning the animals to normal function.

 

The study also examined samples of brain tissue from a group of deceased human patients, half of whom had severe depression. It was found that there were significantly reduced levels of p11 in the nucleus accumbens of depressed patients compared to those without depression.

 

The Company’s development of this investigational gene therapy for depression is currently in the preclinical phase. Additional preclinical testing is required prior to seeking regulatory clearance to commence a Phase 1 clinical trial for this investigational gene therapy. The timing of such trial is subject to, among other things, the completion of additional preclinical testing, the availability of funding and receipt of applicable regulatory approvals. Additionally, the Company intends to concentrate its current operations and resources primarily on its investigational Parkinson’s disease gene therapy. (See Item 1A – “Risk Factors – The Company Cannot Ensure that it will be Able to Pursue Further Trials for its Product Candidates or the Timing of any Future Trials”).

Huntington’s Disease

 

General.  Huntington’s disease is a devastating, hereditary, degenerative brain disorder for which there is, at present, no effective treatment or cure. Huntington’s disease slowly diminishes the affected individual’s ability to walk, think, talk and reason. Early symptoms of Huntington’s disease may affect cognitive ability or mobility and include depression, mood swings, forgetfulness, clumsiness, involuntary twitching and lack of coordination. As the disease progresses, concentration and short-term memory diminish and involuntary movements of the head, trunk and limbs increase. Walking, speaking and swallowing abilities deteriorate and eventually a person is unable to care for himself or herself. Ultimately, death occurs due to complications such as choking, infection or heart failure.

 

According to the Huntington’s Disease Society of America, Huntington’s disease is recognized as one of the more common genetic disorders. More than a quarter of a million Americans have Huntington’s disease or are “at risk” of inheriting the disease from an affected parent. Huntington’s disease typically begins in mid-life, between the ages of 30 and 50 and affects males and females equally. Each child of a person with Huntington’s disease has a 50 percent chance of inheriting the fatal gene. Everyone who carries the gene will develop the disease.

 

Product Development and Operations.  In November 2005, the Company announced findings from preclinical studies which showed that a form of the gene XIAP (x-linked inhibitor of apoptosis protein or “dXIAP”) may prevent the progression of Huntington’s disease. The Company further investigated the neuroprotective effects of dXIAP by injecting pre-symptomatic rodents with AAV vectors encoding dXIAP into the striatum, an area of the brain normally affected in patients with Huntington’s disease. In the study, rodents injected with this vector experienced significant reversal of motor dysfunction to the motor function level of normal rodents, while there was no improvement in the motor function of rodents treated with a control vector. dXIAP also improved the function of the diseased neurons in culture. Furthermore, no adverse effects due to dXIAP overproduction were observed.

 

In August 2008, the Company entered into a license agreement with Aegera Therapeutics Inc. (“Aegera”) (the “Aegera License Agreement”) whereby the Company was granted an exclusive license for the worldwide rights, excluding China, for the use of dXIAP for therapeutic or prophylactic purposes in the treatment of Huntington’s disease.

 

In September 2009, the Company received orphan drug designation from the FDA for its Huntington’s disease product.

 

The Company’s development of this investigational gene therapy for Huntington’s disease is currently in the preclinical phase. The Company reviewed and analyzed its initial preclinical results and determined that additional preclinical testing is required prior to seeking regulatory clearance to commence a Phase 1 clinical trial for this investigational gene therapy. The timing of such trial is subject to, among other things, the completion of additional preclinical testing, the availability of funding, the availability of the AAV vector and an infusion system and the receipt of applicable regulatory approvals. Additionally, the Company intends to concentrate its current operations and resources primarily on its investigational Parkinson’s disease gene therapy. (See Item 1A – “Risk Factors – The Company Cannot Ensure that it will be Able to Pursue Further Trials for its Product Candidates or the Timing of any Future Trials”).

 

Other Neurodegenerative and Metabolic Disorders

 

The Company has also undertaken efforts to develop gene transfer for the treatment of other neurodegenerative and metabolic disorders. Since the Company’s primary focus remains the development of its product for the treatment of Parkinson’s disease, the Company does not

expect to allocate any further resources during the 2011 fiscal year to these other treatment candidates.

 

Patents and Other Proprietary Rights

 

The Company believes that its success depends upon its ability to develop and protect proprietary products and technology. Accordingly, whenever practicable, the Company applies for patents in the United States (and, in some instances, foreign patents as well) covering those developments that it believes are innovative, technologically significant and commercially attractive to its field of operations. At present, it holds the license to over 20 issued U.S. patents and foreign patents, as well as more than 20 pending U.S. and foreign patent applications. In addition, the Company owns 3 issued U.S. patents, 10 U.S. pending patent applications and 10 foreign patent applications. All of the above patents cover gene transfer technologies and delivery mechanisms for gene transfer.

 

Exclusive patent licenses were granted by Rockefeller and TJU pursuant to research agreements that the Company had with these institutions and by Aegera pursuant to the Aegera License Agreement and Cornell pursuant to the Cornell License Agreement. Non-exclusive patent licenses were granted pursuant to agreements the Company has with Rockefeller, Yale University and Diamyd Therapeutics AB (“Diamyd”).

 

All of such licenses granted to the Company cover patent rights and technical information relating to its gene transfer products and its NLX technology. Under the licenses granted by Rockefeller, TJU, the Rockefeller-Yale Agreement (as defined below) and Cornell, Drs. Michael Kaplitt and Matthew During, the Company’s founders, are entitled to receive, and have received, certain amounts out of the payments made by the Company to Rockefeller, TJU, Yale University and Cornell pursuant to such licenses. (See Note 3 to Financial Statements).

 

In August 2002, the Company entered into a license agreement with Rockefeller and Yale University (the “Rockefeller-Yale Agreement”) whereby the universities granted to the Company a nonexclusive license to certain patent rights and technical information. An initial fee of $20,000 was paid to each of the two universities pursuant to the agreement, and the Company pays an annual maintenance fee of $5,000 per year to each university. In addition, the Company must make additional payments upon reaching certain milestones. The Company has the right to terminate the agreement at any time on 3 months’ notice. (See Note 10 to Financial Statements).

 

On July 2, 2003, the Company entered into a Clinical Study Agreement with Cornell (the “Clinical Study Agreement”) to sponsor the Company’s Phase 1 clinical trial for the treatment of Parkinson’s disease. Under this agreement, the Company paid Cornell $36,000 when each patient commenced treatment and $23,000 annually for the services of a nurse to assist in the clinical trial. The Company fulfilled its obligation under this portion of the agreement in May 2006 when the last patient to participate in the Phase 1 clinical trial completed its one-year follow-up. On September 24, 2004, the parties amended the Clinical Study Agreement to provide for research covering the development of gene transfer approaches to neurodegenerative disorders, including Parkinson’s disease, Huntington’s disease, Alzheimer’s disease, depression and epilepsy (the “Scientific Studies”). On March 2, 2007, the parties entered into Amendment No. 2 to the Clinical Study Agreement to, among other things, extend the agreement until August 31, 2008 and to further expand the scope of work to cover research and activities relating to mechanisms by which certain gene therapy treatments may penetrate the blood-brain barrier (“Blood-Brain Barrier Research”). On July 23, 2009, the parties entered into Amendment No. 3 to the Clinical Study Agreement to eliminate all Blood-Brain Barrier Research from the scope of work and to extend the performance period of the sponsored research program until terminated by the Company upon 30 days’ prior written notice or by Cornell if circumstances beyond Cornell’s reasonable control preclude continuation of the Scientific Studies.

This sponsored research under the Clinical Study Agreement is funded by the Company and is being conducted in Cornell’s Laboratory of Molecular Neurosurgery under the direction of Dr. Michael Kaplitt. The Company is required to pay Cornell $135,000 per year for the duration of the Scientific Studies. (See Note 10 to Financial Statements). Pursuant to the terms of the Cornell License Agreement, the Company agreed to continue to provide research support to Cornell under the Clinical Study Agreement until the expiration of the Cornell License Agreement.

 

Effective May 2006, the Company entered into a Sponsored Research Agreement (“Research Agreement”) with OSURF which provides for research covering the development of gene transfer approaches to neurodegenerative disorders, including Parkinson’s disease, epilepsy, Huntington’s disease and Alzheimer’s disease, as well as gene transfer approaches to pain, stroke, neurovascular diseases and other research. 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 Agreement if there is involvement from employees of OSURF. The term of the Research Agreement, as amended in January 2011, runs through November 10, 2011. (See Note 11 to Financial Statements).

 

The Company entered into a Sublicense Agreement, effective as of August 4, 2006, with Diamyd (the “Sublicense Agreement”). 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 GAD 65 in connection with the Company’s gene transfer treatment for Parkinson’s disease. The Company paid Diamyd an initial fee of $500,000 and will pay annual license maintenance fees and certain milestone and royalty payments to Diamyd, as provided for in the Sublicense Agreement. The Sublicense Agreement will terminate upon the last to occur of: (a) expiration of the last to expire patent covered by the Sublicense Agreement; (b) such time as any claims under a properly filed patent application have been fully prosecuted; or (c) 17 years. However, either party may terminate earlier pursuant to the terms of the Sublicense Agreement.

 

On August 28, 2008, the Company entered into the Aegera License Agreement whereby Aegera granted the Company an exclusive license for the worldwide rights, excluding China, for the use of the XIAP gene (x-linked inhibitor of apoptosis protein) for therapeutic or prophylactic purposes in the treatment of Huntington’s disease. Under the terms of the Aegera License Agreement, the Company paid Aegera an initial fee and, during the term of the Aegera License Agreement, the Company will pay to Aegera an annual license maintenance fee and certain milestone and royalty payments, as provided for in the Aegera License Agreement. The Company may terminate the Aegera License Agreement upon 90 days’ written notice to Aegera.

 

On January 13, 2009, the Company entered into the Cornell License Agreement whereby Cornell granted the Company an exclusive license for the worldwide use of certain patents for the development of products and methods for the treatment of psychiatric conditions. Under the terms of the Cornell License Agreement, the Company paid Cornell an initial fee and, during the term of the Cornell License Agreement, will pay to Cornell an annual license maintenance fee and certain milestone and royalty payments as provided for in the Cornell License Agreement. The Cornell License Agreement will terminate on the expiration date of the longest-lived patent rights covered thereunder unless earlier terminated by Cornell or the Company pursuant to the terms thereof. In addition, the Company agreed to continue to provide research support to Cornell under the Clinical Study Agreement during the term of the Cornell License Agreement.

 

In addition to patents, the Company relies on trade secrets, technical know-how and continuing technological innovation to develop and maintain its competitive position. The Company requires all of its employees to execute confidentiality and assignment of invention agreements. These agreements typically provide that (i) all materials and confidential information developed or made known to the individual during the course of the individual’s

relationship with the Company are to be kept confidential and not disclosed to third parties except in specific circumstances and (ii) all inventions arising out of the relationship with the Company shall be the Company’s exclusive property. While the Company takes these and other measures to protect its trade secrets, such measures do not ensure against the unauthorized use and/or disclosure of its confidential information.

 

In January 2010, the USPTO expanded the intellectual property protections enabled by a previously issued patent that is central to the Company’s Parkinson’s disease program. The new allowances to the U.S. Patent entitled “Glutamic acid decarboxylase (GAD) based delivery systems,” broaden the patent’s coverage beyond Parkinson’s disease to include the use of a gene called GAD65 in the treatment of other neurological and related disorders.

 

In May 2010, the USPTO issued a patent to the Company for intellectual property covering the use of NPY for the treatment of TLE. The Company believes that this patent will protect the Company’s intellectual property rights with respect to the use of NPY for the treatment of TLE.

 

The Company’s intellectual property rights may be called into question, subject to litigation or forfeited in certain situations. (See Item 1A – “Risk Factors – The Company’s Intellectual Property Rights may be Called into Question or Subject to Litigation” and “Risk Factors – If the Company Fails to Meet Certain Milestones Related to its Intellectual Property Licenses with Third Parties, the Company Could Forfeit License Rights That Are Important to its Business”).

 

Manufacturing

 

The Company, or third parties retained by it, will need to have available, or develop, capabilities for the manufacture of components and delivery systems utilized in the Company’s products, including all necessary equipment and facilities. In order to receive approval by the FDA and commercialize its product candidates, the Company must develop and implement manufacturing processes and facilities that comply with governmental regulations, including the FDA’s Good Manufacturing Practices (“GMP”). As discussed below, the Company manufactured its own AAV and other components for its Phase 1 clinical trial for Parkinson’s disease and contracted and oversaw a third party manufacturer for the production of its Phase 2 clinical trial for Parkinson’s disease and its previously planned Phase 1 clinical trial for epilepsy. All products have been reviewed by the Company and the third party manufacturer and subsequently were submitted to the FDA for review. The large scale manufacture and development of components and systems will require both time and significant funding. (See Item 1A – “Risk Factors – The Company Does Not Have any Experience in Manufacturing Product for Commercial Sale” and “Risk Factors – The Company’s Ability to Manufacture Product Depends upon FDA Approval and Access to Third-Party Manufacturing Facilities”).

 

The Company’s product for Parkinson’s disease, NLX-P101, as well as other product candidates for its other therapies, is a biological product requiring manufacture in specialized facilities. As the Company’s development programs advance through the phases of clinical development, the regulatory requirements increase for manufacture of these products. The Company is planning to continue manufacturing product consistent with current GMP as defined by the FDA and commensurate with the clinical phase of development and commercial release. The Company does not currently own any such facilities, and it is currently seeking to contract with third parties for such manufacturing.

 

The Company contracted with Cincinnati Children’s Hospital Medical Center (“CCHMC”) for the production of the AAV vectors to be used in the Company’s Phase 2 clinical trial for Parkinson’s disease (including the open-label arm of such trial) and the Company’s Phase 1 clinical trial for epilepsy. The agreement required CCHMC to produce such vectors in accordance with current GMP for the corresponding clinical phase of

development. The products have been released by CCHMC and the Company, and the products have been filed with the FDA in connection with the Company’s submitted clinical protocols. The AAV vector for the Phase 2 clinical trial for Parkinson’s disease (including the open-label arm of such trial) was produced and was supplied by CCHMC as approved by the FDA. Due to facility size and other capacity constraints, the Company does not expect that CCHMC will manufacture the AAV vectors for a Phase 3 clinical trial for Parkinson’s disease. The Company is currently seeking other third-party manufacturers to manufacture the AAV vectors for such Phase 3 clinical trial.

 

Currently, there is no commercial product available for infusion of gene therapeutics or other biological agents into the brain and all clinical trials to date have utilized either experimental devices created specifically for the particular trial or have used technologies which were not designed for use in the brain. Under a manufacturing and development agreement with Medtronic (the “Manufacturing and Development Agreement”), the Company’s scientists, along with Medtronic’s engineers, developed a novel catheter infusion device for infusing gene therapies into the brain. The Company used this device in its Phase 2 clinical trial for Parkinson’s disease and plans to use it in the open-label arm of such Phase 2 clinical trial and in follow-on clinical studies. In order for the Company to market its products, the FDA’s approval is required for use of such catheter infusion device. As of December 31, 2010, the Company had paid $850,000 to Medtronic under the Manufacturing and Development Agreement and purchased the catheter infusion devices used in its Phase 2 clinical trial for Parkinson’s disease pursuant to an addendum to the Manufacturing and Development Agreement. While Medtronic is not obligated to manufacture and supply such device for a Phase 3 clinical trial for Parkinson’s disease or for commercialization of the Parkinson’s product, Medtronic has indicated its intent to manufacture and supply such device for a Phase 3 clinical trial for Parkinson’s disease, subject to the execution and delivery of a definitive agreement satisfactory to Medtronic. If Medtronic does not elect to manufacture and supply the device for such Phase 3 clinical trial, the Company will have to utilize alternative manufacturers and suppliers for such device. (See Item 1A – “Risk Factors – The Company’s Ability to Manufacture Products Depends upon FDA Approval and Access to Third-Party Manufacturing Facilities”).

 

The Manufacturing and Development Agreement provides Medtronic with rights of first offer and first refusal involving the distribution or commercialization of any of the Company’s gene therapies for Parkinson’s disease or TLE. These rights granted to Medtronic will have an impact on the Company’s negotiations with respect to strategic collaborations for the further development and funding of the Company’s Parkinson’s product, including the conduct of a Phase 3 clinical trial and the future manufacture and marketing of a commercial product. (See Item 1A – “Risk Factors – The Company Does Not Have Sufficient Funds to Continue its Operations in the Long Run or to Commercialize its Product Candidates”).

 

The Company continues to seek manufacturing capabilities for its AAV vectors and catheter infusion devices in connection with a potential pivotal trial for the treatment of Parkinson’s disease and for use in its other investigational gene therapy products. At the present time, the Company is seeking to contract with third parties for such manufacturing. (See Item 1A – “Risk Factors – The Company Does Not Have any Experience in Manufacturing Products for Commercial Sale”).

 

Competition

 

The Company is aware of other companies currently conducting clinical trials of gene transfer products in humans to treat Parkinson’s disease, and recognizes that it faces intense competition from pharmaceutical companies, biotechnology companies, universities, governmental entities and other healthcare providers developing alternative treatments for Parkinson’s disease, epilepsy, depression, Huntington’s disease and other neurodegenerative and metabolic disorders. At this time, the Company is not aware of any new developments with respect to these

trials or with respect to the trials described below. Alternative treatments include surgery, deep brain stimulator implants and the use of pharmaceuticals. The Company may also face competition from companies and institutions involved in developing gene transfer and cell therapy treatments for other diseases, whose technologies may be adapted for the treatment of neurodegenerative and metabolic disorders. Some companies, such as Genzyme Corp. (“Genzyme”) and Targeted Genetics Corporation, have significant experience in developing and using AAV vectors to deliver gene transfer products.

 

Oxford Biomedica (“Oxford”), a gene therapy company using the lentivirus to deliver therapeutic genes, announced, in December 2010, three-month data from the third patient cohort of its Phase 1/2 trial of its proprietary gene therapy, ProSavin, for the treatment of Parkinson’s disease. Oxford indicated that ProSavin continues to be safe and well tolerated following treatment. Previously, Oxford announced results from the first six patients in the trial, indicating that all six patients showed improved motor function at six months and that the safety profile of ProSavin had been maintained at six months with no evidence of adverse events or immunologic reactions to the treatment. Oxford is in the first stage of its clinical trial in France, an open-label dose escalation study designed to evaluate at least two dose levels of ProSavin in cohorts of three patients each. If such trial is successful, Oxford has stated it will commence a Phase 3 clinical trial.

 

Ceregene, Inc. (“Ceregene”), announced, in November 2008, that its Phase 2 clinical trial for Parkinson’s disease failed to demonstrate an appreciable difference between patients treated with AAV vectors expressing the neurturin gene (a nerve growth factor) versus those in the control group. In May 2009, Ceregene reported additional findings from the trial and in September 2009 commenced a new Phase 1/2 clinical trial for Parkinson’s disease administering the same gene into an additional target in the brain. In October 2010, Ceregene announced it completed the open-label portion of the new trial and began enrollment for the double-blind sham surgery-controlled portion of the trial. In June 2007, Ceregene announced that it had entered into a partnership with Genzyme for the development and commercialization of its Parkinson’s indication. Under this partnership, Genzyme gained all marketing rights outside of the U.S. and Canada to Ceregene’s Parkinson’s indication.

 

Genzyme purchased the AAV gene transfer assets of Avigen, Inc. (“Avigen”) in December 2005, including Avigen’s AV201, an AAV vector containing the gene for AADC (aromatic amino acid decarboxylase) which is delivered directly to the part of the brain that requires dopamine to control movement. In August 2004, Avigen announced that the FDA had authorized it to initiate a Phase 1/2 clinical trial of gene transfer for the treatment of Parkinson’s disease using AV201. Avigen commenced such trial, with its first patient undergoing gene transfer surgery in December 2004, and Genzyme has since taken over the control of the study. In May 2008, Genzyme published interim results of the trial in Neurology. According to the conclusions of the publication, Genzyme’s gene therapy approach has been well tolerated thus far and shows PET evidence that the AADC gene is evident in the brain. This study is separate and distinct from Ceregene’s study discussed above.

 

Many of the Company’s competitors have significantly greater research and development, marketing, manufacturing, financial and/or managerial resources than the Company enjoys. Moreover, developments by others may render the Company’s products or technologies noncompetitive or obsolete.

 

Government Regulation

 

All of the Company’s potential products must receive regulatory approval before they can be marketed. Human therapeutic products are subject to rigorous preclinical and clinical testing and other pre-market approval procedures administered by the FDA and similar authorities in foreign countries. In accordance with the Federal Food, Drug and Cosmetics

Act, the FDA exercises regulatory authority over, among other things, the development, testing, formulation, manufacture, labeling, storage, record keeping, reporting, quality control, advertising, promotion, export and sale of the Company’s potential products. Similar requirements are imposed by foreign regulatory agencies. In some cases, state regulations may also apply.

 

Gene transfer is a relatively new technology that has not been extensively tested or shown to be effective in humans. The FDA reviews all product candidates for safety at each stage of clinical testing. Safety standards must be met before the FDA permits clinical testing to proceed to the next stage. Also, efficacy must be demonstrated before the FDA grants product approval. The approval process and ongoing compliance with applicable regulations after approval is time intensive and involves substantial risk and expenditure of financial and other resources. (See Item 1A – “Risk Factors – The Company is Subject to Stringent Regulation; FDA Approvals”).

 

Preclinical trials generally require studies in the laboratory or in animals to assess the potential product’s safety and effectiveness. Preclinical trials include laboratory evaluation of toxicity; pharmacokinetics, or how the body processes and reacts to the drug; and pharmacodynamics, or whether the drug is actually having the expected effect on the body. Preclinical trials must be conducted in accordance with the FDA’s Good Laboratory Practice regulations and, before any proposed clinical testing in humans can begin, the FDA must review the results of these preclinical trials as part of an IND.

 

If preclinical trials of a product candidate, including animal studies, demonstrate safety, and laboratory test results are acceptable, then the potential product may undergo clinical trials to test the therapeutic agent in humans. Human clinical trials are subject to numerous governmental regulations that provide detailed procedural and administrative requirements designed to protect the trial’s participants. Each institution that conducts human clinical trials has an Institutional Review Board or Ethics Committee charged with evaluating each trial and any trial amendments to ensure that the trial is ethical, subjects are protected and the trial meets the institutional requirements. These evaluations include reviews of how the institution will communicate the risks inherent in the clinical trial to potential participants, so that the subjects may give their informed consent. Clinical trials must be conducted in accordance with the FDA’s Good Clinical Practices regulations and the protocols established by the Company to govern the trial objectives, the parameters to be used for monitoring safety, the criteria for evaluating the efficacy of the potential product and the rights of each participant with respect to safety. FDA regulations require the Company to submit these protocols as part of the application. FDA review or approval of the protocols, however, does not necessarily mean that the trial will successfully demonstrate safety and/or efficacy of the potential product. (See Item 1A – “Risk Factors – The Company is Subject to Stringent Regulation; FDA Approvals”).

 

Institutions, such as the Company, that receive funding from the National Institutes of Health (the “NIH”) for gene transfer clinical trials must also comply with the NIH Recombinant DNA Guidelines, and the clinical trials are subject to a review by the RAC. The outcome of this review can be either an approval to initiate the trial without a public review or a requirement that the proposed trial be reviewed at a quarterly committee meeting. A clinical trial will be publicly reviewed when at least three of the committee members or the Director of the Office of Biotechnology Activities recommends a public review. The review by the RAC may also delay or impede the Company’s clinical trials. (See Item 1A – “Risk Factors – The Company’s Research Activities are Subject to Review by the RAC”). On December 3, 2007, the Company reviewed its Parkinson’s disease Phase 2 protocol with the RAC in a public forum. In December 2008, the Company initiated its Phase 2 clinical trial for the treatment of advanced Parkinson’s disease.

 

Clinical trials are typically conducted in three phases and may involve multiple studies in each phase. In Phase 1, clinical trials generally involve a small number of subjects, who may or may not be afflicted with the target disease, to determine the preliminary safety profile of the treatment. In Phase 2, clinical trials are conducted with larger groups of subjects afflicted with

the target disease in order to establish preliminary effectiveness and optimal dosages and to obtain additional evidence of safety of the treatment. In Phase 3, large-scale, multi-center, comparative clinical trials are conducted with subjects afflicted with the target disease in order to provide enough data for the statistical proof of efficacy and safety of the treatment required by the FDA and other regulatory agencies for market approval. The Company must report its progress in each phase of clinical testing to the FDA, which may require modification, suspension or termination of the clinical trial if it deems that patient risk is too high. The length of the clinical trial period, the number of trials conducted and the number of enrolled subjects per trial vary, depending on the results of the clinical trial and the FDA’s requirements for the particular clinical trial. Although the Company and other companies in its industry have made progress in the field of gene transfer, it cannot predict what the FDA will require in any of these areas to establish to its satisfaction the safety and effectiveness of a product candidate. (See Item 1A – “Risk Factors – The Company is Subject to Stringent Regulation; FDA Approvals”).

 

If the Company successfully completes clinical trials for a product candidate, it must obtain FDA approval or similar approval required by foreign regulatory agencies, as well as the approval of several other governmental and nongovernmental agencies, before it can market the product in the United States or in foreign countries. Current FDA regulations relating to biologic therapeutics require the Company to submit an acceptable BLA to the FDA to receive the FDA’s approval before the Company may commence commercial marketing. The BLA includes a description of the Company’s product development activities, the results of preclinical trials and clinical trials and detailed manufacturing information. Unless the FDA gives expedited review status (which the Company has been granted by the FDA with regards to Parkinson’s disease), this stage of the review process generally takes at least one year. Should the FDA have concerns with regard to the potential product’s safety and efficacy, it may request additional data, which could delay product review or approval. The FDA may ultimately decide that the BLA does not satisfy its criteria for approval and might require the Company to do any or all of the following:

 

 

Because the FDA has not yet approved any gene transfer products, it is not clear what, if any, unforeseen issues may arise during the approval process. The Company expects the FDA’s regulatory approach to product approval, and its requirements with respect to product testing, to become more predictable as its scientific knowledge and experience in the field of gene transfer increases. Adverse events in the field of gene transfer or other biotechnology-related fields, however, could result in greater governmental regulation, stricter labeling requirements and potential regulatory delays in the testing or approval of gene transfer products. (See Item 1A – “Risk Factors – Events in the General Field of Gene Transfer may Affect the Company’s Ability to Develop its Products”).

 

Once approved by the FDA, marketed products are subject to continual review by the FDA, which could result in restrictions on marketing a product or in its withdrawal from the market, as well as potential criminal penalties or sanctions. (See Item 1A – “Risk Factors – Once Approved by the FDA, the Company’s Products Would Remain Subject to Continual FDA Review” and “Risk Factors – The Company May Face Liability Due to its Use of Hazardous Materials”).

 

Employees

 

As of December 31, 2010, the Company had twelve full-time employees, of which eight are directly involved in its research and development activities, including product development, manufacturing, regulatory affairs and clinical affairs. Four of the Company’s employees have

Ph.D. degrees, with expertise in virology, protein chemistry and molecular biology. The Company’s employees are not subject to any collective bargaining agreements, and the Company regards its relations with its employees to be good.

 

Scientific Advisory Board

 

The Company has assembled the SAB to advise the Company on the selection, implementation and prioritization of its research programs. The SAB, which currently consists of the following seven scientists, did not meet in 2010 or 2009.

 

Paul Greengard, Ph.D.  Dr. Paul Greengard has been a member and the chairman of the SAB since July 2003. Dr. Greengard receives an annual fee of $25,000 for his participation in the SAB. Dr. Greengard is the Vincent Astor Professor of Molecular and Cellular Neuroscience at The Rockefeller University and Director of The Fisher Center for Alzheimer’s Research. Dr. Greengard received his Ph.D. from Johns Hopkins in 1953. He spent five years in England receiving advanced training at the University of London, at Cambridge University and at the National Institute of Medical Research. Upon his return to the United States, Greengard worked as Director of the Department of Biochemistry at Geigy (now Novartis) Research Laboratories, in Ardsley, New York for eight years. In 1967, he left the pharmaceutical industry to return to academia. From 1968 to 1983 Dr. Greengard served as Professor of Pharmacology and Psychiatry at Yale University, at which time he moved to his current position at The Rockefeller University.

 

Over the years, Dr. Greengard’s achievements have earned him many distinguished awards including the Metropolitan Life Foundation Award for Medical Research, The Charles A. Dana Award for Pioneering Achievements in Health, the Ralph W. Gerard Prize in Neuroscience from the Society for Neuroscience, The National Academy of Sciences Award in the Neurosciences and the 3M Life Sciences Award of the Federation of American Societies for Experimental Biology. In 2000, Dr. Greengard was awarded the Nobel Prize in Physiology or Medicine for his discoveries concerning signal transduction in the nervous system. He is an Honorary Member of the National Academies of Science in Sweden, Norway and Serbia and has been the recipient of many honorary degrees. He is a member of the National Academy of Sciences of the United States and of the Institute of Medicine of the National Academies.

 

Andrew J. Brooks, Ph.D.  Dr. Brooks has been a member of the SAB since January 2002. Dr. Brooks receives an annual fee of $12,000 for his participation in the SAB. Dr. Brooks is currently the Director of the Bionomics Research and Technology Center at the Environmental and Occupational Health Science Institute of the University of Medicine and Dentistry of New Jersey (“UMDNJ”). He is also the Chief Operating Officer at the Rutgers University’s Cell and DNA Repository and Associate Professor of Medicine and Genetics at UMDNJ/Rutgers. Dr. Brooks is a molecular neuroscientist whose research focuses on deciphering the molecular mechanisms underlying memory and learning. These studies investigate gene-environment interactions in the context of aging, neurodegenerative disease and neurotoxicant exposure. Dr. Brooks was Director of the Center for Functional Genomics in the Aab Institute for Biomedical Science at the University of Rochester where he also received his Ph.D.

 

Matthew J. During, M.D., D.Sc.  Dr. During, one of the Company’s scientific co-founders, has been a member of the SAB since October 1999. Dr. During receives an annual fee of $175,000 as a consultant to the Company (see Notes 3 and 10 to Financial Statements), but does not receive an additional fee for his participation in the SAB. Dr. During is currently Professor of Molecular Virology, Immunology and Medical Genetics, Neuroscience and Neurological Surgery at The Ohio State University Medical School. He is also Professor of Molecular Medicine and Pathology at the University of Auckland in New Zealand where he directs neuroscience and gene therapy programs. From 2004 to 2006 he was the Research Lab Director of the Department of Neurological Surgery at Cornell. He served as Director of the

CNS Gene Therapy Center and Professor of Neurosurgery at Jefferson Medical College from 1998 through 2002. From 1989 through 1998, Dr. During was an Assistant then Associate Professor of Neurosurgery at Yale University where he directed a translational neuroscience program and headed Yale’s first gene therapy protocol. Dr. During is a graduate of the University of Auckland School of Medicine and did further postgraduate and residency training at M.I.T. from 1985 to 1987, Harvard Medical School from 1986 to 1989 and Yale University from 1988 to 1989.

 

Michael G. Kaplitt, M.D., Ph.D.  Dr. Kaplitt, one of the Company’s scientific co-founders, has been a member of the SAB since October 1999. Dr. Kaplitt receives an annual fee of $175,000 as a consultant to the Company (see Notes 3, 10 and 11 to Financial Statements), but does not receive an additional fee for his participation in the SAB. Dr. Kaplitt, an expert and innovator in the development of gene therapy techniques against Parkinson’s disease and other neurological disorders, performed the world’s first gene therapy surgery for Parkinson’s disease in 2003. He is among the first scientists to publish on the use of viruses for direct gene delivery in the living brain, and was the lead author on the first publication reporting the use of adeno-associated virus (AAV) vectors in the brain. Dr. Kaplitt is currently Associate Professor and Vice Chairman for Research, Department of Neurological Surgery, Weill Medical College of Cornell University, as well as Director Stereotactic and Functional Surgery and Director Laboratory of Molecular Neurosurgery at Cornell University. Dr. Kaplitt graduated magna cum laude with a bachelor’s degree in molecular biology from Princeton University. He received his Ph.D. in molecular neurobiology from The Rockefeller University in 1993. He then received his M.D. from Cornell University School of Medicine in 1995 where he also completed his residency in Neurosurgery. Dr. Kaplitt is the son of Dr. Martin Kaplitt, the chairman of the Board.

 

Daniel H. Lowenstein, M.D.  Dr. Lowenstein has been a member of the SAB since January 2005. Dr. Lowenstein receives an annual fee of $12,000 for his participation in the SAB. Dr. Lowenstein is Professor and Vice Chairman of the Department of Neurology at the University of California, San Francisco (“UCSF”), Director of the UCSF Epilepsy Center and Director of Physician-Scientist Training Programs for the UCSF School of Medicine. He received his M.D. degree from Harvard Medical School in 1983. Dr. Lowenstein established the UCSF Epilepsy Research Laboratory, and was the Robert B. and Ellinor Aird Professor of Neurology from 1998 to 2000. He then joined Harvard Medical School as Dean for Medical Education and Carl W. Walter Professor of Neurology for two and a half years, and in 2003, moved back to UCSF in his current position. During 2004, he served as President of the American Epilepsy Society. His research interests have included molecular and cellular changes in neural networks following seizure activity and injury, and the clinical problem of status epilepticus. More recently, he has turned his attention to the genetics of epilepsy, and he is leading the “Epilepsy Phenome/Genome Project,” a large, national study aimed at identifying the genes responsible for the more common forms of epilepsy. Dr. Lowenstein has received several national awards for excellence in teaching and numerous academic honors and awards, including the American Epilepsy Society’s 2001 Basic Research Award. Among his numerous publications, he has authored approximately 80 papers in peer-reviewed journals, and more than 75 review articles, editorials and book chapters.

 

Andres M. Lozano, M.D., Ph.D.  Dr. Lozano has been a member of the SAB since April 2001. Dr. Lozano receives an annual fee of $25,000 for his participation in the SAB. He is currently Professor and Chairman of Neurosurgery and holds the Ronald Tasker Chair in Stereotactic and Functional Neurosurgery at the University of Toronto. Dr. Lozano received his M.D. from the University of Ottawa and a Ph.D. from McGill University. He completed a residency in Neurosurgery at the Montreal Neurological Institute prior to joining the staff at the University of Toronto. Dr. Lozano is the past President of both the American and the World Society of Stereotactic and Functional Neurosurgery.

Eric J. Nestler, M.D., Ph.D.  Dr. Nestler has been a member of the SAB since May 2004. Dr. Nestler receives an annual fee of $12,000 for his participation in the SAB. Dr. Nestler’s research focuses on better understanding the molecular mechanisms of addiction and depression in animal models and using this information to develop improved treatments for these disorders. He has authored or edited seven books and published more than 375 articles and reviews relating to the field of Neuropsychopharmacology. From 1992-2000, he was Director of the Abraham Ribicoff Research Facilities and the Division of Molecular Psychiatry at Yale University. From 2000-2008, he served as Professor and Chairman of the Department of Psychiatry at The University of Texas Southwestern Medical Center at Dallas. In 2008, he moved to the Mount Sinai School of Medicine in New York where he is now Chairman of the Department of Neuroscience and Director of the Friedman Brain Institute. Dr. Nestler’s awards and honors include the Pfizer Scholars Award (1987), Sloan Research Fellowship (1987), McKnight Scholar Award (1989), Efron Award of the American College of Neuropsychopharmacology (1994), Pasarow Foundation Award for Neuropsychiatric Research (1998), Foundation Ipsen Prize in Neural Plasticity (2008), and the Patricia Goldman-Rakic Award from NARSAD (2008). He is a member of the Institute of Medicine (elected 1998) and a fellow of the American Academy of Arts and Sciences (elected 2005).

 

 

RISK FACTORS

 

The following sets forth some of the business risks and challenges facing the Company as it seeks to develop its business:

 

The Company is Still in the Development Stage and Has Not Generated any Revenues.

 

From inception through December 31, 2010, the Company has incurred net losses of approximately $57.9 million and negative cash flows from operating activities of approximately $44.4 million. Because it takes years to develop, test and obtain regulatory approval for a gene-based therapy product before it can be sold, the Company likely will continue to incur significant losses and cash flow deficiencies for the foreseeable future. Accordingly, it may never be profitable and, if it does become profitable, it may be unable to sustain profitability.

 

The Company Does Not Have Sufficient Funds to Continue its Operations in the Long Run or to Commercialize its Product Candidates.

 

The Company’s existing resources are not sufficient to enable it to obtain the regulatory approvals necessary to commercialize its current or future product candidates. The Company will, from time to time, need to raise additional funds through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements. Availability of financing depends upon a number of factors beyond the Company’s control, including market conditions and interest rates. The Company does not know whether additional financing will be available when needed, or, if available, whether any such financing will be on terms acceptable or favorable to the Company.

 

The Company may need to seek funds through arrangements with collaborative partners or others that require the Company to relinquish rights to technologies or product candidates that the Company would otherwise seek to develop or commercialize itself. These arrangements could harm the Company’s business, results of operations, financial condition, cash flow or future prospects. The Company may not be successful in entering into collaborative partnerships on favorable terms, if at all. The failure to enter into new corporate relationships may harm the Company’s business. (See Item 1 – “Business – Business of the Company – Manufacturing”).

The Company is currently seeking to raise funds sufficient to finance its ongoing operations after October 31, 2011 and to repay the Notes as of said date. If the Company is unable to obtain such additional funding, it may not be able to continue as a going concern after October 31, 2011.

 

The Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern in the audit report on the Company’s audited financial statements for the fiscal year ended December 31, 2010 included herein. (See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

 

If the Clinical Trials for Parkinson’s Disease are Unsuccessful, it Would Likely Have a Material Adverse Effect on the Company’s Operations.

 

In June 2010, the Company announced positive results from its Phase 2 clinical trial of its investigational gene therapy for Parkinson’s disease. The Company is currently taking the steps necessary to receive regulatory approval to initiate a pivotal trial. At this time, the Company cannot determine whether such pivotal trial will yield successful safety results or efficacy results that would warrant regulatory approval necessary to commercialize its Parkinson’s product.

 

If the results of a pivotal trial for Parkinson’s disease do not warrant the necessary regulatory approvals, future operations and the potential for profitability will be significantly adversely affected and the business may not succeed. (See Item 1 – “Business – Business of the Company – Parkinson’s Disease”).

 

The Company Has Not Demonstrated that it Can Establish Many Necessary Business Functions.

 

The Company has not demonstrated that it can:

 

 

The Company will need to establish or otherwise arrange for performance of such functions in order to operate in the long term.

 

The Company Cannot Ensure that it will be Able to Pursue Further Trials for its Product Candidates or the Timing of any Future Trials.

 

The Company’s ability to conduct further trials for its product candidates depends upon a number of factors beyond the Company’s control, including, but not limited to, regulatory reviews of trials, procurement of licenses from third parties and access to third party

manufacturing facilities. Accordingly, the Company is unable to assure that it will be able to pursue further trials for any of its product candidates or the timing of any such trials. As previously stated, the Company has experienced delays in the commencement of its Phase 1 clinical trial for epilepsy. (See Item 1 – “Business – Business of the Company – Epilepsy”). As described directly below, the Company’s ability to pursue further trials also depends upon the Company’s ability to retain its current key physicians and researchers. As described above under “The Company Does Not Have Sufficient Funds to Continue its Operations in the Long Run or To Commercialize its Product Candidates”, the Company will be required to raise additional capital in order to fund further trials.

 

The Company’s Future Success Depends Upon Key Physicians and Researchers.

 

The Company’s future success depends, to a significant degree, on the skills, experience and efforts of its current key physicians and researchers, including Dr. Matthew During and Dr. Michael Kaplitt. If either of Dr. During or Dr. Kaplitt were unable or unwilling to continue his present relationship with the Company, it is likely that the Company’s business, financial condition, operating results and future prospects would be materially adversely affected. Dr. During and Dr. Kaplitt are not employees of the Company, and they devote their attention to other projects and ventures in addition to the services that they render to the Company.

 

The Company is Subject to Stringent Regulation; FDA Approvals.

 

The industry in which the Company competes is subject to stringent regulation by certain regulatory authorities. The Company may not obtain regulatory approval for any future product candidates that it develops. To market a pharmaceutical product in the United States requires the completion of rigorous preclinical testing and clinical trials and an extensive regulatory approval process implemented by the FDA. Satisfaction of regulatory requirements typically takes several years, depends upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. The Company may encounter difficulties or unanticipated costs in its efforts to secure necessary governmental approvals, which could delay or prevent the marketing of its product candidates. The Company may encounter delays or rejections in the regulatory approval process resulting from additional governmental regulation or changes in policy during the period of product development, clinical trials and FDA regulatory review. In addition, the regulatory requirements governing gene transfer product candidates and commercialized products are subject to change.

 

Additionally, the Company must have access to an FDA approved catheter infusion device that has been tested and found compatible to infuse the Company’s gene transfer product into the brain. Currently, the Company is using a catheter infusion device that was developed by Medtronic in collaboration with the Company. To date, such device has not received regulatory approval for commercial use.

 

To the Company’s knowledge, neither the FDA nor any other regulatory agency has approved a gene transfer product for sale in the United States.

 

The Company’s Research Activities are Subject to Review by the RAC.

 

As noted above, institutions that receive NIH funding for gene transfer clinical trials are subject to a review by the RAC. The outcome of this review can be either an approval to initiate the trial without a public review or a requirement that the proposed trial be reviewed at a quarterly committee meeting. Should the RAC require a public hearing, the start of the trial must be delayed until after the hearing date. Although the NIH guidelines do not have regulatory status, the RAC review process can impede the initiation of the trial, even if the FDA has reviewed the trial and approved its initiation. Before any gene transfer clinical trial can be

initiated, the Institutional Biosafety Committee of each site must perform a review of the proposed clinical trial and ensure there are no safety issues associated with the trial.

 

The Company May Face Substantial Penalties if it Fails to Comply with Regulatory Requirements.

 

Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other regulatory action against the Company’s future product candidates or the Company itself. Outside the United States, the ability to market a product is also contingent upon receiving clearances from appropriate foreign regulatory authorities. The non-U.S. regulatory approval process includes risks similar to those associated with the FDA’s clearance.

 

The Company Will Need to Conduct Significant Additional Research and Testing Before Conducting Clinical Trials Involving Future Product Candidates.

 

Before the Company can conduct clinical trials involving future product candidates, the Company will need to conduct substantial research and animal testing, referred to as preclinical testing. It may take many years to complete preclinical testing and clinical trials and failure could occur at any stage of testing. Acceptable results in early testing or trials may not be repeated in later tests. Whether any products in preclinical testing or early stage clinical trials will receive approval is unknown. Before applications can be filed with the FDA for product approval, the Company must demonstrate that a particular future product candidate is safe and effective. The Company’s failure to adequately demonstrate the safety and efficacy of future product candidates would prevent the FDA from approving such products. The Company’s product development costs will increase if it experiences delays in testing or regulatory approvals or if it becomes necessary to perform more or larger clinical trials than planned. If the delays are significant, they could negatively affect the Company’s financial results, ability to raise capital and the commercial prospects for future product candidates.

 

The Company’s Future Success Depends Upon Acceptance of its Products by Health Care Administrators and Providers.

 

The Company’s future success depends upon the acceptance of its products by health care administrators and providers, patients and third-party payors (including, without limitation, health insurance companies, Medicaid and Medicare). Market acceptance will depend on numerous factors, many of which are outside the Company’s control, including:

 

 

Events in the General Field of Gene Transfer May Affect the Company’s Ability to Develop its Products.

 

Patient complications that may occur in gene-based clinical trials conducted by the Company and other companies and the resulting publicity surrounding them, as well as any other serious adverse events in the field of gene transfer that may occur in the future, may result in

greater governmental regulation of future product candidates and potential regulatory delays relating to the testing or approval of them. Even with the requisite approval, the commercial success of the Company’s product candidates will depend in part on public acceptance of the use of gene therapy for the prevention or treatment of human disease. Public attitudes may be influenced by claims that gene transfer is unsafe, and gene transfer may not gain the acceptance of the public or the medical community. Negative public reaction to gene transfer could result in greater governmental regulation, stricter clinical trial oversight and commercial product labeling requirements of gene therapies and could negatively affect demand for any products the Company may develop.

 

Side Effects, Patient Discomfort, Defects or Unfavorable Publicity May Affect the Company’s Ability to Commercialize its Products.

 

The Company’s results for its Phase 1 and Phase 2 clinical trials for Parkinson’s disease suggest that this treatment appears to be safe and well-tolerated in participants with advanced Parkinson’s disease, with no evidence of adverse effects or immunologic reaction related to the study treatment. However, the Company cannot assure that it will not discover unanticipated side effects, patient discomfort or product defects in connection with its Phase 2 clinical trial or additional trials for Parkinson’s disease or its trials for any other product candidates. Unanticipated side effects, patient discomfort, or product defects discovered in connection with the Company’s Phase 2 clinical trial or future trials may significantly impact the Company’s ability to commercialize its products or achieve market acceptance. Commercialization could also be materially affected by unfavorable publicity concerning any of the Company’s future product candidates, or any other product incorporating technology similar to that used by future product candidates.

 

The Company Does Not Have any Experience in Manufacturing Products for Commercial Sale.

 

The Company does not have any experience in manufacturing products for commercial sale and, if the Company is not successful in engaging a third-party to manufacture its products, no assurance can be provided that it will be able to:

 

 

The Company’s Ability to Manufacture Products Depends upon FDA Approval and Access to Third-Party Manufacturing Facilities.

 

The Company, or any third-party manufacturer that it contracts with to manufacture any future product candidate, must receive the FDA’s approval before producing clinical material or commercial products. The Company’s future product candidates may compete with other products for access to third-party manufacturing facilities and may be subject to delays in manufacture if third party manufacturers give priority to products other than the Company’s future product candidates. The Company may be unable to manufacture commercial-scale quantities of gene-based therapy products or any quantities at all. Failure to successfully manufacture products in commercial-scale quantities, and on a timely basis, would prevent the Company from achieving its business objectives.

If the Company Fails to Meet Certain Milestones Related to its Intellectual Property Licenses with Third Parties, the Company Could Forfeit License Rights That Are Important to its Business.

 

In addition to the Company’s own patents, the Company relies on license agreements with third parties relating to its intellectual property. (See Item 1 – “Business – Business of the Company — Patents and Other Proprietary Rights”). These agreements require the Company to use commercially reasonable efforts to meet certain requirements, including meeting specified milestones, to keep the agreements in effect. If the Company is not able to meet its requirements and any agreement is terminated, the Company would forfeit the licenses granted under such agreement. In such event, the Company would lose its rights to use the intellectual property and technology covered by such agreement in its products. Any such loss may prevent the Company from further developing such products, which circumstance could have a material and adverse impact on the Company’s operations and profitability.

 

The Company’s Intellectual Property Rights May Be Called into Question or Subject to Litigation.

 

Because of the complex and difficult legal and factual questions that relate to patent positions in the Company’s industry, no assurance can be provided that its future product candidates or technologies will not be found to infringe upon the intellectual property or proprietary rights of others. Third parties may claim that future product candidates or the Company’s technologies infringe on their patents, copyrights, trademarks or other proprietary rights and demand that it cease development or marketing of those products or technologies or pay license fees. The Company may not be able to avoid costly patent infringement litigation, which may divert the attention of management and cash resources away from the development of new products and the operation of its business. No assurance can be provided that the Company would prevail in any such litigation. If the Company is found to have infringed on a third party’s intellectual property rights, it may be liable for money damages, encounter significant delays in bringing products to market or be precluded from manufacturing particular future product candidates or using a particular technology.

 

The Company May be Subject to Product Liability Claims in Connection with its Clinical and Preclinical Trials.

 

Preclinical and clinical trials of product candidates, and any subsequent sales of products employing the Company’s technology, may involve injuries to persons using those products as a result of mislabeling, misuse or product failure. Product liability insurance is expensive. Although the Company has purchased product liability insurance to cover claims made in connection with its Phase 1 and Phase 2 clinical trials for Parkinson’s disease, its previously planned Phase 1 clinical trial for epilepsy and its potential clinical trials for depression and Huntington’s disease, there can be no assurance that this insurance will continue to be available to the Company in the future on satisfactory terms, if at all. A successful product liability claim or series of claims brought against the Company in excess of any insurance coverage that it has or may obtain in the future would have a material adverse effect on its business, financial condition, results of operations and future prospects. Further, any such claim against the Company, whether successful or not successful, may divert the attention of management and cash resources away from the development of new products and the operation of its business. (See “Item 3 – Legal Proceedings”).

 

The Company May Face Liability Due to its Use of Hazardous Materials.

 

The Company’s research and development processes may involve the use of hazardous materials, including chemicals and radioactive and biological materials. The risk of accidental contamination or discharge or any resultant injury from these materials cannot be completely

eliminated. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials, including, but not limited to, the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act and the Resource Conservation and Recovery Act. The Company could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, such hazardous materials. In addition, claimants may sue the Company for injury or contamination that results from its use or the use by third parties of these materials, and the Company’s liability may exceed its total assets. Compliance with environmental laws and regulations may be expensive and current or future environmental regulations may impair the Company’s research, development or production efforts.

 

Once Approved by the FDA, the Company’s Products Would Remain Subject to Continual FDA Review.

 

Once approved by the FDA, marketed products are subject to continual FDA review. Later discovery of previously unknown problems or failure to comply with applicable regulatory requirements may result in restrictions on marketing a product or in its withdrawal from the market, as well as potential criminal penalties or sanctions. In addition, the FDA requires that manufacturers of a product comply with current GMP requirements, both as a condition to product approval and on a continuing basis. In complying with these requirements, the Company expects to expend significant amounts of time, money and effort in production, record keeping and quality control. All manufacturing facilities are subject to periodic inspections by the FDA. If major problems are identified during these inspections that could impact patient safety, the FDA could subject the Company to possible action, such as the suspension of product manufacturing, product seizure, withdrawal of approval or other regulatory sanctions. The FDA could also require the Company to recall a product.

 

 

In August 2004, the Company subleased 1,185 square feet of space at One Bridge Plaza, Fort Lee, New Jersey (the “Sublease”) from Palisade Capital Securities, LLC (“PCS”), an affiliated company, for use as its corporate offices. The Sublease provided for a base annual rent of approximately $36,000 or $3,000 per month through the expiration of the Sublease on June 30, 2009. (See Notes 3 and 10 to Financial Statements).

 

Effective April 13, 2007, the Company entered into a lease (the “BPRA 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. Pursuant to an amendment to the BPRA Lease, dated February 1, 2008, the office space leased under the Sublease was incorporated into the BPRA Lease. The BPRA Lease, which expires on April 30, 2011, provides for a base annual rent of approximately $58,000 or $4,833 per month through its term. (See Note 10 to Financial Statements). The Company intends to extend the term of the BPRA Lease.

 

The Company entered into a Facility Use Agreement (the “Facility Use Agreement”) in April 2006 with The Ohio State University (“OSU”), which allows the Company’s scientists to access and use OSU’s laboratory facilities and certain equipment to perform the Company’s research in a laboratory directed by Dr. Matthew During. On January 25, 2011, the Company amended the Facility Use Agreement, extending the term through November 10, 2013. As of December 31, 2010, the Company has paid OSU an amount of approximately $106,500, representing rent owed under the Facility Use Agreement through November 10, 2010. Unless sooner terminated, the Company will pay an additional $97,500 over the remaining three years of such agreement. (See Notes 10 and 11 to Financial Statements).

One of the Company’s scientists conducts research at Cornell University in New York City in a laboratory directed by Dr. Michael Kaplitt, as provided for by the Company’s research agreement with Cornell.

 

Management believes that the properties the Company leases are adequately covered by insurance.

 

 

On February 7, 2011, plaintiffs Robert Zeman (“RZ”) and his wife, Julia Zeman (“JZ”), filed a complaint (the “Complaint”) in the United States District Court for the District of Massachusetts against the Company and other named defendants involved in the Company’s Phase 2 clinical trial for the treatment of advanced Parkinson’s disease. The Complaint is styled Robert Zeman et al v. Ziv Williams, M.D. et al.

 

The Complaint, among other things, alleges that RZ, a participant in the Phase 2 clinical trial, was injured during the trial’s surgical procedure by receiving a double dose of the drug used in the trial on one side of his brain rather than a bilateral dose of such drug as called for by the trial’s protocol, and that RZ was not adequately informed of the risks and potential consequences of his participation in the trial. The Complaint further alleges that JZ suffered loss of consortium as a result of RZ’s alleged injuries.

 

RZ seeks from the Company approximately $15,000,000 in damages, and JZ seeks from the Company approximately $3,000,000 in damages.

 

The Company does not believe that RZ’s claimed injuries are related to the drug used in the Phase 2 clinical trial or to the protocol of such trial. The Company believes that the claims against the Company set forth in the Complaint are without merit, and the Company intends to vigorously defend against such claims. (See Note 10 to Financial Statements).

 

The Company is prohibited from declaring, paying or setting aside any distribution or dividend for any shares of its capital stock while the Notes are outstanding. In addition, the Company is prohibited from declaring, paying or setting aside any distribution or dividend for the shares of Common Stock, unless all accrued and unpaid dividends have been paid in full on all outstanding shares of Series C Convertible Preferred Stock, par value $0.10 per share (the “Series C Stock”), and Series D Convertible Preferred Stock, par value $0.10 per share (the “Series D Stock”).

 

The Company had 268 stockholders of record as of March 11, 2011. The Company did not pay cash dividends during the two-year period ended December 31, 2010 and does not currently expect to pay any cash dividends to stockholders in the foreseeable future.

 

The Common Stock is traded on the OTC Bulletin Board under the symbol “NRGX”.

The following table shows the high and low bid quotations as furnished by Bloomberg. The quotations shown reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

 

High and Low Bid Prices of Common Stock

 

 

Company Equity Compensation Plans

 

The following table sets forth information as of December 31, 2010, with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.

 

 

The following discussion should be read in conjunction with the audited financial statements and accompanying notes of the Company for the fiscal year ended December 31, 2010. The Company’s fiscal year ends on the last day of December in each year. References to 2010 and 2009 shall mean the Company’s fiscal year ended on December 31st of such year. All dollar amounts in this Item 7 are in thousands.

 

Business Overview

 

The Company is a development stage company that is engaged in the research and development of proprietary treatments for disorders of the brain and central nervous system using gene transfer 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 December 31, 2010, the Company had an accumulated deficit of $61,763, and it expects to incur additional losses for the foreseeable future. The Company recognized net losses of $10,163 for the fiscal year ended December 31, 2010, and $13,461 for the fiscal year ended December 31, 2009.

 

Since its inception, the Company has financed its operations primarily through sales of its equity and debt securities. From inception through December 31, 2010, the Company received proceeds primarily from private sales of equity and debt securities and from the Merger

of approximately $51,095 in the aggregate. While the Company will continue to seek additional funds through the sale of its securities to fund its operations, the Company will also seek to obtain strategic collaborations to finance the further development of its Parkinson’s product, including the ultimate marketing and sale of such product. (See “Liquidity and Capital Resources”).

 

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 currently directed to the development of a therapeutic product to meet the needs of patients suffering from Parkinson’s disease.

 

In addition to its product for Parkinson’s disease, the Company has undertaken efforts to develop products for the treatment of TLE and depression but does not anticipate using its current funds for the further development of such products at this time. The Company also has undertaken efforts to develop a product for Huntington’s disease and is continuing to engage in preclinical activities relating to such product. See “Plan of Operation – Epilepsy,” “Plan of Operation – Depression” and “Plan of Operation – Huntington’s Disease” below.

 

Plan of Operation

 

Parkinson’s Disease

 

In October 2006, the Company announced that it had completed its Phase 1 clinical trial of gene transfer for Parkinson’s disease. The results of this trial indicated that the treatment, which was confined to only one side of the brain, appeared to be safe and well-tolerated in trial participants 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 results were published in two leading peer-reviewed medical and scientific journals: the June 23, 2007 issue of the journal The Lancet and the online edition of the Proceedings of the National Academy of Sciences in November 2007.

 

In November 2009, the Company completed all of the planned surgeries associated with its Phase 2 clinical trial of gene transfer for the treatment of advanced Parkinson’s disease. In June 2010, the Company announced positive results from such Phase 2 clinical trial. Trial participants who received NLX-P101 experienced statistically significant and clinically meaningful improvements in off-medication motor scores compared to control subjects who received sham surgery. In the trial, this benefit was seen at one month and continued virtually unchanged throughout the six month blinded study period. The results also demonstrated a positive safety profile for NLX-P101, with no serious adverse events related to the gene transfer or surgical procedure reported in the 12-month period following the surgical procedures. The results were published in an online-first edition of The Lancet Neurology on March 17, 2011. Subject to adequate funding, the Company expects to commence the open-label arm of the Phase 2 clinical trial in the second or third quarter of the 2011 fiscal year.

 

The Company is currently taking steps to move toward a pivotal trial for the treatment of Parkinson’s disease, and hopes to be in a position to file its protocol with the FDA in 2011. The Company’s conduct of such a trial will require, among other things, approval by the FDA and adequate funding. Currently, the Company estimates that all surgeries conducted in the pivotal trial could be completed in the first half of 2014 and the estimated total direct costs to reach that milestone are expected to be between $30 million and $40 million. (See Item 1 – “Business – Business of the Company – Parkinson’s Disease”).

Epilepsy

 

In December 2006, the Company submitted an investigational new drug application to the FDA for permission to begin a Phase 1 clinical trial of gene transfer therapy for TLE. The proposed clinical protocol for this study was presented to the National Institute of Health’s Office of Biotechnology Activities Recombinant DNA Advisory Committee on September 23, 2004 and was reviewed favorably.

 

In January 2008, the Company announced that as a result of comments from, and discussions with, the FDA, the Company would need to conduct an additional pre-clinical trial in non-human primates prior to commencing a Phase 1 clinical trial. The Company’s timetable for commencement of such Phase 1 clinical trial for its TLE product has been delayed, with any such commencement being subject to, among other things, the successful completion of the additional pre-clinical trial, the availability of funding, approval by the FDA and procurement of certain intellectual property licenses.

 

The Company does not, at this time, intend to commit its current funds to continue work on its investigational gene transfer therapy for TLE. As previously stated, the Company intends to concentrate its current operations and resources primarily on its investigational Parkinson’s disease therapy. (See Item 1 – “Business – Business of the Company – Epilepsy”).

 

Depression

 

In October 2010, the Company announced the publication of a paper in Science Translational Medicine demonstrating the importance of the p11 gene in modulating depression in mice, utilizing the Company’s investigational gene therapy approach. In the study, reduced levels of p11 in an area of the brain called the nucleus accumbens were associated with depressive behaviors in mice. An AAV vector was used to deliver the p11 gene back into the nucleus accumbens of mice who were lacking the p11 protein, reversing the depressive behavior and returning the animals to normal function.

 

The study also examined samples of brain tissue from a group of deceased human patients, half of whom had severe depression. It was found that there were significantly reduced levels of p11 in the nucleus accumbens of depressed patients compared to those without depression.

 

The Company’s development of this investigational gene therapy for depression is currently in the preclinical phase. Additional preclinical testing is required prior to seeking regulatory clearance to commence a Phase 1 clinical trial for this investigational gene therapy. The Company does not, at this time, intend to commit its current funds to continue work on its investigational gene transfer therapy for treating depression. As previously stated, the Company intends to concentrate its current operations and resources primarily on its investigational Parkinson’s disease therapy. (See Item 1 – “Business – Business of the Company – Depression”).

 

Huntington’s Disease

 

In November 2005, the Company announced findings from preclinical studies that showed that a form of the gene dXIAP may prevent the progression of Huntington’s disease.

 

The Company’s development of this investigational gene therapy for Huntington’s disease is currently in the preclinical phase. The Company reviewed and analyzed its initial preclinical results and determined that additional preclinical testing is required prior to seeking regulatory clearance to commence a Phase 1 clinical trial for this investigational gene therapy. Although currently engaged in pre-clinical activities covered under the Company’s existing research agreements, the Company proposes, at this time, to defer expending additional funds for preclinical tests while the Company focuses its current operations and resources primarily on

its investigational Parkinson’s disease gene therapy. (See Item 1 – “Business – Business of the Company – Huntington’s Disease”).

 

Other Therapies

 

The Company has undertaken efforts to develop therapies to treat other neurodegenerative and metabolic disorders, including genetically-based obesity under its research agreements with Cornell and OSURF. Since the Company’s primary focus remains the development of its product for the treatment of Parkinson’s disease, the Company does not expect to allocate any further resources during the 2011 fiscal year to these other treatment candidates. (See Item 1 – “Business – Business of the Company – Other Neurodegenerative and Metabolic Disorders”).

 

2011 Expenditures

 

Over the next 12 months, the Company expects to spend, in addition to its normal recurring expenditures, approximately $2,700 in Phase 2 clinical trial expenses with regard to its Parkinson’s treatment; approximately $1,800 in costs associated with preparing for a pivotal trial for its Parkinson’s treatment, including the manufacturing of the product and infusion system to be used for such trial and the administrative costs associated with contracting with surgical sites for such trial; approximately $1,000 in costs associated with operating as a publicly traded company, such as legal fees, accounting fees, insurance premiums, investor and public relations fees; approximately $750 in expenses in order to scale up manufacturing capabilities for the supply of product for a Parkinson’s pivotal trial; and approximately $550 in research and licensing fees. The Company will require additional financing to fully fund these expenditures. (See “Liquidity and Capital Resources”).

 

Results of Operations

 

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

 

Revenues.  The Company did not generate any operating revenues in 2010 and 2009.

 

Research and Development Expenses.  The following table summarizes the Company’s research and development expenses for fiscal years ended December 31, 2010 and 2009:

 

 

Research and development expenses decreased by $1,809 in 2010 from the comparable expenses in 2009. The decrease was mainly due to a $1,386 decrease in expenses related to the Company’s Phase 2 clinical trial for Parkinson’s disease, including a (i) $653 decrease in fees due to the investigator, surgical sites and brain imaging sites participating in the clinical trial, (ii) $288 decrease in Manufacturing and Development Agreement expenses relating to the catheter infusion device used in the Phase 2 clinical trial, (iii) $240 decrease in other expenses related to the administration of the clinical trial, including fees to the clinical research organization assisting the Company in overseeing the conduct of the trial, and (iv) $205

decrease in costs associated with the manufacturing of product for a potential open-label arm to the Phase 2 clinical trial. The decrease was also due to a $325 decrease in Manufacturing Process Development expenses for large scale manufacturing of the Company’s products and infusion devices, a $194 decrease in fees related to license agreements and sponsored research agreements and a $158 decrease in laboratory and other miscellaneous research and development expenses. These decreases were offset, in part, by a $254 increase in cash and non-cash compensation paid to the Company’s researchers and scientific consultants.

 

General and Administrative Expenses.  General and administrative expenses increased by $320 to $3,217 in 2010 as compared to $2,897 in 2009. This increase was due mainly to a $423 increase in professional fees, including legal fees, strategic advisory fees, accounting fees and investor and public relations fees. The increase was also due to $208 increase in cash and non-cash compensation expense to Company employees. These increases were offset by $244 in grant monies received in 2010 as part of the Therapeutic Discovery Tax Credit Program administered by the U.S. Internal Revenue Service and by decreases in miscellaneous general and administrative expenses.

 

Other (Expense) Income, Net.  The Company had net other expense of $911 in 2010 as compared to net other expense of $2,720 in 2009. The change is mainly due to a $2,319 decrease in charges recognized for the change in fair value of its derivative liabilities in 2010. This decrease is offset by a $455 increase in interest expense for the year ended December 31, 2010 related to the issuance of the Notes in December 2010, as well as a $55 decrease in interest income for the year ended December 31, 2010.

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $8,055 at December 31, 2010.

 

The Company is still in the development stage and has not generated any operating revenues as of December 31, 2010. In addition, the Company will continue to incur net losses and cash flow deficiencies from operating activities for the foreseeable future.

 

Based on its cash flow projections, the Company will need additional financing to carry out its planned business activities and plan of operations after October 31, 2011 and to repay the Notes as of said date. If the Company is unable to obtain such additional funding, it may not be able to continue as a going concern after October 31, 2011.

 

The Company is making every effort to secure capital commitments for funds at this time. The Company is also currently seeking to raise funds through corporate collaboration and licensing arrangements in connection with its ongoing and long-term operations. (See Item 1 – “Business – Business of the Company – Business Strategy”). 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. (See Item 1A – “Risk Factors – The Company Does Not Have Sufficient Funds to Continue its Operations in the Long Run or to Commercialize its Product Candidates”).

 

The Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern in the audit report on the Company’s audited financial statements for the fiscal year ended December 31, 2010 included herein.

 

Net cash used in operating activities was $7,870 in fiscal year 2010 as compared to $8,971 in fiscal year 2009. The $1,101 decrease in net cash used in operations was primarily due to a $3,298 decrease in net loss, offset by $2,091 in adjustments to net loss for decreased non-cash expenses, as well as a $106 increase in cash used as a result of changes to working capital in 2010.

The Company had net cash used in investing activities of $276 during the year ended December 31, 2010 as compared to $298 during the year ended December 31, 2009. Cash used in investing activities relates to purchases of equipment and additions to intangible assets made by the Company during 2010 and 2009.

 

Net cash provided by financing activities during the year ended December 31, 2010 was $6,564, solely as a result of the proceeds received from the issuance of the Notes and warrants by the Company in December 2010. (See Note 9 to Financial Statements). The Company had no net cash used in or provided by financing activities during the year ended December 31, 2009.

 

Critical Accounting Estimates and Policies

 

The Company’s discussion and analysis and plan of operation is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for financial statements filed with the United States Securities and Exchange Commission (the “SEC”). The preparation of these 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 ongoing 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, 2010, as outlined in the accompanying notes to the financial statements, have been applied consistently for the year ended December 31, 2010. The Company believes the following critical accounting policies affect the significant estimates and judgments used in the preparation of its financial statements.

 

Carrying Value of Fixed and Intangible Assets

 

The Company’s fixed assets and certain of its patents have been recorded at cost. The Company’s fixed assets are being amortized using accelerated methods and its patents are being amortized on a straight-line basis over the estimated useful lives of those assets. If the Company becomes aware of facts that indicate one or more of those assets may be impaired, the Company assesses whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If the Company determines that an asset is impaired, the Company measures the amount of such impairment by comparing the carrying value of the asset to the fair value determined by the present value of the expected future cash flows associated with the use of the asset. Adverse changes to the Company’s estimates of the future cash flows to be received from a particular long-lived asset could indicate that the asset is impaired, and would require the Company to write down the asset’s carrying value at that time.

 

Research and Development

 

Research and development expenses consist of costs incurred in identifying, developing and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, fees of the Company’s scientific and research consultants and related costs, contracted research fees and expenses, clinical studies and license agreement milestone and maintenance fees. Research and development costs are expensed as incurred. Certain of these expenses, such as fees to consultants, fees to collaborators for research activities and costs related to clinical trials are incurred over multiple reporting periods. Management assesses how

much of these multi-period costs should be charged to research and development expense in each reporting period.

 

Stock Based Compensation

 

The Company follows the provisions of Accounting Standards Codification (the “Codification” or “ASC”) Topic 718, “Compensation – Stock Compensation” (“ASC Topic 718”) for employee stock options and other share-based employee compensation using the modified prospective method. The Company continues to reflect share-based employee compensation cost in net loss. The total value of the stock option awards is expensed ratably over the service period of the employees receiving the awards.

 

The Black-Scholes option pricing model used to compute share-based compensation expense requires extensive use of accounting judgment and financial estimates. Items requiring estimation include the expected term option holders will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term of a stock option, and the number of stock options that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could result in significantly different share-based compensation amounts being recorded in the Company’s financial statements.

 

For equity awards to non-employees, the Company also applies the Black-Scholes method to determine the fair value of such awards in accordance with ASC Topic 718 and the provisions of ASC Topic 505-50, “Equity-Based Payments to Non-Employees.” The options granted to non-employees are re-measured as they vest and the resulting value is recognized as an adjustment against the Company’s net loss over the period during which the services are received.

 

Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 includes new disclosure requirements related to fair value measurements, including transfers in and out of Levels 1 and 2 and information about purchases, sales, issuances and settlements for Level 3 fair value measurements. This update also clarifies existing disclosure requirements relating to levels of disaggregation and disclosures of inputs and valuation techniques. The provisions of ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009. The disclosures relating to Level 3 activity are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The impact of this update on the Company’s financial statements will depend on the size and nature of future business combinations.

 

Effective January 1, 2010, the Company adopted the provisions relating to Level 1 and Level 2 disclosures and such provisions did not have a material impact on its financial statements. The Company does not expect the provisions relating to Level 3 disclosures to have a material impact on its financial statements.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Neurologix, Inc.

Fort Lee, NJ

 

We have audited the accompanying balance sheets of Neurologix, Inc. (the “Company”) (a development stage company) as of December 31, 2010 and 2009, and the related statements of operations, changes in stockholders’ equity (deficit) and cash flows for the years then ended, and for the period from February 12, 1999 (inception) to December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended, and for the period from February 12, 1999 (inception) to December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, expects to incur future losses for the foreseeable future and has deficiencies in working capital and capital that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ BDO USA, LLP

New York, New York

March 25, 2011

NEUROLOGIX, INC.
(A Development Stage Company)
BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)

 

 

See accompanying notes to financial statements.

NEUROLOGIX, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)

 

 

See accompanying notes to financial statements.

 

NEUROLOGIX, INC.
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE PERIOD FROM FEBRUARY 12, 1999 (INCEPTION) THROUGH DECEMBER 31, 2010
(Amounts in thousands, except for share and per share amounts)

 

 

 

 

See accompanying notes to financial statements.

 

NEUROLOGIX, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Amounts in thousands)