UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-QSB
(Mark
One)
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
quarterly period ended March
31, 2007
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from _________ to ___________
Commission
File Number
001-33426
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NEURO-HITECH,
INC.
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(Exact
name of Small Business Issuer as Specified in its Charter)
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Delaware
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20-4121393
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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One
Penn Plaza, Suite 1503, New York, NY 10019
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(Address
of Principal Executive Offices)
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(212)
594-1215
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(Issuer’s
Telephone Number, Including Area Code)
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(Former
Name, Former Address and Former Fiscal Year
If
Changed Since Last Report)
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Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
ý No ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ý
No
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: May 5, 2007
Common
Stock 12,331,388
Transitional
Small Business Disclosure Format (check one):
Yes ý
No
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
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Neuro-Hitech,
Inc. and Subsidiaries
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Consolidated
Balance Sheet
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(Unaudited)
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ASSETS:
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As
of March 31, 2007
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Current
Assets:
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Cash
and Cash Equivalents
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$
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5,061,996
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Accounts
Receivable
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163,950
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Subscription
Receivable
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144,525
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Inventory
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41,213
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Prepaid
Expenses
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152,825
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Deferred
Charges
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81,840
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Total
Current Assets
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5,646,349
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Property
and Equipment, net
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6,496
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Total
Assets
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$
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5,652,845
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LIABILITIES
AND STOCKHOLDERS' EQUITY:
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Current
Liabilities:
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Accounts
Payable and Accrued Expenses
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$
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968,404
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Total
Current Liabilities
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Stockholders'
Equity:
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Common
Stock $.001 Par Value Authorized: 44,999,900, Issued & Outstanding:
12,323,351
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12,323
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Common
Stock - Class A Stock $.001 Par Value Authorized: 100, Issued
& Outstanding: 100
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-
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Additional
Paid-in Capital
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31,571,217
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Deferred
Compensation
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(1,417,166
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)
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Accumulated
Deficit
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(25,481,933
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)
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Total
Stockholders' Equity
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4,684,441
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Total
Liabilities and Stockholders' Equity
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$
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5,652,845
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The
accompanying notes are an integral part of these consolidated financial
statements.
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Neuro-Hitech,
Inc. and Subsidiaries
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Consolidated
Statements of Operations
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(Unaudited)
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For
the three months ended
March 31,
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2007
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2006
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Sales
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$
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194,400
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$
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68,040
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Cost
of Goods Sold
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(100,555
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)
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(28,198
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)
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Gross
Profit
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93,845
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39,842
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Operating
Expenses:
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Selling,
General and Administrative Expenses
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662,322
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223,712
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Research
and Development Costs
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735,781
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669,012
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Share-Based
Compensation
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188,732
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89,012
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Amortization
of Deferred Compensation
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15,935
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-
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Total
Operating Expenses
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1,602,770
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981,736
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(Loss)
from Operations
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(1,508,925
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)
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(941,894
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)
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Other
Income:
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Interest
and Dividend Income
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61,206
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30,479
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Total
Other Income
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61,206
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30,479
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(Loss)
Before Provisions for IncomeTaxes
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(1,447,719
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)
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(911,415
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)
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Provisions
for Income Taxes
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-
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-
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Net
(Loss)
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$
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(1,447,719
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)
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$
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(911,415
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)
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Basic
and Diluted (Loss) per Weighted Average Common Shares
Outstanding
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$
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(0.12
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)
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$
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(0.10
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)
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Weighted
Average - Common Shares Outstanding
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12,118,777
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8,974,839
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The
accompanying notes are an integral part of these consolidated financial
statements.
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Neuro-Hitech,
Inc. and Subsidiaries
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Consolidated
Statements of Cash Flows
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(Unaudited)
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For
The Three Months Ended
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March
31,
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2007
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2006
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Cash
flows used in operating activities:
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Net
(Loss)
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$
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(1,447,719
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)
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$
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(911,415
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)
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Adjustments
to Reconcile Net (Loss) to Net Cash (Used In) Operating
Activities:
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Share-based
Compensation Expense
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188,732
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89,012
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Amortization
of Deferred Compensation
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15,935
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-
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Depreciation
Expense
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749
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-
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Change
in operating assets and liabilities:
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(Increase)
Decrease in Assets:
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Accounts
Receivable
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(282,674
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)
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(22,365
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)
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Inventory
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(9,920
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)
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(24,552
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)
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Prepaid
Expenses
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(128,904
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)
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(329,215
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)
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Deferred
Charges
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11,910
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-
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Increase
(Decrease) in Liabilities:
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Accounts
Payable and Accrued Expenses
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(227,339
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)
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282,585
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Total
Adjustments
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(431,511
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)
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(4,535
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)
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Net
cash (used in) Operating activities
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(1,879,230
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)
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(915,950
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)
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Cash
flows from financing activities:
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Net
Proceeds from Private Placement Offering of Common Stock
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2,220,755
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4,085,874
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Proceeds
from Exercise of Stock Options
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15,276
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996,002
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Net
cash provided by Financing activities
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2,236,031
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5,081,876
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Net
increase in cash and cash equivalents
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356,801
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4,165,926
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Cash
and cash equivalents, beginning of periods
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4,705,195
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90,606
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|
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Cash
and cash equivalents, end of periods
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$
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5,061,996
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$
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4,256,532
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Supplemental
Disclosure of Non-Cash Investing and Financing
Activities:
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The
Company entered into a service agreement and issued 100,000 warrants
valued at fair market value as of grant date the contract was
signed. The
fair value of these options approximated $255,000 and was recognized
as
Deferred Compensation in the Stockholders' Equity section of
the Balance
Sheet. During the first quarter of 2007, in accordance with vesting
terms
of the options, the Company recognized approximately $16,000
of expense
for the amortization of Deferred Compensation.
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In
connection with a private placement offering of the Company’s securities
that occurred between January through March 15, 2007, the Company
entered
into a stock subscription agreement for the issuance of 30,000
shares of
common stock and share purchase warrants for an additional 15,000
shares.
The transaction totaled $144,525 and was fully collected by the
Company in
April 2007.
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|
During
the quarter ended March 31, 2007, options held by the Company's
executive
officers vested as to 124,791 shares of the Company's common
stock. The
Company recognized an aggregate compensation cost of $188,732
for the
vesting of the aforementioned options for the quarter ended March
31,
2007.
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The
accompanying notes are an integral part of these consolidated
financial
statements.
|
NEURO-HITECH,
INC. AND SUBSIDIARIES
NOTES
TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March
31,
2007
(Unaudited)
Neuro-Hitech,
Inc. (the “Company” or “Neuro-Hitech”) is an early stage pharmaceutical company
engaged in the acquisition and development of therapies for Alzheimer’s disease
and other degenerative neurological disorders. The Company focuses particularly
on technologies that address large unmet medical needs and have the potential
to
enter clinical development within 12 to 24 months after acquisition, and on
driving development in a rapid, cost-effective manner. The Company’s current
portfolio consists of small molecule drugs in development to treat large, unmet
medical needs - Alzheimer’s disease, Epilepsy and Myasthenia
Gravis.
On
November 29, 2006, the Company completed an acquisition by merger of Q-RNA,
Inc. (“Q-RNA”), a New York-based biotechnology company focused on diseases such
as Alzheimer’s, Epilepsy and Parkinson’s disease. The acquisition of Q-RNA
provides the Company with a pipeline of compounds, many of which have been
discovered and developed internally. Q-RNA believes that these compounds
provided it with significant research and development opportunities.
The
accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB
and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary in order to make the interim financials not misleading
have
been included and all such adjustments are of normal recurring nature. The
operating results for the three months ended March 31, 2007 are not necessarily
indicative of the results that can be expected for the year ending December
31,
2007.
The
accounting policies followed by the Company are set forth in Note 2 of the
Company’s consolidated financial statements in the December 31, 2006 Form
10-KSB. For further information refer to the consolidated financial statements
and footnotes included in the Company’s Annual Report on Form 10-KSB for the
year ended December 31, 2006.
|
(2)
|
Summary
of Significant Accounting
Policies
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All inter-company balances and transactions have
been
eliminated. Approximately $194,000 and $5,653,000 of consolidated revenue and
assets, after eliminations, respectively are based upon the accounts of the
parent and $0 and $0 of consolidated revenue and assets, after eliminations
respectively, of the subsidiary.
Cash
and
Cash Equivalents
Cash
and
cash equivalents consist of highly liquid financial instruments with an original
maturity of three months or less from the date acquired.
Revenue
Recognition
Revenues
from product sales are recognized when products are shipped to the
customer.
Research
and Development Costs
All
research and development costs are expensed as incurred and include costs paid
to sponsored third parties to perform research and conduct clinical
trials.
|
(3)
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Stock
Subscription
Receivable
|
In
connection with a private placement offering of the Company’s securities that
occurred between January 1, 2007 and March 15, 2007, the Company entered
into a
stock subscription agreement for the issuance of 30,000 shares of the Company’s
common stock and warrants to purchase an additional 15,000 shares of the
Company’s common stock. The transaction totaled approximately $144,525 and was
fully collected by the Company in April 2007.
In
accordance with authoritative guidance promulgated by the SEC, the amount
is
reflected in the Current Assets section of the Balance Sheet as the amount
was
received in full prior to issuance of the financial statements.
|
(4)
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Stock
Based Compensation
|
In
January 2006, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment.” The Company determined that based upon further evaluation
of the two methods available for disclosure that the modified prospective
adoption method was more appropriate. Using the modified prospective adoption
method of SFAS 123(R), the Company recognized the fair value of compensation
cost for all share-based payments granted after January 2006, plus any awards
granted to employees prior to January 2006 that remained unvested at the time,
over the service (vesting) period. Under this method of adoption, no restatement
of prior period was made.
The
Company did not grant any stock options for the quarter ending March 31,
2007.
During
the quarter ended March 31, 2007, options held by the Company's executive
officers vested as to 124,791 shares of the Company’s common stock. The
Company recognized an aggregate compensation cost of $188,732 for the vesting
of
the aforementioned options for the quarter ended March 31, 2007.
|
(5)
|
Common
Stock Transactions
|
Recapitalization
On
January 18, 2006, Northern Way Resources, Inc., a Nevada corporation
(“Northern-NV”) was merged with and into Northern Way Resources Inc., a Delaware
corporation (“Northern-DE”) for the sole purpose of changing its state of
incorporation from Nevada to Delaware pursuant to an Agreement and Plan of
Merger dated January 12, 2006 (“Reincorporation Merger Agreement”), which was
approved through an action by written consent of a majority of the stockholders
on the same date (“Reincorporation Merger”). Under the terms of the
Reincorporation Merger, each share of Northern-NV was exchanged for one share
of
Northern-DE. In connection with the Reincorporation Merger, Northern-DE changed
its name to Neurotech Pharmaceuticals, Inc. (“Neurotech”).
On
January 24, 2006 Neurotech entered into an Agreement of Merger and Plan of
Reorganization by and among Neurotech, Marco Hi-Tech J.V. Ltd., a privately
held
New York corporation, and Marco Acquisition I, Inc., (“Acquisition Sub”) a newly
formed wholly-owned Delaware subsidiary of Neurotech. Upon closing of the merger
transactions contemplated under the Merger Agreement (the “Merger”), Acquisition
Sub was merged with and into Marco, and Marco became a wholly-owned subsidiary
of Neurotech.
On
January 25, 2006, Neurotech filed a Certificate of Amendment to its Certificate
of Incorporation in the State of Delaware in order to change its name to
Neuro-Hitech Pharmaceuticals, Inc.
For
accounting purposes, the acquisition was treated as an issuance of shares for
cash by Marco with Marco as the acquirer. Historical operations information
prior to January 2006 is that of Marco only. The accounting is identical to
that
resulting from a reverse acquisition except that no goodwill or other intangible
assets are recorded. Pro forma information is not presented as of the date
of
this transaction as Neurotech was considered a public shell and accordingly,
the
transaction was not considered a business combination.
Thereafter,
on August 11, 2006, Neuro-Hitech Pharmaceuticals, Inc. amended its Certificate
of Incorporation to change its name to “Neuro-Hitech, Inc.”
Private
Placement Offering
Immediately
after the closing of the Merger on January 24, 2006, there were 7,027,252 shares
of Neuro-Hitech Common Stock issued and outstanding and 100 shares of
Neuro-Hitech Class A Common Stock issued and outstanding.
Prior
to
the closing of the Merger, the Company’s predecessor, Marco completed a private
offering in which Marco received total gross proceeds of $996,006, which
after the closing of the Merger, were converted into 664,004 shares of the
Company’s common stock. Subsequent to the closing of the Merger, Neuro-Hitech
completed a private offering of 1,750,000 shares of its common stock and
warrants to purchase 437,500 shares of its common stock for $4,375,000 million
in cash. The exercise price of the warrants was $5.00 per
share.
On
November 29, 2006 Neuro-Hitech closed on the sale in a private offering of
612,200 shares of its common stock and warrants to purchase 306,100 shares
of
its common stock for $3,137,525 in cash. The exercise price of the
warrants was $7.00 per share.
Placement
agent, legal, accounting, printing and other costs related to these offerings,
in the aggregate amount of $353,127, were charged to additional paid-in capital
in the year ended December 31, 2006.
Between
January 1, 2007 and March 15, 2007, the Company conducted a private placement
offering of its securities with institutional and individual investors and
received total net proceeds of $2,280,716 from the offering. The investors
received an aggregate of 464,196 shares of the Company’s common stock and
warrants to purchase an additional 232,098 shares of the Company’s common stock.
The common stock was sold in the offering at $5.125 per share and the exercise
price of the warrants was $7.00 per share.
Placement
agent, legal, accounting, printing and other costs related to these offerings,
in the aggregate amount of $158,200, were charged to additional paid-in capital
in the period ended March 31, 2007.
Business
Combination
On
November 29, 2006 Neuro-Hitech completed the acquisition of Q-RNA, Inc., a
New
York-based biotechnology company focused on diseases such as Alzheimer’s,
Epilepsy and Parkinson’s disease. Neuro-Hitech privately issued merger
consideration to the Q-RNA securityholders consisting of an aggregate of: (i)
1,800,000 shares of Neuro-Hitech common stock, (ii) warrants to purchase 600,356
shares of Neuro-Hitech common stock at an exercise price of $13 per share,
and
(iii) warrants to purchase 600,356 shares of Neuro-Hitech common stock at
an exercise price of $18 per share. In addition, Neuro-Hitech assumed
Q-RNA employee stock options now exercisable for 199,288 shares of Neuro-Hitech
common stock. The weighted average exercise price of these stock options was
$12.66. The Neuro-Hitech common stock issued as merger consideration will be
subject to a lock-up of up to two years and therefore not freely transferable
during the lock-up period.
|
(6)
|
Research
and License Agreements
|
Georgetown
University
In
December 2003, the Company entered into a clinical research agreement, which
was
amended in November 2005, with Georgetown pursuant to which Georgetown will
provide the Company with Phase II research. The costs associated with this
agreement originally totaled $3,146,667 and would be partially funded by the
National Institutes of Health. The Company’s portion of the total cost was
$1,846,667 and payable in installments upon the achievement of certain
milestones.
On
December 8, 2006, the Company announced the expansion in the size of the Phase
II clinical trial by 60 participants, an increase of 40%. The Company’s
portion of the total cost increased by an additional $1,934,270, to an aggregate
of $5,080,937, and is payable in quarterly installments of approximately
$316,000 and $140,000 at the conclusion of the trial. This agreement may be
terminated by either party upon 30 days notice. The Company expects to make
additional payments to Georgetown of approximately $1,850,000, or an aggregate
of $3,696,667, until the conclusion of the Phase II clinical trials which the
Company expects to occur later this year.
For
the
three months ended March 31, 2007, the total cost incurred by the Company was
$250,000 and
the
total costs incurred since inception of the agreement is approximately
$2,177,500 and is reflected in the Research and Development Cost caption of
the
Statement of Operations.
Org
Syn
Laboratory, Inc.
On
February 1, 2006, the Company entered into an exclusive development agreement
with Org Syn for the development of synthetic Huperzine A. Org Syn received
an
aggregate of $209,727 upon the execution of the Agreement and may receive up
to
an additional $209,727 upon the delivery of the synthetic
Huperzine A. The
Development Agreement may be terminated by the Company if Org Syn fails to
achieve certain stated milestones.
Xel
Herbaceuticals, Inc.
On
March
15, 2006, the Company entered into a development agreement with Xel
Herbaceuticals, Inc. (“XEL”) for XEL to develop a Huperzine A Transdermal
Delivery System (“Delivery Product”). Under the terms of the agreement, the
Company paid XEL a $250,000 fee upon the execution of the agreement and will
pay
XEL $92,500 per month during the development of the Delivery Product, which
development is estimated to take approximately 16 months. The $250,000 fee
paid
upon the execution of the agreement is amortized ratably over the term of the
agreement and is reflected in Deferred Charges caption of the Balance Sheet
as
of March 31, 2007 for $81,840. The monthly payment is subject to quarterly
adjustment and subject to a limit on aggregate development cost overruns of
$250,000. XEL has agreed to pay any cost overruns in excess of $250,000. The
Company and XEL intend to seek domestic and foreign patent protection for the
Delivery Product.
If
the
Company elects to exercise its right to license the Delivery Product in the
United States and Canada (“North America”) and to develop the Delivery Product
on its own, the Company will pay XEL an initial license fee of $400,000 and
up
to an aggregate of $2.4 million in additional payments upon the achievement
of
certain milestones, including completion of a prototype, initial submission
to
the FDA, completion of phases of clinical studies and completion of the FDA
submission and FDA approval.. Similarly, if the Company elects to exercise
its
option to license the Delivery Product worldwide excluding China, Taiwan, Hong
Kong, Macau and Singapore (“Worldwide”), and develop the Delivery Product on its
own, the Company will pay XEL an additional initial license fee of $400,000
and
up to an aggregate of $2.4 million in additional payments upon the achievement
of comparable milestones. If XEL fails to obtain a U.S. or international patent,
the corresponding license fee and milestone payments will be reduced by 50%
until such time as XEL obtains such patent, at which time the unpaid 50% of
all
such milestone payments previously not made will be due.
The
Company will also be obligated to pay XEL royalty payments of between 7% and
10%
of net sales, with such royalty payments subject to reduction upon the
expiration of the patent or the launch of a generic product in the applicable
territory. If a patent has not been issued in either the United States or
Canada, the royalty payments will be subject to reduced rates of between 3%
and
5% of net sales. Royalty payments for sales in the worldwide territory will
be
subject to good faith negotiations between the parties.
If
the
Company exercises its right to license the Delivery Product in North America
and
to develop the Delivery Product with a third party, the Company will pay XEL
50%
of any initial signing fees and milestone fees (excluding any research and
development fees) paid by such third party. Similarly, in the event that the
Company decides to exercise its option to license the Delivery Product Worldwide
and to develop the Delivery Product with a third party, the Company will pay
XEL
50% of any initial signing fees and milestone fees (excluding any research
and
development fees) paid by such third party. If XEL fails to obtain a U.S. or
international patent, the percentage of the corresponding fees will be reduced
to 25%. The Company will pay XEL 20% of any royalty payments received by the
Company from third-party sublicensees, or if the Delivery Product is not
protected by at least one patent, 10% of any royalty received by the Company
from sublicensees.
If
the
Company elects not to exercise its right to license the Delivery Product and
XEL
elects to further develop the Delivery Product without the Company, XEL will
be
obligated to pay the Company 30% of any net profits realized up to a maximum
of
two times the amount paid by the Company to XEL during development, excluding
the initial $250,000 signing fee. Upon such election, XEL will be entitled
to
full ownership of the intellectual property of the Delivery Product. If the
Company elects to exercise its rights to license the Delivery Product in North
America, but not Worldwide, XEL will have certain rights to obtain intellectual
property protection in any country outside North America upon payment to the
Company for such rights, such fees to be negotiated in good faith by the
parties.
For
the
three months ended March 31, 2007, the total research and development costs
incurred in connection with the Company’s agreement with XEL were approximately
$277,500 and
are
reflected in the Research and Development Cost caption of the Statement of
Operations.
Dalhousie
License Agreements (PARTEQ)
As
part
of the acquisition of Q-RNA, the Company assumed exclusive License Agreements
with PARTEQ Research and Development Innovations (“PARTEQ”), the technology
licensing arm of Queens University, Kingston, Ontario, Canada.
The
Exclusive Patent License Agreement with PARTEQ (the “Alzheimer’s Agreement”)
grants the Company an exclusive worldwide license to all innovations and
developments, including the patent applications and additional filings, related
to specified patents related to research on Alzheimer’s disease. The Company
made a one-time license fee of C$25,000 when it entered into the Alzheimer’s
Agreement in 2005 and will be required to make quarterly royalty payments equal
to 3% of net sales of the licensed products (as such term is defined in
Alzheimer’s Agreement), with a minimum annual royalty of C$10,000 for 2007,
C$20,000 for 2008, C$30,000 for 2009 and C$40,000 for 2010 and each subsequent
calendar year. The Company is also obligated to make the following milestone
payments: C$100,000 upon completion of a Phase I trial of a licensed product,
C$250,000 upon completion of a Phase II trial of a licensed product, and
C$1,000,000 upon the first FDA approval (as such term is defined in the
Alzheimer’s Agreement). The Company also has the right to sub-license with the
payment of 20% of all non-royalty sublicensing consideration.
Under
the
terms of the Alzheimer’s Agreement which was amended in early 2007, the Company
will pay fixed annual fees of C$256,802.
The
Exclusive Patent License Option Agreement with PARTEQ (the “Epilepsy Agreement”)
grants the Company a three-year option to acquire an exclusive worldwide license
to all innovations and developments, including the patent applications and
additional filings, related to specified patents related to research on
Epilepsy. The Company made a non-refundable, non-creditable option payment
of
C$10,000 when it entered into the Epilepsy Agreement in 2006. If the Company
exercises its option, the Company will make a non-refundable, non-creditable
license payment of C$17,500 at the time of such exercise. If the Company
exercises its option, it will be required to make quarterly royalty payments
of
3% of net sales of the licensed products (as such term is defined in Epilepsy
Agreement), with a minimum annual royalty of C$10,000 through the second
anniversary of the license, C$20,000 through the third anniversary of the
license, C$30,000 through the fourth anniversary of the license and C$40,000
through the fifth anniversary of the license and each subsequent anniversary.
If
the Company exercises its option, the Company is also obligated to make the
following milestone payments: C$100,000 upon completion of a Phase I trial
of a
licensed product, C$250,000 upon completion of a Phase II trial of a licensed
product, and C$1,000,000 upon the first FDA approval (as such term is defined
therein). If the Company exercises its option, the Company also has the right
to
sub-license with the payment of 20% of all non-royalty sublicensing
consideration.
For
the
three months ended March 31, 2007, the total research and development costs
incurred with respect to the Company’s agreements with PARTEQ were approximately
$3,493 and are reflected in the Research and Development caption of the
Statement of Operations.
Under
the
terms of the Epilepsy Agreement which was amended in early 2007, the Company
will pay fixed annual fees of C$150,800.
The
following is a summary of fixed and determinable research and development costs
of the Company, excluding any exercise of the option under the Epilepsy
Agreement and any milestone payments to XEL.
|
Year
|
|
Amount
|
|
|
2008
|
|
$
|
2,300,000
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
$
|
2,300,000
|
|
Item
2. Management’s Discussion and Analysis or Plan of
Operation
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-QSB contains forward-looking statements (as defined
in Section 27A of the Securities Act and Section 21E of the Exchange Act).
To
the extent that any statements made in this Report contain information that
is
not historical, these statements are essentially forward-looking.
Forward-looking statements can be identified by the use of words such as
“expects,” “plans” “will,” “may,” “anticipates,” “believes,” “should,”
“intends,” “estimates,” “projects” and other words of similar meaning. These
statements are subject to risks and uncertainties that cannot be predicted
or
quantified and consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include those outlined in “Risk Factors” found within our Annual
Report on Form 10-KSB and include, without limitation, the Company’s limited
cash and ability to raise capital to finance the growth of the Company’s
operations, the ability of the Company to develop its products and obtain
necessary governmental approvals, the Company’s ability to protect its
proprietary information, the Company’s ability to attract or retain qualified
personnel, including scientific and technical personnel, and other risks
detailed from time to time in the Company’s filings with the SEC, or
otherwise.
All
references to the “Company” for periods prior to the closing of the Merger refer
to Marco, and references to the “Company” for periods subsequent to the closing
of the Merger refer to Neuro-Hitech and its subsidiaries.
THE
FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE INFORMATION CONTAINED
IN
THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS QUARTERLY
REPORT ON FORM 10-QSB .
History
The
Company is an early stage pharmaceutical company engaged in the acquisition
and
development of therapies for Alzheimer’s disease and other degenerative
neurological disorders. The Company is focused particularly on technologies
that
address large unmet medical needs and have the potential to enter clinical
development within 12 to 24 months after acquisition, and on driving development
in a rapid, cost-effective manner.
The
Company’s most advanced product candidate, Huperzine A, is in Phase II clinical
trials in the U.S. and is being tested for efficacy and safety in the treatment
of mild to moderate Alzheimer’s disease. Huperzine A is a cholinesterase
inhibitor that the Company believes may be effective in the treatment of
Alzheimer’s disease and Mild Cognitive Impairment (“MCI”), although, to date,
the Company’s efforts have been focused upon Huperzine A’s effectiveness in
Alzheimer’s disease. Through a collaboration with the Alzheimer’s Disease
Cooperative Study (“ADCS”), the Company has completed two Phase I studies. ADCS
was formed in 1991 as a cooperative agreement between the National Institute
of
Aging and the University of California San Diego, with the goal of advancing
the
research of drugs for treating patients with Alzheimer’s disease, the National
Institutes of Health (“NIH”) and Georgetown University Medical Center
(“Georgetown”).
The
Company anticipates concluding patient recruitment by the end of April 2007
and
obtaining top-line data during the fourth quarter of 2007.
Upon
obtaining FDA approval for Huperzine A, it is anticipated that the Company’s
collaborative partners, if the Company is successful in obtaining collaborative
partners, will be primarily responsible for the manufacturing, sale and
distribution of Huperzine A products. Efforts will be made to reach licensing
agreements with collaborative partners to participate in earlier phases of
the
drug development process for the Company’s products, reducing the likelihood of
the need for it to obtain financing for the additional research and development
costs. This strategy may enable the Company to gain access to the marketing
expertise and resources of the Company’s potential partners, and to lower its
capital requirements.
The
Company is also studying the transdermal delivery of Huperzine A. The Company
believes that Huperzine A can effectively be delivered transdermally because
of
its low dosage requirement and low molecular weight. The Company believes that
a
transdermal patch is the ideal way to deliver any Alzheimer’s treatment because
the patch may provide the drug for transdermal delivery for up to between three
and five days while avoiding the gastrointestinal tract. The Company expects
to
begin Phase I clinical trial in the first quarter of 2008 and to report study
results later that year.
The
Company is also pursuing the optimization and pre-clinical development of
certain compounds that were being developed by Q-RNA, Inc., including NHT0012,
which is one of a number of second generation disease modifying drugs for
Alzheimer’s disease that inhibit A-beta and Tau oligomerization and NHT1107,
which is one of a large pharmaceutical library of drugs designed for the
treatment of Epilepsy that offer both anti-ictogenci (ability to treat Epilepsy)
and anti-epileptogenic (ability to prevent Epilepsy) properties.
Liquidity
and Capital Resources
The
Company has generated limited revenue
from operations to date, and expects to continue generating limited operating
revenue for several years. Substantially all of the Company’s operations to date
have been funded through the sale of its securities, and the Company expects
this to continue in the foreseeable future.
Between
January 1, 2007 and March 15, 2007, the Company conducted a private placement
offering of its securities with institutional and individual investors and
received total gross proceeds of $2,379,005 from these sales. Costs and expenses
related to these offerings, including placement agent, legal, accounting and
other costs, totaled in the aggregate, approximately $158,200 and were charged
to additional paid-in-capital.
The
investors received an aggregate of 464,196 shares of the Company’s common stock
and warrants to purchase 232,098 shares of the Company’s common stock. The
common stock was sold in the offering at $5.125 per share and the exercise
price
of the warrants was $7.00 per share. The private offerings that took place
between January 1, 2007 and March 15, 2007 concluded
the Company’s previously disclosed private offering of up to $9.3 million of
Company common stock and warrants (the “Offering”).
The
principal uses of the Company’s cash and cash equivalents are concluding the
Phase II clinical trials, developing alternative delivery technologies,
improving on the synthetic processes, and continuing to fund pre-clinical
compounds associated with the agreements with PARTEQ. Although the Company
has
developed plans related to its operations, management continues to retain
significant flexibility for the uses of Company funds. In addition to meeting
its working capital needs, the Company may also use its cash and cash
equivalents to acquire additional products or technologies.
Although
the Company has developed initial plans and assumptions related to its
operations, management retains significant flexibility in applying a substantial
portion of the net proceeds of the Offerings. Pending use of the net proceeds,
the Company may invest the net proceeds of the offerings in short-term,
interest-bearing, investment-grade securities or accounts. In the three months
ended March 31, 2007, the Company generated $61,206 from interest and dividend
income, compared to $30,479 generated in the three months ended March 31, 2006.
The increase is largely attributable to the increase in the Company’s cash and
cash equivalents.
Results
of Operations
The
following discussion provides a comparison of the Company’s results of
operations for the quarter ended March 31, 2007 to the quarter ended March
31,
2006.
The
Company had revenues from operations of $194,400 for the quarter ended March
31,
2007, a 185.7% increase from the $68,040 in revenue achieved from the quarter
ended March 31, 2006. The increase in revenue was solely a result of an increase
in product sales to the Company’s sole customer of natural huperzine.
Cost
of
goods sold as a percentage of the Company’s revenue was 51.7% for the quarter
ended March 31, 2007, compared with 41.4% for the quarter ended March 31, 2006.
The decrease in the cost of goods sold as a percentage of the Company’s revenue
was attributable to the sale by the Company of natural huperzine to XEL at
cost.
The
Company’s total selling, general and administrative expenses increased from
$223,712 for the quarter ended March 31, 2006 to $698,129 for the quarter ended
March 31, 2007, an increase of $474,417, or approximately 212%. This increase
was the result of increases in salaries and employee benefit expenses resulting
from the Company’s expansion of its executive management team following the
acquisition of Q-RNA. Additionally, a portion of the increase in the selling,
general and administrative expenses from the prior year is attributable to
increased legal and rent costs.
The
Company’s research and development costs increased from $669,012 for the quarter
ended March 31, 2006 to $735,781 for the quarter ended March 31, 2007, an
increase of $66,769, or approximately 10.0%. The increase in research and
development expenses is attributable to the expansion of the Company’s clinical
development program and an additional $45,000 payment made to PARTEQ during
this
quarter resulting from late billing by PARTEQ. The Company expects operating
expenses in 2007 to increase further as the Company continues to expand its
research and development activities, including its planned IND for the
trandsdermal patch and increases in headcount to staff these activities.
The
Company’s share based compensation costs increased from $89,012 for the quarter
ended March 31, 2006 to $188,732 for the quarter ended March 31, 2007, an
increase of approximately 105.3%. The increase in share based compensation
expenses is attributable to employees receiving share based compensation in
the
three months ended March 31, 2007 that were not employed by the Company in
the
three months ended March 31, 2006.
In
December 2003, the Company entered into a clinical research agreement, which
was
amended in November 2005, with Georgetown pursuant to which Georgetown will
provide the Company with Phase II research on Huperzine A. The costs associated
with this agreement originally totaled $3,146,667 and would be partially funded
by the National Institutes of Health. The Company’s portion of the total cost
was $1,846,667 and payable in installments upon the achievement of certain
milestones. On December 8, 2006, the Company announced the expansion in
the size of the Phase II clinical trial by 60 participants, an increase of
40%. The Company’s portion of the total cost increased by an additional
$1,934,270, to an aggregate of $5,080,937, and is payable in quarterly
installments of approximately $316,000 and $140,000 at the conclusion of the
trial. This agreement may be terminated by either party upon 30 days notice.
The
Company expects to make additional payments to Georgetown of approximately
$1,850,000, or an aggregate of $3,696,667, until the conclusion of the Phase
II
clinical trials which the Company expects to occur later this year.
On
February 1, 2006, the Company entered into an exclusive development agreement
with Org Syn for the development by Org Syn of synthetic Huperzine A, in
accordance with the terms of the Agreement. Org Syn received an aggregate of
$209,727 upon the execution of the Agreement and may receive up to an additional
$209,727 upon the delivery of the synthetic Huperzine A.
On
March
15, 2006, the Company entered into a Development Agreement with XEL for XEL
to
develop a Huperzine A transdermal delivery system (the “Product”). Under the
terms of the agreement, the Company paid XEL a $250,000 fee upon the execution
of the Agreement and will pay XEL $92,500 per month during the development
of
the Product, which development is estimated to occur in the latter half of
2007
in accordance with the original estimates and the existing schedule. The monthly
payment is subject to quarterly adjustment and subject to a limit on aggregate
development cost overruns of $250,000. XEL
has
agreed to pay any cost overruns in excess of $250,000. The Company expects
that
if all of the milestones under its contract with XEL are achieved, the Company
would be required to make additional payments in calendar year 2007 of
approximately $655,500.
As
part
of the acquisition of Q-RNA, the Company assumed exclusive license agreements
with PARTEQ. Under the terms of the exclusive PARTEQ Licensing Agreement the
Company made an initial one-time license fee of C$25,000 and is obligated to
pay
fixed annual fees of $256,802 for the Alzheimer’s research. The Company may also
be required to make quarterly royalty payments of 3% of net sales of the
licensed products, with a minimum annual royalty of C$10,000 for 2007, C$20,000
for 2008, C$30,000 for 2009 and C$40,000 for 2010 and each subsequent calendar
year. Until such time as the Company has a licensed product, the Company will
not have to make any quarterly payments. The Company is also obligated to make
the following milestone payments: C$100,000 upon completion of a Phase I trial
of a licensed product, C$250,000 upon completion of a Phase II trial of a
licensed product, and C$1,000,000 upon the first FDA approval (as such term
is
defined in the PARTEQ Licensing Agreement). The Company does not currently
anticipate having a licensed product in the near term. The Company also has
the
right to sub-license with the payment of 20% of all non-royalty sublicensing
consideration.
Under
the
terms of the PARTEQ Licensing Option Agreement, which provides the Company
an
option to acquire an exclusive worldwide license to all innovations and
developments for certain compounds (including pyrimidine, heterocyclic,
beta-alanine, uracil, diuracil, beta amino acid analogs and related compounds)
and patents/patent applications related thereto from PARTEQ for Epilepsy
research, including the patent applications and additional filings, the Company
made an initial payment of C$10,000. The Company has also paid $3,493 to PARTEQ
under the terms of this agreement during the three months ended March 31, 2007.
If the Company exercises its option, the Company will make a non-refundable,
non-creditable license payment of C$17,500 at the time of such exercise and
will
be required to make quarterly royalty payments of 3% of net sales of the
licensed products, with a minimum annual royalty of C$10,000 through the second
anniversary of the license, C$20,000 through the third anniversary of the
license, C$30,000 through the fourth anniversary of the license and C$40,000
through the fifth anniversary of the license and each subsequent anniversary.
The Company does not anticipate having a licensed product in the near term
and
until such time will not be required to make quarterly payments. If the Company
exercises its option, the Company is also obligated to make the following
milestone payments: C$100,000 upon completion of a Phase I trial of a licensed
product, C$250,000 upon completion of a Phase II trial of a licensed product,
and C$1,000,000 upon the first FDA approval (as such term is defined therein).
If the Company exercises its option, the Company also has the right to
sub-license with the payment of 20% of all non-royalty sublicensing
consideration.
The
Company anticipates, based on current plans and assumptions relating to
operations, that its cash and cash equivalents are sufficient to satisfy its
contemplated cash requirements to implement its business plan for at least
the
next twelve months. In the event that the Company’s cash and cash equivalents
prove to be insufficient to fund the implementation of its business plan (due
to
a change in the Company’s plans or a material inaccuracy in its assumptions, or
as a result of unanticipated expenses, technical difficulties or other
unanticipated problems), the Company will be required to seek additional
financing sooner than anticipated in order to proceed with such implementation.
Additional funds may not be available on acceptable terms, if at all. If
adequate funds are unavailable the Company may have to delay, reduce the scope
of or eliminate one or more of its research or development programs, product
launches or marketing efforts which may materially harm the Company’s financial
condition and operations.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions which affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the balance sheet dates, and the recognition of revenues and
expenses for the reporting periods. These estimates and assumptions are affected
by management’s application of accounting policies.
Item
3. Controls
and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
Evaluation
The
Company carried out an evaluation, under the supervision, and with the
participation, of the Company’s management, including the Company’s Chief
Executive Officer and the Company’s Chief Financial Officer, of the
effectiveness of the Company’s disclosure controls and procedures as of March
31, 2007. Based on the foregoing, the Company’s Chief Executive Officer and
principal financial officer concluded that the Company’s disclosure controls and
procedures were effective as of March 31, 2007.
There
have been no significant changes during the quarter covered by this report
in
the Company’s internal control over financial reporting or in other factors that
could significantly affect the internal control over financial
reporting.
PART
II OTHER
INFORMATION
Item
2. Recent Sales of Unregistered Securities; Use of Proceeds from Registered
Securities.
On
February 14, 2007, the Company’s board of directors approved the issuance of a
warrant to purchase 100,000 shares of the Company’s common stock to Crystal
Research Associates, LLC (“CRA”), in connection with a letter agreement between
the Company and CRA. The warrant is exercisable at a price of $7.15 per share
and vests over the two year term of the agreement.
Item
6. Exhibits.
| 31.1 |
Certification of Chief Executive Officer Pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 |
Certification of the Chief Financial Officer Pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer Pursuant
to 18
U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
Neuro-Hitech,
Inc.
|
| |
(Registrant)
|
| |
|
| |
|
|
Date:
May 15, 2007
|
/s/
Reuben Seltzer
|
|
|
Reuben
Seltzer
|
| |
President
and Chief Executive Officer
|
| |
|
| |
|
| |
|
|
Date:
May 15, 2007
|
/s/
David Barrett
|
|
|
David
Barrett
|
| |
Chief
Financial Officer
|