ITEM
1. Financial Statements.
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
CONSOLIDATED
BALANCE SHEETS
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,725,353
|
|
|
$
|
23,848,892
|
|
Short term deposits
|
|
|
5,219,885
|
|
|
|
10,064,439
|
|
Accounts receivable and prepaid expenses
|
|
|
274,334
|
|
|
|
395,413
|
|
Restricted cash
|
|
|
61,650
|
|
|
|
135,837
|
|
Total Current Assets
|
|
|
30,281,222
|
|
|
|
34,444,581
|
|
|
|
|
|
|
|
|
|
|
Long-term Assets:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,105,695
|
|
|
|
1,162,065
|
|
Assets held for employees’ severance payments
|
|
|
330,315
|
|
|
|
304,477
|
|
Long term deposit
|
|
|
5,705
|
|
|
|
5,575
|
|
Total Long Term Assets
|
|
|
1,441,715
|
|
|
|
1,472,117
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
31,722,937
|
|
|
$
|
35,916,698
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
372,745
|
|
|
$
|
913,514
|
|
Related parties payable
|
|
|
69,147
|
|
|
|
225,480
|
|
Accrued expenses and other liabilities
|
|
|
1,368,490
|
|
|
|
1,196,034
|
|
Total Current Liabilities
|
|
|
1,810,382.00
|
|
|
|
2,335,028
|
|
|
|
|
|
|
|
|
|
|
Liability in Respect of Employees
Severance Payments
|
|
|
458,777
|
|
|
|
381,399
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Stock capital -
|
|
|
|
|
|
|
|
|
Preferred stock of $ 0.00001 par value per share 10,000,000 shares of preferred stock authorized; none issued and outstanding
as of March 31, 2013 and December 31, 2012, respectively.
|
|
|
-
|
|
|
|
-
|
|
Common shares of $ 0.00001 par value per share 300,000,000 shares of common stock authorized; 63,680,118 and 63,405,118
shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively.
|
|
|
636
|
|
|
|
634
|
|
Additional paid-in capital
|
|
|
102,116,395
|
|
|
|
101,118,082
|
|
(Deficit) accumulated during the development stage
|
|
|
(72,663,253
|
)
|
|
|
(67,918,445
|
)
|
Total Shareholders’ Equity
|
|
|
29,453,778
|
|
|
|
33,200,271
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
31,722,937
|
|
|
$
|
35,916,698
|
|
The accompanying notes are an integral
part of the unaudited consolidated financial statements.
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
Period from
May 31, 2005
|
|
|
|
For the three months ended
|
|
|
(date of
inception) to
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
(3,197,600
|
)
|
|
|
(4,304,070
|
)
|
|
|
(51,545,760
|
)
|
General and administrative
|
|
|
(1,530,984
|
)
|
|
|
(789,780
|
)
|
|
|
(21,639,123
|
)
|
Total operating expenses
|
|
|
(4,728,584
|
)
|
|
|
(5,093,850
|
)
|
|
|
(73,184,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
|
|
|
(4,728,584
|
)
|
|
|
(5,093,850
|
)
|
|
|
(73,184,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income (expenses), net
|
|
|
(16,224
|
)
|
|
|
94,479
|
|
|
|
521,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(4,744,808
|
)
|
|
$
|
(4,999,371
|
)
|
|
$
|
(72,663,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) per share (basic & diluted)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
63,420,545
|
|
|
|
54,730,050
|
|
|
|
|
|
The accompanying notes are an integral
part of the unaudited consolidated financial statements.
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the three months ended
March 31,
|
|
|
Period from May
31, 2005 (date of
inception)
to March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(4,744,808
|
)
|
|
$
|
(4,999,371
|
)
|
|
$
|
(72,663,253
|
)
|
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
62,547
|
|
|
|
51,342
|
|
|
|
663,098
|
|
In-process research and development write-off
|
|
|
|
|
|
|
-
|
|
|
|
3,222,831
|
|
Stock based compensation
|
|
|
960,813
|
|
|
|
391,675
|
|
|
|
12,478,746
|
|
Long term deposit exchange rate differences
|
|
|
(130
|
)
|
|
|
(128
|
)
|
|
|
(1,062
|
)
|
(Increase) decrease in accounts receivable and prepaid expenses
|
|
|
121,081
|
|
|
|
(52,364
|
)
|
|
|
(274,055
|
)
|
Increase in accrued severance pay, net
|
|
|
77,378
|
|
|
|
49,513
|
|
|
|
458,777
|
|
Increase (decrease) in trade payables
|
|
|
(540,769
|
)
|
|
|
626,802
|
|
|
|
362,641
|
|
Increase (decrease) in related parties
|
|
|
(156,333
|
)
|
|
|
(156,533
|
)
|
|
|
69,147
|
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
172,456
|
|
|
|
(618,229
|
)
|
|
|
1,247,474
|
|
Net cash (used in) operating activities
|
|
|
(4,047,765
|
)
|
|
|
(4,707,293
|
)
|
|
|
(54,435,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(6,177
|
)
|
|
|
(117,121
|
)
|
|
|
(1,754,437
|
)
|
Payment for the acquisition of Prolor Biotech Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
(474,837
|
)
|
Assets held for employees’ severance payments
|
|
|
(25,838
|
)
|
|
|
(25,083
|
)
|
|
|
(330,315
|
)
|
Long term (deposit)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,643
|
)
|
Short term (deposit) release
|
|
|
4,844,554
|
|
|
|
(1,745,464
|
)
|
|
|
(5,219,885
|
)
|
Restricted cash
|
|
|
74,187
|
|
|
|
98,685
|
|
|
|
(61,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
4,886,726
|
|
|
|
(1,790,663
|
)
|
|
|
(7,845,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term bank credit
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,841
|
)
|
Proceeds from loans
|
|
|
—
|
|
|
|
-
|
|
|
|
(173,000
|
)
|
Principal payment of loans
|
|
|
—
|
|
|
|
-
|
|
|
|
173,000
|
|
Contributed profit from shareholder’s transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
17,012
|
|
Proceeds from issuance of shares
|
|
|
-
|
|
|
|
-
|
|
|
|
82,043,987
|
|
Proceeds from exercise of options
|
|
|
37,500.00
|
|
|
|
12,212
|
|
|
|
1,319,573
|
|
Proceeds from exercise of warrants
|
|
|
-
|
|
|
|
474,361
|
|
|
|
3,629,045
|
|
Net cash provided by financing activities
|
|
|
37,500
|
|
|
|
486,573
|
|
|
|
87,006,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
876,461
|
|
|
|
(6,011,383
|
)
|
|
|
24,725,353
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
23,848,892
|
|
|
|
13,261,687
|
|
|
|
0
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
24,725,353
|
|
|
$
|
7,250,304
|
|
|
$
|
24,725,353
|
|
The accompanying notes are an integral
part of the unaudited consolidated financial statements.
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the three months ended
March 31,
|
|
|
Period from May
31, 2005
(date of inception)
to March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
Non cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee options exercised into shares
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
140
|
|
Issuance of common stock in reverse acquisition
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred to common stock
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18
|
|
Cashless exercise of 0, 97,390 917,421outstanding warrants to purchase0, 59,163 and 625,797 shares of common stock, respectively
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of the unaudited consolidated financial statements.
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
|
a.
|
Prolor Biotech, Inc. (the
“Company”) was incorporated on August 22, 2003
under the laws of the State of Nevada. The Company is a
development stage biopharmaceutical company, utilizing
an exclusive license from Washington University to patented
technology in the development of longer-acting versions
of already-approved therapeutic proteins, through its Israeli
subsidiary, Prolor Biotech Ltd.
|
|
b.
|
The Company currently devotes
substantially all of its efforts toward research and development
activities. The Company’s activities also include
raising capital, recruiting personnel and building infrastructure.
In the course of such activities, the Company has sustained
operating losses and expects such losses to continue for
the foreseeable future. The Company has not generated any
revenues or product sales and has not achieved profitable
operations or positive cash flow from operations. The Company’s
deficit accumulated during the development stage aggregated
$72,663,253 as of March 31, 2013. There is no assurance
that profitable operations, if ever achieved, could be sustained
on a continuing basis. The Company believes that its current
cash sources will enable the continuance of the Company’s
activities for at least a year with no need for additional
funding.
|
|
NOTE 2 -
|
SIGNIFICANT ACCOUNTING POLICIES
|
|
a.
|
Basis of presentation:
The accompanying unaudited financial statements of the Company are presented in accordance with the requirements of Form 10-Q
and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been
condensed or omitted pursuant to such U.S. Securities and Exchange Commission (“SEC”) rules and regulations. In the
opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation
have been made. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying
financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December
31, 2012 and the notes thereto included in the Company’s Report on Form 10-K filed with the SEC on March 15, 2013.
|
|
b.
|
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries,
Modigene Inc. and Prolor Biotech Ltd. Intercompany transactions and balances have been eliminated upon consolidation.
|
|
c.
|
Loss per share:
Basic and diluted losses per share are presented in accordance with ASC No. 260 “Earnings per
share”. Outstanding options, warrants and restricted stock have been excluded from the calculation of the diluted loss per
share because all such securities are antidilutive. The number of shares of the Company’s common stock, par value $0.00001
per share (“Common Stock”), issuable upon exercise or conversion of the foregoing securities that have been excluded
from calculations for the three months ended March 31, 2013 and 2012 were 6,658,244 and 7,129,749, respectively.
|
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
|
NOTE 2 -
|
SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
d.
|
Fair value measurements:
As defined in ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), fair value is based on the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used
to measure fair value into three broad levels, which are described below:
|
|
-
|
Level 1:
Quoted prices (unadjusted)
in active markets that
are accessible at the
measurement date for
assets or liabilities.
The fair value hierarchy
gives the highest priority
to Level 1 inputs.
|
|
-
|
Level 2:
Other inputs that are
observable, directly
or indirectly, such as
quoted prices for similar
assets and liabilities
or market corroborated
inputs.
|
|
-
|
Level 3:
Unobservable inputs are
used when little or no
market data is available,
which requires the Company
to develop its own assumptions
about how market participants
would value the assets
or liabilities. The fair
value hierarchy gives
the lowest priority to
Level 3 inputs.
|
In determining fair value,
the Company utilizes valuation techniques in its assessment that maximize the use of observable inputs and minimize the use of
unobservable inputs.
The following table presents the Company’s financial assets and liabilities that are carried at fair value, classified according
to the three categories described above:
|
|
Fair Value Measurements at March 31, 2013
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Cash and cash equivalents
|
|
$
|
24,725,353
|
|
|
$
|
24,725,353
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short term deposits
|
|
|
5,219,885
|
|
|
|
5,219,885
|
|
|
|
-
|
|
|
|
-
|
|
Restricted cash
|
|
|
61,650
|
|
|
|
61,650
|
|
|
|
-
|
|
|
|
-
|
|
Total assets at fair value
|
|
$
|
30,006,888
|
|
|
$
|
30,006,888
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Fair Value Measurements at December 31, 2012
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Cash and cash equivalents
|
|
$
|
23,848,892
|
|
|
$
|
23,848,892
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short term deposits
|
|
|
10,064,439
|
|
|
|
10,064,439
|
|
|
|
-
|
|
|
|
-
|
|
Restricted cash
|
|
|
135,837
|
|
|
|
135,837
|
|
|
|
-
|
|
|
|
-
|
|
Total assets at fair value
|
|
$
|
34,049,168
|
|
|
$
|
34,049,168
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
e.
|
Concentrations of credit risk:
|
Financial instruments
that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash
equivalents. Cash and cash equivalents are invested in major banks in Israel and in the United States. Such deposits in Israel
and the United States are not insured. Management believes that the financial institutions that hold the Company’s cash
and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to such cash and cash equivalents.
The Company has no off-balance-sheet
arrangements that subject the company to credit risk.
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
|
NOTE 2 -
|
SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
f.
|
Recent
accounting pronouncements:
|
In December 2011, the FASB issued
Accounting Standards Update No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”).
The objective of ASU 2011-11 is to enhance disclosures by requiring improved information about financial instruments and derivative
instruments in relation to netting arrangements. ASU 2011-11 is effective for interim and annual periods beginning on or after
January 1, 2013. The adoption of ASU 2011-11 did not have a material impact on its consolidated results of operation and
financial condition.
On February 5, 2013, the FASB
issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which adds additional
disclosure requirements relating to the reclassification of items out of accumulated other comprehensive income. This ASU
is effective for the first quarter of 2013 and affects only disclosures. The adoption of ASU 2013-02 did not have a material impact
on its consolidated results of operation and financial condition.
There were various other updates recently issued,
none of which are expected to a have a material impact on the Company’s financial position, results of operations or cash
flows.
|
NOTE 3 -
|
ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Israeli government authorities
|
|
$
|
199,747
|
|
|
$
|
276,604
|
|
Prepaid expenses
|
|
|
74,587
|
|
|
|
118,809
|
|
|
|
$
|
274,334
|
|
|
$
|
395,413
|
|
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
|
NOTE 4 -
|
PROPERTY AND EQUIPMENT, NET
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cost:
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
41,767
|
|
|
$
|
41,767
|
|
Computers and electronic equipment
|
|
|
142,121
|
|
|
|
141,574
|
|
Laboratory equipment
|
|
|
1,231,711
|
|
|
|
1,226,909
|
|
Leasehold improvements
|
|
|
370,964
|
|
|
|
370,136
|
|
|
|
|
1,786,563
|
|
|
|
1,780,386
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
|
8,915
|
|
|
|
8,340
|
|
Computers and electronic equipment
|
|
|
112,842
|
|
|
|
106,750
|
|
Laboratory equipment
|
|
|
463,352
|
|
|
|
421,137
|
|
Leasehold improvements
|
|
|
95,759
|
|
|
|
82,094
|
|
|
|
|
680,868
|
|
|
|
618,321
|
|
Depreciated cost
|
|
$
|
1,105,695
|
|
|
$
|
1,162,065
|
|
|
|
Depreciation expenses for the three
months ended March 31, 2013 and 2012 and for the period from May 31,
2005 (inception date) through March 31, 2013 were $62,547, $51,342 and
$663,098, respectively.
|
|
NOTE 5 -
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Employees and payroll accruals
|
|
$
|
269,192
|
|
|
$
|
213,020
|
|
Accrued expenses
|
|
|
1,099,298
|
|
|
|
983,014
|
|
|
|
$
|
1,368,490
|
|
|
$
|
1,196,034
|
|
|
NOTE 6 -
|
STOCK OPTION PLANS
|
As of March 31, 2013, the Company
had two stock option plans, under which there were outstanding stock options to purchase 1,130,797 shares of Common Stock that
were granted under the Company’s 2005 Stock Incentive Plan (the “2005 Plan”), and outstanding options to purchase
5,490,741 shares of Common Stock that were granted under the Company’s 2007 Equity Incentive Plan (the “2007 Plan”
and, together with the 2005 Plan, the “Equity Incentive Plans”). The Company has issued the maximum number of shares
authorized under the 2005 Plan. On May 22, 2009, the Company approved an amendment to the 2007 Plan, which increased the
number of shares of Common Stock authorized for issuance under the 2007 Plan from 3,000,000 shares to 6,000,000 shares. The Company’s
Board of Directors has approved a further amendment to the 2007 Plan, which, if approved by the Company’s stockholders at
the Company’s 2013 Annual Meeting, would increase the number of shares of Common Stock authorized for issuance thereunder
from 6,000,000 to 10,000,000.
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
Options granted under the Equity
Incentive Plans and the related award agreements expire ten years following the date of grant, unless earlier terminated in accordance
with the terms of such grants. Options no longer vest following the termination of the grant recipient’s employment or other
relationship with the Company.
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
NOTE 6 - STOCK OPTION PLANS
(continued)
|
|
The Company accounts for employees’
and directors’ stock-based compensation in accordance with ASC
718-10, “Share-Based Payment”. ASC 718-10 requires companies
to estimate the fair value of equity-based payment awards at the date
of grant. The value of the portion of the award that is ultimately expected
to vest is recognized as an expense over the requisite service periods
in the Company’s consolidated income statements.
|
The
Company recognizes compensation expenses for the value of awards granted based on the straight line method over the requisite
service period, net of estimated forfeitures.
The Company applies ASC 505-50,
“Equity Based Payments to Non Employees” (“ASC 505-50”), with respect to options issued to non-employees.
The Company has accounted for these grants under the fair value method of ASC 505-50, using a Black-Scholes option-pricing model.
The following table summarizes
all share-based compensation expenses related to grants under the Equity Incentive Plans to employees, directors and consultants
included in the Company’s consolidated statements of operations contained in this Quarterly Report on Form 10-Q:
|
|
|
|
|
Period from
May 31, 2005
|
|
|
|
For the three months ended
|
|
|
(date of
inception)
|
|
|
|
March 31,
|
|
|
to March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
Research and development
|
|
$
|
347,419
|
|
|
$
|
149,092
|
|
|
$
|
6,977,752
|
|
General and administrative
|
|
|
613,394
|
|
|
|
242,583
|
|
|
|
5,500,994
|
|
Total
|
|
$
|
960,813
|
|
|
$
|
391,675
|
|
|
$
|
12,478,746
|
|
The Company selected the Black-Scholes
Merton option pricing model as the most appropriate fair value method for its stock-options awards. The option-pricing model requires
a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected
volatility was calculated based upon actual historical stock price movements. The expected term of options granted is based upon
historical experience and represents the period of time that options granted are expected to be outstanding.
The risk-free interest rate
is based on the yield from U.S. treasury bonds with an equivalent term. The Company has not paid dividends and is not expected
to pay dividends in the foreseeable future.
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
NOTE 6 - STOCK OPTION PLANS
(continued)
The following
is a summary of the stock options granted under the 2005 Plan and the 2007 Plan:
|
|
For the three months ended
March 31, 2013
|
|
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at the beginning of the period
|
|
|
5,514,038
|
|
|
$
|
2.24
|
|
Exercised
|
|
|
25,000
|
|
|
$
|
0.88
|
|
Issued under the 2007 Plan
|
|
|
1,132,500
|
|
|
$
|
4.74
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the period
|
|
|
6,621,538
|
|
|
$
|
2.67
|
|
Options exercisable
|
|
|
4,865,538
|
|
|
$
|
1.64
|
|
|
|
For the three months ended
March 31, 2012
|
|
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at the beginning of the period
|
|
|
5,302,905
|
|
|
$
|
2.07
|
|
Exercised
|
|
|
(5,533
|
)
|
|
$
|
2.21
|
|
Issued under the 2007 Plan
|
|
|
197,000
|
|
|
$
|
6.27
|
|
Outstanding at the end of the period
|
|
|
5,494,372
|
|
|
$
|
2.22
|
|
Options exercisable
|
|
|
4,304,080
|
|
|
$
|
1.33
|
|
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
|
NOTE 6 -
|
STOCK OPTION PLANS
(CONTINUED)
|
The total unrecognized estimated compensation cost
related to non-vested stock options granted through March 31, 2013 was $4,267,081, which is expected to be recognized over a period
of up to four years.
|
|
The options outstanding as of March
31, 2013 have been separated by exercise prices, as follows:
|
Exercise
Price
|
|
|
# of Options
Outstanding
|
|
|
Average
Remaining
Contractual
Life (years)
|
|
|
# of Options
Exercisable
|
|
|
Intrinsic
Value of
Options
Outstanding
|
|
|
Fair value
estimated at
grant day
|
|
$
|
0.65
|
|
|
|
365,000
|
|
|
|
5.85
|
|
|
|
365,000
|
|
|
|
4.41
|
|
|
|
0.53
|
|
$
|
0.88
|
|
|
|
871,942
|
|
|
|
3.06
|
|
|
|
871,942
|
|
|
|
4.17
|
|
|
|
0.59
|
|
$
|
0.90
|
|
|
|
1,937,239
|
|
|
|
4.92
|
|
|
|
1,937,239
|
|
|
|
4.16
|
|
|
|
0.74
|
|
$
|
0.93
|
|
|
|
25,000
|
|
|
|
4.93
|
|
|
|
25,000
|
|
|
|
4.13
|
|
|
|
0.74
|
|
$
|
1.32
|
|
|
|
93,855
|
|
|
|
3.26
|
|
|
|
93,855
|
|
|
|
3.74
|
|
|
|
0.64
|
|
$
|
1.50
|
|
|
|
119,502
|
|
|
|
5.07
|
|
|
|
119,502
|
|
|
|
3.56
|
|
|
|
0.58
|
|
$
|
2.00
|
|
|
|
400,000
|
|
|
|
4.11
|
|
|
|
400,000
|
|
|
|
3.06
|
|
|
|
1.52
|
|
$
|
2.35
|
|
|
|
50,000
|
|
|
|
6.77
|
|
|
|
37,500
|
|
|
|
2.71
|
|
|
|
1.98
|
|
$
|
2.40
|
|
|
|
500,000
|
|
|
|
6.79
|
|
|
|
375,000
|
|
|
|
2.66
|
|
|
|
2
|
|
$
|
2.50
|
|
|
|
19,500
|
|
|
|
4.12
|
|
|
|
19,500
|
|
|
|
2.56
|
|
|
|
1.20
|
|
$
|
4.52
|
|
|
|
10,000
|
|
|
|
9.63
|
|
|
|
0
|
|
|
|
0.54
|
|
|
|
3.2
|
|
$
|
4.74
|
|
|
|
1,132,500
|
|
|
|
4.74
|
|
|
|
64,500
|
|
|
|
0.32
|
|
|
|
3.42
|
|
$
|
5.47
|
|
|
|
190,000
|
|
|
|
8.35
|
|
|
|
160,000
|
|
|
|
0
|
|
|
|
2.19
|
|
$
|
5.71
|
|
|
|
25,000
|
|
|
|
9.07
|
|
|
|
6,250
|
|
|
|
0
|
|
|
|
3.42
|
|
$
|
6.23
|
|
|
|
179,000
|
|
|
|
7.79
|
|
|
|
89,500
|
|
|
|
0
|
|
|
|
2.44
|
|
$
|
6.27
|
|
|
|
203,000
|
|
|
|
8.82
|
|
|
|
50,750
|
|
|
|
0
|
|
|
|
3.48
|
|
$
|
6.47
|
|
|
|
500,000
|
|
|
|
7.76
|
|
|
|
250,000
|
|
|
|
0
|
|
|
|
3.84
|
|
|
|
|
|
|
6,621,538
|
|
|
|
|
|
|
|
4,865,538
|
|
|
|
|
|
|
|
|
|
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
|
|
For the three months ended
March 31, 2013
|
|
|
|
Number
of warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding and exercisable at the beginning of the period
|
|
|
321,335
|
|
|
$
|
0.88
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at the end of the period
|
|
|
321,335
|
|
|
$
|
|
|
|
|
For the three months ended
March 31, 2012
|
|
|
|
Number
of warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding and exercisable at the beginning of the period
|
|
|
2,007,856
|
|
|
$
|
2.15
|
|
Exercised
|
|
|
(270,258
|
)
|
|
$
|
2.50
|
|
Exercised
|
|
|
(7,038
|
)
|
|
$
|
0.88
|
|
Outstanding and exercisable at the end of the period
|
|
|
1,730,560
|
|
|
$
|
2.10
|
|
Proceeds from the exercise
of 0 and 277,296 warrants into 0 and 239,069 shares of Common Stock for the three months ended March 31, 2013 and 2012, respectively,
were $0 and $474,361, respectively. Proceeds from the exercise of 3,129,106 warrants into 2,543,958 shares of Common Stock for
the period from May 31, 2005 (date of inception) to March 31, 2013 were $3,629,045
Total aggregate intrinsic
value of warrants outstanding as of March 31, 2013 and 2012 was $1,340,133 and $1,306,866, respectively.
|
NOTE 8 -
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
On March 13, 2011, the Company’s
wholly owned subsidiary, Prolor Biotech Ltd. (“
Prolor Ltd
.”), entered into a lease for office premises for
an original term that ended March 2013. The lease may be renewed annually for up to five successive one-year periods, unless sooner
terminated, and such lease was renewed for a one-year period upon expiration of the original term. Aggregate minimum rental commitments
under the non-cancelable lease as of March 31, 2013 were as follows:
Year ended March 31,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
$
|
212,582
|
|
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
NOTE
9 - COMMON STOCK
On February 4, 2013, the Company
awarded its President, Chief Executive Officer and the Chief Operating Officer of Prolor Ltd., an aggregate of 100,000, 100,000
and 50,000 shares of restricted Common Stock, subject to the terms and conditions of 2007 Plan. The shares vest in equal monthly
installments over 12 months following the date of grant. Each such share of restricted stock was valued at $4.74 on the date of
grant, and the Company recorded $197,500 as-stock based compensation expense for the quarter ended March 31, 2013.
|
|
During the three months ended March
31, 2013, the Company issued additional shares of Common Stock as follows:
|
- 25,000
shares upon the exercise of 25,000 options at an exercise price of $1.5 per share.
NOTE 10 - FINANCIAL
(EXPENSES) INCOME, NET
|
|
|
|
|
Period from May
31, 2005
|
|
|
|
For the three months ended
|
|
|
(date of inception)
|
|
|
|
March 31,
|
|
|
to March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
Financial income
|
|
$
|
22,295
|
|
|
$
|
15,718
|
|
|
$
|
1,182,985
|
|
Financial (expenses) and bank fees
|
|
|
(7,195
|
)
|
|
|
(9,662
|
)
|
|
|
(200,504
|
)
|
Exchange rate differences gain (loss)
|
|
|
(31,324
|
)
|
|
|
88,423
|
|
|
|
(460,851
|
)
|
|
|
$
|
(16,224
|
)
|
|
$
|
94,479
|
|
|
$
|
521,630
|
|
NOTE
11 -SUBSEQUENT EVENTS
|
|
As defined in FASB ASC 855-10, “Subsequent
Events”, subsequent events are events or transactions that occur
after the balance sheet date but before financial statements are issued
or available to be issued.
|
The Company evaluated all events
and transactions that occurred subsequent to the balance sheet date and prior to the date on which the financial statements contained
in this report were issued, and the Company determined that the following events necessitated disclosure.
On April 23, 2013, the Company,
OPKO Health, Inc., a Delaware corporation (“OPKO”), and POM Acquisition, Inc., a Nevada corporation and a direct wholly
owned subsidiary of OPKO (“POM”), entered into an agreement and plan of merger (the “Merger Agreement”).
Pursuant to the Merger Agreement, POM will be merged with and into the Company (the “Merger”) and the Company will
be the surviving corporation and OPKO’s wholly owned subsidiary.
At the effective time of the
merger (the “Effective Time”), each issued and outstanding share of Common Stock automatically will be converted into
and exchanged for the right to receive 0.9951 of a share of OPKO’s common stock, par value $0.01 per share (the “Exchange
Ratio”). In addition, subject to certain limitations described in the Merger Agreement (1) all warrants to purchase Common
Stock will be converted into and become rights with respect to OPKO’s common stock (the “Parent Common Stock”),
and OPKO shall assume each warrant in accordance with the terms of such warrant, subject to adjustment by the Exchange Ratio,
and (2) each option to purchase one share of Common Stock will be converted into and become rights with respect to Parent Common
Stock, and OPKO will assume each such option, in accordance with the terms of the applicable option plan and/or stock option agreement,
subject to adjustment by the Exchange Ratio. Closing of the transaction is subject to certain conditions including, the approval
of OPKO’s and the Company’s stockholders and other customary closing conditions.
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
The Merger Agreement contains
a “go shop” provision pursuant to which the Company has the right to solicit, encourage, facilitate and engage in
discussions and negotiations with third parties with respect to competing proposals through June 2, 2013 (the “Solicitation
Period End Date”). After the Solicitation Period End Date, the Company may continue discussions until June 22, 2013 (the
“Cut-Off Date”) with any party that has submitted a competing proposal that the Board of Directors of the Company
and Strategic Alternatives Committee of the Company’s Board of Directors determine in good faith would reasonably be expected
to result in a Superior Proposal as defined in the Merger Agreement.
For more information regarding
the Merger Agreement, please see the Company’s Current Report on Form 8-K filed with the SEC on April 29, 2013.
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ITEM 2.
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
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Note Regarding Forward-Looking Statements
This Quarterly Report
on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the “PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section
21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs or intentions
regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can
identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,”
“believes,” “estimates,” “likely,” “goal,” “assumes,” “targets”
and similar expressions and/or the use of future tense or conditional constructions (such as “will,” “may,”
“could,” “should” and the like) and by the fact that these statements do not relate strictly to historical
or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results
as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements
are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results
expressed or implied by the forward-looking statements. Many factors could cause our actual operations or results to differ materially
from the operations and results anticipated in forward-looking statements. These factors include, but are not limited to, the factors
contained in “Item 1A — Risk Factors” of our most recently filed Annual Report on Form 10-K, as updated by our
subsequently filed Forms 10-Q or other documents we file with the SEC. We do not undertake any obligation to update forward-looking
statements, except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions
of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect
to future events and financial performance.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion
should be read in conjunction with the consolidated financial statements and the related notes thereto that appear in Item 1 of
this Quarterly Report on Form 10-Q.
The discussion and
analysis of the Company’s financial condition and results of operations are based on the Company’s financial statements,
which the Company has prepared in accordance with U.S. generally accepted accounting principles (“
GAAP
”). The
preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well
as the reported revenues and expenses during the reporting periods. On an ongoing basis, the Company evaluates such estimates and
judgments, including those described in greater detail below. The Company bases its estimates on historical experience and on various
other factors that the Company believes are reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Overview
We are a development
stage biopharmaceutical company utilizing patented technology to develop longer-acting, proprietary versions of already-approved
therapeutic proteins that currently generate billions of dollars in annual global sales. We have obtained certain exclusive worldwide
rights from Washington University in St. Louis, Missouri to use a short, naturally-occurring amino acid sequence (peptide) that
has the effect of slowing the removal from the body of the therapeutic protein to which it is attached. This Carboxyl Terminal
Peptide (CTP) can be readily attached to a wide array of existing therapeutic proteins, stabilizing the therapeutic protein in
the bloodstream and extending its life span without additional toxicity or loss of desired biological activity. We are using the
CTP technology to develop new, proprietary versions of certain existing therapeutic proteins that have longer life spans than therapeutic
proteins without CTP. We believe that our products will have greatly improved therapeutic profiles and distinct market advantages.
We also obtained certain
exclusive worldwide rights from Yeda Research and Development Company Ltd. (“
Yeda
”) for a technology that allows
elongation of circulation time in the body of therapeutic drugs. This technology is named “Reversible PEGylation”.
We plan on using the Reversible PEGylation technology to develop new, proprietary versions of certain existing therapeutic drugs
that have longer life spans than therapeutic proteins without Reversible PEGylation. The license to the Reversible PEGylation technology
is exclusive, worldwide, and excludes development or commercialization of drug compounds in the following fields: (a) haemophilia
A or B; (b) inhibitor haemophilia; (c) haemorrhage; and/or (d) von Willebrand Disease. The license also excludes drugs containing
any of the coagulation proteins known as Factors V, VII, VIIa, VIII or IX, including, in each case, any respective functional human
protein molecule of any of the foregoing, including any fragment, subunit, derivative or modified form of any of the foregoing
(whether recombinant or human plasma derived). Under the Reversible PEGylation license agreement, we are subject to development
and commercialization milestones and timelines, and we are obligated to pay Yeda certain annual fees, as well as up to 3.5% on
net sales of products developed using the Reversible PEGylation technology.
We believe our products
in development will provide several key advantages over our competitor’s existing products:
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significant reduction in the number of injections required to achieve the same or superior therapeutic
effect from the same dosage;
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faster commercialization with greater chance of success and lower costs than those typically associated
with a new therapeutic protein; and
|
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|
manufacturing using industry-standard biotechnology-based protein production processes.
|
Merck & Co. has
developed the first novel protein containing CTP, named ELONVA®, a long-acting CTP-modified version of the fertility drug follicle
stimulating hormone (FSH). On January 28, 2010, Merck received marketing authorization from the European Commission for ELONVA®
with unified labeling valid in all European Union Member States. Our license for CTP technology extends to all human therapeutic
applications other than Follicle Stimulating Hormone (FSH), human Chorionic Gonadotropin (hCG), Luteinizing Hormone (LH) and Thyroid-Stimulating
Hormone (TSH).
Our internal product
development program is currently focused on extending the life span of the following biopharmaceuticals, in an effort to provide
patients with improved therapies that may enhance their quality of life:
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Human Growth Hormone (hGH)
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Diabetes Type II & Obesity Peptide Oxyntomodulin
|
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|
Interferon β and Erythropoietin (EPO)
|
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Atherosclerosis and rheumatoid arthritis long-acting therapies
|
We believe that the
CTP technology will be broadly applicable to these, as well as other, best-selling therapeutic proteins in the market.
Critical Accounting Policies
The historical financial
statements of the Company included with this Quarterly Report have been prepared in accordance with GAAP. The significant accounting
policies followed in the preparation of the financial statements, on a consistent basis, are described below.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Financial
Statements in U.S. Dollars:
The functional and reporting currency of the Company is the U.S. dollar, as the
U.S. dollar is the primary currency of the economic environment in which the Company has operated and expects to operate in the
foreseeable future. The Company’s R&D subsidiary,
PROLOR Biotech Ltd., which we refer to as PROLOR LTD (formerly
known as
ModigeneTech Ltd.), conducts the majority of its operations in Israel. Most of the Israeli
expenses are currently determined and paid in U.S. dollars. Financing and investing activities including loans and equity transactions
are made in U.S. dollars.
Monetary accounts maintained
in currencies other than the U.S. dollar are remeasured into U.S. dollars. All transaction gains and losses from the remeasurement
of monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company’s wholly owned subsidiary, Modigene Delaware, and
its wholly owned subsidiary, PROLOR LTD. Intercompany transactions and balances have been eliminated upon consolidation.
Research and Development
Costs and Participation:
Research and development (“R&D”) costs are expensed as they are incurred and consist
of salaries, benefits and other personnel-related costs, fees paid to consultants, clinical trials and related clinical manufacturing
costs, license and milestone fees, and facilities and overhead costs. R&D expenses consist of independent R&D costs and
costs associated with collaborative R&D and in-licensing arrangements. Participation from government for development of approved
projects are recognized as a reduction of expenses as the related costs are incurred.
Concentrations of
Credit Risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally
of cash and cash equivalents.
Cash and cash equivalents
are invested in major banks in Israel and the United States. Such deposits in the United States are not fully insured. Management
believes that the financial institutions that hold the Company’s investments are financially sound, and, accordingly, minimal
credit risk exists with respect to these investments.
The Company has no
off-balance sheet concentration of credit risk, such as foreign exchange contracts or other foreign hedging arrangements.
Royalty-bearing
Grants:
Royalty-bearing grants from the Government of Israel for participation in the development of approved projects are
recognized as a reduction of expenses as the related costs are incurred. Funding is recognized at the time PROLOR LTD is entitled
to such grants, on the basis of the costs incurred.
Research and development
grants received by PROLOR LTD for the three months ended March 31, 2013 and 2012 and for the period from May 31, 2005 (inception
date) through March 31, 2013 were $0, $0, and $5,922,588, respectively. Research and development grants for the first quarter of
2013 are expected to be received during the second quarter.
Loss per Share
:
Basic and diluted losses per share are presented in accordance with ASC 260-10
“Earnings per share”
. Outstanding
share options, warrants and restricted shares have been excluded from the calculation of diluted loss per share because the effect
of all such securities is antidilutive. The total weighted average number of shares of Common Stock related to outstanding options
and warrants excluded from the calculations of diluted loss per share for the three month periods ended March 31, 2013 and 2012
and for the period from May 31, 2005 (date of inception) to March 31, 2013 was 6,658,244, 7,129,749 and, 7,652,676, respectively.
Recent Events
On April 23, 2013, we entered into an agreement
and plan of merger (the “
Merger Agreement
”) with OPKO Health, Inc., a Delaware corporation (“
OPKO
”),
and POM Acquisition, Inc., a Nevada corporation and a direct wholly owned subsidiary of OPKO (“
POM
”). Pursuant
to the Merger Agreement, POM will be merged with and into us (the “
Merger
”) and we will be the surviving corporation
and OPKO’s wholly owned subsidiary.
At the effective time of the merger (the
“
Effective Time
”), each issued and outstanding share of our common stock (“
Common Stock
”)
automatically will be converted into and exchanged for the right to receive 0.9951 of a share of OPKO’s common stock, par
value $0.01 per share (the “
Exchange Ratio
”). In addition, subject to certain limitations described in the
Merger Agreement (1) all warrants to purchase Common Stock will be converted into and become rights with respect to OPKO’s
common stock (the “
Parent Common Stock
”), and OPKO shall assume each warrant in accordance with the terms of
such warrant, subject to adjustment by the Exchange Ratio, and (2) each option to purchase one share of Common Stock will be converted
into and become rights with respect to Parent Common Stock, and OPKO will assume each such option, in accordance with the terms
of the applicable option plan and/or stock option agreement, subject to adjustment by the Exchange Ratio. Closing of the transaction
is subject to certain conditions including, the approval of OPKO’s and our stockholders and other customary closing conditions.
The Merger Agreement contains a “go
shop” provision pursuant to which we have the right to solicit, encourage, facilitate and engage in discussions and negotiations
with third parties with respect to competing proposals through June 2, 2013 (the “
Solicitation Period End Date
”).
After the Solicitation Period End Date, we may continue discussions until June 22, 2013 (the “
Cut-Off Date
”)
with any party that has submitted a competing proposal that our Board of Directors and the Strategic Alternatives Committee of
our Board of Directors determine in good faith would reasonably be expected to result in a Superior Proposal as defined in the
Merger Agreement.
For more information regarding the Merger
Agreement, please see our Current Report on Form 8-K filed with the SEC on April 29, 2013.
Results of Operation
Three Months
Ended March 31, 2013 Compared to the Three Months ended March 31, 2012
Revenue
The Company has not
generated any revenues from operations since its inception. To date, the Company has funded its operations primarily through grants
from the Israeli Office of the Chief Scientist (the “
OCS
”) and the sale of equity securities. If the Company’s
development efforts result in clinical success, regulatory approval and successful commercialization of the Company’s products,
then the Company could generate revenues from sales of its products.
Research and Development Expenses
The Company expects
its research and development expenses to increase as it continues to develop its product candidates. Research and development expenses
consist of:
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internal costs associated with research and development activities;
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payments made to third party contract research organizations, contract manufacturers, investigative
sites and consultants;
|
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manufacturing development costs;
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personnel-related expenses, including salaries, benefits, travel and related costs for the personnel
involved in research and development;
|
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activities relating to the advancement of product candidates through preclinical studies and clinical
trials; and
|
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facilities and other expenses, which include expenses for rent and maintenance of facilities, as
well as laboratory and other supplies.
|
These costs and expenses
are partially funded by grants received by the Company from the OCS. There can be no assurance that the Company will continue to
receive grants from the OCS in amounts sufficient for its operations, if at all.
The Company expects
its research and development expenditures to increase significantly in the near future in connection with the ongoing production
of its protein drug candidates. The Company intends to continue to hire new employees, in research and development, in order to
meet its operation plans.
The Company has multiple
research and development projects ongoing at any one time. The Company utilizes its internal resources, employees and infrastructure
across multiple projects and tracks time spent by employees on specific projects. The Company believes that significant investment
in product development is a competitive necessity and plans to continue these investments in order to realize the potential of
its product candidates.
For the three month
periods ended March 31, 2013 and 2012 and for the period from May 31, 2005 (inception date) through March 31, 2013, the Company
incurred research and development expenses, net of government grants and participation, of $3,197,600, $4,304,070 and $51,545,760,
respectively. The decrease for the three month period ended March 31, 2013 as compared to the 2012 period resulted primarily from
a decrease in clinical trials expenses, as we completed certain trials. We expect research and development expenses to increase
as we initiate our phase III trials.
The successful development
of the Company’s product candidates is subject to numerous risks, uncertainties and other factors. Beyond the next twelve
months, and even during the next twelve months, the Company cannot reasonably estimate the timing or costs of the efforts necessary
to complete the remainder of the development of the Company’s product candidates. Additionally, the Company cannot reasonably
estimate when it can expect material cash inflows from the Company’s product candidates or any of the Company’s other
development efforts, if at all. The foregoing is due to the numerous risks and uncertainties associated with the duration and cost
of clinical trials, which vary significantly over the life of a project as a result of differences arising during clinical development,
including:
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completion of such preclinical and clinical trials;
|
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receipt of necessary regulatory approvals;
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the number of clinical sites included in the trials;
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the length of time required to enroll suitable patients;
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the number of patients that ultimately participate in the trials;
|
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adverse medical events or side effects in treated patients;
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lack of comparability with complementary technologies;
|
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obtaining capital necessary to fund operations, including research and development efforts; and
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the results of clinical trials.
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The Company’s
expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expenses
of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. The Company may obtain
unexpected results from its clinical trials. The Company may elect to discontinue, delay or modify clinical trials of some product
candidates or focus on others. A change in the outcome of any of the foregoing variables with respect to the development of a product
candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For
example, if the United States Food and Drug Administration (“FDA”) or other regulatory authorities were to require
the Company to conduct clinical trials beyond those which it currently anticipates will be required for the completion of the clinical
development of a product candidate, or if the Company experiences significant delays in enrollment in any of its clinical trials,
the Company could be required to expend significant additional financial resources and time on the completion of clinical development.
Drug development may take several years and millions of dollars in development costs. If the Company does not obtain or maintain
regulatory approval for its products, its financial condition and results of operations will be substantially harmed.
General and Administrative Expenses
General and administrative
expenses consist primarily of salaries and other related costs, including stock-based compensation expense for persons serving
in the Company’s executive and administration functions. Other general and administrative expenses include facility-related
costs not otherwise included in research and development expense and professional fees for legal and accounting services. For the
three month periods ended March 31, 2013 and 2012 and for the period from May 31, 2005 (inception date) through March 31, 2013,
the Company incurred general and administrative expenses of $1,530,954, $789,780 and $21,639,123, respectively. The increase for
the three month period ended March 31, 2013 as compared to the 2012 period was primarily due to an increase in professional services
fees of $493,838 as compared to $195,702, respectively, and an increase in stock-based compensation expenses of $598,515 as compared
to $242,658, respectively.
Financial Expenses and Income
Financial expenses
and income consists of the following:
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interest earned on the Company’s cash and cash equivalents;
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interest expense on short term bank credit and loans; and
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expenses or income resulting from fluctuations of the New Israeli Shekel and the Euro, in which
a portion of the Company’s assets and liabilities are denominated, against the U.S. dollar.
|
For the three month
periods ended March 31, 2013 and 2012 and for the period from May 31, 2005 (inception date) through March 31, 2013, the Company
incurred net financial income (expense) of $(16,224), $94,479 and $521,630, respectively. Financial expense for the three months
ended March 31, 2013 increased as compared to the 2012 period primarily due to currency fluctuations on deposits in Israeli Shekels
and Euros.
Stock-based Compensation
The Company records stock-based compensation
expenses according to ASC 718-10, “Compensation - Stock Compensation”, which requires the measurement and recognition
of compensation expense for all stock-based payment awards made to employees and directors, including employee stock options under
the Company’s stock plans, based on estimated fair values.
ASC 718-10 requires companies to estimate
the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated
statement of operations. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing
model.
The Company applies
ASC 505 “Equity” with respect to options issued to non-employees.
For the three month periods ended March
31, 2013 and 2012 and for the period from May 31, 2005 (inception date) through March 31, 2013, the Company incurred stock-based
compensation expenses of $960,813, $391,675 and $12,478,746, respectively. Stock-based compensation expenses for the three months
ended March 31, 2013 increased as compared to the 2012 period primarily due to the grant of 1,132,500 stock options and 250,000
shares of restricted stock on February 4, 2013.
Cash Flows
For the three months
ended March 31, 2013 and 2012 and for the period from May 31, 2005 (inception date) through March 31, 2013, net cash used in operating
activities was $4,047,765, $4,707,293 and $54,435,656, respectively. The decrease in cash used in operating activities for the
three months ended March 31, 2013 as compared to the 2012 period was primarily due to a decrease in R&D spending related to
the manufacturing of the hGH-CTP product candidate.
For the three months
ended March 31, 2013 and 2012 and for the period from May 31, 2005 (inception date) through March 31, 2013, net cash (used in)
investing activities was $4,886,726, $(1,790,663) and $(7,845,767), respectively. The decrease in net cash used in investing activities
for the three months ended March 31, 2013 as compared to 2012 resulted primarily from our release of a short-term interest bank
deposit.
For the three months
ended March 31, 2013 and 2012 and for the period from May 31, 2005 (inception date) through March 31, 2013, net cash provided by
financing activities was $37,500, $486,573 and $87,006,776, respectively. The decrease for the three months ended March 31, 2013
as compared to 2012 resulted primarily from decrease in cash proceeds from the exercise of warrants.
Liquidity and Capital Resources
The Company expects
to incur losses from operations for the foreseeable future. The Company has incurred, and expects to continue to incur, increasing
research and development expenses, including expenses related to the hiring of personnel and additional clinical trials. General
and administrative expenses have increased, and the Company expects that they will continue to increase, as the Company continues
to expand its finance and administrative staff, add infrastructure and incur additional costs related to being a public company
in the United States, including the costs of directors’ and officers’ insurance, investor relations programs and increased
professional fees. Our future capital requirements will depend on a number of factors, including the continued progress of our
research and development of product candidates, the timing and outcome of clinical trials and regulatory approvals, the costs involved
in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the
status of competitive products, the availability of financing and our success in developing markets for our product candidates.
At March 31, 2013,
we had approximately $24.7 million of cash and cash equivalents, together with approximately $5.2 million of cash in short-term
deposit accounts, and we believe that our existing cash and cash equivalents and short-term investments will be sufficient to enable
us to fund our operating expenses and capital expenditure requirements at least until December 31, 2013. We have based this estimate
on assumptions that may prove to be wrong and are subject to change, and we may be required to use our available capital resources
sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization
of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated
with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including the progress
and results of our clinical trials, the duration and cost of discovery and preclinical development, and laboratory testing and
clinical trials for our product candidates, the timing and outcome of regulatory review of our product candidates, the number and
development requirements of other product candidates that we pursue, and the costs of commercialization activities, including product
marketing, sales, and distribution. We do not anticipate that we will generate product revenues for at least the next several years,
and we expect continuing operating losses to result in increases in our cash used in operations over the next several years. To
the extent that our capital resources are insufficient to meet our future capital requirements, we will need to finance our future
cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We
cannot assure you that we will be able to consummate any such offerings or financings or enter into any such arrangements on terms
favorable to us or at all.
Effects of Inflation and Currency Fluctuation
Inflation generally
affects the Company by increasing costs of labor and clinical trials. The Company does not believe that inflation had a material
effect on its results of operations for the three month periods ended March 31, 2013 or 2012.
The Company has operations
in Israel and has contracts with European companies as well as Euro and Shekel bank deposits. Our foreign
contracts
with service providers use applicable local currencies, Euros or Shekels. As a result, we are subject to adverse movements in foreign
currency exchange rates in countries in which we conduct business. Our results of operations are predominantly affected by fluctuations
in the value of the U.S. dollar as compared to the New Israeli Shekel and the Euro.
We do not engage in
trading of market risk sensitive instruments or purchase hedging or “other than trading” instruments that are likely
to expose us to market risk, whether interest rate, commodity price or equity price risk. We have not purchased options or entered
into swaps or forward or futures contracts, nor do we use derivative financial instruments for speculative trading or any other
purpose
.
Off-Balance Sheet Arrangements
The Company had no
off-balance sheet arrangements as of March 31, 2013.