UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 3)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-52691
MODIGENE INC.
(Exact name of registrant as specified in its charter)
Nevada | 20-0854033 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3 Sapir Street, Weizmann Science Park | ||
Nes-Ziona, Israel | 74140 | |
(Address of principal executive offices) | (Zip Code) |
(866) 644-7811
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer | ¨ | Accelerated Filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 14, 2008, there were 35,549,028 shares of common stock, par value $0.00001 per share (the “Common Stock”).
EXPLANATORY NOTE
Modigene Inc. (“Modigene” or the “Company”) is filing this Amendment No. 3 on Form 10-Q/A to its Annual Report on Form 10-Q for the quarter ended March 31, 20087, as filed with the Securities and Exchange Commission (the “SEC”) on May 13, 2008, and as amended by Amendment No. 1 on Form 10-Q/A as filed with the SEC on August 13, 2008 and Amendment No. 2 on Form 10-Q/A as filed with the SEC on October 2, 2008. This Amendment No. 3 on Form 10-Q/A (“Amendment No. 3”) is being filed in response to comments received from the SEC regarding the accounting treatment for the Company’s reverse acquisition of Modigene Inc., a Delaware corporation (“Modigene Delaware”), in particular amendment of the accounting treatment of the reverse acquisition from purchase accounting to a recapitalization. This Amendment No. 3 contains only the Items and exhibits to the Form 10-Q which are being amended. This Amendment No. 3 amends and restates Item 1, Item 2 and Item 4 of the Form 10-Q in their entirety. The Items of and exhibits to the Form 10-Q as originally filed which are not included herein are unchanged and continue in full force and effect as originally filed. Terms used but not defined in this Amendment No. 3 shall have the meanings given to such terms in the Form 10-Q as originally filed.
This Amendment No. 3 speaks as of the date of the original filing of the Form 10-Q and has not been updated to reflect events occurring subsequent to the original filing date, except to the extent expressly stated herein.
Page 2
PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | ||||||
2008 | 2007 | ||||||
(Unaudited) | (Restated) | ||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 12,830,017 | $ | 11,455,807 | |||
Accounts receivable and prepaid expenses | 108,897 | 506,144 | |||||
Restricted cash | 93,618 | 61,838 | |||||
Total current assets | 13,032,532 | 12,023,789 | |||||
Property and equipment, net | 232,871 | 175,428 | |||||
Long-term Assets: | |||||||
Severance pay fund | 58,695 | 33,685 | |||||
Long term deposit | 2,951 | 2,951 | |||||
Total long term assets | 61,646 | 36,636 | |||||
Total assets | $ | 13,327,049 | $ | 12,235,853 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current Liabilities: | |||||||
Short-term bank credit | $ | - | $ | 1,886 | |||
Trade payables | 83,981 | 142,462 | |||||
Related party payables | 25,938 | 19,365 | |||||
Accrued expenses and other liabilities | 168,173 | 167,218 | |||||
Total current liabilities | 278,092 | 330,931 | |||||
Accrued severance pay | 65,293 | 42,552 | |||||
Commitments and contingent liabilities | |||||||
Shareholders’ equity: | |||||||
Stock capital - | |||||||
Preferred stock of $ 0.00001 par value – 10,000,000 shares of preferred stock authorized, 800,000 issued and outstanding | 8 | - | |||||
Common stock of $ 0.00001 par value – 300,000,000 shares of common stock authorized 35,549,028 and 35,435,266 shares issued and outstanding as of March 31, 2008 and December 31,2007, respectively | 355 | 354 | |||||
Additional paid-in capital * | 26,604,103 | 24,368,587 | |||||
(Deficit) accumulated during the development stage * | (13,620,802 | ) | (12,506,571 | ) | |||
Total shareholders’ equity | 12,983,664 | 11,862,370 | |||||
Total liabilities and shareholders’ equity | $ | 13,327,049 | $ | 12,235,853 |
* Restated, see note 4.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period from | ||||||||||
May 31, 2005 | ||||||||||
For the three months ended | (date of inception) | |||||||||
March 31, | to March 31, | |||||||||
2008 | 2007 | 2008 | ||||||||
(Unaudited) | (Unaudited) | (Restated) | ||||||||
Revenues | $ | - | $ | - | $ | - | ||||
Operating expenses: | ||||||||||
In-process research and development write-off | - | - | * 3,222,831 | |||||||
Research and development, net | 740,510 | 228,394 | 3,504,856 | |||||||
General and administrative | 608,802 | 234,261 | 7,516,361 | |||||||
1,349,312 | 462,655 | * 14,244,048 | ||||||||
Operating (loss) | (1,349,312 | ) | (462,655 | ) | *(14,244,048 | ) | ||||
Financial income | 235,659 | 3,072 | 638,997 | |||||||
Financial (expenses) | (578 | ) | (26,898 | ) | (15,751 | ) | ||||
Net (loss) | $ | (1,114,231 | ) | $ | (486,481 | ) | $ | *(13,620,802 | ) | |
(Loss) per share (basic & diluted) | $ | (0.03 | ) | $ | (0.04 | ) | $ | * (0.67 | ) | |
Weighted average number of shares outstanding | 35,473,187 | 13,588,552 | 20,468,444 |
* Restated, see note 4.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from | ||||||||||
May 31, 2005 | ||||||||||
For the three months ended | (date of inception) | |||||||||
March 31, | to March 31, | |||||||||
2008 | 2007 | 2008 | ||||||||
(Unaudited) | (Unaudited) | |||||||||
Cash flows from operating activities | ||||||||||
Net cash (used in) operating activities | $ | (522,404 | ) | $ | (522,336 | ) | $ | (4,621,070 | ) | |
Cash flows from investing activities | ||||||||||
Purchase of property and equipment | (69,720 | ) | (4,345 | ) | (286,524 | ) | ||||
Payment for the acquisition of ModigeneTech Ltd. | - | - | (474,837 | ) | ||||||
Long term deposit | - | - | (2,951 | ) | ||||||
Restricted cash | (31,780 | ) | (2,929 | ) | (93,618 | ) | ||||
Net cash (used in) investing activities | (101,500 | ) | (7,274 | ) | (857,930 | ) | ||||
Cash flows from financing activities | ||||||||||
Short term bank credit | (1,886 | ) | 17,402 | (2,842 | ) | |||||
Proceeds from loans | - | - | 173,000 | |||||||
Principal payment of loans | - | - | (173,000 | ) | ||||||
Proceeds from issuance of shares | 2,000,000 | 18,311,859 | ||||||||
Net cash provided by (used in) financing activities | 1,998,114 | 17,402 | 18,309,017 | |||||||
(Decrease) increase in cash and cash equivalents | 1,374,210 | (512,208 | ) | 12,830,017 | ||||||
Cash and cash equivalents at the beginning of the period | 11,455,807 | 785,165 | - | |||||||
Cash and cash equivalents at the end of the period | $ | 12,830,017 | $ | 272,957 | $ | 12,830,017 | ||||
Cash paid for income taxes | $ | - | $ | - | $ | - | ||||
Cash paid for interest expense | $ | 578 | $ | 2,937 | $ | 15,751 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Page 5
NOTE 1:- | GENERAL | ||||
a. | General: | ||||
Modigene Inc. (the “Company”) was formed on August 22, 2003 under the laws of the state of Nevada. The Company is engaged in the development of therapeutic proteins with extended half-lifes, through its subsidiary, ModigeneTech Ltd. (“ModigeneTech”). | |||||
The Company is devoting substantially all of its efforts toward conducting 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 $13,620,802 through March 31, 2008. There is no assurance that profitable operations, if ever achieved, could be sustained on a continuing basis. The Company raised $2 million in a private placement, see note b. below. 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 of additional fundraising, | |||||
b. | On March 25, 2008, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a group of related parties (the “Investors”). The Purchase Agreement provides that the Company will sell to the Investors, and the Investors will purchase from the Company, 800,000 shares of non registered Series A preferred stock, $0.00001 par value per share (the “Series A Preferred Stock”), at $2.50 per share, for an aggregate purchase price of $2,000,000. The Series A Preferred Stock is convertible during the period beginning March 1, 2009 though March 25, 2012, without payment of any additional consideration, into non registered Common Stock, $0.00001 par value per share (the “Common Stock”) based on a conversion ratio equal to one share of Common Stock per share of Series A Preferred Stock. In the event that the market capitalization of the Company equals or exceeds $150,000,000 during any forty-five days within a consecutive ninety day period, the conversion ratio will adjust to five shares of Common Stock per share of Series A Preferred Stock. The conversion ratio in effect will be proportionately adjusted for subdivisions, combinations, consolidations and similar corporate events. If not previously converted, the Series A Preferred Stock will automatically be converted into Common Stock, at the applicable exchange ratio, on March 25, 2012. | ||||
c. | On March 25, 2008, simultaneously with the closing of the transaction under the Securities Purchase Agreement, the Company entered into a Credit Agreement with the Investors. Under this line of credit, the Company may, at its discretion, borrow up to $10,000,000, which proceeds may be used for working capital or general corporate purposes of the Company, as approved by our board of directors (the “Board”). The maturity date for the line of credit is March 25, 2009, unless (i) the Company has borrowed any funds under the line of credit prior to March 25, 2009, or (ii) the Company elects to extend the line of credit. In either of such events the maturity date will be extended until March 25, 2013. Upon the maturity date, as the same may be extended, the Company is obligated to repay all outstanding borrowings, together with any accrued interest, and the line of credit will terminate. |
Page 6
NOTE 1:- | GENERAL (continued) The Company is obligated to pay interest on outstanding borrowings under the line of credit at a 10% annual rate. In the event the Company determines to draw on the line of credit, or the Company elects to extend the maturity date until March 25, 2013, the Company will issue the Investors 5-year warrants to purchase 1,500,000 shares of the Company’s non-registered Common Stock, having an exercise price of $0.99 per share. | ||||
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES | ||||
a. | Basis of presentation: | ||||
The accompanying unaudited financial statements of the Company are presented in accordance with the requirements for 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 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 December 31, 2007 financial statements and the notes thereto included in the Company’s Report on Form 10-KSB/A filed in August 2008. | |||||
b. | Principles of consolidation: | ||||
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Modigene Inc., a Delaware corporation (“Modigene Delaware”) and ModigeneTech. Intercompany transactions and balances have been eliminated upon consolidation. | |||||
c. | Loss per share: | ||||
Basic and diluted losses per share are presented in accordance with FASB issued SFAS no. 128 “Earnings per share” (“SFAS 128”). Outstanding share options and warrants have been excluded from the calculation of the diluted loss per share because all such securities are antidilutive. | |||||
NOTE 3:- | SHAREHOLDERS’ EQUITY | ||||
a. | Rights of Common Stock: | ||||
The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Subject to any preferential rights of any outstanding series of preferred stock created by the company’s Board of Directors (the “Board”) from time to time, the common stockholders will be entitled to such cash dividends as may be declared from time to time by the Board from funds available. Subject to any preferential rights of any outstanding series of preferred stock, upon liquidation, dissolution or winding up of the Company, the common stockholders will be entitled to receive pro rata all assets available for distribution to such holders. | |||||
b. | On February 29, 2008 Mr. Havron Abraham, the Company’s Chief Executive Officer, exercised 113,762 employee stock options into 113,762 Common Stock. The options were granted in connection with the merger of Modigene Delaware with a wholly-owned subsidiary of the Company, in exchange for employee stock options to acquire 66,666 shares of Modigene Delaware common stock at $0.0001 per share. The total value of the shares issued was $102,386. |
Page 7
NOTE 3:- | SHAREHOLDERS’ EQUITY (continued) | ||||
c. | Rights of Series A Preferred Stock: | ||||
The Company has approved the designation of 800,000 shares of its preferred stock as the Series A Preferred Stock. Each holder of shares of Series A Preferred Stock shall be entitled, at the option of such holder, to convert all, but not less than all, of the shares of Series A Preferred Stock then held by such holder, at any time and from time to time beginning on March 1, 2009 and ending on March 25, 2012 (the “Conversion Deadline”), without the payment of any additional consideration, into Common Stock at the applicable conversion price discussed in note 1b. If any holder of shares of Series A Preferred Stock has not exercised his, her or its right to convert the shares of Series A Preferred Stock then held by such holder on or prior to the Conversion Deadline, then at the Conversion Deadline all such shares of Series A Preferred Stock will automatically convert, without the payment of any additional consideration, into Common Stock at the applicable conversion price discussed above. The holders of Series A Preferred Stock (and the holders of any other class or series of preferred stock that may have similar voting rights) will vote on an as-if-converted basis with the holders of Common Stock and any other class or series of preferred stock or Common Stock that by its terms, votes on an as-if-converted basis with the holders of Common Stock on all matters to be voted on by stockholders of the Company. Dividends will be payable only if, when and as declared by the Board, and, if declared, any such dividends will be non-cumulative. Such dividends, if any, will be paid out of, and to the extent of, any assets legally available therefore. No dividends will be declared or paid on the Common Stock, unless a dividend, payable in the same consideration or manner, is simultaneously declared or paid, as the case may be, on each share of Series A Preferred Stock. In the event of liquidation of the Company, the entire remaining assets and funds of the Company legally available for distribution, if any, shall be distributed pro rata among the holders of the Series A Preferred Stock, the Common Stock and any other classes entitled to participate with Common Stock in proportion to the shares of Common Stock then held by them and the shares of Common Stock which they then have the right to acquire upon conversion of the capital stock held by them as of the date of such liquidation. | |||||
d. | Option plan: | ||||
The Company issued stock options to purchase shares of Common Stock under the 2005 Stock Incentive Plan (the “2005 Plan”) and under the 2007 Equity Incentive Plan (the “2007 Plan”). The Company accounts for stock based compensation using the fair value recognition provisions of SFAS No. 123R (revised 2004), “Share Based Payment”. The fair value of each stock option is estimated based upon grant date fair value using the Black-Scholes option-pricing model. The following weighted average assumptions used for the options granted during the year 2008 are as follows: (i) annual dividends of $0.00, (ii) expected volatility of 79.3%, (iii) risk-free interest rate of 2.98% , and (iv) expected average option lives of 10 years. |
Page 8
NOTE 3:- | SHAREHOLDERS’ EQUITY (continued) | ||||
d. | Option plan (continued): | ||||
A summary of the stock options granted under the 2005 and 2007 Plans is as follows: |
March 31, 2008 | |||||||
Number of Options | Weighted Average Exercise Price | ||||||
Outstanding at the beginning of the period | 2,437,795 | $ | 1.23 | ||||
Exercised | ( 113,762 | ) | $ | 0.0006 | |||
Issued under the 2007 plan | 1,975,000 | $ | 0.90 | ||||
Forfeited | ( 25,000 | ) | $ | 2.00 | |||
Outstanding at the end of the period | 4,274,033 | $ | 1.10 | ||||
Options exercisable | 1,754,033 | $ | 0.88 |
The options outstanding as of March 31, 2008, have been separated into exercise prices, as follows:
Remaining Weighted average contractual life | |||||||||||
Exercise Price | Options Outstanding | (years) | Options Exercisable | ||||||||
$ | 0.879 | 1,268,887 | 7.97 | 1,268,887 | |||||||
$ | 0.90 | 1,950,000 | 9.92 | - | |||||||
$ | 0.93 | 25,000 | 9.93 | - | |||||||
$ | 1.32 | 435,146 | 4.92 | 435,146 | |||||||
$ | 2.00 | 475,000 | 9.11 | - | |||||||
$ | 2.50 | 120,000 | 4.95 | 50,000 | |||||||
4,274,033 | 8.61 | 1,754,033 |
Weighted average fair values and average exercise prices of options at date of grant are as follows:
Weighted average exercise price $ 0.88
Weighted average fair value on date of grant $0.92
Stock based compensation expense for the three months ended March 31, 2008 and 2007 were $235,524 and $88,623, respectively. Stock based compensation for the period from May 31, 2005 (date of inception) through March 31, 2008 include stock based payment in the acquisition of a subsidiary, deferred compensation on restricted shares and stock based compensation on options in the amount of $5,663,940.
Page 9
NOTE 4:- | AMENDED FINANCIAL STATEMENTS |
On May 13, 2008 The Company filed its Interim Report on Form 10-Q for the three months ended March 31, 2008. On June 13, 2008, the Company received a comment letter from the United States Securities and Exchange Commission (“SEC”). As part of the Company’s response to the comment letter, an Amendment to the Form 10-Q is filed to amend the accounting treatment of the reverse acquisition from purchase accounting to a recapitalization. On May 9, 2007 the Company, entered into a Merger Agreement. In accordance with Statement of Financial Accounting Standards No. 141, the Company has amended its 2007 financial statements to record the Merger as a recapitalization. The merger was a Reverse Acquisition. The following financial statements line items were affected by the restatement: |
Originally reported | Amended | Differences | ||||||||
Balance Sheets: | ||||||||||
Additional paid-in capital | $ | 37,604,112 | $ | 26,604,103 | $ | 11,000,009 | ||||
(Deficit) accumulated during the development stage | $ | (24,620,811 | ) | $ | (13,620,802 | ) | $ | (11,000,009 | ) | |
Statements of Operations: | ||||||||||
For the Period from May 31, 2005 (date of inception) to March 31, 2008: | ||||||||||
In-process research and development write-off | $ | (14,222,840 | ) | $ | ( 3,222,831 | ) | $ | (11,000,009 | ) | |
Operating (loss) | $ | (25,244,057 | ) | $ | (14,244,048 | ) | $ | (11,000,009 | ) | |
Net (loss) | $ | (24,620,811 | ) | $ | (13,620,802 | ) | $ | (11,000,009 | ) | |
(Loss) per share (basic & diluted) | $ | ( 1.20 | ) | $ | ( 0.67 | ) | $ | ( 0.53 | ) |
Page 10
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Amended Financial Statements
On May 13, 2008, the Company filed its Interim Report on Form 10-Q for the three months ended March 31, 2008. On June 13, 2008, the Company received a comment letter from the SEC. As part of the Company’s response to the comment letter, this Amendment No. 3 is being filed to amend the accounting treatment of the reverse acquisition from purchase accounting to a recapitalization. On May 9, 2007, the Company, entered into the Merger Agreement (see “Historical Note,” below in this Item 2). In accordance with Statement of Financial Accounting Standards No. 141, the Company has amended its 2007 financial statements to record the Merger as a recapitalization. The Merger was a Reverse Acquisition. The following financial statements line items were affected by the restatement:
Originally reported | Amended | Differences | ||||||||
Balance Sheets: | ||||||||||
Additional paid-in capital | $ | 37,604,112 | $ | 26,604,103 | $ | 11,000,009 | ||||
(Deficit) accumulated during the development stage | $ | (24,620,811 | ) | $ | (13,620,802 | ) | $ | (11,000,009 | ) | |
Statements of Operations: | ||||||||||
For the Period from May 31, 2005 (date of inception) to March 31, 2008: | ||||||||||
In-process research and development write-off | $ | (14,222,840 | ) | $ | ( 3,222,831 | ) | $ | (11,000,009 | ) | |
Operating (loss) | $ | (25,244,057 | ) | $ | (14,244,048 | ) | $ | (11,000,009 | ) | |
Net (loss) | $ | (24,620,811 | ) | $ | (13,620,802 | ) | $ | (11,000,009 | ) | |
(Loss) per share (basic & diluted) | $ | ( 1.20 | ) | $ | ( 0.67 | ) | $ | ( 0.53 | ) |
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/A.
Our disclosure and analysis in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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). In the normal course of business, Modigene Inc. (“Modigene” or the “Company”), in an effort to help keep its stockholders and the public informed about the Company may, from time to time, issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans strategies or opportunities, and/or projected or anticipated benefits or other consequences of such plans, strategies, or opportunities, including anticipated revenues or earnings. Modigene bases the forward-looking statements on its current expectations, estimates and projections. Modigene cautions you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that Modigene cannot predict. In addition, Modigene has based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of future events described in such forward-looking statements in this Management’s Discussion and Analysis, or elsewhere, could differ materially from those stated in such forward-looking statements.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. 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.
Page 11
Historical Note
On May 9, 2007, Modigene Inc., a Delaware corporation (“Modigene Delaware”), Modigene Acquisition Corp., a wholly-owned subsidiary of the Company (the “Acquisition Subsidiary”) and the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). Pursuant to the Merger Agreement, the Acquisition Subsidiary merged (the “Merger”) with and into Modigene Delaware, with Modigene Delaware remaining as the surviving entity and a wholly-owned subsidiary of the Company. The Company acquired the business of Modigene Delaware pursuant to the Merger and is continuing the existing business operations of Modigene Delaware as a publicly-traded company under the name Modigene Inc. In the Merger, the stockholders of Modigene Delaware received Common Stock of the Company in exchange for their shares of common stock of Modigene Delaware. Pursuant to the Merger Agreement the Company became the holding company of Modigene Delaware and ModigeneTech Ltd., an Israeli company (“ModigeneTech”).
Results of Operation
Critical Accounting Policies
The historical financial statements of the Company included with this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the United States. 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 generally accepted accounting principles 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 United States Dollars: The functional currency of the Company is, and of Modigene Delaware prior to the Merger has been, the U.S. dollar, as the U.S. dollar is the primary currency of the economic environment in which Modigene Delaware has operated and in which the Company expects to continue to operate in the foreseeable future. The majority of ModigeneTech’s operations are currently conducted in Israel, and most of the Israeli expenses are paid in new Israeli schekels; however, most of the expenses are denominated and determined in U.S. dollars. Financing and investing activities, including loans and equity transactions, are made in U.S. dollars.
Accordingly, monetary accounts maintained in currencies other than the U.S. dollar are remeasured into U.S. dollars in accordance with Statement No. 52 of the Financial Accounting Standards Board (“FASB”), “Foreign Currency Translation.” 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 Modigene Delaware and its wholly-owned subsidiary, ModigeneTech. Intercompany transactions and balances have been eliminated upon consolidation.
Cash Equivalents: Cash equivalents include short-term liquid investments that are readily convertible to cash with original maturities of three months or less.
Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets. The annual depreciation rates are as follows:
Page 12
% | ||||
Office furniture and equipment | 6 | |||
Laboratory equipment | 15 | |||
Computers and electronic equipment | 33 | |||
Leasehold improvements | 25 |
The Company’s long-lived assets have been reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
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.
Severance Pay: The liability of ModigeneTech for severance pay is calculated pursuant to the Severance Pay Law in Israel, based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date and is presented on an undiscounted bases. ModigeneTech’s employees are entitled to one month’s salary for each year of employment or portion thereof. Severance income for the three month period ending March 31, 2008 and Severance expense for the three month period ending March 31, 2007 amounted to $2,268 and $1,967, respectively.
Income Taxes: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes.” This statement prescribes the use of the liability method, whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company has provided a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
Concentrations of Credit Risk: Financial instruments that potentially subjected the Company, Modigene Delaware and ModigeneTech 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 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.
Fair Value of Financial Instruments: The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: The carrying amounts of cash and cash equivalents, other receivables, trade payables and liabilities approximate their fair value due to the short-term maturity of such instruments.
Royalty-bearing Grants: Royalty-bearing grants from the Government of Israel for participation in development of approved projects are recognized as a reduction of expenses as the related costs are incurred. Funding is recognized at the time ModigeneTech is entitled to such grants, on the basis of the costs incurred.
Page 13
Research and development grants received by ModigeneTech during the three month period ending March 31, 2008 and the three month period ending March 31, 2007 amounted to $396,260 and $62,662, respectively.
Loss per Share: Basic and diluted losses per share are presented in accordance with Statement of Financial Accounting Standard No. 128 “Earning per Share.” Outstanding share options and warrants have been excluded from the calculation of the diluted loss per share because all such securities are antidilutive. The total weighted average number of ordinary shares related to outstanding options and warrants excluded from the calculations of diluted loss per share were 7,217,321 and 3,078,112 for the three month period ending March 31, 2008 and three month period ending March 31, 2007, respectively.
Revenue
The Company has not generated any substantial revenue 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, the Company could generate revenue from sales of its products.
Research and Development Expense
The Company expects its research and development expense to increase as it continues to develop its product candidates. Research and development expense consists of:
· | internal costs associated with research and development activities; |
· | payments made to third party contract research organizations, contract manufacturers, investigative sites, and consultants; |
· | manufacturing development costs; |
· | personnel-related expenses, including salaries, benefits, travel, and related costs for the personnel involved in the research and development; |
· | activities relating to the advancement of product candidates through preclinical studies and clinical trials; and |
· | 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 most 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. In the three month periods ending March 31, 2007 and March 31, 2008, the Company incurred a gross research and development expense in the aggregate of $228,394, and $740,510, respectively. The increase resulted primarily from significant development expenses associated with the development of hGH-CTP and IFN-Beta-CTP. The successful development of the Company’s product candidates is subject to numerous risks, uncertainties, and other factors. Beyond the next twelve months, the Company cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from the Company’s product candidates or any of the Company’s other development efforts. This 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:
Page 14
· | completion of such preclinical and clinical trials; |
· | the number of clinical sites included in the trials; |
· | the length of time required to enroll suitable patients; |
· | the number of patients that ultimately participate in the trials; |
· | adverse medical events or side effects in treated patients; |
· | Lack of comparability with complementary technologies; |
· | obtaining capital necessary to fund operations, including the research and development efforts; and |
· | the results of clinical trials. |
The Company’s expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expense 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 Expense
General and administrative expense consists 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 expense includes facility-related costs not otherwise included in research and development expense, and professional fees for legal and accounting services. The Company expects that its general and administrative expenses will increase as it adds additional personnel and continues to be subject to the reporting obligations applicable to public companies in the United States. In the three month periods ending March 31, 2007 and March 31, 2008, the Company incurred a gross general and administrative expense in the aggregate of $234,261 and $608,803, respectively. The difference resulted primarily from additional public-company associated expenses that were added to the normal course of general and administrative (“G&A”) expenses, as well as 2007 year-end bonuses.
Financial Expense and Income
Financial expense and income consists of the following:
· | interest earned on the Company’s cash and cash equivalents; |
· | interest expense on short term bank credit and loan; and |
Page 15
· | expense or income resulting from fluctuations of the New Israeli Shekel, which a portion of the Company’s assets and liabilities are denominated in, against the United States Dollar and other foreign currencies. |
In the three month periods ending March 31, 2007 and March 31, 2008, the Company incurred a gross financial income/(loss) in the aggregate of ($23,826), and $235,081, respectively. The increase resulted primarily from the higher balance of cash and cash equivalents held by the Company throughout the first quarter of 2008 compared to the first quarter 2007.
Stock-based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004), “Stock-Based Payment” (“SFAS 123(R)”), 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 plan, based on estimated fair values. SFAS(R) superseded the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006.
SFAS 123(R) 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. Prior to the adoption of SFAS 123(R), the Company accounted for equity-based awards to employees and directors using the intrinsic value method, in accordance with APB 25, as allowed under Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation (“SFAS 123”).
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. Under this transition method, compensation cost recognized in the year ended December 31, 2006 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As required by the modified prospective method, results for prior periods have not been restated.
The Company recognized compensation expenses for the value of these awards, based on the straight line method over the requisite service period of each award.
The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model. For the three month period ending March 31, 2008 and March 31, 2007, the Company’s stock-based compensation expenses were $235,524 and $88,623, respectively.
The Company applies SFAS 123 and EITF 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”) with respect to options and warrants issued to non-employees.
SFAS 123 and EITF 96-18 require the use of an option valuation model to measure the fair value of the options at the grant date.
Cash Flows
In the three month periods ending March 31, 2007 and March 31, 2008, net cash used in operations was approximately $522,336, and $522,404, respectively.
In the three month periods ending March 31, 2007 and March 31, 2008, net cash used in investing activities was approximately $101,500, and $7,274, respectively. The difference resulted primarily from an increase in equipment purchases compared to the first quarter of 2007.
Page 16
In the three month periods ending March 31, 2007 and March 31, 2008, net cash provided by financing activities was approximately $1,998,114, and $17,402, respectively. The difference resulted primarily from proceeds from issuance of redeemable convertible preferred shares to investors in the first quarter of 2008.
Funding Requirements
The Company expects to incur losses from operations for the foreseeable future. The Company expects to incur increasing research and development expenses, including expenses related to the hiring of personnel and additional clinical trials. The Company expects that general and administrative expenses will also increase as the Company expands its finance and administrative staff, adds infrastructure, and incurs 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 its 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.
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 for the nexttwelve months. We have based this estimate on assumptions that may prove to be wrong or 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 its 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. In the absence of additional funding, 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 currently do not have any commitments for future external funding. We may need to raise additional funds more quickly if one or more of our assumptions proves to be incorrect or if we choose to expand our product development efforts more rapidly than we presently anticipate, and we may decide to raise additional funds even before we need them if the conditions for raising capital are favorable. We may seek to sell additional equity or debt securities or obtain a bank credit facility. The sale of additional equity or debt securities may result in dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that would restrict our operations. Additional equity or debt financing, grants, or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently.
Effects of Inflation and Currency Fluctuations
Inflation generally affects the Company by increasing its cost of labor and clinical trial costs. The Company does not believe that inflation has had a material effect on its results of operations during the three month periods ending March 31, 2007 and March 31, 2008.
Currency fluctuations could affect the Company by increased or decreased costs mainly for goods and services acquired outside of Israel. The Company does not believe currency fluctuations have had a material effect on its results of operations during the three month periods ending March 31, 2007 and March 31, 2008.
Page 17
Arrangements
The Company had no off-balance sheet arrangements as of March 31, 2007 or March 31, 2008.
Recently Issued Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. As applicable to the Company, this statement became as of the year beginning January 1, 2008. The adoption of SFAS 159 has had minimal impact on the Company’s financial statements and disclosures.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” This statement replaces FASB Statement No. 141, “Business Combinations.” This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 141 to have a significant impact on its results of operations or financial position.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.
ITEM 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, is responsible for evaluating the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. As defined by the rules of the SEC, disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms and include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures. Subsequent to such evaluation, and subsequent to the receipt of comments received from the SEC regarding the accounting treatment for the Company’s reverse acquisition of Modigene Delaware, the Company restated our previously-issued consolidated financial statements as of and for the quarter ended March 31, 2008. See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operation, and Note 4: - Amended Financial Statements contained in the notes to consolidated financial statements in Item 1 for more detailed information regarding the restatement. In connection with this restatement, the Company’s Chief Executive Officer and Chief Financial Officer undertook a special evaluation of the effectiveness of the Company’s disclosure controls and procedures in connection with accounting for reverse mergers. In light of the material weakness in internal control over financial reporting discussed below, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.
Page 18
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with our evaluation of these controls as of the end of the period covered by this report that occurred during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As of the end of the period covered by this report, management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our internal controls over financial reporting as of the end of the period covered by this report. This evaluation utilized a management review that was designed to identify the risks and control objectives related to the evaluation of our control environment, and was conducted in accordance with the interpretive guidance issued by the SEC in Release No. 34-55929. Subsequently, the Company undertook the process of evaluating the effectiveness of the Company’s internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, utilizing the framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In connection with the restatement described above, during the third quarter of 2008, our Chief Executive Officer and Chief Financial Officer undertook a special evaluation of the effectiveness of the Company’s internal control over financial reporting, in connection with accounting for reverse mergers, under the COSO framework, which was implemented by the Company throughout the year and formally adopted by the Company on September 25, 2008. This special evaluation was also conducted in accordance with the interpretive guidance issued by the SEC in Release No. 34-55929. Pursuant to this evaluation, our Chief Executive Officer and Chief Financial Officer identified a material weakness in the Company’s internal control over financial reporting related to accounting for reverse mergers. The material weakness involved the inappropriate purchase accounting treatment for the reverse merger transaction, instead of capitalization, and inappropriate accounting treatment for shares issued or exchanged in the reverse merger transaction as a form of compensation for research and development services rendered, which led to a corresponding credit in stockholders’ equity. To remediate this material weakness, management approved a resolution to enhance verification of accounting treatment for future mergers and acquisitions by retaining expert consultants to review its accounting treatments, and to carefully validate that such treatments are in full alignment with accounting principles generally accepted in the United States of America. The Company believes that this action has remediated the material weakness described above.
Page 19
ITEM 6. Exhibits.
31.1 | Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K (Filed herewith). |
31.2 | Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K (Filed herewith). |
32.1 | Certification of Chief Executive Officer pursuant to Item 601(b)(32) of Regulation S-K (Filed herewith). |
32.2 | Certification of Principal Financial Officer pursuant to Item 601(b)(32) of Regulation S-B (Filed herewith). |
Page 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MODIGENE INC. | |||
November 18, 2008 | /s/ Abraham Havron | ||
Date | Abraham Havron | ||
Chief Executive Officer |
Page 21