UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
OR
o 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark 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 May 13, 2009 there were 35,549,028 shares of common stock, par value $0.00001 per share (the “Common Stock”).
MODIGENE INC.
INDEX TO FORM 10-Q FILING
FOR THE QUARTER ENDED MARCH 31, 2009
Table of Contents
Page | ||
Part I | ||
Item 1. | Financial Statements | 3 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 |
Item 4T. Controls and Procedures | 15 | |
Part II | ||
Item 1. | Legal Proceedings | 16 |
Item 1A. | Risk Factors | 16 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 16 |
Item 3. | Defaults upon Senior Securities | 16 |
Item 4. | Submission of Matter to a Vote of Security Holders | 16 |
Item 5. | Other Information | 16 |
Item 6. | Exhibits | 16 |
Signatures | 17 | |
Certifications |
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PART I – FINANCIAL INFORMATION
ITEM 1. | Financial Statements. |
MODIGENE INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS | (Unaudited) | |||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 5,555,044 | $ | 7,465,232 | ||||
Accounts receivable and prepaid expenses | 382,858 | 412,515 | ||||||
Restricted cash | 82,684 | 91,078 | ||||||
Total current assets | 6,020,586 | 7,968,825 | ||||||
Property and equipment, net | 291,087 | 310,173 | ||||||
Long-term Assets: | ||||||||
Severance pay fund | 74,465 | 73,775 | ||||||
Long term deposit | 1,719 | 1,894 | ||||||
Total long term assets | 76,184 | 75,669 | ||||||
Total assets | $ | 6,387,857 | $ | 8,354,667 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Trade payables | $ | 152,424 | $ | 156,039 | ||||
Related party payables | 41,902 | 51,374 | ||||||
Accrued expenses and other liabilities | 1,118,761 | 188,660 | ||||||
Total current liabilities | 1,313,087 | 396,073 | ||||||
Accrued severance pay | 89,107 | 90,732 | ||||||
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 | 8 | ||||||
Common stock of $ 0.00001 par value – 300,000,000 shares of common stock authorized; 35,549,028 shares issued and outstanding as of March 31, 2009 and December 31, 2008 | 355 | 355 | ||||||
Additional paid-in capital | 27,644,285 | 27,407,606 | ||||||
(Deficit) accumulated during the development stage | (22,658,985 | ) | (19,540,107 | ) | ||||
Total shareholders' equity | 4,985,663 | 7,867,862 | ||||||
Total liabilities and shareholders' equity | $ | 6,387,857 | $ | 8,354,667 |
The accompanying notes are an integral part of the consolidated financial statements.
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MODIGENE INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period from | ||||||||||||
May 31, 2005 | ||||||||||||
For the three months ended | (date of inception) | |||||||||||
March 31, | to March 31, | |||||||||||
2009 | 2008 | 2009 | ||||||||||
Revenues | $ | - | $ | - | $ | - | ||||||
Operating expenses: | ||||||||||||
In-process research and development write-off | - | 3,222,831 | ||||||||||
Research and development, net | 2,585,702 | 740,510 | 10,131,137 | |||||||||
General and administrative | 478,734 | 608,802 | 9,796,308 | |||||||||
Total operating expenses | 3,064,436 | 1,349,312 | 23,150,276 | |||||||||
Operating (loss) | (3,064,436 | ) | (1,349,312 | ) | (23,150,276 | ) | ||||||
Financial income | 30,191 | 235,659 | 871,878 | |||||||||
Financial (expenses) | (84,633 | ) | ( 578 | ) | (380,587 | ) | ||||||
Net (loss) | $ | (3,118,878 | ) | $ | (1,114,231 | ) | $ | (22,658,985 | ) | |||
(Loss) per share (basic & diluted) | $ | (0.09 | ) | $ | ( 0.03 | ) | $ | (0.93 | ) | |||
Weighted average number of shares outstanding | 35,549,028 | 35,473,187 | 24,399,702 |
The accompanying notes are an integral part of the consolidated financial statements.
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MODIGENE INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from | ||||||||||||
May 31, 2005 | ||||||||||||
For the three months ended | (date of inception) | |||||||||||
March 31, | to March 31, | |||||||||||
2009 | 2008 | 2009 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net cash (used in) operating activities | $ | (1,918,757 | ) | $ | ( 522,404 | ) | $ | (11,778,484 | ) | |||
Cash flows from investing activities | ||||||||||||
Purchase of property and equipment | - | ( 69,720 | ) | (416,250 | ) | |||||||
Payment for the acquisition of ModigeneTech Ltd. | - | - | (474,837 | ) | ||||||||
Long term deposit | 175 | - | (1,719 | ) | ||||||||
Restricted cash | 8,394 | ( 31,780 | ) | (82,684 | ) | |||||||
Net cash provided by (used in) investing activities | 8,569 | ( 101,500 | ) | (975,490 | ) | |||||||
Cash flows from financing activities | ||||||||||||
Short term bank credit | - | ( 1,886 | ) | (2,841 | ) | |||||||
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 | 18,309,018 | |||||||||
(Decrease) increase in cash and cash equivalents | (1,910,188 | ) | 1,374,210 | 5,555,044 | ||||||||
Cash and cash equivalents at the beginning of the period | 7,465,232 | 11,455,807 | - | |||||||||
Cash and cash equivalents at the end of the period | $ | 5,555,044 | $ | 12,830,017 | $ | 5,555,044 | ||||||
Cash paid for income taxes | $ | - | $ | - | $ | - | ||||||
Cash paid for interest expense | $ | 22 | $ | 578 | $ | 295,991 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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MODIGENE INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Unaudited)
NOTE 1:- | 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 $22,658,985 through March 31, 2009. 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 of additional financing. | ||
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 United States 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 December 31, 2008 financial statements and the notes thereto included in the Company's Report on Form 10-K filed March 16, 2009. | ||
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. Securities excluded from the calculation for the three months periods ended March 31, 2009 and 2008 and for the period from May 31, 2005 (date of inception) to March 31, 2009 were 9,018,909, 6,634,524 and 4,675,467, respectively. |
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NOTE 3:- | SHAREHOLDERS' EQUITY |
Option plans: | |
The Company issued stock options to purchase shares of common stock under its 2005 Stock Incentive Plan (the “2005 Plan”) and under its 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 were used for the options granted during the year 2009: (i) annual dividends of $0.00, (ii) expected volatility of 116.72%, (iii) risk-free interest rate of 0.51%, and (iv) expected average option lives of 5 years. | |
The following is a summary of the stock options granted under the 2005 and 2007 Plans: |
March 31, 2009 | ||||||||
Number of Options | Weighted Average Exercise Price | |||||||
Outstanding at the beginning of the period | 4,432,292 | $ | 1.14 | |||||
Issued under the 2005 plan | 175,500 | $ | 0.65 | |||||
Issued under the 2007 plan | 200,000 | $ | 0.65 | |||||
Forfeited | ( 2,353 | ) | $ | 1.49 | ||||
Outstanding at the end of the period | 4,805,439 | $ | 1.10 | |||||
Options exercisable | 2,538,522 | $ | 1.14 |
The options outstanding as of March 31, 2009, have been separated into exercise prices, as follows: |
Remaining Weighted average contractual life | ||||||||||||
Exercise Price | Options Outstanding | (years) | Options Exercisable | |||||||||
$ 0.65 | 375,500 | 9.85 | 0 | |||||||||
$ 0.879 | 1,265,474 | 6.97 | 1,265,474 | |||||||||
$ 0.90 | 1,950,000 | 8.92 | 487,500 | |||||||||
$ 0.93 | 25,000 | 8.93 | 6,250 | |||||||||
$ 1.32 | 435,146 | 3.92 | 435,146 | |||||||||
$ 1.50 | 130,500 | 9.07 | - | |||||||||
$ 2.00 | 475,000 | 8.11 | 208,333 | |||||||||
$ 2.50 | 148,819 | 4.01 | 135,819 | |||||||||
4,805,439 | 7.80 | 2,538,522 |
The weighted average fair value at grant date of options outstanding as of March 31, 2009 was $0.71. | ||
Stock based compensation expense for the three months ended March 31, 2009 and 2008 and for the period from May 31, 2005 (date of inception) through March 31, 2009 were $236,679, $235,524 and $6,704,123, respectively. Stock based compensation for the period from May 31, 2005 (date of inception) through March 31, 2009 includes stock based payment in the acquisition of a subsidiary and deferred compensation on restricted shares in the amount of $3,876,960. | ||
NOTE 4:- | EXTENSION OF LINE OF CREDIT | |
On March 25, 2008, the Company entered into a Credit Agreement with a group of 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 Company's 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. 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 five-year warrants to purchase an aggregate of 1,500,000 shares of the Company’s non-registered Common stock, having an exercise price of $0.99 per share. In March 2009, the lending shareholders agreed to grant the Company until April 30, 2009 to elect whether to extend the line of credit. |
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ITEM 2. | 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.
Note Regarding Forward-Looking Statements
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.
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”).
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Results of Operation
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:
% | ||||
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 is recognized as a reduction of expenses as the related costs are incurred.
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Cash and cash equivalents are invested in major banks in Israel and the United States. Such deposits with balances greater than $250,000 in the United States and Israel are not insured. All cash balances in the United States are held in money market funds, and management believes that the Israeli financial institutions that hold the Company’s investments are financially sound. Accordingly, management believes that 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 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.
Research and development grants received by ModigeneTech during the three month periods ending March 31, 2009 and 2008 and the period from May 31, 2005 (date of inception) to March 31, 2009 amounted to $208,000, $396,260 and $1,445,517, respectively.
Loss per Share: Basic and diluted losses per share are presented in accordance with Statement of Financial Accounting Standard No. 128 “Earnings 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 9,018,909, 7,217,321 and 4,675,467 for the three month periods ending March 31, 2009 and 2008 and the period from May 31, 2005 (date of inception) to March 31, 2009, respectively.
Revenue
The Company has not generated any revenue 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, 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 |
Page 10
· | 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, 2009 and 2008 and the period from May 31, 2005 (date of inception) to March 31, 2009, the Company incurred net research and development expense in the aggregate of $2,585,702, $740,510 and $10,131,137, respectively. The increase resulted primarily from significant development expenses associated with the manufacturing of high quantities of non-GMP and GMP of hGH-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:
· | 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.
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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, 2009 and 2008 and the period from May 31, 2005 (date of inception) to March 31, 2009, the Company incurred general and administrative expenses in the aggregate of $478,734, $608,802 and $9,796,308, respectively.
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 |
· | 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, 2009 and 2008 and the period from May 31, 2005 (date of inception) to March 31, 2009, the Company incurred net financial income/(expense) in the aggregate of ($54,442), $235,081 and $491,291, respectively. The decrease resulted primarily from the lower balance of cash and cash equivalents held by the Company, as well as currency fluctuations on deposits in Israeli Shekels.
Stock-based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), 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 123R 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 123R 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 123R, 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 123R 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 123R. As required by the modified prospective method, results for prior periods have not been restated.
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The Company recognized compensation expense 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 periods ending March 31, 2009 and 2008 and the period from May 31, 2005 (date of inception) to March 31, 2009, the Company incurred stock-based compensation expenses in the aggregate of $236,679 $235,524 and $6,704,123, 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, 2009 and 2008 and the period from May 31, 2005 (date of inception) to March 31, 2009, net cash used in operations was approximately $1,918,755, $522,404 and $11,778,484, respectively. The increase resulted primarily from significant manufacturing expenses associated with the production of large quantities of non-GMP and GMP hGH-CTP.
In the three month periods ending March 31, 2009 and 2008 and the period from May 31, 2005 (date of inception) to March 31, 2009, net cash from investing activities was approximately $8,569, $(101,500) and $(975,490), respectively. The difference resulted primarily from a decrease in equipment purchases and lab buildup.
In the three month periods ending March 31, 2009 and 2008 and the period from May 31, 2005 (date of inception) to March 31, 2009, net cash provided by financing activities was approximately $0, $1,998,114 and $18,309,018, respectively. The difference resulted from no proceeds from issuance of shares to investors, compared with issuance of preferred shares during March 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.
On March 25, 2008, we entered into a line of credit with The Frost Group, LLC (“TFG”), a Florida limited liability company whose members include Frost Gamma Investments Trust (the “Frost Trust”), Jane Hsiao, M.B.A., Ph.D., and Steven D. Rubin. Dr.Phillip Frost, the Chairman of our board of directors, is the sole trustee of the Frost Trust. Frost Gamma, L.P. is the sole and exclusive beneficiary of the Frost Trust, and Dr. Frost is one of two limited partners of Frost Gamma, L.P. The general partner of Frost Gamma, L.P. is Frost Gamma, Inc. and the sole stockholder of Frost Gamma, Inc. is Frost-Nevada Corporation. Dr. Frost is the sole stockholder of Frost-Nevada Corporation. Dr. Hsiao and Mr. Rubin are also directors of Modigene.
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Under this line of credit, we may, at our discretion, borrow up to $10,000,000, which proceeds may be used for working capital or general corporate purposes, as approved by our board of directors. The maturity date for the line of credit is March 25, 2009, unless (i) we have borrowed any funds under the line of credit prior to March 25, 2009, or (ii) we elect 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, we will be obligated to repay to TFG all outstanding borrowings, together with any accrued interest, and the line of credit will terminate. We will be obligated to pay interest on outstanding borrowings under the line of credit at a 10% annual rate. If we determine to draw on the line of credit, or if we elect to extend the maturity date until March 25, 2013, we will issue to TFG 5-year warrants to purchase 1,500,000 shares of our common stock, having an exercise price of $0.99 per share. On March 11, 2009, the Company entered into a letter agreement with TFG, as the lender under the line of credit between the Company and TFG, pursuant to which TFG agreed to grant the Company until April 30, 2009 to elect whether to extend the line of credit.
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 next twelve 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 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. 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, 2009 and 2008.
Currency fluctuations could affect the Company by increased or decreased costs mainly for goods and services acquired in 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, 2009 and 2008.
The Company had no off-balance sheet arrangements as of March 31, 2009 and 2008.
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ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not Applicable.
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, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Pursuant to this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at March 31, 2009.
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 required by paragraph (d) of §2401.13a-15 or §2401.13a-15 that occurred during our fiscal quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
Not Applicable.
ITEM 1A. Risk Factors.
Not Applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not Applicable.
ITEM 3. Defaults Upon Senior Securities.
Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
ITEM 5. Other Information.
On March 25, 2008, we entered into a line of credit with The Frost Group, LLC ("TFG") under which we may, at our discretion, borrow up to $10,000,000, which proceeds may be used for working capital or general corporate purposes, as approved by our board of directors. The maturity date for the line of credit was March 25, 2009, unless (i) we borrowed any funds under the line of credit prior to March 25, 2009, or (ii) we elected to extend the line of credit. In either of such events, the maturity date would be extended until March 25, 2013. We have not borrowed any funds under the line of credit. On March 11, 2009, TFG agreed to grant the Company until April 30, 2009 to elect whether to extend the line of credit, and on April 23, 2009, that deadline was further extended to May 29, 2009. On May 14, 2009, the Company and TFG entered into another letter agreement, pursuant to which we now have until July 31, 2009 to elect whether to extend the line of credit. If we determine to draw on the line of credit, or if we elect to extend the maturity date until March 25, 2013, we will issue to TFG five-year warrants to purchase 1,500,000 shares of our common stock, having an exercise price of $0.99 per share.
ITEM 6. Exhibits.
10.1 Letter Agreement between Modigene, Inc. and The Frost Group, LLC (Filed herewith).
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).
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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. | ||
May 14, 2009 | /s/ Abraham Havron | |
Date | Abraham Havron | |
Chief Executive Officer |
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