We were incorporated in the United States under the laws of the State of Delaware on July 26, 2004 and commenced operations on October 1, 2004. We filed a prospectus for an initial public offering on the Tel Aviv Stock Exchange, or TASE, and, since August 17, 2006, our securities have been publicly traded in Israel on the TASE. For TASE purposes, we file Hebrew-language financial statements in New Israeli Shekels in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. On June 22, 2009, our registration statement with the U.S. Securities and Exchange Commission (SEC) was deemed effective and we began reporting under the Securities Exchange Act of 1934, as amended, or the Exchange Act. For our filings in the United States, we prepare English-language financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
We and our wholly owned subsidiary in Israel, BioCancell Therapeutics Israel Ltd., focus our activities on the research and development of drugs for the treatment of various cancer types. The leading drug candidate developed by us, BC-819, has been tested for a number of cancer types in pre-clinical animal studies, compassionate use human trials and Phase I/IIa clinical trials. We are now performing a Phase IIb clinical trial on pancreatic cancer patients, Phase IIb clinical trial on bladder cancer patients, and a Phase I/IIa clinical trial on ovarian cancer patients.
We are a development stage company. Therefore, there is no certainty regarding our ability to complete the development of any of our product-candidates, receive regulatory permits and succeed in our marketing efforts. Our operations since inception have been directed primarily toward developing research and development activities, conducting pre-clinical and clinical testing of our product candidates, business strategies, raising capital, exploring marketing channels and recruiting personnel.
From our inception, we have raised a cumulative net amount of $28,173,000, including amounts received as a result of the exercise of options by our employees, directors and consultants. During 2005 and the first half of 2006, we raised $2,951,000 from private investors and from Yissum Research Development Company of the Hebrew University of Jerusalem Ltd., a founder of our company. We raised an additional $4,976,000 in connection with our initial public offering in August 2006 on the TASE. On May 15, 2008, we executed a private placement to Clal Biotechnology Industries Ltd., or CBI, from which we received aggregate gross proceeds of $669,000 (net proceeds of $653,000). On July 30, 2008, we carried out private placements with Tikcro Technologies Ltd. ("Tikcro"), CBI and the Provident Fund of the Employees of the Hebrew University of Jerusalem Ltd. (together, the "Three Institutional Investors"), whereby the Three Institutional Investors received an aggregate amount of 1,222,780 shares of our common stock at a price of about $0.60 per share, non-registered convertible notes payable, convertible into an aggregate of 5,058,002 shares of our common stock at a conversion price of about $0.72 per share and three non-registered warrants to purchase an aggregate of up to 6,280,783 shares of our common stock at a price of about $0.72 per share exercisable for five years. The aggregate gross proceeds from the private placements to the Three Institutional Investors were $3,650,000 (net proceeds of $3,609,000). During May and June 2009, we sold 1,099,756 shares of treasury stock, at an average price of $0.92 per share, for total proceeds of $1,017,000. In August 2009, we sold 713,000 shares of treasury stock, at an average price of $0.79 per share, for total proceeds of $552,000. Following the sale, we no longer hold any shares of treasury stock. In March 2010, we executed private placements to institutional and individual investors of 4,157,500 shares of common stock at a price of approximately $0.78 per share, and warrants to purchase an additional 4,157,500 shares of our common stock, exercisable immediately upon their issuance with a life of four years and an exercise price of approximately $1.12. The aggregate gross proceeds from the March 2010 private placements were $3,285,000 at an approximate price of $0.78 per share (net proceeds of $2,694,000). On November 18, 2010, we consummated a public offering, whereby investors received an aggregate amount of 5,634,970 shares of common stock at a price of NIS 3.30 per share (approximately $0.90 per share), 2,817,485 non-registered warrants to purchase 2,817,485 shares of common stock at a price of NIS 3.69 (approximately $1.01 per share) exercisable immediately upon their issuance with a life of two years and 2,817,485 non-registered warrants to purchase 2,817,485 shares of common stock at a price of NIS 4.43 (approximately $1.21 per share) exercisable immediately upon their issuance with a life of four years. The aggregate gross proceeds from the November 2010 offering were $5,104,000 (NIS 18,595,000) and the net proceeds were $4,196,000 (NIS 15,277,000). On January 24, 2012, we consummated a private offering, whereby investors received an aggregate amount of 11,144,400 shares of common stock at a price of NIS 1.00 (approximately $0.27) per share. The aggregate gross proceeds were NIS 11,144,400 (approximately $2,943,000) and the net proceeds were NIS 10,773,000 (approximately $2,850,000).
We have incurred operating losses since inception, have not generated any product sales revenues and have not achieved profitable operations. Our net loss, accumulated during the development stage through March 31, 2012, aggregated $27,712,000 and we expect to continue to incur substantial losses in future periods while we continue to test and prepare our product candidates for the market. We believe that we have sufficient cash to meet our planned operating needs until July 2012, based on our current cash levels. If convertible notes payable are not converted by July 30, 2012, we will need to pay a total of $3,621,000 at that time. However, in April 2012, we reported that our Board of Directors and that of CBI had agreed that: (a) if and to the extent that Tikcro does not fully convert its convertible note from July 2008 and its notebecomes payable on July 30, 2012, CBI will invest the amount needed for the repayment of Tikcro’s note – up to $2,481 thousand – in return for an allocation of shares of common stock. The aforementioned investment would serve only to repay Tikcro’s note; (b) CBI will convert its own note from July 2008, provided that the Provident Fund of the Employees of the Hebrew University of Jerusalem commits to do likewise.
We are highly dependent on the success of our research, development and licensing efforts and, ultimately, upon regulatory approval and market acceptance of our products under development. Our short- and long-term capital requirements depend upon a variety of factors, including market acceptance for our technologies and product-candidates and various other factors. The continuation of our stages of development and the realization of assets related to our planned activities depend on future events, including the receipt of interim financing and achieving operational profitability in the future. It is not possible to forecast accurately the results of these activities.
The biotechnology industry is characterized by strong competition, resulting in part from frequent technological changes. Entry into this market requires the investment of significant capital resources and continuous development. Our future success is dependent on several factors, including the quality of our product's technology, the product's price, and the creation of an advantage over the competition.
Our research and development activities are carried out by our Israeli subsidiary primarily through a laboratory research team in the Hebrew University of Jerusalem. The laboratory is managed by our Chief Scientist, Prof. Abraham Hochberg. All of our assets are presently situated in Israel.
We are currently preparing for a restructuring, whereby we would become an Israeli company, through a reverse triple merger. In order to carry out the process, prospectuses have been filed with the authorities in the U.S. and Israel. It is not certain that it will be possible to complete the restructuring. As a result of the merger, no change is expected in our operations, nor in the interests of the existing shareholders, nor any material change in the financial statements.
Research and development costs are expensed as incurred. Research and development costs comprise costs incurred in performing research and development activities, including salaries and related costs, consultants and sub-contractors costs, clinical trials costs, patent fees, materials and depreciation costs. We are running three main research and development projects: clinical trials for each of bladder, ovarian and pancreatic cancer. Completion of the projects is subject to a number of factors unknown and/or not under our control, including, but not limited to, clinical trial expectations of the FDA, the participation of sufficient volunteers that meet inclusion criteria in clinical trials and the required granting of final market approval by the FDA. Therefore, the nature and scope of costs needed to bring each of these projects to conclusion is not estimable. If the bladder cancer trials conclude successfully, we expect to receive final FDA approval and commence sales in 2017. On account of anticipated FDA fast-track development for life-saving drugs, we expect the ovarian and pancreatic cancer trial projects to conclude by 2018, and if successful, for sales to commence shortly thereafter. Delays in completing a project on schedule would entail additional operating costs for the period of delay, and could adversely affect our liquidity in the pre-sales period.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation, travel and overhead costs for financial, legal and administrative personnel, insurance fees, fees for professional services, including investor relations, public relations, legal, accounting and other consulting fees and other general corporate expenses. Overhead costs consist primarily of rent, telecommunications, utilities and depreciation expenses.
Stock-Based Compensation
New employees typically receive stock option awards. We also grant additional stock option awards to existing employees and directors. The Company records stock-based compensation as an expense in the statement of operations.
The cost of stock-based compensation awards is measured at their fair value at the date of the award. Fair value is determined using the Black-Scholes-Merton option pricing model. We have accounted for stock-based compensation in this way from our inception.
Non-operating expenses (income), net
Non-operating expenses (income), net consists primarily of interest income, net which primarily consists of interest income earned on cash, cash equivalent and investment securities balances, gain from marketable securities, net, interest on convertible notes and discount amortization, fair value adjustments of our warrants and liability for commission to underwriters and foreign currency exchange gains and losses.
Income Tax Expense
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized. ASC subtopic 740-10 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
Results of Operations
Three Months Ended March 31, 2012 and March 31, 2011 and the Development Stage Period (cumulative from inception to March 31, 2012)
Research and Development Expenses
| | | Three Months Ended March 31, 2012 | | | Three Months Ended March 31, 2011 | | | Cumulative From Inception to March 31, 2012 | |
| | | U.S. Dollars in Thousands | |
Research and Development Expenses, Gross | | | 923 | | | | 690 | | | | 18,328 | |
| Research and Development Expenses, Net | | $ | 747 | | | $ | 629 | | | $ | 15,327 | |
Research and development expenses, gross, increased by approximately $233,000, or 34%, to $923,000 for the three months ended March 31, 2012, from $690,000 for the three months ended March 31, 2011. Research and development expenses, gross, increased due to increased bladder and pancreatic cancer clinical trial expenses, mainly due to increased hospital and regulatory expenses as a result of the beginning of our Phase IIb pancreas cancer trial. Salary expenses for clinical trial and pre-clinical personnel decreased to $290,000 (including $29,000 stock-based compensation to employees) for the three months ended March 31, 2012, from $297,000 (including $61,000 stock-based compensation to employees) for the three months ended March 31, 2011.
Research and development expenses, net, increased by $118,000, or 19%, to $747,000 for the three months ended March 31, 2012, from $629,000 for the three months ended March 31, 2011. Research and development expenses, net, increased as disclosed above. Research and development expenses for the three months ended March 31, 2012 were comprised mainly of compensation to clinical trial and pre-clinical personnel and clinical trial expenses, as disclosed above. We also received grants from the Office of the Chief Scientist in Israel or OCS ($176,000 for the three months ended March 31, 2012, as compared to $61,000 for the three months ended March 31, 2011).
It is anticipated that our level of research and development expenses will remain relatively the same as our clinical trials move forward, dependent upon the enrollment of patients and the availability of funding.
Research and development expenses, gross increased by approximately $156,000, or 29.2%, to $690,000 for the three months ended March 31, 2011, from $534,000 for the three months ended March 31, 2010. Research and development expenses, gross increased due to increased clinical trials expenses in bladder and pancreatic cancer, mainly due to increased hospital and regulatory expenses as a result of the completion of our Phase I/IIa pancreas cancer trial, and pre-clinical compensation. This was partially offset by clinical trial compensation, patent expenses and increased funding from OCS and other grants, decreased clinical trial expenses in ovarian cancer and more efficient cost control methods. Salary expenses for clinical trial and pre-clinical personnel increased to $297,000 for the three months ended March 31, 2011, from $264,000 for the three months ended March 31, 2010. Research and development expenses, gross for the three month period ending March 31, 2011 were comprised mainly of compensation to personnel, and clinical trial expenses of $292,000. By comparison, research and development expenses for the three month period ending March 31, 2010, were comprised mainly of compensation to personnel of $264,000 and other clinical trial expenses of $128,000.
Research and development expenses, net increased by $124,000, or 24.6%, to $629,000 for the three months ended March 31, 2011, from $505,000 for the three months ended March 31, 2010. Research and development expenses, net, increased, as disclosed above. Research and development expenses for the three months ended March 31, 2011 were comprised mainly of compensation to clinical trial and pre-clinical personnel and clinical trial expenses, as discussed in the preceding paragraph.
The following table summarizes information about our research and development expenses for the three months ended March 31, 2012 and March 31, 2011 and the cumulative period from inception to March 31, 2012:
| | | Three Months Ended March 31, 2012 | | | Three Months Ended March 31, 2011 | | | Cumulative From Inception to March 31, 2012 | |
| | | U.S. Dollars in Thousands | |
| Clinical Trials: | | | | | | | | | |
| Bladder cancer Phase I/IIa | | $ | — | | | $ | - | | | $ | 897 | |
| Bladder cancer Phase IIb | | | 58 | | | | 37 | | | | 3,088 | |
| Pancreatic cancer Phase I/IIa | | | - | | | | 132 | | | | 1,239 | |
| Pancreatic cancer Phase IIb | | | 327 | | | | 54 | | | | 1,511 | |
| Ovarian cancer Phase I/IIa | | | 101 | | | | 62 | | | | 2,387 | |
| Liver cancer | | | - | | | | - | | | | 40 | |
| Clinical trial compensation | | | 144 | | | | 142 | | | | 2,483 | |
| General expenses | | | 8 | | | | 7 | | | | 129 | |
| | | | 638 | | | | 434 | | | | 11,774 | |
| Pre-clinical expenses: | | | | | | | | | | | | |
| Compensation | | | 146 | | | | 155 | | | | 4,657 | |
| Material | | | 75 | | | | 37 | | | | 612 | |
| Patents | | | 54 | | | | 40 | | | | 834 | |
| Depreciation | | | 7 | | | | 7 | | | | 183 | |
| General expenses | | | 3 | | | | 17 | | | | 268 | |
| | | | 285 | | | | 256 | | | | 6,554 | |
| Total Research and Development Expenses, Gross | | | 923 | | | | 690 | | | | 18,328 | |
| Chief Scientist and other grants | | | (176 | ) | | | (61 | ) | | | (2,616 | ) |
| BIRD Foundation grant for Pancreatic cancer Phase I/IIa | | | - | | | | - | | | | (385 | ) |
| Total Research and Development Expenses, Net | | $ | 747 | | | $ | 629 | | | $ | 15,327 | |
General and Administrative Expenses
| | | Three Months Ended March 31, 2012 | | | Three Months Ended March 31, 2010 | | | Cumulative From Inception to March 31, 2012 | |
| | | U.S. Dollars in Thousands | |
| General and Administrative Expenses | | $ | 449 | | | $ | 512 | | | $ | 10,831 | |
General and administrative expenses decreased by $63,000, 12%, to $449,000 for the three months ended March 31, 2012 from $512,000 for the three months ended March 31, 2011. General and administrative expenses were lower for the three months ended March 31, 2012 than for the three months ended March 31, 2011, due to decreased stock-based compensation expenses and professional service fees and consulting fees, partially offset by restructuring expenses. The main components of general and administrative expense were compensation costs of $214,000 (including $13,000 stock-based compensation to employees and directors) as compared to $302,000 (including $74,000 stock-based compensation to employees and directors), professional service and consulting fees of $122,000 as compared to $157,000 for the periods ended March 31, 2012 and 2011, respectively. It is anticipated that our level of general and administrative expenses will remain relatively the same in the upcoming quarters.
General and administrative expenses increased by $84,000, or 19.6%, to $512,000 for the three months ended March 31, 2011 from $428,000 for the three months ended March 31, 2010. General and administrative expenses were higher in 2011 than in 2010 due primarily to increased professional service fees (primarily legal fees) and consulting fees. The main components of general and administrative expense were compensation costs of $302,000 (inclusive of $79,000 stock-based compensation to employees and directors) as compared to $302,000 (inclusive of $94,000 stock-based compensation provided to employees and directors), and professional service and consulting fees of $157,000 as compared to $74,000 for the periods ended March 31, 2011 and 2010, respectively. The increase in consulting fees is due to an increase in public relations and investor relations expenses, legal fees, accounting expenses and management fees paid to Tikcro.
The following table summarizes information about our general and administrative expenses for the three months ended March 31, 2012 and March 31, 2011 and the cumulative period from inception to March 31, 2012:
| | | Three Months Ended March 31, 2012 | | | Three Months Ended March 31, 2011 | | | Cumulative From Inception to March 31, 2012 | |
| | U.S. Dollars in Thousands | |
| Compensation | | $ | 214 | | | $ | 302 | | | $ | 5,611 | |
| Professional services and consulting fees | | | 122 | | | | 157 | | | | 3,414 | |
| Restructuring | | | 54 | | | | - | | | | 245 | |
| Rent & office related expenses | | | 29 | | | | 28 | | | | 763 | |
| Travel | | | - | | | | - | | | | 144 | |
| Insurance | | | 8 | | | | 10 | | | | 136 | |
| Corporate and filing fees | | | 6 | | | | 6 | | | | 142 | |
| Other general expenses | | | 16 | | | | 9 | | | | 376 | |
| Total General and Administrative Expenses | | $ | 449 | | | $ | 512 | | | $ | 10,831 | |
Non-operating expenses (income), net
Non-operating expenses (income), net, increased $558,000 to $1,195,000 for the three months ended March 31, 2012 from $637,000 for the period ended March 31, 2011. The increase in non-operating expenses (income), net, resulted primarily from interest on convertible notes and discount amortization (See Valuation of Financial Instruments Issued in Private Placement Financing, below) offset by the fair value adjustment of our warrants which are being accounted for as derivative financial instruments, as described below. The primary drivers of the adjustment of our warrants were the decrease in our stock price and the implied volatility of the underlying stock as compared to the comparable quarter. An increase in the price of our common stock among other factors increases the value of the warrants and thus results in a loss in our income statement. Conversely, a decline in the price of our common stock would decrease the value of the warrants and thus result in a gain in our statement of operations. We recorded income of approximately $308 thousand as compared to expenses of $444 thousand for the three months ended March 31, 2012 and 2011, respectively, resulting from revaluation of warrants to shareholders.
Non-operating expenses (income), net, decreased $646,000 to $637,000 for the three months ended March 31, 2011 from $1,283,000 for the period ended March 31, 2010. The decrease in non-operating expenses (income), net, resulted primarily from the fair value adjustment of our warrants which are being accounted for as derivative financial instruments, as described below. The primary drivers of the adjustment of our warrants were the decrease in our stock price and the implied volatility of the underlying stock as compared to the comparable quarter. An increase in the price of our common stock, among other factors, increases the value of the warrants and thus results in a loss in our income statement. Conversely, a decline in the price of our common stock would decrease the value of the warrants and thus result in a gain in our statement of operations. We recorded a charge of approximately $444,000 as compared to $1,186,000 for the three months ended March 31, 2011 and 2010, respectively, resulting from revaluation of warrants to shareholders.
The following table summarizes information about our non-operating expenses (income), net:
| | | Three Months Ended March 31, 2012 | | | Three Months Ended March 31, 2011 | | | Cumulative From Inception to March 31, 2012 | |
| | | U.S. Dollars in Thousands | |
| Interest income, net | | | (13 | ) | | | (21 | ) | | | (28 | ) |
| Gain from marketable securities, net | | | - | | | | - | | | | (6 | ) |
| Interest on convertible notes and discount amortization | | | 1,541 | | | | 227 | | | | 3,936 | |
| Loss (gain) on revaluation of warrants | | | (308 | ) | | | 444 | | | | (1,789 | ) |
| Loss (gain) on revaluation of liability for commission to underwriters | | | (6 | ) | | | 15 | | | | (281 | ) |
| Other financing expense (income), net | | | (19) | | | | (28) | | | | (278 | ) |
| | | $ | 1,195 | | | $ | 637 | | | $ | 1,554 | |
Our warrants are valued using the Binomial model. This model uses the variables of the price of the underlying stock, the strike price, the continuously compounded risk-free interest rate, the continuously compounded annual dividend yield, the time in years until the expiration of the option, and the implied volatility of the company's common stock.
The following table shows the changes in the underlying parameters used in the valuation of the Warrants and convertible note:
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Market price of underlying stock | | | | | | | | | |
| | | | | $ | 0.716 | | | $ | 0.716 | |
Continuously compounded risk-free interest rate for | | | | | | | | | | | |
the debt feature of the Convertible Notes Payable | | | 0.10 | % | | | 0.47 | % | | | 0.07 | % |
Continuously compounded risk-free interest rate for Warrants | | | 0.273 | % | | | 0.96 | % | | | 0.12-1.19 | % |
Continuously compounded annual dividend rate | | | 0 | % | | | 0 | % | | | 0 | % |
Time in years until the expiration of the Convertible Notes Payable | | | 0.33 | | | | 1.33 | | | | 0.58 | |
Time in years until the expiration of the Warrant | | | 1.33 | | | | 2.33 | | | | 1.58 | |
| | | | | | | | | | | | | |
Implied volatility for the underlying stock | | | 38.13-46.37 | % | | | 61.41 | % | | | 56.08-60.94 | % |
*Exercise price adjusted to invoking of ratchet provision as result of January 2012 financing.
Income Tax (Expense) Benefit
The federal tax rates applicable to us, as an entity incorporated in Delaware in the United States, are progressive corporate tax rates of up to 34%.
At December 31, 2011, we had net operating loss (NOL) carryforwards in the United States amounting to $3.9 million, which will expire beginning in 2024 through 2031. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, in accordance with Internal Revenue Code, Section 382, our initial public offering, or IPO, and other ownership changes that have transpired, may limit our ability to utilize the NOL and credit carryforwards although we have not yet determined to what extent.
Pursuant to the current tax laws applicable to Israeli residents, dividends received from a company that is not an Israeli resident are subject to tax in Israel, at a rate of 20% or 25%, depending on the identity of the stockholder (individual or company) and the ownership percentage. According to the tax laws in the United States, such a dividend is subject to withholding tax at the rate of 30%, which could be reduced to the rate of 25% or 12.5% (depending on the identity of the stockholder and the ownership percentage), in accordance with the Treaty to Prevent Double Taxation between Israel and the United States. In order to enjoy this tax treaty's benefits, several procedural requirements must be met. As of March 31, 2012, we believe that we are currently a dual tax resident in both Delaware and Israel.
The tax rate that is applicable to us in Israel and to our Israeli subsidiary is the current corporate tax rate of 25%.
At December 31, 2011, our wholly owned Israeli subsidiary had NOL carryforwards in Israel amounting to NIS 64 million (approximately $16.7 million) and capital loss carryforwards of NIS 12 million (approximately $3 million), which under current tax law can be carried forward indefinitely.
Liquidity and Capital Resources
We are a development-stage company and have not experienced significant revenue-generating activities since our formation. We have incurred operating losses for each year since our inception in 2004. To achieve operating profits, we, alone or together with others, must successfully identify, develop and market product-candidates. Our principal activities, from the beginning of our development stage, have been organizational matters, issuance of stock, product research and development, fundraising and market research. We have financed our operations from inception primarily through various private placement transactions, public offerings of our common stock, and option exercises.
We are currently operating under a material liquidity deficiency. On January 24, 2012, we consummated a private offering, whereby investors received an aggregate amount of 11,144,400 shares of common stock at a price of NIS 1.00 (approximately $0.27) per share. The aggregate gross proceeds were NIS 11,144,400 (approximately $2,943,000) and the net proceeds were NIS 10,773,000 (approximately $2,850,000). Following this offering, we believe that we have sufficient cash to meet our planned operating needs until July 2012, based on our current cash levels. We therefore will need to raise substantial additional capital through future equity or debt financing to finance our initiatives and are currently evaluating potential alternatives. Furthermore, we will be obligated to repay the Convertible Notes Payable, in the face amount of $3,621,000, in July 2012, in the event that they are not converted. We currently do not have the funds available to repay this obligation. However, in April 2012, we reported that our Board of Directors and that of CBI had agreed that: (a) if and to the extent that Tikcro does not fully convert its convertible note from July 2008 and its note becomes payable on July 30, 2012, CBI will invest the amount needed for the repayment of Tikcro’s note – up to $2,481 thousand – in return for an allocation of shares of common stock. The aforementioned investment would serve only to repay Tikcro’s note; (b) CBI will convert its own note from July 2008, provided that the Provident Fund of the Employees of the Hebrew University of Jerusalem commits to do likewise.
Our board of directors has authorized our management to raise additional capital funds at terms to be approved by the board. The fundraising may be subject to stockholder approval by special majority and Tel Aviv Sock Exchange approval to register the securities to be issued.
In the near term, we expect to continue to incur significant and increasing operating losses as a result of the research and development expenses we expect to incur in developing our product candidates and the general and administrative expenses we expect to incur as a reporting company under the Exchange Act. Our research and development activity is subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization, and we may be unable to obtain regulatory approval for any of our prospective therapeutic products.
| | | Three Months Ended March 31, 2012 | | | Three Months Ended March 31, 2011 | | | Cumulative From Inception to March 31, 2012 | |
| | | U.S. Dollars in Thousands | |
| Net cash used in operating activities | | $ | (1,530 | ) | | $ | (590 | ) | | $ | (24,693 | ) |
| Net cash provided by (used in) investing activities | | $ | (- | ) | | $ | (5 | ) | | $ | 2,179 | |
| Net cash provided by financing activities | | $ | 2,843 | | | $ | 17 | | | $ | 24,240 | |
As of March 31, 2012, we had $1,585,000 in cash, cash equivalents, and short-term deposits, an increase of $1,345,000 from December 31, 2011.
Operating Activities
Net cash used in operations was $1,530,000 for the three months ended March 31, 2012 as compared to net cash used in operating activities of $590,000 for the three months ended March 31, 2011. The net cash used in operations was mainly used for operating expenses. The difference between our net loss of $2,391,000 and our net cash used in operations was attributable mostly to $50,000 of operating expenses that were the result of non-cash, stock-based compensation to employees and directors and management fee to Tikcro, and depreciation of $7,000, while recognizing income of $308,000 for the fair value adjustment of the derivative instruments.
Currently all of our funds are held as cash and cash equivalents. Net cash used in operations from our inception is attributable mostly to our net loss offset by non-cash items, primarily change in fair value and stock-based compensation, as delineated in our Consolidated Statement of Cash Flows. It is anticipated that our level of net cash used in operations will increase as our clinical trials move forward. Our cash reserves are currently the sole resource of funding for our current operations. We will require substantial additional funds to complete our research and development activities and, if additional funds are not available, we may need to significantly scale back or cease our operations, and our level of activity may change based on ability to secure future funding.
Investing Activities
Net cash used in investing activities during the three months ended March 31, 2012 and March 31, 2011 is mainly attributable to the acquisition of equipment, as delineated in our Consolidated Statement of Cash Flows. Net cash provided by investing activities from our inception is attributable mostly to the proceeds from marketable securities less the investments in marketable securities and acquisition of equipment, as delineated in our Consolidated Statement of Cash Flows. We redeemed our marketable securities for our ongoing activities and we do not expect this to continue because currently all of our funds are held as cash and cash equivalents.
Financing Activities
Net cash flows provided by financing activities was $2,843,000 for the three months ended March 31, 2012 as compared to net cash provided by financing activities of $17,000 for the three months ended March 31, 2011. In January 2012, we executed a private offering, whereby investors received an aggregate amount of 11,144,400 shares of common stock at a price of NIS 1.00 (approximately $0.27) per share. The aggregate gross proceeds were NIS 11,144,400 (approximately $2,943,000) and the net proceeds were NIS 10,793,000 (approximately $2,850,000), as described above.
Cash flows provided by financing activities for the development stage period (cumulative from inception to March 31, 2012) stems from the net proceeds from private placements to institutional and individual investors and public offerings in 2006 and 2010, the net proceeds from the proceeds from a private placement allocation of common shares and warrants to Tikcro Technologies, Ltd., CBI and The Provident Fund of the Hebrew University of Jerusalem in 2008, the net proceeds from our initial public offering in Israel and the conversion of our series A convertible preferred stock in 2006, and the exercise of stock options less the purchase of treasury stock.
Commencing January 30, 2011, we have been paying interest on the convertible notes payable on a quarterly basis to the three Institutional Investors, in an amount of approximately $90,000 per quarter, provided that the notes have not been converted.
Our financing needs may change substantially because of the results of our research and development, competition, advancing of our clinical trials and costs arising from additional regulatory approvals. We may not succeed in raising additional funds if needed. The timing of our need for additional funds will depend on a number of factors, which factors are difficult to predict or may be outside of our control, including:
| | •• | progress in our research and development programs; |
| | •• | the resources, time and costs required to initiate and complete our research and development and to initiate and complete pre-clinical and clinical studies and to obtain regulatory approvals for our prospective therapeutic products; |
| | •• | the timing, receipt and amount of milestone, royalty and other payments from present and future collaborators, if any; and |
| | •• | costs necessary to protect our intellectual property. |
Future Operations
As discussed above, we believe we have sufficient cash to meet our planned operating needs until July 2012, based on our current cash levels (see also discussion in Liquidity and Capital Resources above). Furthermore, our business strategy includes growth through additional business combinations and licensing which could require use of a significant amount of our available cash and raising additional capital. We therefore will be required to raise additional capital through future debt or equity financing to finance such initiatives. However, we cannot be certain that additional financing will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. As mentioned in Note 1 to our consolidated financial statements, we have incurred recurring losses from operations which raise substantial doubt as to our ability to continue as a going concern. Our financial statements do not include any adjustments to the value of our assets or the classification of our liabilities that might result if we would be unable to continue as a going concern. We have incurred operating losses since inception, have not generated any product sales revenues and have not achieved profitable operations. Our net loss accumulated during the development stage through March 31, 2012 aggregated $26,712,000, and we expect to continue to incur substantial losses in future periods while we continue to test and prepare our products for the market.
Our short and long-term capital requirements depend upon a variety of factors, including market acceptance for our technologies and product candidates and various other factors, many of which we cannot control, including:
| | •• | continued progress of and increased spending related to our research and development activities; |
| | •• | progress with clinical trials and pre-clinical experiments; |
| | •• | increased general and administrative expenses related to our being a reporting company both to the ISA and SEC (however, see details regarding proposed restructuring in the Overview above); |
| | •• | prosecuting and enforcing patent claims; |
| | •• | technological and market developments; |
| | •• | the ability to establish product development arrangements; |
| | •• | the cost of manufacturing development; |
| | •• | effective marketing activities and arrangements; and |
| | •• | licensing activity. |
Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Critical Accounting Policies and Significant Estimates
While our significant accounting policies are more fully described in the notes to our audited consolidated financial statements for the year ended December 31, 2011, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements.
Accounting for Stock-based Compensation
We record stock-based compensation as an expense in the statement of operations and this requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. Compensation cost of all stock-based compensation awards are recorded at their fair value at the date of the award over the service period for awards expected to vest. Fair value is determined using the Black-Scholes-Merton option pricing model, which considers the exercise price relative to the market value of the underlying stock, the expected stock price volatility, the risk-free interest rate and the dividend yield, and the estimated period of time option grants will be outstanding before they are ultimately exercised. We also determine the fair value of stock options and warrants granted to non-employees, for accounting purposes, using the Black-Scholes-Merton valuation model. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider various factors when estimating expected forfeitures, including historical experience. Actual results may differ substantially from these estimates.
Prior to our IPO, the market value of the underlying stock was based on estimates, including volatility estimates that are inherently highly uncertain and subjective, since prior to our IPO there had been no public market for our stock. Subsequent to our IPO, we did not have sufficient history to actually predict our volatility, therefore, our assumptions about stock price volatility were based on the volatility rates of comparable publicly held companies. These rates may or may not reflect our actual stock price volatility. Our current assumptions about our stock price volatility are based on a rate that we derived by taking into consideration our own historical volatility rates. Had we made different assumptions about the stock price volatility or the estimated time option and warrant grants will be outstanding before they are ultimately exercised, the related stock-based compensation expense and our net loss and net loss per share amounts could have been significantly different.
The pre-IPO options were granted with a par value exercise price. Due to the par value amount of $0.01, the fair value of these options was estimated to be equal to our share price at the grant date, based on stock issuances that took place surrounding the grant date. The expenses recorded in the statement of operations on account of stock-based transactions were $50,000 and $161,000 for the three months ended March 31, 2012 and March 31, 2011, respectively, and $2,396,000 for the development stage period (cumulative from inception to March 31, 2012).
The parameter used from 2004 – 2005 to value options for employees was the price of the share on grant date, a method described above. The parameters used to value grants from 2006 – 2011 were based on the Black-Scholes-Merton model for valuing options for employees, as follows:
| | | | Expected Average Term of the Option | | | | | Estimate Value of the Share on the Grant Date | |
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The fair value of options granted to non-employees has been computed and accounted for in accordance with ASC subtopic 505-50 and 718-10. The fair value of options granted to non-employees has been measured according to the Black-Scholes-Merton option-pricing model. To the extent that there are non-employee options for which a measurement date was not yet reached, the stock option compensation is revalued at the end of each reporting period.
Accounting for Income Taxes
We are taxed under the laws of the United States, and we are registered as a tax-reporting company in Israel. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves management estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have almost fully offset our net deferred tax asset with a valuation allowance. Our lack of earnings history and the uncertainty surrounding our ability to generate taxable income prior to the expiration of such deferred tax assets were the primary factors considered by our management in establishing the valuation allowance.
We recognize tax benefits from tax positions only if they have at least a “more likely than not” chance of being sustained upon a challenge by the respective taxing authorities. Recognition and measurement of uncertain tax positions are also subject to management’s estimates and judgment of whether they are more likely than not to be sustained, and the amount to be recognized. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
Valuation of Financial Instruments Issued in Private Placement Financing
On July 30, 2008 we completed private placements with the Three Institutional Investors, for the purchase of: (i) shares of our common stock, (ii) notes payable convertible into shares of our common stock and (iii) warrants to purchase shares of our common stock.
To account for these private placements, we estimated the fair value of the three components embodied in the agreements. We used various valuation models and techniques to determine the individual values of the three components. These models use the variables of the price of the underlying stock, the strike price, the continuously compounded risk free interest rate, the continuously compounded annual dividend yield, the time in years until the expiration of the option, the implied volatility for the underlying stock and the standard normal cumulative distribution function. The $3.650 million of proceeds from the private placements were first allocated to the warrants, which were classified as derivative instruments. The warrants are considered derivatives since they were not indexed solely to our own stock as they were to be settled in a currency other than our functional currency, and the warrants meet all of the characteristics of a derivative instrument. The convertible notes payable were classified as long-term liabilities and have been recorded at their relative fair value, discounted by a beneficial conversion feature. The company amortized the discounts on the Convertible Notes Payable over the period from the issuance date, July 30, 2008, until January 24, 2012, the date of the private placement. The Company recognized approximately $1,359,000 in amortization of the discount from 2008 using the effective interest method. Following the aforementioned private placement, the decrease in share price led to invoking certain adjustment formulas. Consequently, the exercise price of the warrants received by 2008 Investors was changed from $0.716 per share to NIS 1 per share. In addition the Company recorded an additional beneficial conversion feature of $2,336,000, resulting in a total remaining discount of $3,621,000 that will be amortized from January 24, 2012 until the redemption date of the notes (July 30, 2012), unless converted or redeemed earlier. During the first quarter of 2012, the Company amortized $1,303,000 of the remaining discount, to interest expense.
The warrants have been recorded as a liability, with a corresponding discount to the Convertible Notes Payable, based on their fair values, and are revalued at each reporting date. This model uses the variables of the price of the underlying stock, the strike price, the continuously compounded risk free interest rate, the continuously compounded annual dividend yield, the time in years until the expiration of the option, the implied volatility of the underlying stock and the standard deviation. While we believe we have applied appropriate judgment in the assumptions and estimates, variations in judgment in applying assumptions and estimates used in the valuations could have a material effect upon the valuation results, and thus, on our financial statements. For further details regarding these estimates, see the discussion on non-operating expenses (income), net above.
