Attached files
file | filename |
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EX-21 - PROLOR Biotech, Inc. | v178700_ex21.htm |
EX-23.1 - PROLOR Biotech, Inc. | v178700_ex23-1.htm |
EX-31.2 - PROLOR Biotech, Inc. | v178700_ex31-2.htm |
EX-32.1 - PROLOR Biotech, Inc. | v178700_ex32-1.htm |
EX-32.2 - PROLOR Biotech, Inc. | v178700_ex32-2.htm |
EX-31.1 - PROLOR Biotech, Inc. | v178700_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
¨
|
TRANSITION REPORT PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from to
COMMISSION
FILE NUMBER 000-52691
PROLOR
BIOTECH, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
|
20-0854033
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
3
Sapir Street, Weizmann Science Park
Nes-Ziona,
Israel 74140
(Address
of principal executive offices) (zip code)
Registrant’s
Telephone Number, Including Area Code: (866) 644-7811
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
|
Name of Each Exchange On Which
Registered
|
None
|
N/A
|
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.00001 per share
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes ¨ No x
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 Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
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 if the Act).
Yes ¨ No x
The
aggregate market value of the registrant’s outstanding common stock held by
non-affiliates of the registrant computed by reference to the price at which the
common stock was last sold as of the last business day of the registrant’s most
recently completed second fiscal quarter was $26,952,807 (based on a closing
price of $0.82 per share for the registrant’s common stock on the OTCBB on June
30, 2009).
As of
March 22, 2010, the registrant had 46,168,311 shares of common stock
outstanding.
The
registrant’s definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A for the 2010 annual meeting of
stockholders is incorporated by reference in Part III of this Form 10-K to the
extent stated herein.
INDEX
AND CROSS REFERENCE SHEET
PART
I
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3
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||
Item
1.
|
Business
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3
|
|
Item
1A.
|
Risk
Factors
|
16
|
|
Item
1B.
|
Unresolved
Staff Comments
|
31
|
|
Item
2.
|
Properties
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31
|
|
Item
3.
|
Legal
Proceedings
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31
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|
Item
4.
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[Reserved]
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32
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PART
II
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32
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||
Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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32
|
|
Item
6.
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Selected
Financial Data
|
32
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|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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32
|
|
Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
|
42
|
|
Item
8.
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Financial
Statements and Supplementary Data
|
42
|
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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42
|
|
Item
9A(T).
|
Controls
and Procedures
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42
|
|
Item
9B.
|
Other
Information.
|
43
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|
PART
III
|
43
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||
Item
10.
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Directors,
Executive Officers and Corporate Governance.
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43
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Item
11.
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Executive
Compensation.
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43
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|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
43
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
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43
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|
Item
14.
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Principal
Accounting Fees and Services.
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43
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|
PART
IV
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43
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||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
43
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|
SIGNATURES
|
i
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”), about our expectations, beliefs or intentions regarding, among other
things, our product development efforts, business, financial condition, results
of operations, strategies or prospects. You can identify
forward-looking statements by the fact that these statements do not relate
strictly to historical or current matters. Rather, forward-looking
statements relate to anticipated or expected events, activities, trends or
results as of the date they are made. Because forward-looking
statements relate to matters that have not yet occurred, these statements are
inherently subject to risks and uncertainties that could cause our actual
results to differ materially from any future results expressed or implied by the
forward-looking statements. Many factors could cause our actual
activities or results to differ materially from the activities and results
anticipated in forward-looking statements. Risks and uncertainties,
the occurrence of which could adversely affect our business, include the
following:
|
·
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our
limited operating history;
|
|
·
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our
lack of any commercialized products or
technologies;
|
|
·
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our
product candidates are at an early stage of product development and may
never be commercialized;
|
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·
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that
we may be unable to develop product candidates that will achieve
commercial success in a timely and cost-effective manner, or
ever;
|
|
·
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our
need to raise additional capital to meet our business requirements in the
future, and such capital raising may be costly or difficult to obtain and
could dilute current stockholders’ ownership
interests;
|
|
·
|
if
we fail to obtain necessary funds for our operations, we will be unable to
maintain and improve our patented technology, and we will be unable to
develop and commercialize our products and
technologies;
|
|
·
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our
dependence on key members of our management and advisory
team;
|
|
·
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our
potential inability to enforce employees’ covenants not to compete and
therefore may be unable to prevent our competitors from benefiting from
the expertise of some of our former
employees;
|
|
·
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our
current lack of sales, marketing or distribution
capabilities;
|
|
·
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potential
product liability claims if our product candidates cause harm to
patients;
|
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·
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our
product candidates will remain subject to ongoing regulatory requirements
even if they receive marketing approval, and if we fail to comply with
these requirements, we could lose these approvals, and the sales of any
approved commercial products could be
suspended;
|
|
·
|
clinical
trials are very expensive, time-consuming and difficult to design and
implement and, as a result, we may suffer delays or suspensions in future
trials which would have a material adverse effect on our ability to
generate revenues;
|
|
·
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the
manufacture of our product candidates is an exacting and complex process,
and if we or one of our materials suppliers encounters problems
manufacturing its products, our business could
suffer;
|
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·
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our
reliance on third parties to implement our manufacturing and supply
strategies;
|
|
·
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our
inability to successfully integrate any acquisitions of technologies or
products;
|
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·
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our
inability to successfully grow and expand our
business;
|
|
·
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our
inability to obtain adequate
insurance;
|
1
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·
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costs
associated with being a U.S. public reporting
company;
|
|
·
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our
holding company structure and our dependence on cash flow from our
wholly-owned subsidiaries to meet our
obligations;
|
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·
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liabilities
arising from our prior business;
|
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·
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our
inability to maintain an effective system of internal
controls;
|
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·
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the
impact of potential political, economic and military instability in the
State of Israel, where key members of our senior management and our
research and development facilities are
located;
|
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·
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recent
disruptions in the financial markets and global economic
conditions;
|
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·
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our
dependence on our license of core technology from Washington
University;
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·
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our
failure to obtain or maintain or protect our patents, licensing agreements
and other intellectual property;
|
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·
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the
cost of potential litigation required to protect our intellectual property
or to defend against claims alleging that we have violated the
intellectual property rights of
others;
|
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·
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our
inability to enforce confidentiality agreements, which could result in
third parties using our intellectual property to compete against
us;
|
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·
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our
inability to obtain required regulatory approvals in the United States to
market our proposed product
candidates;
|
|
·
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the
impact of government regulations and delays associated with obtaining
required regulatory approvals in the United States necessary to market our
proposed product candidates;
|
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·
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the
impact of competition and continuous technological
change;
|
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·
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the
impact of healthcare reform, which could adversely impact how much or
under what circumstances healthcare providers will prescribe or administer
our products;
|
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·
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compliance
with federal anti-kickback laws and
regulations;
|
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·
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the
volatility, limited trading history and liquidity of our common
stock;
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·
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the
potential that our common stock may be a “penny
stock”;
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·
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that
we do not anticipate paying dividends on our common
stock;
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·
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a
lack of security analyst coverage of our
company;
|
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·
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potential
dilution of your ownership interest because of future issuances of
additional shares of our common stock and our preferred
stock;
|
|
·
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that
our principal stockholders have significant voting power and may take
actions that may not be in the best interest of other stockholders;
and
|
|
·
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sales
by stockholders who had previously been subject to restrictions on the
sale of their shares and who may now sell those shares into the public
market.
|
2
We
believe these forward-looking statements are reasonable; however, you should not
place undue reliance on any forward-looking statements, which are based on
current expectations. Furthermore, forward-looking statements speak only as of
the date they are made. If any of these risks or uncertainties materialize, or
if any of our underlying assumptions are incorrect, our actual results may
differ significantly from the results that we express in, or imply by, any of
our forward-looking statements. These and other risks are detailed in this
Annual Report on Form 10-K, in the documents that we incorporate by reference
into this Annual Report on Form 10-K and in other documents that we file with
the Securities and Exchange Commission. We do not undertake any obligation to
publicly update or revise these forward-looking statements after the date of
this Annual Report on Form 10-K to reflect future events or circumstances. We
qualify any and all of our forward-looking statements by these cautionary
factors.
PART
I
Item 1.
|
Business
|
Unless
the context otherwise requires, all references in this Annual Report on Form
10-K to “the Company”, “Prolor”, “we,” “us” and “our” refer to PROLOR Biotech,
Inc., a Nevada corporation (formerly Modigene Inc.), including its direct and
indirect wholly-owned subsidiaries, Modigene, Inc., a Delaware corporation,
which we refer to as Modigene Delaware, and ModigeneTech Ltd., which we refer to
as ModigeneTech.
History
We were
originally incorporated under the laws of the State of Delaware in August 2003
as LDG, Inc., referred to as LDG, which was engaged in the graphics design,
marketing and advertising business. On February 26, 2007, LDG, Inc.
changed its name to Modigene Inc, and on May 9, 2007, its wholly-owned
subsidiary Modigene Acquisition Corp. merged with and into Modigene
Delaware. Modigene Delaware survived the merger, following which we
have operated the business of Modigene Delaware and its wholly-owned subsidiary
ModigeneTech.
Prior to
the consummation of the merger, we transferred all of our former operating
assets and liabilities to our then wholly-owned subsidiary Liaison Design Group,
LLC, which we refer to as LDG, LLC. Simultaneously with the closing
of the merger, we sold all of our membership interests in LDG, LLC to the
original members of LDG, LLC in exchange for the surrender and cancellation of
34,920,633 shares of our common stock held by such persons.
Concurrently
with and in contemplation of the merger, we completed a private placement of our
securities, 6,418,814 units of which were sold on May 9, 2007, and an additional
2,247,858 units of which were sold on May 21, 2007. Each unit
consisted of one share of our common stock and a warrant to purchase one-quarter
of one share of our common stock. Also simultaneously with the
closing of the merger, for total consideration of $2 million, we sold 5,377,660
shares of our common stock plus warrants to purchase 333,333 shares of our
common stock to four strategic investors led by Dr. Phillip Frost and Dr. Jane
Hsiao, who were appointed as directors. On May 21, 2007, we issued an
additional 155,673 shares of our common stock for no additional consideration to
these investors, for a total of 5,533,333 shares issued to this investor
group.
As a
result of the foregoing transactions, the former stockholders of Modigene
Delaware acquired approximately 38.7% of our then-outstanding shares of common
stock, new investors were issued approximately 40.4% of our then-outstanding
common stock and our former stockholders retained approximately 20.9% of our
then-outstanding common stock. The business of Modigene Delaware and
ModigeneTech became our business on a going-forward basis, and the description
of our business included in this Annual Report on Form 10-K is a discussion of
the business of Modigene Delaware and ModigeneTech, including all relevant
periods prior to the consummation of the merger on May 9, 2007.
On June
10, 2009, we changed our name from Modigene Inc. to PROLOR Biotech, Inc., and on
June 12, 2009 the trading symbol for our common stock on the OTCBB changed from
MODG to PBTH.
Overview
We are a
development stage biopharmaceutical company utilizing patented technology to
develop longer-acting, proprietary versions of already-approved therapeutic
proteins that currently generate billions of dollars in annual global
sales. We have obtained certain exclusive worldwide rights from
Washington University in St. Louis, Missouri to use a short, naturally-occurring
amino acid sequence (peptide) that has the effect of slowing the removal from
the body of the therapeutic protein to which it is attached. This
Carboxyl Terminal Peptide (CTP) can be readily attached to a wide array of
existing therapeutic proteins, stabilizing the therapeutic protein in the
bloodstream and extending its life span without additional toxicity or loss of
desired biological activity. We are using the CTP technology to
develop new, proprietary versions of certain existing therapeutic proteins that
have longer life spans than therapeutic proteins without CTP. We
believe that our products will have greatly improved therapeutic profiles and
distinct market advantages.
3
We
believe our products in development will provide several key advantages over our
competitor’s existing products:
|
·
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significant
reduction in the number of injections required to achieve the same or
superior therapeutic effect from the same
dosage;
|
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·
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extended
patent protection for proprietary new formulations of existing
therapies;
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·
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faster
commercialization with greater chance of success and lower costs than
those typically associated with a new therapeutic protein;
and
|
|
·
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manufacturing
using industry-standard biotechnology-based protein production
processes.
|
Merck
& Co. has developed the first novel protein containing CTP, named ELONVA®, a
long-acting CTP-modified version of the fertility drug follicle stimulating
hormone (FSH). On January 28, 2010, Merck received marketing
authorization from the European Commission for ELONVA® with unified labeling
valid in all European Union Member States. Merck licensed the CTP
technology directly from Washington University (prior to the formation of
Modigene Delaware) for application only to Follicle Stimulating Hormone (FSH)
and three other hormones, human Chorionic Gonadotropin (hCG), Luteinizing
Hormone (LH) and Thyroid-Stimulating Hormone (TSH).
Our
internal product development program is currently focused on extending the life
span of the following biopharmaceuticals, which together address an established
market in excess of $15 billion:
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·
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Human
Growth Hormone (hGH)
|
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·
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Interferon
β
|
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·
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Factor
VIIa, Factor IX
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·
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Erythropoietin
(EPO)
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·
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Anti-Obesity
Peptide
|
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·
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Glucagon-Like
Peptide-1 (GLP-1)
|
Worldwide
sales of hGH are estimated at $3.0 billion, those of EPO are estimated at $10.0
billion, those of
interferon β are estimated at $5.3 billion, and those of Factor VIIa and Factor
IX are estimated at $1.5 billion in the aggregate. We believe that
the CTP technology will be broadly applicable to these as well as other
best-selling therapeutic proteins in the market and will be attractive to
potential partners because it will allow them to extend proprietary rights for
therapeutic proteins with near-term patent expirations.
Discovery,
Development and Clinical Experience with CTP Technology
Our core
technology was developed by Washington University in St. Louis, while
investigating the female hormone hCG, which facilitates pregnancy by maintaining
production of progesterone and stimulating development of the
fetus.
hCG has a
long life span of up to 2 days, meaning that the body is slow to break it
down. LH is another female hormone having a chemical
composition (amino acid sequence) very close to that of hCG. LH has a
very short life span of 20 minutes. Scientists at Washington
University discovered that the only difference between hCG and LH is a short
amino-acid sequence present in hCG and not in LH which they called “CTP” for
Carboxyl-Terminal Peptide. This is shown schematically
below. When produced in mammalian cells, this CTP is heavily modified
by sugars being added (a process called glycosylation). Through
numerous experiments, it was confirmed that CTP was responsible for the longer
life span of hCG as compared to LH. Washington University then
performed additional experimentation adding CTP to different therapeutic
proteins and the results showed that the CTP-modified proteins had dramatically
increased life span.
4
Prolor’s
core technology is the use of a short, naturally occurring amino acid sequence
(CTP) to slow the removal of therapeutic proteins from the body
without
increasing toxicity or altering the overall biological activity
Our
scientific founder, Dr. Fuad Fares, was a post-doctoral student at Washington
University and worked on these findings and experiments. When Dr.
Fares returned to Israel in 2001, he formed ModigeneTech to license the CTP
technology from Washington University for certain therapeutic
indications.
Prior to
Dr. Fares’ completion of our initial license agreement with Washington
University, the Dutch biotech company Organon, now part of Merck & Co.,
licensed the CTP solution to be used in conjunction with four endocrine
proteins: FSH, hCG, TSH and LH. Organon’s goal was to
develop a longer-lasting version of their FSH product, marketed as Follistim®
and required to be injected on a daily basis. There have been several
attempts to create a long-lasting version of FSH utilizing existing technologies
that compete with our CTP technology, including a PEGylated version, all of
which have been abandoned or terminated.
In July
2008, Schering-Plough, now part of Merck, announced successful top-line data
from its Phase III ENGAGE trial demonstrating that women receiving a single
injection of FSH-CTP (now branded ELONVA®) achieved the same pregnancy rates as
women receiving seven consecutive daily injections of FSH, a primary endpoint of
the study. This 1,509 patient trial was the largest double-blind
fertility trial ever conducted. On January 28, 2010, Merck received
marketing authorization from the European Commission for ELONVA® with unified
labeling valid in all European Union Member States. We are now the
exclusive licensee for the utilization of CTP technology in all therapeutic
proteins, peptides and their modified forms except for human FSH, LH, TSH and
hCG.
Stimulation of egg follicle growth in
women preparing for IVF.
Standard treatment of daily injection of rFSH (rightmost bar in each day’s
group) is compared to a single injection of FSH-CTP in one of three dose
levels. At the days shown, large (growing) follicles were detected by
ultrasound. There were at least as many large follicles stimulated by
each of the FSH-CTP doses as with the control group.
5
Opportunity
Background
Overview
of Therapeutic Proteins
Therapeutic
proteins are proteins that are either extracted from human cells or engineered
and produced in the laboratory for pharmaceutical use. The majority
of therapeutic proteins are recombinant human proteins manufactured using
non-human cell lines that are engineered to contain certain human genetic
sequences which cause them to produce the desired
protein. Recombinant proteins are an important class of therapeutics
used to replace deficiencies in critical blood borne growth factors and to
strengthen the immune system to fight cancer and infectious
disease. Therapeutic proteins are also used to relieve patients’
suffering from many conditions, including various cancers (treated by monoclonal
antibodies and interferons), heart attacks, strokes, cystic fibrosis and
Gaucher’s disease (treated by enzymes and blood factors), diabetes (treated by
insulin), anemia (treated by erythopoietins), and hemophilia (treated by blood
clotting factors).
The U.S.
Food and Drug Administration (FDA) has approved 75 therapeutic proteins, also
known as biopharmaceuticals, and there are more than 500 additional proteins
under development. To date, much of the growth has been in sales of
erythopoietins (used to treat anemia) and insulins (used to treat
diabetes). Many of the proteins currently on the market will lose the
protection of certain patent claims over the next 15 years. In
addition, many marketed proteins are facing increased competition from
next-generation versions or from other therapeutic proteins approved for the
same disease indications.
Because
proteins are broken down in the gastrointestinal system, therapeutic proteins
must be administered by injection. Once in the bloodstream,
therapeutic proteins are broken down by enzymes and cellular activity, as well
as filtered out of the blood by the kidneys. Therefore, injections
must be given frequently to achieve effective therapeutic levels. We
believe that a large market opportunity exists for new versions of proven
therapeutic proteins that remain active longer, thereby reducing the number of
required injections and optimizing therapeutic results and patient
acceptability. However, existing approaches to creating modified
therapeutic proteins are generally based on the addition of synthetic,
non-protein elements that result in problems such as loss of desired biological
activity, toxicity of the modified protein and increased manufacturing
complexity and cost. Despite these challenges, several longer-lasting
modified therapeutic proteins currently on the market have been demonstrated to
be successful. Each of these improved therapeutics was
custom-designed with great effort.
Attempts
to Extend the Life Span of Therapeutic Proteins
Several
strategies have been devised in recent years to extend the life span of
therapeutic proteins by slowing their clearance from the body. These strategies
have included two main techniques:
|
·
|
Increasing
the size of the therapeutic protein. This is achieved either by attaching
large polymeric chains to the protein (PEGylation) or by attaching other
large, non-active proteins that have longer life spans compared to the
target therapeutic protein.
|
|
·
|
Altering
the physical structure of the therapeutic protein. This is achieved by
adding carbohydrate structures to the therapeutic protein (glycosylation)
through modifications of the original genetic sequence of the protein.
These additional “sugar chains” slow the clearance of the therapeutic
protein from the bloodstream.
|
Limitations
of Existing Life Span Extension Solutions
There are
several fundamental issues with the existing technologies that attempt to create
longer-lasting versions of therapeutic proteins. If the size of the
protein is increased by way of attaching large polymeric chains or another
protein, the end result is a very large protein. Because most
therapeutic proteins work by binding to specific receptors, the new “bulkiness”
may prevent them from achieving the desired result. The smaller the
protein, the more significant the effect of the size increase may
be. Successful attempts at increasing the size of therapeutic
proteins, while preserving substantial activity, have been relatively few, and
have been with proteins that are already large. Moreover, the
biological activity of the modified protein has been significantly less than
that of the unmodified protein and therefore requires a higher injected dose as
compared to the unmodified protein’s usual dosage. One typical method
to achieve the desired size increase is to add long polymers of polyethylene
glycol (PEG) to a protein; however, this method has historically resulted in the
creation of foreign structures to which the immune system may adversely
react. When this happens, the immune system works to remove the
modified protein from the bloodstream, defeating the purpose of the original
modification. It can also lead to additional negative effects, such
as reaction at the injection site.
6
Another
technique, glycosylation, requires custom alterations (point mutations) to the
protein’s genetic structure to increase its life span. The resulting
modified protein is entirely new and often generates unexpected adverse
reactions, resulting in potentially toxic effects. To date, creating
a protein with a longer life span that is not toxic has been a lengthy trial and
error process.
Although
the existing modification technologies have been tried on almost all therapeutic
proteins, only three “blockbuster” modified proteins have been commercially
successful: two developed by Amgen Inc., and one independently
developed by Schering-Plough Corporation and Roche
Pharmaceuticals. Each of these three longer-lasting therapeutic
proteins has had annual sales in the billions of dollars and is a leader in its
respective market based upon annual sales:
|
·
|
Utilizing
PEGylation, Schering-Plough and Roche independently developed PEG-INTRON
and PEGASYS, therapeutic proteins with a longer life span than that of
regular Alpha interferon (used for treating Hepatitis B and C), and which
generated sales in 2009 of $2.3
billion.
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Utilizing
PEGylation, Amgen developed Neulasta, an anti-neutropenia therapeutic
protein with a longer life span than that of regular G-CSF, and which
generated sales in 2008 of $3.3
billion.
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Utilizing
additional glycosylation, Amgen developed Aranesp, an anti-anemia
therapeutic protein with a longer life span than that of regular EPO, and
which generated sales in 2008 of $2.6
billion.
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We
believe that these products, which together have generated in excess of $8.0
billion in annual revenues, clearly indicate the potential value of developing
improved therapeutic proteins.
Our
Solution
Our
solution to creating proprietary, enhanced longevity protein therapeutics is
CTP, a short, naturally-occurring amino acid sequence that has the effect of
slowing the removal and/or breakdown of the therapeutic protein to which it is
attached. Through our license agreement with Washington University,
we have secured exclusive, worldwide rights to use the CTP technology with
respect to all natural and non-natural therapeutic proteins and peptides (other
than LH, TSH, FSH and hCG, which are licensed to an affiliate of Schering-Plough
Corp.), including hGH, EPO, interferon β
and GLP-1. Using standard recombinant DNA techniques, the CTP peptide
can be readily attached in one or more copies to a wide array of existing
therapeutic proteins. When these proteins are produced in mammalian
cells, the CTP portion undergoes a natural process in which special carbohydrate
chains are attached (O-linked glycosylation). This additional CTP
piece, along with its carbohydrate chains, stabilizes the therapeutic protein in
the bloodstream and greatly extends its life span, without additional toxicity
or loss of its desired biological activity. This is quite distinct
from other methods used to extend protein life span, which require the addition
to the therapeutic drug of large proteins or of synthetic, non-protein elements
that may result in problems such as loss of desired biological activity or
toxicity of the modified protein, as well as increased manufacturing complexity
and cost. Moreover, CTP-modified proteins can be manufactured using
established and widely used mammalian protein expression systems (cell
lines). Therefore, we believe that the technology risks are
minimized, while the benefits of the CTP technology can be
substantial.
There are
two existing biopharmaceuticals that utilize CTP technology. The
first product is hCG, of which CTP is naturally a part. Besides being
present normally in high amounts during pregnancy, it is also given
therapeutically to women or men as a fertility treatment (sold by Merck-Serono,
Merck & Co. and Ferring). The second product is ELONVA®
(FSH-CTP), which is approved for marketing in Europe as described
above. The data from the use in humans of these two products give us
confidence that the CTP technology may be able to address the major problems
faced by the other attempted approaches to increase protein
lifespan. Data from these products reassures us that CTP can be used
safely in humans and that it is effective in extending the serum lifetime and
activity in humans.
7
We
believe the clinical development program for our drugs will be faster, less
expensive and more predictable than those conducted for existing therapeutic
proteins. We can base the design of our studies, the inclusion
criteria, clinical endpoints and sample sizes, on the knowledge gained from
development of the predecessor drugs, with the assurance that these have been
accepted by regulatory authorities in the past. In addition there are
usually surrogate markers for clinical efficacy that have been defined and
accepted by the medical community. These can provide easier and
faster ways of learning at an early stage the correct dosing range and
frequency. In some cases, they can even be used as definitive
clinical trial endpoints. We believe that these factors drive will
down the time and costs associated with clinical trials.
Research
& Development: Our Development Programs
We are
currently pursuing the development and commercialization of six
products: Human Growth Hormone, Interferon β,
Factor VIIa, Factor IX, Erythropoietin and an anti-obesity peptide, which
collectively address an established market in excess of $15
billion.
Human
Growth Hormone (hGH)
Market
Opportunity
Growth
hormone deficiency (GHD) is a pituitary disorder resulting in short stature in
children and other physical ailments in both children and adults. GHD
occurs when the production of growth hormone, secreted by the pituitary gland,
is disrupted. Since growth hormone plays a critical role in
stimulating body growth and development, and is involved in the production of
muscle protein and in the breakdown of fats, a decrease in the hormone affects
numerous body processes.
Recombinant
hGH is used for the long-term treatment of children and adults with growth
failure due to inadequate secretion of endogenous growth hormone. The
primary indications it treats in children are growth hormone deficiency, kidney
disease, Prader-Willi Syndrome and Turner’s Syndrome. In adults, the
primary indications are replacement of endogenous growth hormone and the
treatment of AIDS-induced weight loss. The annual market for hGH was
$2.7 billion in 2008, with six companies then marketing versions of the
therapeutic protein.
In
addition to its current use, hGH has been proven to promote a number of
lifestyle benefits including weight loss, increased energy levels, enhanced
sexual performance, improved cholesterol, younger, tighter, thicker skin and
reduced wrinkles and cellulite. We expect the hGH market to expand
significantly as hGH moves beyond therapeutic treatment to include the treatment
of lifestyle issues.
Current
Products
Prior to
the advent of recombinant versions, growth hormone was purified from human
cadavers. For the past 20 years, recombinantly produced protein has
been supplied to the market by an increasing number of
companies. Current products on the U.S. market are Nutropin
(Genentech), Genotropin (Pfizer), Humatrope (Eli Lilly), Norditropin (Novo
Nordisk), Serostim (Merck-Serono) and Omnitrope (Novartis).
Our
hGH-CTP Program
Patients
using hGH receive daily injections six or seven times a week. This is
particularly burdensome for pediatric patients. We believe a
significant market opportunity exists for a longer-lasting version of hGH that
would require fewer injections.
We
reported positive top-line results from a Phase I study of our longer-acting
version of hGH. The study was designed to measure the potential
durability (half-life), overall drug exposure (AUC) and biological efficacy, as
well as the safety and tolerability of our longer-acting CTP-modified human
growth hormone (hGH-CTP).
The Phase
I study enrolled 24 healthy adults who were randomized to receive one of three
doses of hGH-CTP (4mg, 7mg or 21mg) or placebo. The study results
showed that safety and tolerability endpoints were met at all doses in all
participants. The potential clinical efficacy of hGH-CTP was assessed
by measuring the extent to which hGH-CTP induced insulin-like growth factor-1
(IGF-1) in subjects. This biomarker is the clinically accepted primary indicator
of hGH biological activity and is used by endocrinologists to optimize dosing
for hGH-deficient adults. Based on this measure, the study results
suggest that the daily injections required by patients using conventional hGH
could potentially be replaced with just two monthly injections of
hGH-CTP.
8
Erythropoietin
(“EPO”)
Market
Opportunity
The level
of red blood cells in the body at any given time depends on a protein hormone
called Erythropoietin (EPO). The kidneys make EPO, and it travels to
the bone marrow where it stimulates the production of red blood
cells. Individuals with chronic kidney failure, chemotherapy patients
and HIV/AIDS patients on AZT therapy suffer from low levels of
EPO. Without sufficient EPO, the level of red blood cells drops,
which causes anemia. Symptoms of anemia can be vague, but most
commonly, people with anemia report a feeling of weakness or
fatigue. More severe anemia leads to shortness of breath, and can
lead to heart failure in the elderly.
In
addition to its major use in patients with chronic kidney failure and those on
chemotherapy, EPO is also used in patients who may require a blood transfusion
or undergo surgery where blood loss is expected. In these cases, EPO
is given in advance as a precaution. The bone marrow produces more
red blood cells, and if blood is lost during the operation, there is still
enough to sustain the patient.
Estimated
worldwide sales of EPO were approximately $10 billion in 2008.
Current
Products Produced by Others
Recombinant
EPO was launched as a pharmaceutical product by Amgen for treatment of anemia
resulting from chronic renal failure in 1989 under the brand name
Epogen. In 1991 it was also approved for treating anemia resulting
from cancer chemotherapy. Johnson & Johnson (J&J) markets EPO
under license from Amgen for cancer chemotherapy under the brand names Procrit
(US) and Eprex (ex-US). A longer-acting erythropoietin analogue,
darbepoetin (dEPO), also known as novel erythropoiesis-stimulating protein
(NESP), was launched by Amgen under the brand name Aranesp in 2001.
Amgen’s
patents have so far prevented other companies from entering the U.S.
market. Even though the patents are all based on work done in the
early 1980s, the last of them will not expire until 2015, thirty-two years after
the date of the original application. Outside the United States,
Amgen’s patents did not prevail and EPO is also available from Roche and Chugai
under the brand names NeoRecormon and Epogin. A long-acting PEGylated
form is in development by Roche as CERA.
9
EPO is
generally injected subcutaneously (under the skin) by the patient, although it
may also be given intravenously (through a vein). Several injections
weekly are required for the original forms, but the long-acting forms may
require injections only once every two weeks.
Our
EPO-CTP Program
Our
scientists have created constructs of EPO with CTP attached and have
demonstrated in rodents that EPO-CTP has extended serum lifetime and enhanced
activity compared to equivalent amounts of EPO without CTP, and is at least as
effective as Aranesp, Amgen’s long-acting EPO. Aranesp was
constructed as one of a very large number of mutants of EPO, each of which was
laboriously cloned, expressed and tested for activity. By comparison,
only a single cloning experiment was required to engineer each variant of
EPO-CTP. Schematic structures of EPO, Aranesp and EPO-CTP with a
single CTP cassette are shown below (not to scale). It can be seen
that EPO-CTP with a single CTP cassette contains the same maximal number of
sialic acids as the terminal residues on its carbohydrate chains as does
Aranesp. These sialic acids have been described by Amgen to be a
major factor in determining serum half-life. A secondary contributor
is molecular weight, and EPO-CTP appears to benefit from this factor, especially
in EPO-CTP variants with three CTP cassettes.
The
in-vivo biological activity of the EPO-CTP variants has been tested using the
standard EPO animal model. In that animal model, we conducted a
comparative study of the biological effect of single injection of commercial
EPO, single injection of Aranesp, and a single weekly injection of EPO-CTP, on
mice. The hemoglobin levels as well as other parameters of the mice
were measured. In addition, the half-life (durability) of EPO,
Aranesp and EPO-CTP was measured. As shown below, the results
demonstrate that (i) a EPO-CTP has a 33% greater half-life than that of Aranesp,
(ii) a single injection per week of our EPO-CTP is highly effective in inducing
immature red blood cells, as well as hemoglobin levels, and (iii) a single
injection per week of our EPO-CTP has a stronger biological effect than that of
a single injection per week of Aranesp.
10
11
Interferon
β
Market
Opportunity
Beta
interferon is a drug used to reduce the frequency and severity of relapses
afflicting people suffering from multiple sclerosis (MS). MS is an
autoimmune neurological disorder affecting the insulating myelin layers of the
brain and spinal cord. If unchecked, over time the immune system
attack on the myelin leads to poor coordination, severe disabilities and
premature death.
Annual
sales of beta interferon were estimated to be $5.3 billion in 2008, selling
under the product names Rebif by Merck-Serono, Inc., Betaseron/Betaferon by
Schering AG and Avonex by Biogen Idec.
Current
Products for MS Produced by Others
Beta interferon is
available as two different proteins with similar activity. Interferon
β-1b (Betaseron) is a genetically altered protein produced in E. coli bacteria and was the
first product introduced for MS in 1993. Interferon
β-1a is the natural sequence protein, produced in mammalian cells, and is
glycosylated. It was introduced to the U.S. market in 1996 by Biogen
Idec (Avonex), followed in 2002 by Serono’s product Rebif, which is co-marketed
by Pfizer. Betaseron is injected every other day
subcutaneously, Avonex is given once per week by intramuscular injection and
Rebif is given subcutaneously three times per week. Beta interferon
has been shown to reduce the rate of MS relapses by 30-40% and to slow the
progression of disability in MS patients. None of the products on the
market is a cure, but patients who start on beta interferon early can suppress
the disease enough that they are much less likely today to end up in a
wheelchair than they were before these treatments were available.
In
addition to the beta interferons sold by Biogen Idec, Schering and Serono, the
other major product used for MS is Copaxone, developed by Teva and marketed
together with Sanofi Aventis. Worldwide sales of Copaxone were $2.8
billion in 2009. Other drugs approved for MS include the
chemotherapeutic Novantrone (Serono) and the biologic Tysabri (Biogen Idec),
which is reserved for unresponsive cases due to potentially fatal adverse
effects.
Our
Interferon β-1a-CTP Program
Our
IFN-β-CTP is
produced in Chinese hamster ovary cells—the same cell line also used by
Avonex® and Rebif®. We
produced the protein and conducted in vitro and preclinical animal models of
IFN-β-CTP. A single injection of
IFN-β-CTP has shown the potential to require injection protocol of only
once every two weeks, compared with two to four times for the current protocols
with commercial IFN-β (Avonex® and Rebif®).
12
Pharmacokinetic primate
models show that the durability of the IFN-β-CTP, as measured by its
T1/2,
is approximately 13x longer than commercial IFN-β when injected
intravenously. In addition, the serum availability of IFN-β-CTP is
approximately 55x better than commercial IFN-β, for intravenous
administration.
Our
Business Strategy
Our goal
is to become a leader in the development and commercialization of
longer-lasting, proprietary versions of already approved therapeutic proteins
that currently generate billions of dollars in annual global sales, through the
utilization of our CTP technology. Key elements of our strategy are
to:
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Develop and
commercialize improved versions of biopharmaceuticals that dramatically
reduce the number of injections required to achieve the same therapeutic
effect from the existing drugs. Based on the clinical
track record of our CTP technology, as evidenced by the results of Merck’s
FSH-CTP European marketing approval, we believe that the addition of CTP
to therapeutic proteins significantly enhances the lifespan of those
proteins, without any adverse effects. We expect these modified
proteins to offer significant advantages, including less frequent dosing
and possibly improved efficacy, over the original versions of the drugs
now on the market, as well as to meet or exceed the pharmacokinetic
profile of next-generation versions of the drugs now on the
market.
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Leverage
extensive existing clinical and regulatory experience with the original
drugs to bring our improved versions of these biopharmaceuticals to market
more quickly, at lower costs and with a clearer path to regulatory
approval. Because there is a large knowledge base on the
original products, the preclinical, clinical and regulatory requirements
needed to obtain marketing approval are very well defined. In
particular, clinical study designs, inclusion criteria and endpoints can
be used that have already been accepted by regulatory
authorities. There typically exist accepted surrogate markers
for clinical efficacy, which can sometimes even be used as definitive
trial endpoints, but at the least are highly informative of proper dose
range and frequency. All of these factors drive down the time
and costs associated with clinical trials, which represent up to 90% of
product development costs for a typical therapeutic protein. In
addition to lowering the costs and time to market, we believe the strategy
of targeting drugs with proven safety and efficacy provides a better
prospect of clinical success of our proprietary development portfolio as
compared to de novo protein drug development. The possibility
of delays due to regulatory safety concerns is also reduced as the FDA
gains comfort with the safety profile of CTP-modified proteins (CTP is
naturally present in the body, on the approved drug hCG and on
FSH-CTP). We estimate that the average time to market and cost
of clinical trials for our products could be up to 50% less than that
required to develop a new therapeutic
protein.
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Seek
attractive partnership opportunities. We believe that
the CTP technology is applicable to most therapeutic proteins and peptides
that have been approved to date by the FDA, including many of the
best-selling therapeutic proteins in the market. We believe
that the proprietary rights provided by CTP technology, together with the
clinical and compliance benefits, will be attractive to potential
partners, either the originator of the therapeutic protein or their
prospective competitors. We will seek to build a portfolio of
commercially attractive partnerships in a blend of co-developments and
licenses. Where possible, we will seek partnerships that allow
us to participate significantly in the commercial success of each of the
compounds.
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Leverage
our core competencies. We believe that our CTP
technology improves the drug properties of therapeutic
proteins. We will continue to use our CTP technology to develop
improved versions of protein drugs with proven safety and efficacy and to
improve the therapeutic profiles of new drugs that will be developed by
our partners. We will also continue to conduct exploratory drug
development research in therapeutic peptides and Fab fragments of
monoclonal antibodies, where our CTP technology, intellectual property and
internal expertise provide us with
opportunities.
|
Our
Partnering Strategy
In
addition to commercializing the three therapeutic proteins and one peptide
discussed above, there are many additional product candidates we can pursue in
an opportunistic fashion. We plan to pursue partnering deals with
biotechnology companies that have a strategic interest in using our solution to
develop longer-lasting versions of their existing therapeutic proteins or
peptides, or those in development. We anticipate such partnerships
will provide significant revenues in the form of license fees, milestone
payments and royalties on sales, which will help to subsidize our research and
development costs.
13
Intellectual
Property
We
license from Washington University the intellectual property that is necessary
to conduct our business. In 2001, we initially licensed from
Washington University core intellectual property pursuant to a non-exclusive
license agreement, and, in 2004, we amended this license to make us the
exclusive licensee of the two key CTP patents in connection with
11 therapeutic proteins. Pursuant to the prior license
agreement, Modigene Delaware issued a total of 221,979 shares of its common
stock to Washington University (378,796 shares of our common stock on a
post-merger basis). In February 2007, we entered into a new license
agreement, which we refer to as the License Agreement, with Washington
University that superseded the prior license agreement. Pursuant to
the new License Agreement, Washington University granted us the exclusive
license to three CTP patents and expanded the field of use to all natural and
non-natural therapeutic proteins and peptides (other than LH, FSH, TSH and
hCG). Under the License Agreement, we have the right to sub-license
the licensed patents. The License Agreement terminates in 2018 when
the last of the patents licensed to us under the License Agreement expires,
unless terminated earlier. Under the License Agreement, we were
required to pay an initial fee of $100,000 in installments over the 18 months
following the effective date of the License Agreement. In addition,
we are required to pay annual license maintenance fees of $30,000 (payable until
the first commercial sale); royalty fees of 1.5% to 5% from net revenues (with
certain required minimum royalties after the first commercial sale of $10,000,
$20,000 and $40,000 for the first, second, and third year and beyond,
respectively), and sub-licensing fees of 7.5% to 20% on sub-licensing
payments. Pursuant to the License Agreement, we will also be
responsible for milestone payments of $15,000 for each molecule at
investigational new drug application (IND) filing, $30,000 at the initiation of
a Phase II clinical trial and $40,000 at the initiation of a Phase III clinical
trial.
Pursuant
to our License Agreement with Washington University, we have obtained an
exclusive license to the key CTP patents that have been issued by the U.S.
Patent and Trademark Office – U.S. #5,712,122, U.S. #5,759,818 and
U.S. #6,225,449. We believe these patents provide broad and
comprehensive coverage of the CTP technology, and we intend to aggressively
enforce our intellectual property rights if necessary. In addition,
unrelated to the patents from Washington University, we have filed, and will
likely continue to file, patent applications covering specific CTP-modified
molecules and CTP innovations, such as configurations, compositions and
methods. Two of these patents, covering hGH (#7,553,940) and EPO
(#7,553,941), have been issued by the U.S. Patent Office in June
2009.
Competition
The
pharmaceutical industry is highly competitive. We face significant
competition from pharmaceutical companies and biotechnology companies that are
researching and developing therapeutic proteins with enhanced life
spans. Several pharmaceutical companies, such as Amgen, Eli Lilly and
Company (through its acquisition of Applied Molecular Evolution), Nektar
Therapeutics, ConjuChem Inc., Flamel Technologies S.A., , Nautilus Biotech S.A.
and Ambrx Inc. have marketed products or are involved with the development of
therapeutic proteins with enhanced life spans.
These
companies, as well as potential entrants into our market, have longer operating
histories, larger customer or use bases, greater brand recognition and
significantly greater financial, marketing and other resources than we
do. Many of these current or potential competitors can devote
substantially greater resources to the development and promotion of their
products than we can.
Additionally,
there has been consolidation within the pharmaceutical industry and larger,
well-established and well-financed entities may continue to acquire, invest in
or form joint ventures to gain access to additional technology or
products. Any of these trends would increase the competition we face
and could adversely affect our business and operating
results.
Government
Regulation
Regulation
by governmental authorities in the United States and other countries will be a
significant factor in the production and marketing of our products and our
ongoing research and development activities. All of our products
require rigorous preclinical and clinical testing and regulatory approval by
governmental agencies prior to commercialization and are subject to pervasive
and continuing regulation upon approval. The lengthy process of
seeking approval and the subsequent compliance with applicable statutes and
regulations, if approval is obtained, are very costly and require the
expenditure of substantial resources.
14
In the
United States, the Public Health Service Act and the Federal Food, Drug, and
Cosmetic Act, as amended, and the regulations promulgated thereunder, and other
federal and state statutes and regulations govern, among other things, the
safety and effectiveness standards for our products and the raw materials and
components used in the production of, testing, manufacture, labeling, storage,
record keeping, approval, advertising and promotion of our products on a
product-by-product basis.
Preclinical
tests include laboratory evaluation of the product candidate, its chemistry,
formulation and stability, and animal studies to assess potential safety and
efficacy. Certain preclinical tests must be conducted in compliance
with good laboratory practice regulations. Violations of these
regulations can, in some cases, lead to invalidation of the studies, requiring
them to be replicated. After laboratory analysis and preclinical
testing, we intend to file an IND with the FDA to begin human
testing. Typically, this requires a three-phase human clinical
testing program which itself is subject to numerous laws and regulatory
requirements, including adequate monitoring, reporting, record keeping and
informed consent. In Phase I, small clinical trials are conducted to
determine the safety and proper dose ranges of our product
candidates. In Phase II, clinical trials are conducted to assess
safety and gain preliminary evidence of the efficacy of our product
candidates. In Phase III, clinical trials are conducted to provide
sufficient data for the statistically valid proof of safety and
efficacy. The time and expense required for us to perform this
clinical testing can vary and is substantial. We cannot be certain
that we will successfully complete Phase I, Phase II or Phase III testing of our
product candidates within any specific time period, if at
all. Furthermore, the FDA, the Institutional Review Board monitoring
the clinical trials or the IND sponsor may suspend the clinical trials at any
time on various grounds, including a finding that subjects or patients are
exposed to unacceptable health risk.
We cannot
take any action to market any new drug or biologic product in the United States
until our appropriate marketing application has been approved by the
FDA. The FDA has substantial discretion over the approval process and
may disagree with our interpretation of the data submitted. The
process may be significantly extended by requests for additional information or
clarification regarding information already provided. As part of this
review, the FDA may refer the application to an appropriate advisory committee,
typically a panel of clinicians. Satisfaction of these and other
regulatory requirements typically takes several years, and the actual time
required may vary substantially based upon the type, complexity and novelty of
the product. Government regulation may delay or prevent marketing of
potential products for a considerable period of time and impose costly
procedures on our activities. We cannot be certain that the FDA or
other regulatory agencies will approve any of our products on a timely basis, if
at all. Success in preclinical or early stage clinical trials does
not assure success in later-stage clinical trials. Even if a product
receives regulatory approval, the approval may be significantly limited to
specific indications or uses. Delays in obtaining, or failures to
obtain regulatory approvals, would have a material adverse effect on our
business.
Even
after we obtain FDA approval, we may be required to conduct further clinical
trials and provide additional data on safety and effectiveness. We
are also required to gain separate clearance for the use of an approved product
as a treatment for indications other than those initially
approved. In addition, side effects or adverse events that are
reported during clinical trials can delay, impede or prevent marketing
approval. Similarly, adverse events that are reported after marketing
approval can result in additional limitations being placed on the product’s use
and, potentially, withdrawal of the product from the market. Any
adverse event, either before or after marketing approval, can result in product
liability claims against us.
In
addition to regulating and auditing human clinical trials, the FDA regulates and
inspects equipment, facilities, laboratories and processes used in the
manufacturing and testing of such products prior to providing approval to market
a product. If after receiving FDA approval, we make a material change
in manufacturing equipment, location or process, additional regulatory review
may be required. We also must adhere to current Good Manufacturing
Practice (GMP) regulations and product-specific regulations enforced by the FDA
through its facilities inspection program. The FDA also conducts
regular, periodic visits to re-inspect our equipment, facilities, laboratories
and processes following the initial approval. If, as a result of
these inspections, the FDA determines that our equipment, facilities,
laboratories or processes do not comply with applicable FDA regulations and
conditions of product approval, the FDA may seek civil, criminal or
administrative sanctions and/or remedies against us, including the suspension of
our manufacturing operations.
The
requirements that we and our collaborators must satisfy to obtain regulatory
approval by government agencies in other countries prior to commercialization of
our products in such countries can be rigorous, costly and
uncertain. In the European countries, Canada and Australia,
regulatory requirements and approval processes are similar in principle to those
in the United States. Additionally, depending on the type of drug for
which approval is sought, there are currently two potential tracks for marketing
approval in the European countries: mutual recognition and the centralized
procedure. These review mechanisms may ultimately lead to approval in
all European Union countries, but each method grants all participating countries
some decision-making authority in product approval. Foreign
governments also have stringent post-approval requirements including those
relating to manufacture, labeling, reporting, record keeping and
marketing. Failure to substantially comply with these on-going
requirements could lead to government action against the product, the Company
and/or its representatives.
15
The
levels of revenues and profitability of biopharmaceutical companies may be
affected by the continuing efforts of government and third party payers to
contain or reduce the costs of health care through various means. For
example, in certain foreign markets, pricing or profitability of therapeutic and
other pharmaceutical products is subject to governmental control. In
the United States, there have been, and we expect that there will continue to
be, a number of federal and state proposals to implement similar governmental
control. In addition, in the United States and elsewhere, sales of
therapeutic and other pharmaceutical products are dependent in part on the
availability and adequacy of reimbursement from third party payers, such as the
government or private insurance plans. Third party payers are
increasingly challenging established prices, and new products that are more
expensive than existing treatments may have difficulty finding ready acceptance
unless there is a clear therapeutic benefit. We cannot assure you
that any of our products will be considered cost effective, or that
reimbursement will be available or sufficient to allow us to sell them
competitively and profitably.
We are
also subject to various federal, state, and international laws pertaining to
health care “fraud and abuse,” including anti-kickback laws and false claims
laws. Anti-kickback laws make it illegal to solicit, offer, receive
or pay any remuneration in exchange for, or to induce, the referral of business,
including the purchase or prescription of a particular drug. Federal
and state false claims laws prohibit anyone from knowingly and willingly
presenting, or causing to be presented for payment to third-party payors
(including Medicare and Medicaid), claims for reimbursed drugs or services that
are false or fraudulent, claims for items or services not provided as claimed,
or claims for medically unnecessary items or services. If the
government were to allege against or convict us of violating these laws, there
could be a material adverse effect on us, including our stock
price. Even an unsuccessful challenge could cause adverse publicity
and be costly to respond to, which could have a materially adverse effect on our
business, results of operations and financial condition. We will
consult counsel concerning the potential application of these and other laws to
our business and our sales, marketing and other activities and will make good
faith efforts to comply with them. However, given their broad reach
and the increasing attention given by law enforcement authorities, we cannot
assure you that some of our activities will not be challenged or deemed to
violate some of these laws.
We are
also subject to numerous federal, state, local, and international laws and
regulations relating to safe working conditions, manufacturing practices,
environmental protection, import and export controls, fire hazard control, the
experimental use of animals and the use and disposal of hazardous or potentially
hazardous substances. We believe that our procedures comply with the
standards prescribed by federal, state, or local laws, rules, and/or
regulations; however, the risk of injury or accidental contamination cannot be
completely eliminated. Currently, we have no costs with respect to
environmental law compliance. At
our current stage of product development, we cannot accurately estimate what our
future costs relating to environmental law compliance may be.
We have
currently received no approvals to market our products from the FDA or other
foreign regulators.
We
currently employ 15
full-time and two part-time employees, including six with Ph.D. degrees and
three with M.Sc. degrees, focused on research and development, and three focused
on general management and business development. None of our employees
is represented by a labor union, and we consider our employee relations to be
good. We also utilize a number of consultants to assist with research
and development and commercialization activities. We believe that our
future success will depend in part on our continued ability to attract, hire and
retain qualified personnel. All of our employees are located in
Israel, and all of our research and development activities are conducted at the
offices of Modigenetech, Ltd., our Israeli subsidiary.
Item 1A.
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Risk
Factors
|
Risks
Related to Our Company and Our Business
We
have a limited operating history, and we do not expect to become profitable in
the near future.
We are a
development stage biopharmaceutical company with a limited operating history. We
are not profitable and have incurred losses since our inception. We have not
generated any revenue since our inception, and we continue to incur research and
development and general and administrative expenses related to our
operations. We expect to continue to incur losses for the foreseeable
future, and these losses will likely increase as we move toward the
commercialization of any of our products in development. If our
product candidates fail in clinical trials or do not gain regulatory clearance
or approval, or if our product candidates do not achieve market acceptance, we
may never become profitable. Even if we achieve profitability in the
future, we may not be able to sustain profitability in subsequent
periods. Accordingly, it is difficult to evaluate our business
prospects. Moreover, our prospects must be considered in light of the risks and
uncertainties encountered by an early-stage company and in highly regulated and
competitive markets, such as the biopharmaceutical market, where regulatory
approval and market acceptance of our products are uncertain.
16
We depend
on the implementation of our business plan, including our ability to make future
investments. There can be no assurance that our efforts will ultimately be
successful or result in revenues or profits.
We
have not yet commercialized any products or technologies, and we may never
become profitable.
We have
not yet commercialized any products or technologies, and we may never be able to
do so. We do not know when or if we will complete any of our product
development efforts, obtain regulatory approval for any product candidates
incorporating our technologies, or successfully commercialize any approved
products. Even if we are successful in developing products that are
approved for marketing, we will not be successful unless these products gain
market acceptance. The degree of market acceptance of these products
will depend on a number of factors, including:
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·
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the
timing of regulatory approvals in the countries, and for the uses, we
seek;
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the
competitive environment;
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·
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the
establishment and demonstration in the medical community of the safety and
clinical efficacy of our products and their potential advantages over
existing therapeutic products;
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·
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the
adequacy and success of distribution, sales and marketing efforts;
and
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·
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the
pricing and reimbursement policies of government and third-party payors,
such as insurance companies, health maintenance organizations and other
plan administrators.
|
Physicians,
patients, thirty-party payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our products or products
incorporating our technologies. As a result, we are unable to predict the extent
of future losses or the time required to achieve profitability, if at all. Even
if we successfully develop one or more products that incorporate our
technologies, we may not become profitable.
Our
product candidates are at an early stage of product development and may never be
commercialized.
All of
our product candidates are at early stages of product development and may never
be commercialized. Initially, we plan to develop product candidates through
studies, testing and clinical lead product candidate selection, and then to
license them to other companies. The progress and results of any
future pre-clinical testing or future clinical trials are uncertain, and the
failure of our product candidates to receive regulatory approvals will have a
material adverse effect on our business, operating results and financial
condition to the extent we are unable to commercialize any
products. None of our product candidates has received regulatory
approval for commercial sale. In addition, all of our product
candidates are in the early stages of development, and we face the risks of
failure inherent in developing therapeutic proteins based on new
technologies. Our product candidates are not expected to be
commercially available for several years, if at all.
In
addition, our product candidates must satisfy rigorous standards of safety and
efficacy before they can be approved by the FDA and international regulatory
authorities for commercial use. The FDA and foreign regulatory
authorities have full discretion over this approval process. We will
need to conduct significant additional research, involving testing in animals
and in humans, before we can file applications for product
approval. Typically, in the pharmaceutical industry there is a high
rate of attrition for product candidates in pre-clinical testing and clinical
trials. Also, satisfaction of regulatory requirements typically takes
many years, is dependent upon the type, complexity and novelty of the product
and requires the expenditure of substantial resources. Success in
pre-clinical testing and early clinical trials does not ensure that later
clinical trials will be successful. For example, a number of
companies in the pharmaceutical industry, including biotechnology companies,
have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials and in interim analyses. In addition, delays
or rejections may be encountered based upon additional government regulation,
including any changes in FDA policy, during the process of product development,
clinical trials and regulatory approvals.
In order
to receive FDA approval or approval from foreign regulatory authorities to
market a product candidate or to distribute our products, we must demonstrate
through pre-clinical testing and through human clinical trials that the product
candidate is safe and effective for the treatment of a specific condition. We do
not know when, if ever, any human clinical trials will begin with respect to our
product candidates.
17
We
might be unable to develop product candidates that will achieve commercial
success in a timely and cost-effective manner, or ever.
Even if
regulatory authorities approve our product candidates, they may not be
commercially successful. Our product candidates may not be
commercially successful because physicians, government agencies and other
third-party payors may not accept them. Third parties may develop
superior products or have proprietary rights that preclude us from marketing our
products. We also expect that most of our product candidates will be
very expensive, if approved. Patient acceptance of and demand for any
product candidates for which we obtain regulatory approval or license will
depend largely on many factors, including but not limited to the extent, if any,
of reimbursement of therapeutic protein and treatment costs by government
agencies and other third-party payors, pricing, the effectiveness of our
marketing and distribution efforts, the safety and effectiveness of alternative
products, and the prevalence and severity of side effects associated with our
products. If physicians, government agencies and other third-party
payors do not accept our products, we will not be able to generate significant
revenue.
It
is highly likely that we will need to raise additional capital to meet our
business requirements in the future, and such capital raising may be costly or
difficult to obtain and could dilute current stockholders’ ownership
interests.
It is
highly likely that we will need to raise additional funds through public or
private debt or equity financings to meet various objectives including, but not
limited to:
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pursuing
growth opportunities, including more rapid
expansion;
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acquiring
complementary businesses;
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making
capital improvements to improve our
infrastructure;
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hiring
qualified management and key
employees;
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research
and development of new products;
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responding
to competitive pressures;
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complying
with regulatory requirements such as licensing and registration;
and
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maintaining
compliance with applicable laws.
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Any
additional capital raised through the sale of equity or equity backed securities
may dilute current stockholders’ ownership percentages and could also result in
a decrease in the fair market value of our equity securities because our assets
would be owned by a larger pool of outstanding equity. The terms of
those securities issued by us in future capital transactions may be more
favorable to new investors, and may include preferences, superior voting rights
and the issuance of warrants or other derivative securities, which may have a
further dilutive effect.
Furthermore,
any debt or equity financing that we may need may not be available on terms
favorable to us, or at all. If we are unable to obtain required additional
capital, we may have to curtail our growth plans or cut back on existing
business and, further, we may not be able to continue operating if we do not
generate sufficient revenues from operations needed to stay in
business.
We may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
issue, such as convertible notes and warrants, which may adversely impact our
financial condition.
18
If
we fail to obtain necessary funds for our operations, we will be unable to
maintain and improve our patented technology, and we will be unable to develop
and commercialize our products and technologies.
Our
operations are currently funded primarily through the proceeds from the private
offering of our securities in connection with the merger and other private
placements. We believe that our existing cash, cash equivalents and
financing arrangements should be sufficient to meet our operating and capital
requirements for approximately 24 months, although changes in our business,
whether or not initiated by us, may affect the rate at which we deplete our cash
and cash equivalents. Our present and future capital requirements depend on many
factors, including:
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the
level of research and development investment required to develop our
product candidates, and maintain and improve our patented technology
position;
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the
costs of obtaining or manufacturing therapeutic proteins for research and
development and at commercial
scale;
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the
results of preclinical and clinical testing, which can be unpredictable in
therapeutic protein development;
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changes
in product candidate development plans needed to address any difficulties
that may arise in manufacturing, preclinical activities, clinical studies
or commercialization;
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our
ability and willingness to enter into new agreements with strategic
partners, and the terms of these
agreements;
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our
success rate in preclinical and clinical efforts associated with
milestones and royalties;
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the
costs of investigating patents that might block us from developing
potential product candidates;
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the
costs of recruiting and retaining qualified
personnel;
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the
time and costs involved in obtaining regulatory
approvals;
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the
costs of filing, prosecuting, defending, and enforcing patent claims and
other intellectual property rights;
and
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·
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our
need or decision to acquire or license complementary technologies or new
therapeutic protein targets.
|
We
depend on key members of our management and advisory team and will need to add
and retain additional leading experts.
We are
highly dependent on our executive officers and other key management and
technical personnel. Our failure to retain our Chief Executive Officer, Abraham
(Avri) Havron, or our President, Shai Novik, or any other key management and
technical personnel could have a material adverse effect on our future
operations. Our success is also dependent on our ability to attract, retain and
motivate highly trained technical, marketing, sales and management personnel,
among others, to produce our product candidates and, if our product candidates
are produced, to market our products and to continue to produce enhanced
releases of our products. We presently do not maintain “key person” life
insurance policies on any of our personnel.
Our
success also depends on our ability to attract, retain and motivate personnel
required for the development, maintenance and expansion of our activities. There
can be no assurance that we will be able to retain our existing personnel or
attract additional qualified employees. The loss of key personnel or the
inability to hire and retain additional qualified personnel in the future could
have a material adverse effect on our business, financial condition and results
of operation.
Under
current United States and Israeli law, we may not be able to enforce employees’
covenants not to compete and therefore may be unable to prevent our competitors
from benefiting from the expertise of some of our former employees.
We have
entered into non-competition agreements with our key employees. These agreements
prohibit our key employees, if they cease working for us, from competing
directly with us or working for our competitors for a limited period. Under
applicable United States and Israeli law, we may be unable to enforce these
agreements. If we cannot enforce our non-compete agreements with our employees,
then we may be unable to prevent our competitors from benefiting from the
expertise of our former employees, which could materially adversely affect our
business, results of operations and ability to capitalize on our proprietary
information.
19
We
do not currently have sales, marketing or distribution capabilities, and we may
be unable to effectively sell, market and distribute our product candidates in
the future, and the failure to do so will have an adverse effect on our business
and results of operations.
If we are
unable to create sales, marketing and distribution capabilities or enter into
agreements with third parties to perform these functions, we will not be able to
successfully commercialize any of our product candidates. We currently have only
limited sales, marketing or distribution capabilities. In order to successfully
commercialize any of our product candidates, we must either internally develop
sales, marketing and distribution capabilities or make arrangements with third
parties to perform these services.
If we do
not develop a marketing and sales force with technical expertise and supporting
distribution capabilities, we will be unable to market any of our product
candidates directly. To promote any of our potential products through third
parties, we will have to locate acceptable third parties for these functions and
enter into agreements with them on acceptable terms and we may not be able to do
so. In addition, any third-party arrangements we are able to enter into may
result in lower revenues than we could achieve by directly marketing and selling
our potential products.
We
may suffer losses from product liability claims if our product candidates cause
harm to patients.
Any of
our product candidates could cause adverse events, such as immunologic or
allergic reactions. These reactions may not be observed in clinical trials, but
may nonetheless occur after commercialization. If any of these reactions occur,
they may render our product candidates ineffective or harmful in some patients
and our sales would suffer, materially adversely affecting our business,
financial condition and results of operations.
In
addition, potential adverse events caused by our product candidates could lead
to product liability lawsuits. If product liability lawsuits are successfully
brought against us, we may incur substantial liabilities and may be required to
limit commercialization of our product candidates. Our business exposes us to
potential product liability risks, which are inherent in the testing,
manufacturing, marketing and sale of pharmaceutical products. We may not be able
to avoid product liability claims. Product liability insurance for the
pharmaceutical and biotechnology industries is generally expensive, if available
at all. We do not currently have any product liability insurance because we are
not yet conducting trials on humans. When we begin human trials, we will
endeavor to obtain sufficient product liability insurance. If we are unable to
obtain sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims, we may be unable to commercialize
our product candidates. A successful product liability claim brought against us
in excess of our insurance coverage, if any, may cause us to incur substantial
liabilities and, as a result, our business, liquidity and results of operations
would be materially adversely affected.
Even if
we receive regulatory approval to market a particular product candidate, the
product will remain subject to extensive regulatory requirements, including
requirements relating to manufacturing, labeling, packaging, adverse event
reporting, storage, advertising, promotion, distribution and recordkeeping. Even
if regulatory approval of a product is granted, the approval may be subject to
limitations on the uses for which the product may be marketed or the conditions
of approval, or may contain requirements for costly post-marketing testing and
surveillance to monitor the safety or efficacy of the product, which could
negatively impact us or our collaboration partners by reducing revenues or
increasing expenses, and cause the approved product candidate not to be
commercially viable. In addition, as clinical experience with a drug expands
after approval, typically because it is used by a greater number and more
diverse group of patients after approval than during clinical trials, side
effects and other problems may be observed after approval that were not seen or
anticipated during pre-approval clinical trials or other studies. Any adverse
effects observed after the approval and marketing of a product candidate could
result in limitations on the use of or withdrawal of any approved products from
the marketplace. Absence of long-term safety data may also limit the approved
uses of our products, if any. If we fail to comply with the regulatory
requirements of the FDA and other applicable U.S. and foreign regulatory
authorities, or previously unknown problems with any approved commercial
products, manufacturers or manufacturing processes are discovered, we could be
subject to administrative or judicially imposed sanctions or other setbacks,
including the following:
20
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Restrictions
on the products, manufacturers or manufacturing
process;
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Warning
letters;
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Civil
or criminal penalties, fines and/or
injunctions;
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Product
seizures or detentions;
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Import
or export bans or restrictions;
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Voluntary
or mandatory product recalls and related publicity
requirements;
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Suspension
or withdrawal of regulatory
approvals;
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Total
or partial suspension of production,
and
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Refusal
to approve pending applications for marketing approval of new products or
supplements to approved
applications.
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If we or
our collaborators are slow to adapt, or are unable to adapt, to changes in
existing regulatory requirements or adoption of new regulatory requirements or
policies, marketing approval for our product candidates may be lost or cease to
be achievable, resulting in decreased revenue from milestones, product sales or
royalties, which would have a material adverse effect on our results of
operations.
Clinical
trials are very expensive, time-consuming and difficult to design and implement
and, as a result, we may suffer delays or suspensions in future trials which
would have a material adverse effect on our ability to generate
revenues.
Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time-consuming and while we are optimistic about our
ability to complete our clinical trials relatively quickly as compared to
average trial lengths for clinical trials, failure can occur at any stage of the
trials, and we may encounter problems that cause it to abandon or repeat
clinical trials. The commencement and completion of clinical trials may be
delayed by several factors, including:
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unforeseen
safety issues;
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determination
of dosing issues;
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lack
of effectiveness or efficacy during clinical
trials;
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failure
of third party suppliers to perform final manufacturing steps for the drug
substance;
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slower
than expected rates of patient
recruitment;
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inability
to monitor patients adequately during or after
treatment;
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inability
or unwillingness of medical investigators and institutional review boards
to follow our clinical protocols;
and
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lack
of sufficient funding to finance the clinical
trials.
|
In
addition, we or regulatory authorities may suspend our clinical trials at any
time if it appears that we are exposing participants to unacceptable health
risks or if the regulatory authorities find deficiencies in our regulatory
submissions or the conduct of these trials. Any suspension of clinical trials
will delay possible regulatory approval, if any, and adversely impact our
ability to develop products and generate revenue.
21
The
manufacture of our product candidates is an exacting and complex process, and if
we or one of our materials suppliers encounters problems manufacturing its
products, our business could suffer.
The FDA
and foreign regulators require manufacturers to register manufacturing
facilities. The FDA and foreign regulators also inspect these facilities to
confirm compliance with requirements that the FDA or foreign regulators
establish. We or our materials suppliers may face manufacturing or quality
control problems causing product production and shipment delays or a situation
where we or the supplier may not be able to maintain compliance with the FDA’s
requirements, or those of foreign regulators, necessary to continue
manufacturing our drug substance. Drug manufacturers are subject to ongoing
periodic unannounced inspections by the FDA, the U.S. Drug Enforcement Agency
and corresponding foreign regulators to ensure strict compliance with
requirements and other governmental regulations and corresponding foreign
standards. Any failure to comply with requirements or other FDA or foreign
regulatory requirements could adversely affect our clinical research activities
and our ability to market and develop our product candidates.
We
may rely on third parties to implement our manufacturing and supply
strategies.
If our
current and future licensing, manufacturing and supply strategies are
unsuccessful, then we may be unable to complete any future pre-clinical or
clinical trials and/or commercialize our product candidates in a timely manner,
if at all. Completion of any potential future pre-clinical trials and
commercialization of our product candidates will require access to, or
development of, facilities to manufacture a sufficient supply of our product
candidates, or the ability to license them to other companies to perform these
functions. We do not have the resources, facilities or experience to manufacture
our product candidates on our own and do not intend to develop or acquire
facilities for the manufacture of product candidates for pre-clinical trials,
clinical trials or commercial purposes in the foreseeable future. We intend to
continue to license technology and/or rely on contract manufacturers to produce
sufficient quantities of our product candidates necessary for any pre-clinical
or clinical testing we undertake in the future. Such contract manufacturers may
be the sole source of production and may have limited experience at
manufacturing, formulating, analyzing, filling and finishing our types of
product candidates.
We also
intend to rely on third parties to supply the components that we will need to
develop, test and commercialize all of our product candidates. There may be a
limited supply of these components. We might not be able to enter into
agreements that provide us assurance of availability of such components in the
future from any supplier. Our potential suppliers may not be able to adequately
supply us with the components necessary to successfully conduct our pre-clinical
and clinical trials and/or to commercialize our product candidates. If we cannot
acquire an acceptable supply of components to produce our product candidates, we
will not be able to complete pre-clinical and clinical trials and will not be
able to commercialize our product candidates.
If
we make technology or product acquisitions, we may incur a number of costs, may
have integration difficulties and may experience other risks that could harm our
business and results of operations.
We may
acquire and/or license additional product candidates and/or technologies. Any
product candidate or technology we license or acquire will likely require
additional development efforts prior to commercial sale, including extensive
clinical testing and approval by the FDA and applicable foreign regulatory
authorities, if any. All product candidates are prone to risks of failure
inherent in pharmaceutical product development, including the possibility that
the product candidate or product developed based on licensed technology will not
be shown to be sufficiently safe and effective for approval by regulatory
authorities. In addition, we cannot assure you that any product candidate that
we develop based on acquired or licensed technology that is granted regulatory
approval will be manufactured or produced economically, successfully
commercialized or widely accepted in the marketplace. Moreover, integrating any
newly acquired product candidates could be expensive and time-consuming. If we
cannot effectively manage these aspects of our business strategy, our business
may not succeed.
22
We
may not be able to successfully grow and expand our business.
We may
not be able to successfully expand. Successful implementation of our business
plan will require management of growth, which will result in an increase in the
level of responsibility for management personnel. To manage growth effectively,
we will be required to continue to implement and improve our operating and
financial systems and controls to expand, train and manage our employee base.
The management, systems and controls currently in place or to be implemented may
not be adequate for such growth, and the steps taken to hire personnel and to
improve such systems and controls might not be sufficient. If we are unable to
manage our growth effectively, it will have a material adverse effect on our
business, results of operations and financial condition.
We
may encounter difficulties in managing our growth. These difficulties could
increase our losses.
We may
experience rapid and substantial growth in order to achieve our operating plans,
which will place a strain on our human and capital resources. If we are unable
to manage this growth effectively, our losses could increase. Our ability to
manage our operations and growth effectively requires us to continue to expend
funds to enhance our operational, financial and management controls, reporting
systems and procedures and to attract and retain sufficient numbers of talented
employees. If we are unable to scale up and implement improvements to our
control systems in an efficient or timely manner, or if we encounter
deficiencies in existing systems and controls, then we will not be able to make
available the products required to successfully commercialize our technology.
Failure to attract and retain sufficient numbers of talented employees will
further strain our human resources and could impede our growth or result in
ineffective growth.
If
we are unable to obtain adequate insurance, our financial condition could be
adversely affected in the event of uninsured or inadequately insured loss or
damage. Our ability to effectively recruit and retain qualified officers and
directors could also be adversely affected if we experience difficulty in
obtaining adequate directors’ and officers’ liability insurance.
We may
not be able to obtain insurance policies on terms affordable to us that would
adequately insure our business and property against damage, loss or claims by
third parties. To the extent our business or property suffers any damages,
losses or claims by third parties, which are not covered or adequately covered
by insurance, our financial condition may be materially adversely
affected.
We may be
unable to maintain sufficient insurance as a public company to cover liability
claims made against our officers and directors. If we are unable to adequately
insure our officers and directors, we may not be able to retain or recruit
qualified officers and directors to manage the Company.
Compliance
with the reporting requirements of federal securities laws can be
expensive.
We are a
public reporting company in the United States and, accordingly, subject to the
information and reporting requirements of the U.S. securities laws. The U.S.
securities laws require, among other things, review, audit and public reporting
of our financial results, business activities and other matters. Recent SEC
regulation, including regulation enacted as a result of the Sarbanes-Oxley Act
of 2002, has also substantially increased the accounting, legal and other costs
related to becoming and remaining an SEC reporting company. The public company
costs of preparing and filing annual and quarterly reports and other information
with the SEC and furnishing audited reports to stockholders are significant. Our
failure to comply with the federal securities laws could result in private or
governmental legal action against us and/or our officers and directors, which
could have a detrimental effect on our business and finances, the value of our
stock and the ability of stockholders to resell their stock.
Rules
applicable to publicly held companies, including those contained in and issued
under the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or
attract qualified officers and directors, which could adversely affect the
management of our business and our ability to obtain or retain listing of our
common stock.
We may be
unable to attract and retain those qualified officers, directors and members of
board committees required to provide for our effective management because of the
rules and regulations that govern publicly held companies, including, but not
limited to, certifications by principal executive officers. The enactment of the
Sarbanes-Oxley Act has resulted in the issuance of a series of rules and
regulations and the strengthening of existing rules and regulations by the SEC,
as well as the adoption of new and more stringent rules by the stock exchanges.
The perceived increased personal risk associated with these recent changes may
deter qualified individuals from accepting roles as directors and executive
officers.
Further,
some of these rules and regulations heighten the requirements for board or
committee membership, particularly with respect to an individual’s independence
from the corporation and level of experience in finance and accounting matters.
We may have difficulty attracting and retaining directors with the requisite
qualifications. If we are unable to attract and retain qualified officers and
directors, the management of our business and our ability to obtain or retain
listing of our shares of common stock on any stock exchange could be adversely
affected.
23
We
are a holding company that depends on cash flow from our wholly-owned
subsidiary, to meet our obligations.
We are a
holding company with no material assets other than the stock of our wholly-owned
subsidiary. Accordingly, all our operations are conducted by Modigene Delaware,
our wholly-owned subsidiary (and its wholly-owned subsidiary, ModigeneTech). We
currently expect that the earnings and cash flow of our subsidiary will
primarily be retained and used by it in its operations, including servicing any
debt obligations it may have now or in the future. Accordingly, although we do
not anticipate paying any dividends in the foreseeable future, our subsidiary
may not be able to generate sufficient cash flow to distribute funds to us in
order to allow us to pay future dividends on, or make any distributions with
respect to our common stock.
We
may have liabilities arising from our prior business.
Prior to
the merger, our business involved providing advertising and graphic design
services to corporate clients. Pursuant to the merger, we acquired the business
of Modigene Delaware and continued the business operations of Modigene Delaware
as a publicly-traded company, and accordingly are not pursuing our prior
business. Although Modigene Delaware and its legal counsel conducted due
diligence on our prior business, the due diligence process may not have revealed
all material liabilities of our prior business then existing or that may be
asserted in the future against us relating to our activities prior to the
consummation of the merger. These liabilities may arise from our prior operating
activities (such as employee or labor matters), financing and credit
arrangements and other commercial transactions. The merger agreement contains a
limited post-closing adjustment to the number of shares of our common stock
issued to pre-merger Modigene Delaware stockholders as a means of providing a
remedy for breaches of representations made in the merger agreement by us,
including representations related to undisclosed liabilities; however, there is
no comparable protection offered to our other investors. Any such liabilities
that may survive the merger could harm our revenues, business, prospects,
financial condition and results of operations upon our acceptance of
responsibility for such liabilities. Even if any asserted claims are without
merit and we were ultimately found to have no liability for such claims, the
defense costs and distraction of management’s attention may harm the growth and
profitability of our business.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or detect fraud. Consequently,
investors could lose confidence in our financial reporting and this may decrease
the trading price of our stock.
We must
maintain effective internal controls to provide reliable financial reports and
detect fraud. We have been assessing our internal controls to identify areas
that need improvement. As a result of the assessment we have implemented changes
to internal controls. Failure to properly maintain our internal controls or any
others that we identify as necessary to maintain an effective system of internal
controls could harm our operating results and cause investors to lose confidence
in our reported financial information. In addition, such failure may cause us to
suffer violations of the federal securities laws to the extent we are unable to
maintain effective internal controls as a result. Any such loss of confidence or
violations would have a negative effect on the trading price of our
stock.
Potential
political, economic and military instability in the State of Israel, where key
members of our senior management and our research and development facilities are
located, may adversely affect our results of operations.
We
maintain office and research and development facilities in the State of Israel.
Political, economic and military conditions in Israel may directly affect our
ability to conduct business. Since the State of Israel was established in 1948,
a number of armed conflicts have occurred between Israel and its Arab neighbors.
Any hostilities involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners, or a significant downturn in
the economic or financial condition of Israel, could affect adversely our
operations. Ongoing and revived hostilities or other Israeli political or
economic factors could harm our operations and product development and cause our
revenues to fail to develop or decrease if we have already begun
sales.
Recent
disruptions in the financial markets and economic conditions could affect our
ability to raise capital and could disrupt or delay the performance of our
third-party contractors and suppliers.
In the
past eighteen months, the U.S. and global economies have taken a dramatic
downturn as the result of the deterioration in the credit markets and related
financial crisis as well as a variety of other factors including, among other
things, extreme volatility in security prices, severely diminished liquidity and
credit availability, ratings downgrades of certain investments and declining
valuations of others. The U.S. and certain foreign governments have recently
taken unprecedented actions in an attempt to address and rectify these extreme
market and economic conditions by providing liquidity and stability to the
financial markets. If the actions taken by these governments are not
successful, the continued economic decline may cause a significant impact on our
ability to raise capital, if needed, on a timely basis and on acceptable terms
or at all. In addition, we rely and intend to rely on third-parties,
including our clinical research organizations, third-party manufacturers and
second source suppliers, and certain other important vendors and
consultants. As a result of the current volatile and unpredictable
global economic situation, there may be a disruption or delay in the performance
of our third-party contractors and suppliers. If such third-parties are unable
to satisfy their contractual commitments to us, our business could be severely
adversely affected.
24
Risks
Related to Our Intellectual Property
We
license our core technology from Washington University, and we could lose our
rights to this license if a dispute with Washington University arises or if we
fail to comply with the financial and other terms of the license.
We
license our core intellectual property from Washington University. We initially
entered into a non-exclusive license agreement with Washington University in
2001, and in 2004 we amended the license to extend the CTP technology to eleven
therapeutic proteins and make it exclusive. In February 2007, we entered into a
revised and expanded license agreement with Washington University, which we
refer to as the License Agreement, pursuant to which we and Washington
University expanded the exclusive license, adding additional patents, and
expanding the applicability of licensed CTP technology to all proteins and
peptides having a native or non-native amino acid sequence, excluding Follicle
Stimulating Hormone (FSH), Luteinizing Hormone (LH), Thyroid Stimulating Hormone
(TSH) and Chorionic Gonadotropin (hCG). The License Agreement imposes
certain payment, reporting, confidentiality and other obligations on us. In the
event that we were to breach any of the obligations and fail to cure, Washington
University would have the right to terminate the License Agreement upon 90 days’
notice. In addition, Washington University has the right to terminate the
License Agreement upon the bankruptcy or receivership of our
Company. If any dispute arises with respect to our arrangement with
Washington University, such dispute may disrupt our operations and would likely
have a material and adverse impact on us if resolved in a manner that is
unfavorable to our Company. All of our current product candidates are partly
based on the intellectual property licensed under the License Agreement, and if
the License Agreement were terminated, it would have a material adverse effect
on our business, prospects and results of operations.
The
failure to obtain or maintain patents, licensing agreements and other
intellectual property could impact our ability to compete
effectively.
To
compete effectively, we need to develop and maintain a proprietary position with
regard to our own technologies, intellectual property, licensing agreements,
product candidates and business. Legal standards relating to the validity and
scope of claims in the CTP technology field are still evolving. Therefore, the
degree of future protection for our proprietary rights in our core technologies
and any products that might be made using these technologies is also uncertain.
The risks and uncertainties that we face with respect to our patents and other
proprietary rights include the following:
|
·
|
while
the patents we license have been issued, the pending patent applications
we have filed may not result in issued patents or may take longer than we
expect to result in issued patents;
|
|
·
|
we
may be subject to interference
proceedings;
|
|
·
|
we
may be subject to opposition proceedings in foreign
countries;
|
|
·
|
any
patents that are issued may not provide meaningful
protection;
|
|
·
|
we
may not be able to develop additional proprietary technologies that are
patentable;
|
|
·
|
other
companies may challenge patents licensed or issued to us or our
customers;
|
|
·
|
other
companies may independently develop similar or alternative technologies,
or duplicate our technologies;
|
|
·
|
other
companies may design around technologies we have licensed or developed;
and
|
|
·
|
enforcement
of patents is complex, uncertain and
expensive.
|
25
We cannot
be certain that patents will be issued as a result of any of our pending
applications, and we cannot be certain that any of our issued patents, whether
issued pursuant to our pending applications or licensed from Washington
University, will give us adequate protection from competing products. For
example, issued patents, including the patents licensed from Washington
University, may be circumvented or challenged, declared invalid or
unenforceable, or narrowed in scope. In addition, since publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries, we cannot be certain that we were the first to make our inventions
or to file patent applications covering those inventions.
It is
also possible that others may obtain issued patents that could prevent us from
commercializing our products or require us to obtain licenses requiring the
payment of significant fees or royalties in order to enable us to conduct our
business. As to those patents that we have licensed, our rights depend on
maintaining our obligations to the licensor under the applicable license
agreement, and we may be unable to do so.
In
addition to patents and patent applications, we depend upon trade secrets and
proprietary know-how to protect our proprietary technology. We require our
employees, consultants, advisors and collaborators to enter into confidentiality
agreements that prohibit the disclosure of confidential information to any other
parties. We require our employees and consultants to disclose and assign to us
their ideas, developments, discoveries and inventions. These agreements may not,
however, provide adequate protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use or
disclosure.
Costly
litigation may be necessary to protect our intellectual property rights and we
may be subject to claims alleging the violation of the intellectual property
rights of others.
We may
face significant expense and liability as a result of litigation or other
proceedings relating to patents and other intellectual property rights of
others. In the event that another party has also filed a patent application or
been issued a patent relating to an invention or technology claimed by us in
pending applications, we may be required to participate in an interference
proceeding declared by the U.S. Patent and Trademark Office to determine
priority of invention, which could result in substantial uncertainties and costs
for us, even if the eventual outcome were favorable to us. We, or our licensors,
also could be required to participate in interference proceedings involving
issued patents and pending applications of another entity. An adverse outcome in
an interference proceeding could require us to cease using the technology or to
license rights from prevailing third parties.
The cost
to us of any patent litigation or other proceeding relating to our licensed
patents or patent applications, even if resolved in our favor, could be
substantial. Our ability to enforce our patent protection could be limited by
our financial resources, and may be subject to lengthy delays. If we are unable
to effectively enforce our proprietary rights, or if we are found to infringe
the rights of others, we may be in breach of our License Agreement.
A third
party may claim that we are using inventions claimed by their patents and may go
to court to stop us from engaging in our normal operations and activities, such
as research, development and the sale of any future products. Such lawsuits are
expensive and would consume time and other resources. There is a risk that the
court will decide that we are infringing the third party’s patents and will
order us to stop the activities claimed by the patents. In addition, there is a
risk that a court will order us to pay the other party damages for having
infringed their patents.
Moreover,
there is no guarantee that any prevailing patent owner would offer us a license
so that we could continue to engage in activities claimed by the patent, or that
such a license, if made available to us, could be acquired on commercially
acceptable terms. In addition, third parties may, in the future, assert other
intellectual property infringement claims against us with respect to our product
candidates, technologies or other matters.
We
rely on confidentiality agreements that could be breached and may be difficult
to enforce, which could result in third parties using our intellectual property
to compete against us.
Although
we believe that we take reasonable steps to protect our intellectual property,
including the use of agreements relating to the non-disclosure of confidential
information to third parties, as well as agreements that purport to require the
disclosure and assignment to us of the rights to the ideas, developments,
discoveries and inventions of our employees and consultants while we employ
them, the agreements can be difficult and costly to enforce. Although we seek to
obtain these types of agreements from our contractors, consultants, advisors and
research collaborators, to the extent that employees and consultants utilize or
independently develop intellectual property in connection with any of our
projects, disputes may arise as to the intellectual property rights associated
with our products. If a dispute arises, a court may determine that the right
belongs to a third party. In addition, enforcement of our rights can be costly
and unpredictable. We also rely on trade secrets and proprietary know-how that
we seek to protect in part by confidentiality agreements with our employees,
contractors, consultants, advisors or others. Despite the protective measures we
employ, we still face the risk that:
26
|
·
|
these
agreements may be breached;
|
|
·
|
these
agreements may not provide adequate remedies for the applicable type of
breach;
|
|
·
|
our
trade secrets or proprietary know-how will otherwise become known;
or
|
|
·
|
our
competitors will independently develop similar technology or proprietary
information.
|
International
patent protection is particularly uncertain, and if we are involved in
opposition proceedings in foreign countries, we may have to expend substantial
sums and management resources.
Patent
law outside the United States is even more uncertain than in the United States
and is currently undergoing review and revision in many countries. Further, the
laws of some foreign countries may not protect our intellectual property rights
to the same extent as the laws of the United States. For example, certain
countries do not grant patent claims that are directed to the treatment of
humans. We may participate in opposition proceedings to determine the validity
of our foreign patents or our competitors’ foreign patents, which could result
in substantial costs and diversion of our efforts.
We
may be unable to protect the intellectual property rights of the third parties
from whom we license certain of our intellectual property or with whom we have
entered into other strategic relationships.
Certain
of our intellectual property rights are currently licensed from Washington
University and, in the future, we intend to continue to license intellectual
property from Washington University and/or other key strategic partners. We are,
and will continue to be, reliant upon such third parties to protect their
intellectual property rights to any licensed technology. Such third parties may
determine not to protect the intellectual property rights that we license from
them and we may be unable defend such intellectual property rights on our own or
we may have to undertake costly litigation to defend the intellectual property
rights of such third parties. There can be no assurances that we will continue
to have proprietary rights to any of the intellectual property that we license
from such third parties or otherwise have the right to use through similar
strategic relationships. Any loss or limitations on use with respect to our
right to use such intellectual property licensed from third parties or otherwise
obtained from third parties with whom we have entered into strategic
relationships could have a material adverse effect on our business, operating
results and financial condition.
Risks
Related to Our Industry
We
are subject to government regulations, and we may experience delays in obtaining
required regulatory approvals in the United States to market our proposed
product candidates.
Various
aspects of our operations are or may become subject to federal, state or local
laws, rules and regulations, any of which may change from time to time. Costs
arising out of any regulatory developments could be time-consuming, expensive
and could divert management resources and attention and, consequently, could
adversely affect our business operations and financial performance.
Delays in
regulatory approval, limitations in regulatory approval and withdrawals of
regulatory approval may have a negative impact on our results. If we experience
significant delays in testing or approvals, our product development costs, or
our ability to license product candidates, will increase. If the FDA grants
regulatory approval of a product, this approval will be limited to those disease
states and conditions for which the product has demonstrated, through clinical
trials, to be safe and effective. Any product approvals that we receive in the
future could also include significant restrictions on the use or marketing of
our products. Product approvals, if granted, can be withdrawn for failure to
comply with regulatory requirements or upon the occurrence of adverse events
following commercial introduction of the products. Failure to comply with
applicable FDA or other applicable regulatory requirements may result in
criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other regulatory
action against our product candidates or us. If approval is withdrawn for a
product, or if a product were seized or recalled, we would be unable to sell or
license that product and our revenues would suffer. In addition, outside the
United States, our ability to market any of our potential products is contingent
upon receiving market application authorizations from the appropriate regulatory
authorities and these foreign regulatory approval processes include all of the
risks associated with the FDA approval process described above.
27
We
face significant competition and continuous technological change.
If our
competitors develop and commercialize products faster than we do, or develop and
commercialize products that are superior to our product candidates, our
commercial opportunities will be reduced or eliminated. The extent to which any
of our product candidates achieve market acceptance will depend on competitive
factors, many of which are beyond our control. Competition in the pharmaceutical
industry is intense and has been accentuated by the rapid pace of technology
development. Our competitors include large integrated pharmaceutical companies,
biotechnology companies that currently have drug and target discovery efforts,
universities, and public and private research institutions. Almost all of these
entities have substantially greater research and development capabilities and
financial, scientific, manufacturing, marketing and sales resources than we do,
as well as more experience in research and development, clinical trials,
regulatory matters, manufacturing, marketing and sales. These organizations also
compete with us to:
|
·
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attract
parties for acquisitions, joint ventures or other
collaborations;
|
|
·
|
license
proprietary technology that is competitive with the technology we are
developing;
|
|
·
|
attract
funding; and
|
|
·
|
attract
and hire scientific talent.
|
Our
competitors may succeed in developing and commercializing products earlier and
obtaining regulatory approvals from the FDA more rapidly than we do. Our
competitors may also develop products or technologies that are superior to those
we are developing, and render our product candidates or technologies obsolete or
non-competitive. If we cannot successfully compete with new or existing
products, our marketing and sales will suffer and we may not ever be
profitable.
We
expect the healthcare industry to face increased scrutiny over reimbursement and
healthcare reform, which could adversely impact how much or under what
circumstances healthcare providers will prescribe or administer our
products.
In both
the United States and other countries, sales of our products will depend in part
upon the availability of reimbursement from third party payors, which include
government health administration authorities, managed care providers and private
health insurers. Third party payors are increasingly challenging the price and
examining the cost effectiveness of medical products and services.
We
are subject to federal anti-kickback laws and regulations. Our failure to comply
with these laws and regulations could have adverse consequences to
us.
There are
extensive federal and state laws and regulations prohibiting fraud and abuse in
the healthcare industry that can result in significant criminal and civil
penalties. These federal laws include: the anti-kickback statute, which
prohibits certain business practices and relationships, including the payment or
receipt of remuneration for the referral of patients whose care will be paid by
Medicare or other federal healthcare programs; the physician self-referral
prohibition, commonly referred to as the Stark Law; the anti-inducement law,
which prohibits providers from offering anything to a Medicare or Medicaid
beneficiary to induce that beneficiary to use items or services covered by
either program; the False Claims Act, which prohibits any person from knowingly
presenting or causing to be presented false or fraudulent claims for payment by
the federal government, including the Medicare and Medicaid programs; and the
Civil Monetary Penalties Law, which authorizes the United States Department of
Health and Human Services to impose civil penalties administratively for
fraudulent or abusive acts.
28
Sanctions
for violating these federal laws include criminal and civil penalties that range
from punitive sanctions, damage assessments, money penalties, imprisonment,
denial of Medicare and Medicaid payments, or exclusion from the Medicare and
Medicaid programs, or both. As federal and state budget pressures continue,
federal and state administrative agencies may also continue to escalate
investigation and enforcement efforts to root out waste and to control fraud and
abuse in governmental healthcare programs. Private enforcement of healthcare
fraud has also increased, due in large part to amendments to the civil False
Claims Act in 1986 that were designed to encourage private persons to sue on
behalf of the government. A violation of any of these federal and state fraud
and abuse laws and regulations could have a material adverse effect on our
liquidity and financial condition. An investigation into the use by physicians
of any of our products once commercialized may dissuade physicians from either
purchasing or using them, and could have a material adverse effect on our
ability to commercialize those products.
Risks
Related to Our Common Stock
Our
common stock has a limited trading history, and prospective investors may not be
able to sell their shares at their purchase price, if at all.
There is
currently a limited public market for our common stock. Our common stock is
currently quoted on the OTCBB under the symbol “PBTH.” Prior to our merger with
Modigene Delaware, there was no trading of our common stock, and there is no
assurance that a regular trading market will develop or, if developed, will be
sustained. As a result, an investor may find it difficult to dispose of, or to
obtain accurate quotations of the price of, our common stock.
We expect
the market price of our common stock will fluctuate significantly in response to
factors, some of which are beyond our control, such as the announcement of new
products or product enhancements by us or our competitors, developments
concerning intellectual property rights and regulatory approvals, quarterly
variations in our and our competitors’ results of operations, changes in
earnings estimates or recommendations by securities analysts, developments in
our industry, and general market conditions and other factors, including factors
unrelated to our own operating performance or the condition or prospects of our
industry.
We
cannot assure you that our common stock will become liquid or that it will be
listed on a securities exchange.
We may
seek listing of our common stock on the NYSE Amex or the Nasdaq Capital Market;
however, we cannot assure you that we will be able to meet the initial listing
standards of either of those or of any other stock exchange, or that we will be
able to maintain any such listing. Until our common stock is listed on an
exchange, we expect to remain eligible for quotation on the OTCBB, or on another
over-the-counter quotation system, or in the “pink sheets.” In those venues,
however, an investor may find it difficult to obtain accurate quotations as to
the market value of the common stock. In addition, if we fail to meet the
criteria set forth in SEC regulations, various requirements would be imposed by
law on broker-dealers who sell our securities to persons other than established
customers and accredited investors. Consequently, such regulations may deter
broker-dealers from recommending or selling our common stock, which may further
affect the liquidity of our common stock. This would also make it more difficult
for us to raise additional capital or attract qualified employees or
partners.
Additionally,
the stock market in general, and securities of small-cap companies in
particular, have recently experienced extreme price and volume fluctuations.
Continued market fluctuations could result in extreme volatility in the price of
our common stock, which could cause a decline in the value of our common stock.
You should also be aware that price volatility might be worse if the trading
volume of the common stock is low.
Because
our common stock may be a “penny stock,” it may be more difficult for investors
to sell shares of our common stock, and the market price of our common stock may
be adversely affected.
Our
common stock may be a “penny stock” if, among other things, the stock price is
below $5.00 per share, it is not listed on a national securities exchange or
approved for quotation on the Nasdaq Capital Market or any other national stock
exchange or it has not met certain net tangible asset or average revenue
requirements. Broker-dealers who sell penny stocks must provide
purchasers of these stocks with a standardized risk-disclosure document prepared
by the SEC. This document provides information about penny stocks and
the nature and level of risks involved in investing in the penny-stock
market. A broker must also give a purchaser, orally or in writing,
bid and offer quotations and information regarding broker and salesperson
compensation, make a written determination that the penny stock is a suitable
investment for the purchaser and obtain the purchaser’s written agreement to the
purchase. Broker-dealers must also provide customers that hold penny
stock in their accounts with such broker-dealer a monthly statement containing
price and market information relating to the penny stock. If a penny
stock is sold to an investor in violation of the penny stock rules, the investor
may be able to cancel its purchase and get its money back.
29
If
applicable, the penny stock rules may make it difficult for investors to sell
their shares of our common stock. Because of the rules and
restrictions applicable to a penny stock, there is less trading in penny stocks
and the market price of our common stock may be adversely
affected. Also, many brokers choose not to participate in penny stock
transactions. Accordingly, investors may not always be able to resell
their shares of our common stock publicly at times and prices that they feel are
appropriate.
The
price of our common stock may become volatile, which could lead to losses by
investors and costly securities litigation.
The
trading price of our common stock is likely to be highly volatile and could
fluctuate in response to factors such as:
|
·
|
actual
or anticipated variations in our operating
results;
|
|
·
|
announcements
of developments by us or our
competitors;
|
|
·
|
announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
·
|
adoption
of new accounting standards affecting our
industry;
|
|
·
|
additions
or departures of key personnel;
|
|
·
|
introduction
of new products by us or our
competitors;
|
|
·
|
sales
of our common stock or other securities in the open market;
and
|
|
·
|
other
events or factors, many of which are beyond our
control.
|
The stock
market has experienced significant price and volume fluctuations. In the past,
following periods of volatility in the market price of a company’s securities,
securities class action litigation has often been initiated against the company.
Litigation initiated against us, whether or not successful, could result in
substantial costs and diversion of our management’s attention and resources,
which could harm our business and financial condition.
We
do not anticipate dividends to be paid on our common stock, and investors may
lose the entire amount of their investment.
Cash
dividends have never been declared or paid on our common stock, and we do not
anticipate such a declaration or payment for the foreseeable future. We expect
to use future earnings, if any, to fund business growth. Therefore, stockholders
will not receive any funds absent a sale of their shares. We cannot assure
stockholders of a positive return on their investment when they sell their
shares, nor can we assure stockholders that they will not lose the entire amount
of their investment.
Securities
analysts may not initiate coverage or continue to cover our common stock, and
this may have a negative impact on its market price.
The
trading market for our common stock will depend in part on the research and
reports that securities analysts publish about our business and us. We do not
have any control over these analysts. There is no guarantee that securities
analysts will cover our common stock. If securities analysts do not cover our
common stock, the lack of research coverage may adversely affect its market
price. If we are covered by securities analysts, and our stock is the subject of
an unfavorable report, our stock price would likely decline. If one or more of
these analysts ceases to cover us or fails to publish regular reports on us, we
could lose visibility in the financial markets, which could cause our stock
price or trading volume to decline. In addition, because we became public
through a “reverse merger,” we may have further difficulty attracting the
coverage of securities analysts.
30
Stockholders
may experience dilution of ownership interests because of the future issuance of
additional shares of our common stock and our preferred stock.
In the
future, we may issue our authorized but previously unissued equity securities,
resulting in the dilution of the ownership interests of our present
stockholders. We are currently authorized to issue an aggregate of 310,000,000
shares of capital stock consisting of 300,000,000 shares of common stock and
10,000,000 shares of preferred stock with preferences and rights to be
determined by our Board of Directors. As of March 22, 2010, there
were 46,168,311 shares of our common stock outstanding and a total of 8,278,947
shares subject to outstanding options and warrants. On March 25,
2008, we authorized and issued 800,000 shares of preferred stock designated as
Series A preferred stock, and we have reserved a total of 10,000,000
shares of our common stock for issuance upon conversion of the Series
A preferred stock. On July 23, 2009, we issued 1,000,000 shares of
our Series B preferred stock, each share of which is currently convertible into
two shares of our common stock. Under the purchase agreement pursuant
to which we issued the Series B preferred stock, we may, at our election, cause
the investors party thereto to purchase from us up to an additional 4,000,000
shares of Series B preferred stock, which, if issued, would be initially
convertible into 8,000,000 shares of our common stock. We may also
issue additional shares of our common stock or other securities that are
convertible into or exercisable for common stock in connection with hiring or
retaining employees, future acquisitions, future sales of our securities for
capital raising purposes, or for other business purposes. The future issuance of
any such additional shares of our common stock may create downward pressure on
the trading price of the common stock. There can be no assurance that we will
not be required to issue additional shares, warrants or other convertible
securities in the future in conjunction with any capital raising efforts,
including at a price (or exercise prices) below the price at which shares of our
common stock are currently traded on the OTCBB.
Our
principal stockholders have significant voting power and may take actions that
may not be in the best interests of other stockholders.
Our
officers, directors, principal stockholders and their affiliates control
approximately 31.7% of our outstanding common stock. If these stockholders act
together, they will be able to exert significant control over our management and
affairs requiring stockholder approval, including approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control and might adversely affect the market
price of our common stock. This concentration of ownership may not be in the
best interests of all our stockholders. Holders of our common stock have no
effective voice in the management of the Company. Sales by insiders or
affiliates of the Company, along with any other market transactions, could
affect the market price of our common stock.
A
significant number of our shares are eligible for sale, which could depress the
market price of our stock.
Sales of
a significant number of shares of our common stock in the public market could
harm the market price of our stock. As additional shares of our common stock
become available for resale in the public market, the supply of the common stock
will increase, which could decrease its price. Further, shares may be offered by
selling stockholders from time to time in the open market pursuant to Rule 144,
and these sales may have a depressive effect on the market for the shares of our
common stock.
Item 1B.
|
Unresolved
Staff Comments
|
None.
Item 2.
|
Properties
|
Our
executive offices and our research and development laboratory are located at 3
Sapir Street, Weizmann Science Park, Nes-Ziona, Israel 74140 and our phone
number is (866) 644-7811. The facility is approximately 6,000 square
feet. We pay a monthly lease of $7,600, plus approximately $450 per
month with respect to taxes and utilities, for this space. This lease
will expire on January 20, 2012.
Item 3.
|
Legal
Proceedings
|
From time
to time we may be named in claims arising in the ordinary course of
business. Currently, no legal proceedings, government actions,
administrative actions, investigations or claims are pending against us or
involve us that, in the opinion of our management, could reasonably be expected
to have a material adverse effect on our business or financial
condition.
31
Item 4.
|
[Reserved]
|
PART
II
Item 5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Market
Information
Our
common stock is quoted on the OTCBB under the symbol “PBTH”. The
table below sets forth, for the respective periods indicated, the high and low
bid prices for our common stock in the over-the-counter market as reported on
the OTCBB. The bid prices represent inter-dealer transactions,
without adjustments for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. Prior to June 12, 2009,
our trading symbol on the OTCBB was “MODG”.
Our
common stock is currently available for trading in the over-the-counter market
and is quoted on the OTC Bulletin Board under the symbol “PBTH.”
Quarter Ended
|
High Bid
|
Low Bid
|
||||||
December
31, 2009
|
$ | 2.57 | $ | 1.22 | ||||
September
30, 2009
|
$ | 1.99 | $ | 0.79 | ||||
June
30, 2009
|
$ | 0.94 | $ | 0.40 | ||||
March
31, 2009
|
$ | 0.75 | $ | 0.40 | ||||
December
31, 2008
|
$ | 3.50 | $ | 0.37 | ||||
September
30, 2008
|
$ | 3.50 | $ | 0.80 | ||||
June
30, 2008
|
$ | 6.00 | $ | 0.65 | ||||
March
31, 2008
|
$ | 8.00 | $ | 0.80 |
Number
of Holders
As of
March 22, 2010, our common stock was held by 103 stockholders of
record.
Dividends
The
Company has never declared or paid dividends. We do not intend to pay
cash dividends on our common stock for the foreseeable future, and we intend to
retain any future earnings to fund the development and growth of our
business. The payment of dividends if any, on the common stock will
rest solely within the discretion of our board of directors and will depend,
among other things, upon our earnings, capital requirements, financial
condition, and other relevant factors.
Item 6.
|
Selected
Financial Data
|
As a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are
not required to include information otherwise required by this
item.
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our historical consolidated
financial statements and related notes thereto in “Item 7. Financial Statements
and Supplementary Data.” The discussion below contains forward-looking
statements that are based upon our current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially
from these expectations due to inaccurate assumptions and known or unknown risks
and uncertainties, including those identified in “Cautionary Statement Regarding
Forward-Looking Statements” and “Item 1A. Risk Factors.”
32
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.
Overview
We are a
development stage biopharmaceutical company utilizing patented technology to
develop longer-acting, proprietary versions of already-approved therapeutic
proteins that currently generate billions of dollars in annual global
sales. We have obtained certain exclusive worldwide rights from
Washington University in St. Louis, Missouri to use a short, naturally-occurring
amino acid sequence (peptide) that has the effect of slowing the removal from
the body of the therapeutic protein to which it is attached. This
Carboxyl Terminal Peptide (CTP) can be readily attached to a wide array of
existing therapeutic proteins, stabilizing the therapeutic protein in the
bloodstream and extending its life span without additional toxicity or loss of
desired biological activity. We are using the CTP technology to
develop new, proprietary versions of certain existing therapeutic proteins that
have longer life spans than therapeutic proteins without CTP. We
believe that our products will have greatly improved therapeutic profiles and
distinct market advantages.
We
believe our products in development will provide several key advantages over our
competitor’s existing products:
|
·
|
significant
reduction in the number of injections required to achieve the same or
superior therapeutic effect from the same
dosage;
|
|
·
|
extended
patent protection for proprietary new formulations of existing
therapies;
|
|
·
|
faster
commercialization with greater chance of success and lower costs than
those typically associated with a new therapeutic protein;
and
|
|
·
|
manufacturing
using industry-standard biotechnology-based protein production
processes.
|
Merck
& Co. has developed the first novel protein containing CTP, named ELONVA®, a
long-acting CTP-modified version of the fertility drug follicle stimulating
hormone (FSH). On January 28, 2010, Merck received marketing
authorization from the European Commission for ELONVA® with unified labeling
valid in all European Union Member States. Merck licensed the CTP
technology directly from Washington University (prior to the formation of
Modigene Delaware) for application only to Follicle Stimulating Hormone (FSH)
and three other hormones, human Chorionic Gonadotropin (hCG), Luteinizing
Hormone (LH) and Thyroid-Stimulating Hormone (TSH).
Our
internal product development program is currently focused on extending the life
span of the following biopharmaceuticals, which together address an established
market in excess of $15 billion:
|
·
|
Human
Growth Hormone (hGH)
|
|
·
|
Interferon
β
|
|
·
|
Factor
VIIa, Factor IX
|
|
·
|
Erythropoietin
(EPO)
|
|
·
|
Anti-Obesity
Peptide
|
|
·
|
Glucagon-Like
Peptide-1 (GLP-1)
|
33
Worldwide
sales of hGH are estimated at $3.0 billion, those of EPO are estimated at $10.0
billion, those of
interferon β are estimated at $5.3 billion, and those of Factor VIIa and Factor
IX are estimated at $1.5 billion in the aggregate. We believe that
the CTP technology will be broadly applicable to these as well as other
best-selling therapeutic proteins in the market and will be attractive to
potential partners because it will allow them to extend proprietary rights for
therapeutic proteins with near-term patent expirations.
Plan
of Operation
During
2010, Modigene intends to continue the development of its clinical and
preclinical programs, including hGH-CTP,
Interefron-β-CTP, Factor VIIa, Factor IX, and the anti-obesity peptide. These
programs include a variety of operating tasks such as optimization of expression
levels, toxicity and efficacy animal models, completion of purification
processes, GMP production of compounds and clinical
studies. The Company’s cash resources, including expected payments
from the OCS, and its line of preferred, are expected to be sufficient to
maintain the Company’s operations through the fourth quarter of 2011. The
Company is not planning any major purchase or sale of equipment during that
timeframe, and its employee headcount is expected to increase by three to
eighteen employees, of which seventeen will be full time.
Critical
Accounting Policies
The
historical financial statements of the Company included with this Annual Report
have been prepared in accordance with U.S. generally accepted accounting
principles. 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,
the functional and reporting currency of the Company is the dollar. Monetary
accounts maintained in currencies other than the dollar are remeasured into U.S.
dollars. All transaction gains and losses from the remeasurement of monetary
balance sheet items are reflected in the statements of operations as financial
income or expenses, as appropriate.
Principles of Consolidation:
The consolidated financial statements include the accounts of Modigene Delaware
and its wholly-owned subsidiary, ModigeneTech. Intercompany transactions and
balances have been eliminated upon consolidation.
Cash Equivalents: For
purposes of reporting within the statement of cash flows, the Company considers
all cash on hand, cash accounts not subject to withdrawal restrictions or
penalties, and all highly liquid debt instruments purchased with a maturity of
three months or less to be cash and cash equivalents.
Accounts receivable: Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less the allowance for uncollectible accounts. As of December 31, 2009
and 2008 the Company has not accrued an allowance for uncollectible
accounts.
34
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 reviews the carrying value of its long-lived assets, including
intangible assets subject to amortization, for impairment whenever events and
circumstances indicate that the carrying value of the assets may not be
recoverable. Recoverability of these assets is measured by comparing the
carrying value of the assets to the undiscounted cash flows estimated to be
generated by those assets over their remaining economic life. If the
undiscounted cash flows are not sufficient to recover the carrying value of the
assets, the assets are considered impaired. The impairment loss is measured by
comparing the fair value of the assets to their carrying value. Fair value is
determined by either a quoted market price or a value determined by a discounted
cash flow technique, whichever is more appropriate under the circumstances
involved. No impairments were recognized from May 31, 2005 (inception date) to
December 31, 2009.
Research and Development Costs and
Participation: Research and development (“R&D”) costs are expensed as
they are incurred and consist of salaries, benefits and other personnel related
costs, fees paid to consultants, clinical trials and related clinical
manufacturing costs, license and milestone fees, and facilities and overhead
costs. R&D expenses consist of independent R&D costs and costs
associated with collaborative R&D and in-licensing arrangements.
Participation from government for development of approved projects are
recognized as a reduction of expenses as the related costs are
incurred.
Severance Pay: The liability
of ModigeneTech for severance pay is calculated pursuant to the Severance Pay
Law in Israel, based on the most recent salary of the employees multiplied by
the number of years of employment as of the balance sheet date and is presented
on an undiscounted basis. ModigeneTech’s employees are entitled to one month’s
salary for each year of employment or a portion thereof. According to agreements
with key employees that are related parties of the Company, upon retirement, the
key employees will be entitled to receive a lump-sum payment, therefore the
Company does not accumulate severance pay for those employees and the sum will
be accrued when the Company has to pay such payments according to the employment
agreements.. Severance (income) expenses for the years ended December 31, 2009
and 2008 and for the period from May 31, 2005 (inception date) through December
31, 2009 amounted to $(1,044), $8,090, and $16,957, respectively.
Income Taxes: The Company
accounts for income taxes in accordance with the provisions of ASC 740-10,
Income Taxes. ASC 740-10 requires companies to recognize deferred tax assets and
liabilities based on the differences between financial reporting and tax bases
of assets and liabilities. These differences are measured using the enacted tax
rates and laws that are expected to be in effect when the temporary differences
are expected to reverse. A valuation allowance is established against net
deferred tax assets, if based on the weighted available evidence, it is more
likely than not that all or a portion of the deferred tax assets will not be
realized. On January 1, 2007, the Company adopted ASC 740-10, Income Taxes,
as it applies to accounting for uncertainty in income taxes, which did not
result in an adjustment to its tax contingencies.
Concentrations of Credit
Risk: Financial instruments that potentially subjected the Company,
Modigene Delaware and ModigeneTech to concentrations of credit risk consist
principally of cash and cash equivalents.
Cash and
cash equivalents are invested in major banks in Israel and the United States.
Such deposits in the United States are not insured. Management believes that the
financial institutions that hold the Company’s investments are financially sound
and, accordingly, minimal credit risk exists with respect to these
investments.
The
Company has no off-balance sheet concentration of credit risk such as foreign
exchange contracts or other foreign hedging arrangements.
35
Fair Value Measurement: As defined in ASC
820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), fair value is
based on the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. In order to increase consistency and comparability in fair
value measurements, ASC 820-10 establishes a fair value hierarchy that
prioritizes observable and unobservable inputs used to measure fair value into
three broad levels, which are described below:
Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2:
Other inputs that are observable, directly or indirectly, such as quoted prices
for similar assets and liabilities or market corroborated inputs.
Level 3:
Unobservable inputs are used when little or no market data is available, which
requires the Company to develop its own assumptions about how market
participants would value the assets or liabilities. The fair value hierarchy
gives the lowest priority to Level 3 inputs.
In
determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the
extent possible in its assessment of fair value.
The
following table presents the Company’s financial assets and liabilities that are
carried at fair value, classified according to the three categories described
above:
Fair Value Measurements at December 31, 2009
|
||||||||||||||||
Quoted Prices
in Active
|
Significant
Other
|
Significant
|
||||||||||||||
Markets for
Identical Assets
|
Observable
Inputs
|
Unobservable
Inputs
|
||||||||||||||
Total
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Cash
and cash equivalents
|
$ | 3,521,866 | $ | 3,521,866 | $ | - | $ | - | ||||||||
Restricted
cash
|
$ | 91,730 | 91,730 | |||||||||||||
Total
assets at fair value
|
$ | 3,521,866 | $ | 3,521,866 | $ | - | $ | - |
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 for the years ended December 31,
2009 and 2008 and for the period from May 31, 2005 (inception date) through
December 31, 2009 amounted to $767,248, $865,367 and $2,004,765,
respectively.
Loss per Share: Basic and
diluted losses per share are presented in accordance with ASC 260-10 “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 9,572,278, 7,620,546 and 5,509,154 for the years ended December
31, 2009 and 2008 and for the period from May 31, 2005 (inception date) through
December 31, 2009, respectively.
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenue
The
Company has not generated any revenue since its inception. To date, the Company
has funded its operations primarily through grants from 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.
36
Revenue,
when generated, will be recognized in accordance with ASC 605-10-S99, “Revenue
Recognition”. The Company will recognize revenue when the significant
risks and rewards of ownership have been transferred to the customer pursuant to
applicable laws and regulations, including factors such as when there has been
evidence of a sales arrangement, the performance has occurred, or service have
been rendered, the price to the buyer is fixed or determinable, and
collectability is reasonably assured.
Research
and Development Expense
The
Company expects its research and development expense to increase as it continues
to develop its product candidates. Research and development expense consists
of:
|
·
|
internal
costs associated with research and development
activities;
|
|
·
|
payments
made to third party contract research organizations, contract
manufacturers, investigative sites, and
consultants;
|
|
·
|
manufacturing
development costs;
|
|
·
|
personnel-related
expenses, including salaries, benefits, travel, and related costs for the
personnel involved in the research and
development;
|
|
·
|
activities
relating to the advancement of product candidates through preclinical
studies and clinical trials; and
|
|
·
|
facilities
and other expenses, which include expenses for rent and maintenance of
facilities, as well as laboratory and other
supplies.
|
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. For the years ended
December 31, 2009 and 2008 and for the period from May 31, 2005 (inception date)
through December 31, 2009, the Company incurred gross research and development
expense in the aggregate of $6,040,235, $5,527,102 and $15,100,549,
respectively.
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;
|
|
receipt
of necessary regulatory approvals;
|
|
·
|
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;
|
37
|
·
|
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 FDA or other
regulatory authorities were to require the Company to conduct clinical trials
beyond those which it currently anticipates will be required for the completion
of the clinical development of a product candidate, or if the Company
experiences significant delays in enrollment in any of its clinical trials, the
Company could be required to expend significant additional financial resources
and time on the completion of clinical development. Drug development may take
several years and millions of dollars in development costs. If the Company does
not obtain or maintain regulatory approval for its products, its financial
condition and results of operations will be substantially harmed.
General
and Administrative Expense
General
and administrative expense consists primarily of salaries and other related
costs, including stock-based compensation expense, for persons serving in the
Company’s executive and administration functions. Other general and
administrative expense includes facility-related costs not otherwise included in
research and development expense, and professional fees for legal and accounting
services, including those associated with reporting obligations applicable to
public companies in the United States. The Company expects that its general and
administrative expenses will increase as it adds additional personnel and
advances its research and development programs. For the years ended December 31,
2009 and 2008 and for the period from May 31, 2005 (inception date) through
December 31, 2009, the Company incurred general and administrative expense of
$1,901,952, $2,410,015 and $11,219,526, 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, and
other foreign currencies against the United States Dollar and other
foreign currencies.
|
For the
years ended December 31, 2009 and 2008 and for the period from May 31, 2005
(inception date) through December 31, 2009, the Company recorded gross financial
income of $(27,443), $157,568 and $518,290, respectively.
Stock-based
Compensation
The
Company’s stock-based compensation are recorded according to ASC 718-10,
"Compensation - Stock Compensation", which requires the measurement and
recognition of compensation expense for all stock-based payment awards made to
employees and directors, including employee stock options under the Company’s
stock plans, based on estimated fair values.
ASC
718-10 requires companies to estimate the fair value of equity-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s consolidated
statement of operations.
38
The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing model. For the years ended December 31, 2009
and 2008 and for the period from May 31, 2005 (inception date) through December
31, 2009, the Company’s stock-based compensation expenses were $728,341,
$1,039,028 and $7,195,785, respectively.
Cash
Flows
For the
years ended December 31, 2009 and 2008 and for the period from May 31, 2005
(inception date) through December 31, 2009, net cash used in operations was
$5,907,653, $5,761,061 and $15,767,380, respectively. The increase in 2009 as
compared to 2008 resulted primarily from increases in R&D
expenses.
For the
years ended December 31, 2009 and 2008 and for the period from May 31, 2005
(inception date) through December 31, 2009, net cash used in investing
activities was $53,293, $227,628 and $1,037,352, respectively. The reduction in
2009 as compared to 2008 resulted primarily from reduced purchases of
equipment.
For the
years ended December 31, 2009 and 2008 and for the period from May 31, 2005
(inception date) through December 31, 2009, net cash provided by financing
activities was $2,017,580, $1,998,114 and $20,326,598, respectively, primarily
from the proceeds of issuance of common stock.
Liquidity
and Capital Resources
The
Company expects to incur losses from operations for the foreseeable future. The
Company expects to incur increasing research and development expenses, including
expenses related to the hiring of personnel and additional clinical trials. The
Company expects that general and administrative expenses will also increase as
the Company expands its finance and administrative staff, adds infrastructure,
and incurs additional costs related to being a public company in the United
States, including the costs of directors’ and officers’ insurance, investor
relations programs, and increased professional fees. Our future capital
requirements will depend on a number of factors, including the continued
progress of its research and development of product candidates, the timing and
outcome of clinical trials and regulatory approvals, the costs involved in
preparing, filing, prosecuting, maintaining, defending, and enforcing patent
claims and other intellectual property rights, the status of competitive
products, the availability of financing, and our success in developing markets
for our product candidates.
We
believe that our existing cash and cash equivalents, which includes
approximately $24.4 million of proceeds (before costs and expenses) from our
issuance in a private transaction on March 17, 2010 of 10,382,975 shares of our
common stock, will be sufficient to enable us to fund our operating expenses and
capital expenditure requirements at least until December 31, 2011. We have based
this estimate on assumptions that may prove to be wrong or subject to change,
and we may be required to use our available capital resources sooner than we
currently expect. Because of the numerous risks and uncertainties associated
with the development and commercialization of its product
candidates, we are unable to estimate the amounts of increased capital outlays
and operating expenditures associated with our current and anticipated clinical
trials. Our future capital requirements will depend on many factors, including
the progress and results of our clinical trials, the duration and cost of
discovery and preclinical development, and laboratory testing and clinical
trials for our product candidates, the timing and outcome of regulatory review
of our product candidates, the number and development requirements of other
product candidates that we pursue, and the costs of commercialization
activities, including product marketing, sales, and distribution. We do not
anticipate that we will generate product revenues for at least the next several
years. In the absence of additional funding, we expect continuing operating
losses to result in increases in our cash used in operations over the next
several years. To the extent that our capital resources are insufficient to meet
our future capital requirements, we will need to finance our future cash needs
through public or private equity offerings, debt financings, or corporate
collaboration and licensing arrangements. We currently do not have any
commitments for future external funding. We may need to raise additional funds
more quickly if one or more of our assumptions proves to be incorrect or if we
choose to expand our product development efforts more rapidly than we presently
anticipate, and we may decide to raise additional funds even before we need them
if the conditions for raising capital are favorable. We may seek to sell
additional equity or debt securities or obtain a bank credit facility. The sale
of additional equity or debt securities may result in dilution to our
shareholders. The incurrence of indebtedness would result in increased fixed
obligations and could also result in covenants that would restrict our
operations. Additional equity or debt financing, grants, or corporate
collaboration and licensing arrangements may not be available on acceptable
terms, if at all. If adequate funds are not available, we may be required to
delay, reduce the scope of or eliminate our research and development programs,
reduce our planned commercialization efforts or obtain funds through
arrangements with collaborators or others that may require us to relinquish
rights to certain product candidates that we might otherwise seek to develop or
commercialize independently.
39
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 for the years ended December 31, 2009 or December 31,
2008.
Currency
fluctuations could affect the Company by increased or decreased costs. The
Company does not believe currency fluctuations have had a material effect on its
results of operations for the years ended December 31, 2009 or December 31,
2008.
In
February 2008, the FASB issued an accounting standard update that delayed the
effective date of fair value measurements accounting for all non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until the beginning of the first quarter of fiscal 2009. These
include goodwill and other non-amortizable intangible assets. The Company
adopted this accounting standard update effective January 1, 2009. The adoption
of this update to non-financial assets and liabilities, as codified in ASC
820-10, did not have any impact on the Company’s consolidated financial
statements.
Effective
January 1, 2009, the Company adopted ASC 805 adopted - an accounting standard
update regarding business combinations. This update requires an entity to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred; that restructuring costs generally be
expensed in periods subsequent to the acquisition date; and that changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period be recognized as a component of
provision for taxes. In addition, acquired in-process research and development
is capitalized as an intangible asset and amortized over its estimated useful
life. With the adoption of this accounting standard update, any tax related
adjustments associated with acquisitions that closed prior to January 1, 2009
will be recorded through income tax expense, whereas the previous accounting
treatment would require any adjustment to be recognized through the purchase
price. This accounting standard update applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The adoption of this accounting update did not have any impact on the
Company’s consolidated financial statements.
Effective
January 1, 2009, the Company adopted ASC 810-10 which establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This accounting standard states that accounting
and reporting for minority interests are to be recharacterized as noncontrolling
interests and classified as a component of equity. The calculation of earnings
per share continues to be based on income amounts attributable to the
parent. The adoption of this accounting update did not have any
impact on the Company’s consolidated financial statements.
Effective
January 1, 2009, the Company adopted ASC 350-30-35 an accounting standard update
regarding the determination of the useful life of intangible assets. This update
amends the factors considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under
intangibles accounting. It also requires a consistent approach between the
useful life of a recognized intangible asset under prior business combination
accounting and the period of expected cash flows used to measure the fair value
of an asset under the new business combinations accounting (ASC 850). The update
also requires enhanced disclosures when an intangible asset’s expected future
cash flows are affected by an entity’s intent and/or ability to renew or extend
the arrangement. The adoption of this accounting update did not have any impact
on the Company’s consolidated financial statements.
Effective
January 1, 2009, the Company adopted ASC 350-30 - a new accounting standard
update. This update clarifies accounting for defensive intangible assets
subsequent to initial measurement. It applies to acquired intangible assets
which an entity has no intention of actively using, or intends to discontinue
use of, the intangible asset but holds it to prevent others from obtaining
access to it (i.e., a defensive intangible asset). Under this update, a
consensus was reached that an acquired defensive asset should be accounted for
as a separate unit of accounting (i.e., an asset separate from other assets of
the acquirer); and the useful life assigned to an acquired defensive asset
should be based on the period during which the asset would diminish in value.
The adoption of this accounting update did not have any impact on the Company’s
consolidated financial statements.
40
Effective
April 1, 2009, the Company adopted ASC 855-10 “subsequent events”. ASC 855-10
modifies the names of the two types of subsequent events either as recognized
subsequent events (previously referred to in practice as Type I subsequent
events) or non-recognized subsequent events (previously referred to in practice
as Type II subsequent events). In addition, the standard modifies the definition
of subsequent events to refer to events or transactions that occur after the
balance sheet date, but before the financial statements are issued (for public
entities) or available to be issued (for nonpublic entities). It also requires
the disclosure of the date through which subsequent events have been evaluated.
The update did not result in significant changes in the practice of subsequent
event disclosures, and therefore the adoption did not have any impact on the
Company’s consolidated financial statements.
Effective
April 1, 2009, the Company adopted three accounting standard updates which were
intended to provide additional application guidance and enhanced disclosures
regarding fair value measurements and impairments of securities. They also
provide additional guidelines for estimating fair value in accordance with fair
value accounting. The first update, ASC 820-10-65, provides additional
guidelines for estimating fair value in accordance with fair value accounting.
The second accounting update, ASC 320-10-65, changes accounting requirements for
other-than-temporary-impairment (OTTI) for debt securities by replacing the
current requirement that a holder have the positive intent and ability to hold
an impaired security to recovery in order to conclude an impairment was
temporary with a requirement that an entity conclude it does not intend to sell
an impaired security and it will not be required to sell the security before the
recovery of its amortized cost basis. The third accounting update, ASC
825-10-65, increases the frequency of fair value disclosures. These updates were
effective for fiscal years and interim periods ended after June 15, 2009. The
adoption of these accounting updates did not have any impact on the Company’s
consolidated financial statements.
Effective
July 1, 2009, the Company adopted ASC 105 the “FASB Accounting Standards
Codification”. This standard establishes only two levels of U.S. generally
accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The
Financial Accounting Standard Board (“FASB”) Accounting Standards Codification
(the “Codification”) became the source of authoritative, nongovernmental GAAP,
except for rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the Codification became nonauthoritative.
The Company began using the new guidelines and numbering system prescribed by
the Codification when referring to GAAP in the third quarter of fiscal 2009.
Authoritative standards included in the Codification are designated by their
Accounting Standards Codification (ASC) topical reference, and new standards
will be designated as Accounting Standards Updates (ASU), with a year and
assigned sequence number. As the Codification was not intended to change or
alter existing GAAP, it did not have any impact on the Company’s consolidated
financial statements.
In June
2009, the FASB concurrently issued amendments to ASC 860, Transfers and
Servicing, and ASC 810, Consolidation, that change the way entities account for
securitizations and other transfers of financial instruments. In
addition to increased disclosure, these amendments eliminate the concept of
qualifying special purpose entities and change the test for consolidation of
variable interest entities. These amendments will be effective as of
January 1, 2010. The Company has evaluated these amendments and
believes that they will have no impact on its financial condition or results of
operations.
In
October 2009, the FASB concurrently issued the following Accounting Standards
Updates:
ASU No.
2009-14 - Software (Topic 985): Certain Revenue Arrangements That Include
Software Elements. This standard removes tangible products from the scope of
software revenue recognition guidance and also provides guidance on determining
whether software deliverables in an arrangement that includes a tangible
product, such as embedded software, are within the scope of the software revenue
guidance.
ASU No.
2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements. This standard modifies the revenue recognition guidance
for arrangements that involve the delivery of multiple elements, such as
product, software, services or support, to a customer at different times as part
of a single revenue generating transaction. This standard provides
principles and application guidance to determine whether multiple deliverables
exist, how the individual deliverables should be separated and how to allocate
the revenue in the arrangement among those separate deliverables. The standard
also expands the disclosure requirements for multiple deliverable revenue
arrangements.
These
Accounting Standards Updates should be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with earlier application
permitted. Alternatively, an entity can elect to adopt these
standards on a retrospective basis, but both these standards must be adopted in
the same period using the same transition method. The Company does
not expect these updates to have impact on its financial position and results of
operations.
41
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on the Company’s financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources that are material to
investors.
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
As a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are
not required to include the information otherwise required by this
item.
Item 8.
|
Financial
Statements and Supplementary Data
|
The
financial statements required by this Item 8 are filed herewith commencing
on page F-1 hereto.
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
None.
Item 9A(T).
|
Controls
and Procedures
|
The
Company’s management, with the participation of its Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) or 15d-15(e)) as of December 31, 2009. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of that date, the Company’s disclosure controls and
procedures were effective as of the end of the period covered by this annual
report. This annual report does not include an attestation report of
our registered public accounting firm, BKR Yarel + Partners, regarding internal
control over financial reporting. Management’s report was not subject
to attestation by our registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit us to provide only
management’s report in this annual report.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
For the
period ended December 31, 2009, pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002, management (with the participation of our principal executive
officer and principal financial officer) conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that, as of
December 31, 2009, our internal control over financial reporting was
effective.
42
Changes
in Internal Controls Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
during the last quarter that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
Item 9B.
|
Other
Information.
|
None.
PART
III
Item 10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2009.
Item 11.
|
Executive
Compensation.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2009.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2009.
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2009.
Item 14.
|
Principal
Accounting Fees and Services.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2009.
PART
IV
Item 15.
|
Exhibits
and Financial Statement Schedules
|
The
following documents are filed as part of this Annual Report on Form
10-K:
1. Financial
Statements. The following Consolidated Financial
Statements of PROLOR Biotech, Inc. are included in Item 7 of this Annual
Report on Form 10-K:
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
Consolidated
Balance Sheets
|
F-4
|
|
Consolidated
Statements of Operations
|
F-5
|
|
Statements
of Stockholders’ Equity
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-9
|
|
Notes
to Consolidated Financial Statements
|
F-11
|
43
2. Financial Statement
Schedule. The information required by this item is
included in the consolidated financial statements contained in this Annual
Report on Form 10-K.
3. Exhibits
Exhibit
|
Description
|
|
3.1
|
Amended
and Restated Articles of Incorporation of Modigene Inc. (n/k/a PROLOR
Biotech, Inc.), filed as Exhibit 3.1 to our Current Report on Form
8-K filed with the SEC on February 27, 2007 and incorporated by reference
herein.
|
|
3.2
|
Certificate
of Amendment to the Amended and Restated Articles of Incorporation of
Modigene Inc. (n/k/a PROLOR Biotech, Inc.), filed as Exhibit 3.1 to our
Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2009 and
incorporated by reference herein.
|
|
3.3
|
Amended
and Restated Bylaws of Modigene Inc. (n/k/a PROLOR Biotech, Inc.), filed
as Exhibit 3.2 to our Current Report on Form 8-K filed with the SEC
on May 14, 2007 and incorporated by reference herein.
|
|
4.1
|
Form
of Investor Warrant of Modigene Inc. issued as of May 9, 2007, filed as
Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on
May 14, 2007 and incorporated by reference herein.
|
|
4.2
|
Form
of Warrant of Modigene Inc. issued to broker/dealers as of May 9, 2007,
filed as Exhibit 4.2 to our Current Report on Form 8-K filed with the
SEC on May 14, 2007 and incorporated by reference
herein.
|
|
4.3
|
Form
of Warrant of Modigene Inc. issued to Frost Gamma Investments Trust, Jane
Hsiao, Steven D. Rubin and Subbarao Uppaluri, filed as Exhibit 4.3 to
our Current Report on Form 8-K filed with the SEC on May 14, 2007 and
incorporated by reference herein.
|
|
4.4
|
Warrant
Agreement dated as of May 9, 2007, between Modigene Inc. and Spencer Trask
Ventures, Inc., together with the form of Warrant Certificate issued
thereunder, filed as Exhibit 4.4 to our Current Report on Form 8-K
filed with the SEC on May 14, 2007 and incorporated by reference
herein.
|
|
4.5
|
Form
of Lock-Up Agreement, filed as Exhibit 4.5 to our Current Report on
Form 8-K filed with the SEC on May 14, 2007 and incorporated by reference
herein.
|
|
4.6
|
Certificate
of Designation of Series A Convertible Preferred Stock, filed as
Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on
March 27, 2008 and incorporated by reference herein.
|
|
4.7
|
Certificate
of Designation of Series B Convertible Preferred Stock, filed as Exhibit
3.1 to our Current Report on Form 8-K filed with the SEC on July 24, 2009
and incorporated by reference herein.
|
|
4.8
|
Specimen
Certificate for Series B Preferred Stock, filed as Exhibit 4.2 to our
Current Report on Form 8-K filed with the SEC on July 24, 2009 and
incorporated by reference herein.
|
|
10.1
|
Escrow
Agreement, dated as of May 9, 2007, by and among Modigene Inc., Abraham
Havron, Shai Novik and Gottbetter & Partners, LLP, filed as
Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on
May 14, 2007 and incorporated by reference herein.
|
|
10.2
|
Form
of Registration Rights Agreement, dated as of May 9, 2007, filed as
Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on May
14, 2007 and incorporated by reference herein.
|
|
10.3+
|
Consulting
Agreement between Modigene Inc. and Abraham (Avri) Havron, filed as
Exhibit 10.6 to our Current Report on Form 8-K filed with the SEC on
May 14, 2007 and incorporated by reference herein.
|
|
10.4+
|
Amendment
to Consulting Agreement between Modigene Inc. and Abraham (Avri) Havron,
filed as Exhibit 10.4 to our Annual Report on Form 10-KSB filed with
the SEC on March 31, 2008 and incorporated by reference
herein.
|
44
Exhibit
|
Description
|
|
10.5+
|
Amendment
to Consulting Agreement between the Company and Abraham (Avri) Havron,
filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC
on July 18, 2008 and incorporated by reference herein.
|
|
10.6+
|
Employment
Agreement between Modigene Inc. and Shai Novik, filed as Exhibit 10.7
to our Current Report on Form 8-K filed with the SEC on May 14, 2007 and
incorporated by reference herein.
|
|
10.7+
|
First
Amendment to Employment Agreement between Modigene Inc. and Shai Novik,
filed as Exhibit 10.8 to our Current Report on Form 8-K filed with
the SEC on May 14, 2007 and incorporated by reference
herein.
|
|
10.8+
|
Second
Amendment to Employment Agreement between Modigene Inc. and Shai Novik,
filed as Exhibit 10.7 to our Annual Report on Form 10-KSB filed with
the SEC on March 31, 2008 and incorporated by reference
herein.
|
|
10.9+
|
Third
Amendment to Employment Agreement between the Company and Shai Novik,
filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC
on July 18, 2008 and incorporated by reference herein.
|
|
10.10
|
Employment
Agreement between ModigeneTech Ltd. and Dr. Eyal Fima, filed as
Exhibit 10.9 to our Current Report on Form 8-K filed with the SEC on
May 14, 2007 and incorporated by reference herein.
|
|
10.11
|
First
Amendment to Employment Agreement between ModigeneTech Ltd. and Dr. Eyal
Fima, filed as Exhibit 10.9 to our Annual Report on Form 10-KSB filed
with the SEC on March 31, 2008 and incorporated by reference
herein.
|
|
10.12
|
Second
Amendment to Employment Agreement between ModigeneTech Ltd. and Dr. Eyal
Fima, filed as Exhibit 10.4 to our Current Report on Form 8-K filed with
the SEC on July 18, 2008 and incorporated by reference
herein.
|
|
10.13+
|
Consulting
Agreement between ModigeneTech Ltd. and Dr. Fuad Fares, filed as
Exhibit 10.10 to our Current Report on Form 8-K filed with the SEC on
May 14, 2007 and incorporated by reference herein.
|
|
10.14+
|
First
Amendment to Consulting Agreement between Modigene Inc. and Dr. Fuad
Fares, filed as Exhibit 10.3 to our Current Report on Form 8-K filed with
the SEC on July 18, 2008 and incorporated by reference
herein.
|
|
10.15+
|
Modigene
Inc. 2005 Stock Incentive Plan, filed as Exhibit 10.11 to our Current
Report on Form 8-K filed with the SEC on May 14, 2007 and incorporated by
reference herein.
|
|
10.16+
|
Modigene
Inc. 2007 Equity Incentive Plan, as amended, filed as Exhibit 10.12
to our Annual Report on Form 10-KSB filed with the SEC on March 26, 2008
and incorporated by reference herein.
|
|
10.17+
|
Form
of Stock Option Agreement under the 2005 Stock Incentive Plan, filed as
Exhibit 10.13 to our Current Report on Form 8-K filed with the SEC on
May 14, 2007 and incorporated by reference herein.
|
|
10.18+
|
Form
of Stock Option Agreement under the 2007 Equity Incentive Plan, filed as
Exhibit 10.14 to our Current Report on Form 8-K filed with the SEC on
May 14, 2007 and incorporated by reference herein.
|
|
10.19
|
Exclusive
License Agreement dated February 2, 2007 between Modigene Inc. and
Washington University, filed as Exhibit 10.15 to our Current Report
on Form 8-K filed with the SEC on May 14, 2007 and incorporated by
reference herein.
|
|
10.20
|
Form
of Clinical Advisory Panel Agreement, filed as Exhibit 10.16 to our
Current Report on Form 8-K filed with the SEC on May 14, 2007 and
incorporated by reference herein.
|
|
10.21
|
Form
of Scientific Advisory Board Agreement, filed as Exhibit 10.17 to our
Current Report on Form 8-K filed with the SEC on May 14, 2007 and
incorporated by reference herein.
|
|
10.22
|
Agreement
between Modigene Inc. and Cohen & Schaeffer P.C. and Steve Schaeffer,
filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC
on March 6, 2008 and incorporated by reference
herein.
|
45
Exhibit
|
Description
|
|
10.23
|
Securities
Purchase Agreement among Modigene Inc., Frost Gamma Investments Trust,
Jane Hsiao, Steven D. Rubin and Subbarao Uppaluri, filed as
Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on
March 27, 2008 and incorporated by reference herein.
|
|
10.24
|
Credit
Agreement dated as of March 25, 2009 between Modigene Inc. and The Frost
Group, LLC, filed as Exhibit 10.2 to our Current Report on Form 8-K
filed with the SEC on March 27, 2008 and incorporated by reference
herein.
|
|
10.25
|
Form
of Note and Security Agreement between Modigene Inc. and The Frost Group,
LLC, filed as Exhibit 10.3 to the Current Report on Form 8-K filed
with the SEC on March 27, 2008 and incorporated by reference
herein.
|
|
10.26
|
Letter
Agreement dated March 11, 2009, regarding Credit Agreement between
Modigene Inc. and The Frost Group, LLC, filed as Exhibit 10.26 to our
Annual Report on Form 10-K filed with the SEC on March 16, 2009 and
incorporated by reference herein.
|
|
10.27
|
Finder’s
Fee Agreement, dated December 14, 2005, between Modigene Inc. and Spencer
Trask Ventures, Inc., filed as Exhibit 10.20 to our Current Report on 8-K
filed with the SEC on May 14, 2007 and incorporated by reference
herein.
|
|
10.28
|
Series
B Convertible Preferred Stock Purchase Agreement, dated July 22, 2009,
filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC
on July 24, 2009 and incorporated by reference herein.
|
|
10.29
|
Form
of Lockup Agreement, filed as Exhibit 10.2 to our Current Report on Form
8-K filed with the SEC on July 24, 2009 and incorporated by reference
herein.
|
|
10.30
|
Letter
Agreement, dated July 22, 2009, between PROLOR Biotech, Inc. and The Frost
Group, LLC terminating Credit Agreement and Note and Security Agreement,
filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC
on July 24, 2009 and incorporated by reference herein.
|
|
10.31+
|
Third
Amendment to Consulting Agreement between PROLOR Biotech, Inc. and Abraham
Havron, Ph.D, filed as Exhibit 10.1 to our Current Report on Form 8-K
filed with the SEC on January 25, 2010 and incorporated by reference
herein.
|
|
10.32+
|
Fourth
Amendment to Employment Agreement between PROLOR Biotech, Inc. and Shai
Novik, filed as Exhibit 10.2 to our Current Report on Form 8-K filed with
the SEC on January 25, 2010 and incorporated by reference
herein.
|
|
|
||
10.33
|
Form
of Securities Purchase Agreement, filed as Exhibit 10.1 to our Current
Report on Form 8-K filed with the SEC on March 17, 2010 and incorporated
by reference herein.
|
|
10.34
|
Form
of Lockup Agreement, filed as Exhibit 10.2 to our Current Report on Form
8-K filed with the SEC on March 17, 2010 and incorporated by reference
herein.
|
|
21*
|
Subsidiaries
of PROLOR Biotech, Inc.
|
|
23.1*
|
Consent
of BKR Yarel + Partners
|
|
31.1*
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2*
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1*
|
Certifications
of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
32.2*
|
Certifications
of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley
Act of 2002
|
*
Filed herewith.
+
Compensation plan or arrangement or management contract.
46
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this report to be signed on
our behalf by the undersigned, thereunto duly authorized.
PROLOR
Biotech, Inc.
|
|
By:
|
/s/
Abraham Havron
|
Abraham
Havron
|
|
Chief
Executive Officer
|
Date:
March 25, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/ Abraham Havron
|
Chief
Executive Officer
|
March 25, 2010
|
||
Abraham
Havron
|
(Principal
Executive Officer) and Director
|
|||
/s/ Steve Schaeffer
|
Chief
Financial Officer
|
March
25, 2010
|
||
Steve
Schaeffer
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|||
Director
|
||||
Fuad
Fares
|
||||
/s/
Phillip Frost
|
Director
|
March
26, 2010
|
||
Phillip
Frost
|
||||
/s/ Marian Gorecki
|
Director
|
March
25, 2010
|
||
Marian
Gorecki
|
||||
/s/
Jane Hsiao
|
Director
|
March
26, 2010
|
||
Jane
Hsiao
|
||||
/s/ Shai Novik
|
President
and Director
|
March
25, 2010
|
||
Shai
Novik
|
||||
/s/ Steven Rubin
|
Director
|
March
25, 2010
|
||
Steven
Rubin
|
||||
/s/ Adam Stern
|
Director
|
March
26, 2010
|
||
Adam
Stern
|
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
development stage company)
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
AND
THE YEARS THEN ENDED
IN
U.S. DOLLARS
F-1
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
development stage company)
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
AND
THE YEARS THEN ENDED
IN
U.S. DOLLARS
INDEX
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
Consolidated
Balance Sheets
|
F-4
|
|
Consolidated
Statements of Operations
|
F-5
|
|
Statements
of Stockholders’ Equity
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-9
|
|
Notes
to Consolidated Financial Statements
|
F-11
|
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the stockholders of
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
Development Stage Company)
We have
audited the accompanying consolidated balance sheets of Prolor Biotech, Inc. (a
development stage company) (“the Company”) and its subsidiaries as of December
31, 2009 and 2008, and the related consolidated statements of operations,
changes in stockholders’ equity and cash flows for the years ended December 31,
2009 and 2008, and for the period from May 31, 2005 (inception date) through
December 31, 2009. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by the management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2009 and 2008, and the consolidated
results of their operations, stockholders’ equity and cash flows for the years
ended December 31, 2009 and 2008, and for the period from May 31, 2005
(inception date) through December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.
/s/
Yarel + Partners
Yarel
+ Partners
|
|
Certified
Public Accountants
|
Tel-Aviv,
Israel
|
|
March
25, 2010
|
F-3
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 3,521,866 | $ | 7,465,232 | ||||
Accounts
receivable and prepaid expenses
|
85,280 | 412,515 | ||||||
Restricted
cash
|
91,730 | 91,078 | ||||||
Total
Current Assets
|
3,698,876 | 7,968,825 | ||||||
Long-term
Assets:
|
||||||||
Property
and Equipment, net
|
284,315 | 310,173 | ||||||
Severance
pay fund
|
124,324 | 73,775 | ||||||
Long
term deposit
|
1,906 | 1,894 | ||||||
Total
Long Term Assets
|
310,545 | 385,842 | ||||||
Total
Assets
|
$ | 4,109,421 | $ | 8,354,667 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Trade
payables
|
$ | 131,924 | $ | 156,039 | ||||
Related
party payables
|
203,583 | 51,374 | ||||||
Accrued
expenses and other liabilities
|
504,612 | 188,660 | ||||||
Total
Current Liabilities
|
840,119 | 396,073 | ||||||
Accrued
Severance Pay
|
140,237 | 90,732 | ||||||
Commitments
and Contingent Liabilities
|
||||||||
Stockholders’
Equity:
|
||||||||
Stock
capital -
|
||||||||
Preferred
stock of $ 0.00001 par value per share 10,000,000 shares of preferred
stock authorized; 1,800,000 and 800,000 shares issued and outstanding on
December 31, 2009 and 2008, respectively
|
18 | 8 | ||||||
Common
shares of $ 0.00001 par value per share 300,000,000 shares of common stock
authorized; 35,569,028 and 35,549,028 shares issued and
outstanding on December 31, 2009 and 2008, respectively
|
355 | 355 | ||||||
Additional
paid-in capital
|
30,153,517 | 27,407,606 | ||||||
(Deficit)
accumulated during the development stage
|
(27,024,825 | ) | (19,540,107 | ) | ||||
Total
Stockholders’ Equity
|
3,129,065 | 7,867,862 | ||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 4,109,421 | $ | 8,354,667 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-4
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF OPERATIONS
U.S.
dollars
Period from May 31,
2005
|
||||||||||||
(date of inception)
|
||||||||||||
Year ended December 31,
|
to December 31,
|
|||||||||||
2009
|
2008
|
2009
|
||||||||||
Revenues
|
$ | - | $ | - | $ | - | ||||||
Operating
expenses:
|
||||||||||||
In-process
research and development write-off
|
- | - | (3,222,831 | ) | ||||||||
Research
and development, net
|
(5,555,323 | ) | (4,781,089 | ) | (13,100,758 | ) | ||||||
General
and administrative
|
(1,901,952 | ) | (2,410,015 | ) | (11,219,526 | ) | ||||||
Operating
(loss)
|
(7,457,275 | ) | (7,191,104 | ) | (27,543,115 | ) | ||||||
Financial
income
|
35,559 | 438,349 | 877,246 | |||||||||
Financial (expenses)
|
(63,002 | ) | (280,781 | ) | (358,956 | ) | ||||||
Net
(loss)
|
$ | (7,484,718 | ) | $ | (7,033,536 | ) | $ | (27,024,825 | ) | |||
(Loss)
per share (basic & diluted)
|
$ | (0.21 | ) | $ | (0.20 | ) | $ | (1.03 | ) | |||
Weighted
average number of shares outstanding
|
35,549,083 | 35,530,378 | 26,230,200 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-5
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF STOCKHOLDERS’ EQUITY
FOR
THE PERIOD MAY 31, 2005 (INCEPTION) TO DECEMBER 31, 2009
U.S.
dollars
Preferred Stock
|
Common Stock
|
(Deficit)
|
||||||||||||||||||||||||||||||
accumulated
|
||||||||||||||||||||||||||||||||
during the
|
Total
|
|||||||||||||||||||||||||||||||
Additional
|
Deferred
|
development
|
stockholders’
|
|||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
paid-in capital
|
compensation
|
stage
|
equity
|
|||||||||||||||||||||||||
Balance
as of May 31, 2005 (date of inception)
|
- | $ | - | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
Issuance
of common stock
|
- | - | 3,506,527 | 35 | 2,896,589 | - | - | 2,896,624 | ||||||||||||||||||||||||
Issuance
of common stock and options in conjunction with the acquisition of
ModigeneTech Ltd.
|
- | - | 3,788,632 | 38 | 2,628,528 | - | - | 2,628,566 | ||||||||||||||||||||||||
Contributed
capital
|
- | - | 5,704,668 | 57 | - | - | - | 57 | ||||||||||||||||||||||||
Stock
based compensation
|
- | - | - | - | 3,514,369 | - | - | 3,514,369 | ||||||||||||||||||||||||
Deferred
compensation on restricted shares to non-employees
|
- | - | 588,725 | 6 | 362,591 | ( 347,004 | ) | - | 15,593 | |||||||||||||||||||||||
Stock-based
compensation related to options granted to non employees
|
- | - | - | - | 76,885 | - | - | 76,885 | ||||||||||||||||||||||||
Net
(loss)
|
- | - | - | - | - | - | (6,977,419 | ) | (6,977,419 | ) | ||||||||||||||||||||||
Balance
as of December 31, 2005
|
- | - | 13,588,552 | 136 | 9,478,962 | ( 347,004 | ) | (6,977,419 | ) | 2,154,675 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-6
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF STOCKHOLDERS’ EQUITY
FOR
THE PERIOD MAY 31, 2005 (INCEPTION) TO DECEMBER 31, 2009
U.S.
dollars
Preferred Stock
|
Common Stock
|
(Deficit)
|
||||||||||||||||||||||||||||||
accumulated
|
||||||||||||||||||||||||||||||||
during the
|
Total
|
|||||||||||||||||||||||||||||||
Additional
|
Deferred
|
development
|
stockholders’
|
|||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
paid-in capital
|
compensation
|
stage
|
equity
|
|||||||||||||||||||||||||
Amortization
of deferred compensation on restricted shares of common stock to non
employees
|
- | - | - | - | - | 347,004 | - | 347,004 | ||||||||||||||||||||||||
Cumulative
effect of first time adoption of the fair value based method for stock
based compensation to employees
|
- | - | - | - | 3,415 | - | - | 3,415 | ||||||||||||||||||||||||
Stock-based
compensation on options
|
- | - | - | - | 259,620 | - | - | 259,620 | ||||||||||||||||||||||||
Net
(loss)
|
- | - | - | - | - | - | (2,215,949 | ) | (2,215,949 | ) | ||||||||||||||||||||||
Balance
as of December 31, 2006
|
- | - | 13,588,552 | 136 | 9,741,997 | - | (9,193,368 | ) | 548,765 | |||||||||||||||||||||||
Issuance
of common stock and options in conjunction with the reverse
acquisition
|
- | - | 7,333,339 | 73 | (73 | ) | - | - | - | |||||||||||||||||||||||
Issuance
of common stock and options in private placement
|
- | - | 14,200,005 | 142 | 13,414,991 | - | - | 13,415,133 | ||||||||||||||||||||||||
Options
exercised
|
- | - | 313,370 | 3 | 136 | - | - | 139 | ||||||||||||||||||||||||
Stock-based
compensation on options
|
- | - | - | - | 1,211,536 | - | - | 1,211,536 | ||||||||||||||||||||||||
Net
(loss)
|
- | - | - | - | - | - | ( 3,313,203 | ) | (3,313,203 | ) | ||||||||||||||||||||||
Balance
as of December 31, 2007
|
- | - | 35,435,266 | 354 | 24,368,587 | - | (12,506,571 | ) | 11,862,370 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-7
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF STOCKHOLDERS’ EQUITY (continued)
FOR
THE PERIOD MAY 31, 2005 (INCEPTION) TO DECEMBER 31, 2009
U.S.
dollars
Preferred Stock
|
Common Stock
|
(Deficit)
|
||||||||||||||||||||||||||||||
accumulated
|
||||||||||||||||||||||||||||||||
during the
|
Total
|
|||||||||||||||||||||||||||||||
Additional
|
Deferred
|
development
|
stockholders’
|
|||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
paid-in capital
|
compensation
|
stage
|
equity
|
|||||||||||||||||||||||||
Issuance
of preferred stock
|
800,000 | 8 | - | - | 1,999,992 | - | - | 2,000,000 | ||||||||||||||||||||||||
Options
exercised
|
- | - | 113,762 | 1 | - | - | - | - | ||||||||||||||||||||||||
Stock-based
compensation on options
|
- | - | - | - | 1,039,028 | - | - | 1,039,028 | ||||||||||||||||||||||||
Net
(loss)
|
- | - | - | - | - | - | (7,033,536 | ) | (7,033,536 | ) | ||||||||||||||||||||||
Balance
as of December 31, 2008
|
800,000 | 8 | 35,549,028 | 355 | $ | 27,407,606 | - | (19,540,107 | ) | 7,867,862 | ||||||||||||||||||||||
Issuance
of preferred stock
|
1,000,000 | 10 | - | - | 1,999,990 | - | - | 2,000,000 | ||||||||||||||||||||||||
Options
exercised
|
- | - | 20,000 | - | 17,580 | - | - | 17,580 | ||||||||||||||||||||||||
Stock-based
compensation on options
|
- | - | - | - | 728,341 | 728,341 | ||||||||||||||||||||||||||
Net
(loss)
|
- | - | - | - | - | - | (7,484,718 | ) | (7,484,718 | ) | ||||||||||||||||||||||
Balance
as of December 31, 2009
|
1,800,000 | $ | 18 | 35,569,028 | $ | 355 | $ | 30,153,517 | $ | - | $ | (27,024,825 | ) | $ | 3,129,065 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-8
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars
Period from May
31, 2005
|
||||||||||||
(date of inception)
|
||||||||||||
Year ended December 31,
|
to December 31,
|
|||||||||||
2009
|
2008
|
2009
|
||||||||||
Cash flows from operating
activities
|
||||||||||||
Net
(loss)
|
$ | (7,484,718 | ) | $ | (7,033,536 | ) | $ | (27,024,825 | ) | |||
Adjustments
to reconcile net (loss) to net cash (used in) operating
activities:
|
||||||||||||
Depreciation
|
78,509 | 64,700 | 198,942 | |||||||||
In-process
research and development write-off
|
- | - | 3,222,831 | |||||||||
Stock
based compensation
|
728,341 | 1,039,028 | 7,195,785 | |||||||||
(Decrease)
Increase in accrued severance pay, net
|
(1,044 | ) | 8,090 | 15,913 | ||||||||
Decrease
(increase) in accounts receivable and prepaid expenses
|
327,235 | 93,629 | (85,003 | ) | ||||||||
Increase(
Decrease) in trade payables
|
(24,115 | ) | 13,577 | 121,820 | ||||||||
Increase
in related party payables
|
152,209 | 32,009 | 203,583 | |||||||||
Long
term deposit exchange rate differences
|
(22 | ) | - | (22 | ) | |||||||
Increase in
accrued expenses and other liabilities
|
315,952 | 21,442 | 383,596 | |||||||||
Net
cash (used in) operating activities
|
(5,907,653 | ) | (5,761,061 | ) | (15,767,380 | ) | ||||||
Cash flows from investing
activities
|
||||||||||||
Purchase
of property and equipment
|
(52,651 | ) | (199,445 | ) | (468,901 | ) | ||||||
Payment
for the acquisition of ModigeneTech
Ltd.
|
- | - | (474,837 | ) | ||||||||
Long
term deposit
|
10 | 1,057 | (1,884 | ) | ||||||||
Restricted
deposit
|
(652 | ) | (29,240 | ) | (91,730 | ) | ||||||
Net
cash (used in) investing activities
|
(53,293 | ) | (227,628 | ) | (1,037,352 | ) | ||||||
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
|
2,017,580 | 2,000,000 | 20,329,439 | |||||||||
Net
cash provided by financing activities
|
2,017,580 | 1,998,114 | 20,326,598 | |||||||||
Increase
(decrease) in cash and cash equivalents
|
(3,943,366 | ) | (3,990,575 | ) | 3,521,866 | |||||||
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
|
$ | 3,521,866 | $ | 7,465,232 | $ | 3,521,866 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-9
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
U.S.
dollars in thousands
|
Period from May
|
|||||||||||
31, 2005
|
||||||||||||
(date of inception)
|
||||||||||||
Year ended December 31,
|
to December 31,
|
|||||||||||
2009
|
2008
|
2009
|
||||||||||
Non
cash transactions:
|
||||||||||||
Employee
options exercised into shares
|
$ | - | $ | 1 | $ | 140 | ||||||
Issuance
of common stock in reverse acquisition
|
$ | - | $ | - | $ | 73 | ||||||
Additional
information:
|
||||||||||||
Cash
paid for income taxes
|
$ | - | $ | - | $ | - | ||||||
Cash
paid for interest expense
|
$ | 57,755 | $ | 280,796 | $ | 353,724 | ||||||
Payment
for the acquisition of ModigeneTech Ltd.:
|
||||||||||||
Issuance
expenses
|
$ | - | $ | - | $ | (356,979 | ) | |||||
Loan
granted by the Company to ModigeneTech Ltd.
|
- | - | (497,575 | ) | ||||||||
Cash
at date of acquisition in ModigeneTech Ltd.
|
- | - | 379,717 | |||||||||
$ | - | $ | - | $ | (474,837 | ) |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-10
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE
1:-
|
GENERAL
|
|
a.
|
Prolor
Biotech, Inc. (the “Company”) was incorporated 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-lives, through its
Israeli subsidiary, ModigeneTech Ltd.
(“ModigeneTech”).
|
|
b.
|
On
May 9, 2007, Modigene Inc., a Delaware corporation, Modigene Acquisition
Corp., a wholly-owned subsidiary of the Company (the “Acquisition
Subsidiary”), and the Company entered into a merger agreement (the “Merger
Agreement”). Pursuant to the Merger Agreement, the Acquisition Subsidiary
merged (the “Merger”) with and into Modigene Inc. with Modigene Inc.
remaining as the surviving entity and a wholly-owned subsidiary of the
Company.
|
The
Merger was accounted for as a recapitalization. The Company has continued the
business operations of Modigene Inc. as a publicly-traded company under the name
Prolor Biotech, Inc.
In the
Merger, the stockholders of Modigene Inc. received a total of 13,588,552
newly-issued shares of the Company’s common stock, par value $0.00001 per share
(“Common Stock”), in exchange for all of their shares of common stock of
Modigene Inc.
Pursuant
to the Merger Agreement, the Company became the holding company of Modigene Inc.
and ModigeneTech. Contemporaneously
with the closing of the Merger, the Company split off its wholly-owned
subsidiary, Liaison Design Group, LLC., through the sale of all of the
membership interests of the subsidiary.
|
c.
|
In
December 2005, Modigene Inc. acquired all of the outstanding shares of
ModigeneTech, an Israeli-based corporation, in consideration for shares of
common stock of Modigene Inc.. The fair value of the common stock issued
and the options granted for the acquisition was
$2,628,566.
|
In
connection with the transaction, Modigene Inc. also issued shares of common
stock, valued at $3,514,426, to Modigene Inc.’s founders for their services as
the agents in the transaction.
The
acquisition was accounted for as an acquisition of a group of assets that does
not constitute a business and no goodwill was recognized.
The
know-how purchased in the amount of $3,222,831 has not yet reached technological
feasibility and has no alternative future use other than the technological
indications for which it was in development. Accordingly, the entire amount
representing the know-how was recorded as in-process research and development
and accordingly was immediately expensed in the consolidated statement of
operations on the acquisition date. Following the acquisition of
ModigeneTech, ModigeneTech became a wholly-owned subsidiary of Modigene Inc. The
financial statements of ModigeneTech were consolidated with the accounts of
Modigene Inc, commencing December 14, 2005.
|
d.
|
The
Company devotes substantially all of its efforts toward research and
development activities. 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 $27,024,825 through December 31, 2009. There
is no assurance that profitable operations, if ever achieved, could be
sustained on a continuing
basis.
|
F-11
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 1:-
|
GENERAL
(continued)
|
|
d.
|
Pursuant
to a securities purchase agreement, dated July 22, 2009, by and among the
Company and certain private investors (the “Investors”), the Company may
at its own discretion close on the sale and issuance of up to four million
shares of its Series B Cumulative Convertible Preferred Stock, par value
$0.00001 per share, at a purchase price of $2.00 per share (a total of $8
million), on any date on or prior to March 25, 2013, subject to providing
the Investors thirty days prior written notice of such closing date, see
note 7b below.
|
The
Company is entitled to receive R&D grants from the Israeli government on
approved projects during the year 2010, see note 2r.
In March
2010, the Company entered into securities purchase agreements with private
investors, pursuant to which the Investors agreed to purchase an aggregate of
10,382,975 shares of Common Stock for an aggregate consideration of
approximately $24.4 million.
The
Company believes that its current cash sources with the anticipated R&D
grants will enable the continuance of the Company’s activities for at least a
year with no need for additional fundraising.
NOTE 2:-
|
SIGNIFICANT ACCOUNTING
POLICIES
|
The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). The significant accounting
policies followed in the preparation of the financial statements, on a
consistent basis are:
|
a.
|
Subsequent
events:
|
The
Company has evaluated subsequent events for potential recognition and/or
disclosure through the date these consolidated financial statements were
issued.
|
b.
|
Accounting Standards
Codification:
|
The
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s
officially recognized source of GAAP applicable to all public and non-public
non-governmental entities, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and
related literature. Rules and interpretive releases of the SEC under the
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the way companies refer to GAAP
in financial statements and accounting policies. Citing particular content in
the ASC involves specifying the unique numeric path to the content through the
Topic, Subtopic, Section and Paragraph structure.
F-12
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 2:-
|
SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
|
c.
|
Use of
estimates:
|
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. While management believes that such
estimates are fair when considered in conjunction with the consolidated
financial position and results of operations taken as a whole, actual results
could differ from those estimates and such differences may be material to the
financial statements.
|
d.
|
Financial
statements in U.S. dollars:
|
The
functional currency of the Company is the U.S dollar, as the U.S. dollar is the
primary currency of the economic environment in which the Company has operated
and expects to continue to operate in the foreseeable future. The majority of
ModigeneTech’s operations are currently conducted in Israel. Most of the Israeli
expenses are currently determined and paid in U.S. dollars. Financing and
investing activities including loans and equity transactions are made in U.S.
dollars.
Accordingly,
the functional and reporting currency of the Company is the dollar. Monetary
accounts maintained in currencies other than the dollar are remeasured into U.S.
dollars. All transaction gains and losses from the remeasurement of monetary
balance sheet items are reflected in the statements of operations as financial
income or expenses, as appropriate.
|
e.
|
Comprehensive
Income (Loss):
|
Accounting
guidance requires financial statements to include the reporting of comprehensive
income (loss), which includes net income (loss) and certain transactions that
have generally been reported in the statement of stockholders’ equity. The
Company’s comprehensive income (loss) consists of net income
(loss).
|
f.
|
Segment
Reporting:
|
A
business segment is a distinguishable component of an enterprise that is engaged
in providing an individual product or service or a group of related products or
services and that is subject to risks and returns that are different from those
of other business segments. Management believes that the Company meets the
criteria for aggregating its operating segments into a single reporting
segment.
|
g.
|
Principles
of consolidation:
|
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Modigene Inc. and ModigeneTech Ltd.
Intercompany
transactions and balances, have been eliminated upon consolidation.
|
h.
|
Cash
equivalents:
|
For
purposes of reporting within the statement of cash flows, the Company considers
all cash on hand, cash accounts not subject to withdrawal restrictions or
penalties, and all highly liquid debt instruments purchased with a maturity of
three months or less to be cash and cash equivalents.
|
i.
|
Restricted
cash:
|
Cash and
cash items which are restricted as to withdrawal or usage. Restricted cash
includes legally restricted deposits held as compensating balances against a
rent agreement to assure future credit availability.
F-13
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 2:-
|
SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
|
j.
|
Accounts
receivable:
|
Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less the allowance for uncollectible accounts. As of December 31, 2009
and 2008, the Company has not accrued an allowance for uncollectible
accounts.
|
k.
|
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 reviews the carrying value of its long-lived assets, including
intangible assets subject to amortization, for impairment whenever events and
circumstances indicate that the carrying value of the assets may not be
recoverable. Recoverability of these assets is measured by comparing the
carrying value of the assets to the undiscounted cash flows estimated to be
generated by those assets over their remaining economic life. If the
undiscounted cash flows are not sufficient to recover the carrying value of the
assets, the assets are considered impaired. The impairment loss is measured by
comparing the fair value of the assets to their carrying value. Fair value is
determined by either a quoted market price or a value determined by a discounted
cash flow technique, whichever is more appropriate under the circumstances
involved. No impairments were recognized from May 31, 2005 (inception date)
through December 31, 2009.
|
l.
|
Accounting
for stock-based compensation:
|
The
Company’s stock-based compensation are recorded according to ASC 718-10,
“Compensation - Stock Compensation”, which requires the measurement and
recognition of compensation expense for all stock-based payment awards made to
employees and directors, including employee stock options under the Company’s
stock plans, based on estimated fair values.
ASC
718-10 requires companies to estimate the fair value of equity-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s consolidated
statement of operations. The Company estimates the fair value of stock options
granted using the Black-Scholes-Merton option-pricing model.
F-14
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 2:-
|
SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
Research
and development costs and participations:
|
m.
|
Research
and development (“R&D”) costs are expensed as they are incurred and
consist of salaries, stock-based compensation 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.
|
Participations
from the Israeli government for development of approved projects are recognized
as a reduction of expenses as the related costs are incurred (see note 2r and
9).
|
n.
|
Severance
pay:
|
The
liability of ModigeneTech for severance pay is calculated pursuant to the
Severance Pay Law in Israel, based on the most recent salary of the employees
multiplied by the number of years of employment as of the balance sheet date and
is presented on an undiscounted basis. ModigeneTech’s employees are entitled to
one month’s salary for each year of employment or a portion
thereof.
According
to agreements with key employees that are related parties of the Company, upon
retirement, such employees will be entitled to receive a lump-sum payment;
therefore, the Company does not accumulate severance pay for those employees,
and the sum will be accrued when the Company has to pay such payments according
to the employment agreements.
Severance
(income) expenses for the years ended December 31, 2009 and 2008 and the period
from May 31, 2005 (inception date) through December 31, 2009 amounted to
$(1,044), $8,090 and $15,913, respectively.
|
o.
|
Income
taxes:
|
The
Company accounts for income taxes in accordance with the provisions of ASC
740-10, Income Taxes. ASC 740-10 requires companies to recognize deferred tax
assets and liabilities based on the differences between financial reporting and
tax bases of assets and liabilities. These differences are measured using the
enacted tax rates and laws that are expected to be in effect when the temporary
differences are expected to reverse. A valuation allowance is established
against net deferred tax assets, if based on the weighted available evidence, it
is more likely than not that all or a portion of the deferred tax assets will
not be realized. On January 1, 2007, the Company adopted ASC 740-10, Income
Taxes, as it applies to accounting for uncertainty in income taxes, which did
not result in an adjustment to its tax contingencies.
F-15
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 2:-
|
SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
|
p.
|
Concentrations
of credit risk:
|
Financial
instruments that potentially subject the Company and subsidiaries to
concentrations of credit risk consist principally of cash and cash
equivalents.
Cash and
cash equivalents are invested in major banks in Israel and in the U.S. Such
deposits in the U.S. are not insured [WHAT ABOUT FDIC? ARE BALANCES
ALL KEPT IN MONEY MARKET OR OTHER NON-FDIC INSURED ACCOUNTS?]. Management
believes that the financial institutions that hold the Company’s investments are
financially sound and, accordingly, minimal credit risk exists with respect to
these investments.
The
Company has no off-balance-sheet concentration of credit risk such as foreign
exchange contracts or other foreign hedging arrangements.
|
q.
|
Fair
value measurements:
|
As
defined in ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”),
fair value is based on the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. In order to increase consistency and comparability in fair
value measurements, ASC 820-10 establishes a fair value hierarchy that
prioritizes observable and unobservable inputs used to measure fair value into
three broad levels, which are described below:
Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2:
Other inputs that are observable, directly or indirectly, such as quoted prices
for similar assets and liabilities or market corroborated inputs.
Level 3:
Unobservable inputs are used when little or no market data is available, which
requires the Company to develop its own assumptions about how market
participants would value the assets or liabilities. The fair value hierarchy
gives the lowest priority to Level 3 inputs.
In
determining fair value, the Company utilizes valuation techniques in its
assessment that maximize the use of observable inputs and minimize the use of
unobservable inputs.
The
following table presents the Company’s financial assets and liabilities that are
carried at fair value, classified according to the three categories described
above:
Fair
Value Measurements at December 31, 2009
|
||||||||||||||||
Quoted
Prices
in
Active
|
Significant
|
|
||||||||||||||
Markets
for
Identical
Assets
|
Other
Observable
Inputs
|
Significant UnobservableInputs
|
||||||||||||||
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Cash
and cash equivalents
|
$ | 3,521,866 | $ | 3,521,866 | $ | - | $ | - | ||||||||
Restricted
cash
|
$ | 91,730 | 91,730 | |||||||||||||
Total
assets at fair value
|
$ | 3,521,866 | $ | 3,521,866 | $ | - | $ | - |
F-16
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 2:-
|
SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
|
r.
|
Royalty-bearing
grants:
|
Royalty-bearing
grants from the Government of Israel for funding approved research and
development projects are recognized at the time ModigeneTech is entitled to such
grants, on the basis of the costs incurred and included as a reduction of
research and development costs. Research and development grants received by
ModigeneTech during the years ended December 31, 2009 and 2008 and the period
from May 31, 2005 (inception date) through December 31, 2009 amounted to
$767,248, $865,367 and $2,004,765, respectively.
|
s.
|
Loss
per share:
|
Basic and
diluted losses per share are presented in accordance with ASC 260-10 “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 9,572,278, 7,620,546 and 5,509,154 for the years ended December
31, 2009 and 2008 and for the period from May 31, 2005 (inception date) through
December 31, 2009, respectively.
|
t.
|
Revenue
recognition:
|
Revenue,
if and when generated, will be recognized in accordance with ASC 605-10-S99,
“Revenue Recognition”. The Company will recognize revenue when the
significant risks and rewards of ownership have been transferred to the customer
pursuant to applicable laws and regulations, including factors such as when
there has been evidence of a sales arrangement, the performance has occurred, or
service have been rendered, the price to the buyer is fixed or determinable, and
collectability is reasonably assured.
|
u.
|
Impact
of recently issued accounting
standards:
|
In
February 2008, the FASB issued an accounting standard update that delayed the
effective date of fair value measurements accounting for all non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until the beginning of the first quarter of fiscal 2009. These
include goodwill and other non-amortizable intangible assets. The Company
adopted this accounting standard update effective January 1, 2009. The
adoption of this update to non-financial assets and liabilities, as codified in
ASC 820-10, did not have any impact on the Company’s consolidated financial
statements.
F-17
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 2:-
|
SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
|
u.
|
Impact of recently issued
accounting standards (continued):
|
Effective
January 1, 2009, the Company adopted ASC 805 adopted - an accounting
standard update regarding business combinations. This update requires an entity
to recognize the assets acquired, liabilities assumed, contractual contingencies
and contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred; that restructuring costs generally be
expensed in periods subsequent to the acquisition date; and that changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period be recognized as a component of
provision for taxes. In addition, acquired in-process research and development
is capitalized as an intangible asset and amortized over its estimated useful
life. With the adoption of this accounting standard update, any tax-related
adjustments associated with acquisitions that closed prior to January 1,
2009 will be recorded through income tax expense, whereas the previous
accounting treatment would require any adjustment to be recognized through the
purchase price. This accounting standard update applies prospectively
to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The adoption of this accounting update did not have any impact on the
Company’s consolidated financial statements.
Effective
January 1, 2009, the Company adopted ASC 810-10, which establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. This accounting standard states that
accounting and reporting for minority interests are to be recharacterized as
noncontrolling interests and classified as a component of equity. The
calculation of earnings per share continues to be based on income amounts
attributable to the parent. The adoption of this accounting update
did not have any impact on the Company’s consolidated financial
statements.
Effective
January 1, 2009, the Company adopted ASC 350-30-35 an accounting standard
update regarding the determination of the useful life of intangible assets. This
update amends the factors considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under intangibles accounting. It also requires a consistent approach between the
useful life of a recognized intangible asset under prior business combination
accounting and the period of expected cash flows used to measure the fair value
of an asset under the new business combinations accounting (ASC 850). The update
also requires enhanced disclosures when an intangible asset’s expected future
cash flows are affected by an entity’s intent and/or ability to renew or extend
the arrangement. The adoption of this accounting update did not have any impact
on the Company’s consolidated financial statements.
F-18
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 2:-
|
SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
|
u.
|
Impact of recently issued
accounting standards (continued):
|
|
Effective
January 1, 2009, the Company adopted ASC 350-30 - a new accounting
standard update. This update clarifies accounting for defensive intangible
assets subsequent to initial measurement. It applies to acquired
intangible assets which an entity has no intention of actively using, or
intends to discontinue use of, the intangible asset but holds it to
prevent others from obtaining access to it (i.e., a defensive intangible
asset). Under this update, a consensus was reached that an acquired
defensive asset should be accounted for as a separate unit of accounting
(i.e., an asset separate from other assets of the acquirer), and the
useful life assigned to an acquired defensive asset should be based on the
period during which the asset would diminish in value. The adoption of
this accounting update did not have any impact on the Company’s
consolidated financial statements.
|
|
Effective
April 1, 2009, the Company adopted ASC 855-10 “subsequent events”. ASC
855-10 modifies the names of the two types of subsequent events either as
recognized subsequent events (previously referred to in practice as Type I
subsequent events) or non-recognized subsequent events (previously
referred to in practice as Type II subsequent events). In addition, the
standard modifies the definition of subsequent events to refer to events
or transactions that occur after the balance sheet date, but before the
financial statements are issued (for public entities) or available to be
issued (for nonpublic entities). It also requires the disclosure of the
date through which subsequent events have been evaluated. The update did
not result in significant changes in the practice of subsequent event
disclosures, and therefore the adoption did not have any impact on the
Company’s consolidated financial
statements.
|
|
Effective
April 1, 2009, the Company adopted three accounting standard updates
which were intended to provide additional application guidance and
enhanced disclosures regarding fair value measurements and impairments of
securities. They also provide additional guidelines for estimating fair
value in accordance with fair value accounting. The first update, ASC
820-10-65, provides additional guidelines for estimating fair value in
accordance with fair value accounting. The second accounting update, ASC
320-10-65, changes accounting requirements for
other-than-temporary-impairment (OTTI) for debt securities by replacing
the current requirement that a holder have the positive intent and ability
to hold an impaired security to recovery in order to conclude an
impairment was temporary with a requirement that an entity conclude it
does not intend to sell an impaired security and it will not be required
to sell the security before the recovery of its amortized cost basis. The
third accounting update, ASC 825-10-65, increases the frequency of fair
value disclosures. These updates were effective for fiscal years and
interim periods ended after June 15, 2009. The adoption of these
accounting updates did not have any impact on the Company’s consolidated
financial statements.
|
F-19
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 2:-
|
SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
|
u.
|
Impact of recently issued
accounting standards (continued):
|
|
Effective
July 1, 2009, the Company adopted ASC 105 the “FASB Accounting
Standards Codification”. This standard establishes only two levels of U.S.
generally accepted accounting principles (“GAAP”), authoritative and
nonauthoritative. The Financial Accounting Standard Board (“FASB”)
Accounting Standards Codification (the “Codification”) became the source
of authoritative, nongovernmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP
for SEC registrants. All other non-grandfathered, non-SEC accounting
literature not included in the Codification became nonauthoritative. The
Company began using the new guidelines and numbering system prescribed by
the Codification when referring to GAAP in the third quarter of fiscal
2009. Authoritative standards included in the Codification are designated
by their Accounting Standards Codification (ASC) topical reference, and
new standards will be designated as Accounting Standards Updates (ASU),
with a year and assigned sequence number. As the Codification was not
intended to change or alter existing GAAP, it did not have any impact on
the Company’s consolidated financial
statements.
|
|
In
June 2009, the FASB concurrently issued amendments to ASC 860, Transfers
and Servicing, and ASC 810, Consolidation, that change the way
entities account for securitizations and other transfers of financial
instruments. In addition to increased disclosure, these amendments
eliminate the concept of qualifying special purpose entities and change
the test for consolidation of variable interest entities. These
amendments will be effective as of January 1, 2010. The Company has
evaluated these amendments and believes that they will have no impact on
its financial condition or results of
operations.
|
|
In
October 2009, the FASB concurrently issued the following Accounting
Standards Updates:
|
|
ASU
No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements That
Include Software Elements. This standard removes tangible products from
the scope of software revenue recognition guidance and also provides
guidance on determining whether software deliverables in an arrangement
that includes a tangible product, such as embedded software, are within
the scope of the software revenue guidance.
|
|
ASU
No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable
Revenue Arrangements. This standard modifies the revenue
recognition guidance for arrangements that involve the delivery of
multiple elements, such as product, software, services or support, to a
customer at different times as part of a single revenue generating
transaction. This standard provides principles and application
guidance to determine whether multiple deliverables exist, how the
individual deliverables should be separated and how to allocate the
revenue in the arrangement among those separate deliverables. The standard
also expands the disclosure requirements for multiple deliverable revenue
arrangements.
|
|
These
Accounting Standards Updates should be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with earlier application
permitted. Alternatively, an entity can elect to adopt these
standards on a retrospective basis, but both these standards must be
adopted in the same period using the same transition
method. The Company does not expect these updates to have
impact on its financial position and results of
operations.
|
F-20
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 3:-
|
ACCOUNTS
RECEIVABLE AND PREPAID EXPENSES
|
December 31,
|
||||||||
2009
|
2008
|
|||||||
Government
authorities
|
$ | 46,054 | $ | 344,927 | ||||
Prepaid
expenses
|
38,474 | 34,989 | ||||||
Others
|
752 | 32,599 | ||||||
$ | 85,280 | $ | 412,515 |
NOTE 4:-
|
PROPERTY
AND EQUIPMENT,
NET
|
December 31,
|
||||||||
2009
|
2008
|
|||||||
Cost:
|
||||||||
Office
furniture and equipment
|
$ | 24,243 | $ | 20,479 | ||||
Computers
and electronic equipment
|
65,230 | 60,238 | ||||||
Laboratory
equipment
|
348,652 | 306,855 | ||||||
Leasehold
improvements
|
60,114 | 58,016 | ||||||
498,239 | 445,588 | |||||||
Accumulated
depreciation:
|
||||||||
Office
furniture and equipment
|
3,274 | 2,045 | ||||||
Computers
and electronic equipment
|
41,989 | 25,852 | ||||||
Laboratory
equipment
|
135,783 | 89,122 | ||||||
Leasehold
improvements
|
32,878 | 18,396 | ||||||
213,924 | 135,415 | |||||||
Depreciated
cost
|
$ | 284,315 | $ | 310,173 |
Depreciation
expenses for the years ended December 31, 2009 and 2008 and for the period from
May 31, 2005 (inception date) through December 31, 2009 were $78,509, $64,700
and $198,942, respectively.
F-21
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 5:-
|
ACCRUED
EXPENSES AND OTHER LIABILITIES
|
December 31,
|
||||||||
2009
|
2008
|
|||||||
Employees
and payroll accruals
|
$ | 112,293 | $ | 95,689 | ||||
Accrued
expenses
|
367,745 | 92,971 | ||||||
Government
authorities
|
24,574 | - | ||||||
$ | 504,612 | $ | 188,660 |
NOTE 6:-
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
a.
|
ModigeneTech
is committed to pay royalties to the Government of Israel with respect to
the proceeds from sales of products developed in the framework of projects
in which the Israeli Government paid a portion of the expenses. Under the
terms of the funding received from the Israeli Office of the Chief
Scientist (the “Chief Scientist”), royalty payments are computed on the
sales proceeds from such products at the rate of 3%. The contingent
liability to the Chief Scientist is limited to the amount of the grants
received plus interest at the rate of LIBOR. As of December 31, 2009, no
royalties had been paid or accrued. The Company is committed to the Chief
Scientist to keep the know-how and production rights in the framework of
the abovementioned projects under ModigeneTech’s
possession.
|
|
b.
|
The
Company entered into a consulting agreement with its Chief Executive
Officer (“CEO”), pursuant to which he serves as the Company’s CEO on a
part-time basis at an annual compensation rate of NIS 829,900
(approximates $215,000) and an annual cash bonus target of up to NIS
231,600 (approximates $60,000). The consulting agreement had an initial
one-year term that expired December 14, 2006, with an option to extend by
mutual agreement of the parties. The agreement was
extended until December 14, 2010. Either party may terminate the agreement
on 30 days prior notice; however, if the Company terminates the agreement
for any reason other than the CEO’s material breach, then the CEO will be
entitled to a lump sum severance payment of
$40,000.
|
On
January 24, 2010, the Company and the CEO entered into an amendment to the
consulting agreement, pursuant to which, effective as of January 1, 2010, the
CEO’s annual base salary has been increased by $35,000 to
$250,000.
F-22
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 6:-
|
COMMITMENTS AND CONTINGENT
LIABILITIES (continued)
|
|
c.
|
On
January 1, 2007, the Company signed a 24-month consulting agreement with
its Chief Scientific Officer (“CSO”), with an option to extend for an
additional 12 months. The agreement was extended until December 31, 2010.
Under the agreement, the Company will pay the CSO an annual consulting fee
of NIS 138,960 (approximately $36,000). In addition, the Company will pay
milestone payments of up to $102,000 upon successful completion of the
milestones, as determined by the agreement. As of December 31, 2009 no
milestone payments had been paid or accrued. Upon the Company’s
termination of this agreement, the Company shall pay the CSO a lump sum of
$18,000.
|
|
d.
|
The
Company entered into an employment agreement with its President. Such
agreement provides for employment as President of the Company for an
initial two-year term that expired December 14, 2007, which term is
automatically extended for additional successive one-year terms on each
one-year anniversary, unless either party gives written notice of an
election not to renew the agreement. The agreement was automatically
renewed on December 14, 2009. The President’s annual base salary under the
agreement is NIS 965,000 (approximately $250,000). In addition, the
President will be entitled to an annual cash bonus of up to NIS 328,100
(approximately $85,000) based on corporate and personal milestones, along
with equity performance awards, each as determined by the compensation
committee of the Board. If the President voluntarily terminates his
employment (other than in connection with a change of control and certain
other reasons), he will be entitled to payment of only his base salary
through the date of termination, and would not be entitled to any
performance bonus for that year. However, if the President terminates the
agreement as the result of a material breach by the Company, then he will
be entitled to payment of his base salary over a 12-month period following
the termination, plus the value of any accrued benefits. If the Company
terminates the employment other than for cause (as defined in the
agreement), or if the term expires and is not renewed by the Company, then
the President will be entitled to receive an amount equal to his
then-current base salary over the 12-month period following termination,
plus the value of accrued benefits and a pro-rata portion of the current
year’s performance bonus. If the President is terminated for cause, then
he will be entitled to receive only any amounts that were due and owing to
him at the time of such termination. If either (a) the President
terminates his employment for good reason (as defined in the agreement) or
(b) the Company terminates the employment within 12 months of a change in
control (as defined in the agreement), then the President will be entitled
to receive a lump-sum payment equal to the lesser of (i) his base salary
for 12 months and (ii) his base salary for the remainder of the term, and
all unvested stock options will immediately vest and be
exercisable.
|
On
January 24, 2010, the Company and the President entered into an amendment to the
employment agreement, pursuant to which, effective as of January 1, 2010; the
President’s annual base salary has been increased by $20,000 to
$270,000.
F-23
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 6:-
|
COMMITMENTS AND CONTINGENT
LIABILITIES (continued)
|
|
e.
|
On
July 27, 2009, the Company entered into an evaluation and option agreement
with Yeda Research and Development Co. Ltd. (“Yeda”), pursuant to which
the Company may obtain from Yeda a license for the right to develop a
number of peptide drug candidates, including an anti-obesity drug
candidate. [DETAILS?]
|
|
f.
|
Liquidation Payment of Series B
Preferred Stock:
|
The
holders of Series B Preferred Stock shall be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally available therefore,
dividends on each share of Series B Preferred Stock at a rate per annum equal to
10.0% of the liquidation amount per share of the Series B Preferred
Stock.
All
dividends shall be cumulative, whether or not earned or declared, accruing on an
annual basis from the issue date. Upon the occurrence of a liquidation event,
the holders shall be entitled to be paid (provided that such cash payment is not
then prohibited under the Nevada Revised Statues or other applicable law) out of
the assets of the Company available for distribution to its stockholders an
amount in cash for each share of Series B Preferred Stock equal to the greater
of (x) the sum of the liquidation amount for each share of Series B Preferred
Stock outstanding, including an amount in cash equal to all declared and accrued
unpaid dividends thereon to the date of such liquidation event, or (y) the
amount for each share of Series B Preferred Stock the holders would be entitled
to receive pursuant to the liquidation event if all of the shares of Series B
Preferred Stock had been converted into Common Stock as of the date immediately
prior to the date fixed for determination of stockholders entitled to receive a
distribution in such liquidation event, before any cash distribution shall be
made or any other assets distributed in respect of junior securities to the
holders of any junior securities including, without limitation, the Company’s
Series A Preferred Stock and Common Stock.
The
Company did not accrue for such dividends.
g.
|
Operating
leases:
|
ModigeneTech
rents its offices and motor vehicles under a lease operating agreement.
Aggregate minimum rental commitments, under non-cancelable leases, as of
December 31, 2009, are as follows:
Year ended December 31,
|
||||
2010
|
$ | 106,220 | ||
2011
|
8,852 | |||
$ | 115,072 |
Rent
expenses for the years ended December 31, 2009 and 2008 and for the period from
May 31, 2005 (date of inception) to December 31, 2009 were $107,129, $119,489 and
$374,722, respectively.
F-24
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 7:-
|
STOCKHOLDERS’
EQUITY
|
|
a.
|
On
July 22, 2009, the Company entered into a securities purchase agreement
(the “Purchase Agreement”) with a group of related parties of the Company
(the “Investors”), pursuant to which the Investors agreed to purchase an
aggregate of up to 5,000,000 shares (the “Shares”) of the Company’s
newly-designated 10% Series B Cumulative Convertible Preferred Stock, par
value $0.00001 per share (“Series B Preferred Stock”), at a purchase price
of $2.00 per share, which was two-time the average closing price of the
Common Stock as reported on the OTCBB during the thirty day period
immediately preceding July 22, 2009, rounded up to
$1.00.
|
|
On
July 23, 2009 (the “Closing Date”), the Company closed on the issuance of
1,000,000 Shares for an aggregate consideration of
$2,000,000.
|
|
b.
|
Under
the Purchase Agreement described in paragraph (a) above, the Company may
elect, in its sole discretion, to close on the sale and issuance of up to
an additional 4 million of Series B Preferred Stock, at a purchase price
of $2.00 per share (a total of $8 million), on any date on or prior to
March 25, 2013, subject to providing the Investors thirty days prior
written notice of such closing
date.
|
|
c.
|
On
March 25, 2008, the Company entered into a Securities Purchase Agreement
with a group of related parties (the “Investors”), pursuant to which it
sold to the Investors an aggregate of 800,000 shares of Series A preferred
stock, $0.00001 par value per share (the “Series A Preferred Stock”), at
$2.50 per share, for an aggregate purchase price of $2,000,000. The Series
A Preferred Stock is convertible during the period beginning March 1, 2009
through March 25, 2012, without payment of any additional consideration,
into Common Stock based on a conversion ratio equal to one share of Common
Stock per share of Series A Preferred Stock. In the event that the market
capitalization of the Company equals or exceeds $150,000,000 during any
forty-five days within a consecutive ninety day period, the conversion
ratio will adjust to five shares of Common Stock per share of Series A
Preferred Stock. The conversion ratio in effect will be proportionately
adjusted for subdivisions, combinations, consolidations and similar
corporate events. If not previously converted, the Series A Preferred
Stock will automatically be converted into Common Stock, at the applicable
exchange ratio, on March 25, 2012.
|
F-25
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 7:-
|
STOCKHOLDERS’ EQUITY
(continued):
|
|
d.
|
On
May 9, 2007, simultaneously with the closing of the Merger discussed in
note 1b., the Company completed the first phase of a private placement
(the “Offering”) of 6,418,814 units of its securities at a purchase price
of $1.50 per unit, with each unit consisting of one share of Common Stock
and a five year warrant to purchase one-quarter of one share of Common
Stock for an exercise price of $2.50 per whole
share.
|
The
Company raised total cash consideration of $9,628,212 before expenses. Upon the
completion of the first phase of the Offering the Company issued warrants to
purchase up to an aggregate of 242,324 shares of Common Stock to broker/dealers
who assisted in the Offering.
Contemporaneously
with the closing of the Merger and the first phase of the Offering, the Company
completed a sale (the “Private Sale”) of 5,377,660 shares of Common Stock, and
warrants to purchase 333,333 shares of Common Stock, to strategic investors, for
total consideration of $2,000,000.
The
strategic investors were entitled to additional shares on a pro rata basis if
additional units were sold in connection with the Offering. Pursuant to the
terms of the Offering, the Company could sell additional units up to an
aggregate of 8,666,672 units and $13,000,008 (including those sold in the
initial closing of the Offering). On May 21, 2007, the Company
completed a second phase of the offering and closed on the sale of an additional
2,247,858 units, for total cash proceeds of $3,371,766. Upon the completion of
the second closing of the offering, the Company issued warrants to purchase up
to an aggregate of 51,885 shares of Common Stock to the broker/dealers who
assisted in the Offering and additional 155,673 shares of Common Stock (for no
additional consideration) to the strategic investors. Issuance
expenses paid in cash in the amount of $1,584,878 were recorded as a reduction
of additional paid in capital.
|
e.
|
Rights
of Common Stock capital:
|
The
holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders, including the election of directors.
Subject to any preferential rights of any outstanding series of preferred stock
created by the Board from time to time, the common stockholders will be entitled
to such cash dividends as may be declared from time to time by the Board from
funds available. Subject to any preferential rights of any outstanding series of
preferred stock, upon liquidation, dissolution or winding up of the Company, the
common stockholders will be entitled to receive pro rata all assets available
for distribution to such holders.
F-26
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 7:-
|
STOCKHOLDERS’ EQUITY
(continued)
|
f.
|
Rights
of Series A Preferred Stock:
|
The
Company has approved the designation of 800,000 shares of its preferred stock as
“Series A Preferred Stock”. Each holder of shares of Series A Preferred Stock
shall be entitled, at the option of such holder, to convert all of the shares of
Series A Preferred Stock then held by such holder, at any time beginning on
March 1, 2009 and ending on March 25, 2012, without the payment of any
additional consideration, into Common Stock, if any holder has not exercised his
right to convert the shares all such shares will automatically convert into
Common Stock on March 25, 2012. The holders of Series A Preferred Stock will
vote on an as-if-converted basis. Dividends will be payable only if, when and as
declared by our Board of Directors, and, if declared, any such dividends will be
non-cumulative.
In the
event of the liquidation of the Company, the entire remaining assets and funds
of the Company legally available for distribution, if any, shall be distributed
pro rata among the holders of the Series A Preferred Stock, the Common
Stock and any other classes entitled to participate with Common Stock in
proportion to the shares of Common Stock then held by them and the shares of
Common Stock which they then have the right to acquire upon conversion of the
capital stock held by them as of the date of such liquidation.
g.
|
Rights
of Series B Cumulative Convertible Preferred
Stock:
|
Holders
of the Series B Preferred Stock are entitled to receive, when, as and if
declared by the Company’s Board of Directors, dividends on each share of Series
B Preferred Stock at a rate per annum equal to 10.0% of the sum of
(i) $2.00 plus (ii) any and all declared and unpaid and accrued dividends
thereon, subject to adjustment for any stock split, combination,
recapitalization or other similar corporate action.
The
Holders of Series B Preferred Stock have the right to receive notice of any
meeting of holders of the Company’s Common Stock or Series B Preferred Stock and
to vote on an as-converted basis.
With
respect to dividend distributions and distributions upon liquidation, winding up
or dissolution of the Company, the Series B Preferred Stock ranks senior to the
Series A Preferred Stock and all classes of Common Stock.
The
holder of a share of Series B Preferred Stock may at any time convert such share
at the rate of 1 share of Series B Preferred Stock for 2 shares of Common Stock,
subject to adjustment for any stock dividends or distributions, splits,
subdivisions, combinations, reclassifications, certain stock issuances or
similar events with respect to the Common Stock.
The
Company, with a 30 days notice to the holder, may redeem all of the then
outstanding shares of Series B Preferred Stock by paying in cash an amount per
share equal to $2.00 plus all declared or accrued unpaid dividends on such
shares, subject to adjustment for any stock dividends or distributions, splits,
subdivisions, combinations, reclassifications, stock issuances or similar events
with respect to the Common Stock.
F-27
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 7:-
|
STOCKHOLDERS’ EQUITY
(continued)
|
h.
|
Warrants:
|
A summary
of the warrants granted is as follows:
1. |
Number
of warrants
|
2,295,654 | |||
Grant
date
|
May
9, 2007
|
||||
Expiration
date
|
May
8, 2012
|
||||
Exercise
price
|
$ | 2.50 | |||
Number
of warrants vested
|
2,295,654 | ||||
2.
|
Number
of warrants
|
561,965 | |||
Grant
date
|
May
21, 2007
|
||||
Expiration
date
|
May
20, 2012
|
||||
Exercise
price
|
$ | 2.50 | |||
Number
of warrants vested
|
561,965 | ||||
3.
|
Number
of warrants
|
701,305 | |||
Grant
date
|
December
14, 2005
|
||||
Expiration
date
|
December
13, 2015
|
||||
Exercise
price
|
$ | 0.88 | |||
Number
of warrants vested
|
701,305 |
The
warrants provide for the purchase of shares of Common Stock. The warrants, at
the option of the holder, may be exercised by cash payment of the exercise price
or by “cashless exercise.” A “cashless exercise” means that in lieu of paying
the aggregate purchase price for the shares being purchased upon exercise of the
warrants in cash, the holder will forfeit a number of shares underlying the
warrants with a “fair market value” equal to such aggregate exercise price. The
Company will not receive additional proceeds to the extent that warrants are
exercised by cashless exercise.
The
exercise price and number of shares of Common Stock issuable on exercise of the
warrants may be adjusted in certain circumstances including in the event of a
stock dividend, or recapitalization, reorganization, merger or
consolidation.
F-28
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 7:-
|
STOCKHOLDERS’ EQUITY
(continued)
|
i.
|
Option
plan:
|
|
|
1.
|
The
Company issued stock options to purchase 4,946,554 shares of Common Stock,
of which options to purchase 1,990,735 shares were granted under the
Company’s 2005 Stock Incentive Plan (the “2005 Plan”), and options to
purchase 2,955,819 shares were granted under the Company’s 2007 Equity
Incentive Plan (the “2007 Plan”).
|
On
May 22, 2009, the Company approved an amendment to the 2007 Plan, which
increased the number of shares of Common Stock authorized for issuance under the
2007 Plan from 3,000,000 shares to 6,000,000 shares.
The Company accounts for stock based
compensation using the fair value recognition provisions of ASC No. 718
“Compensation – stock compensation”.
The fair
value of the stock options is estimated based upon grant date fair value using
the Black-Scholes option-pricing model with the following weighted average
assumptions used:
Options granted under
|
||||||||||||||||||||
2005 Plan
|
2007 Plan
|
|||||||||||||||||||
Granted
2005
|
Granted
2006
|
Granted
2007
|
Granted
2008
|
Granted
2009
|
||||||||||||||||
annual
dividends of
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
expected
volatility of
|
85 | % | 85 | % | 85 | % | 79 | % | 117 | % | ||||||||||
risk-free
interest rate of
|
4.41 | % | 4.63 | % | 4.67 | % | 2.90 | % | 0.01 | %, | ||||||||||
expected
average options expiration
|
8.05 | 7.9 | 9.19 | 9.94 | 10 |
2.
|
A
summary of the stock options granted under the 2005 and 2007 Plans is as
follows:
|
December 31, 2008
|
||||||||
Number
of Options
|
Weighted average
Exercise Price
|
|||||||
Outstanding
at the beginning of the year
|
2,437,795 | $ | 1.26 | |||||
Forfeited
|
( 27,560 | ) | $ | 1.90 | ||||
Exercised
|
( 113,762 | ) | $ | 0.00001 | ||||
Granted
|
2,135,819 | $ | 0.96 | |||||
Outstanding
at the end of the year
|
4,432,292 | $ | 1.14 | |||||
Options
exercisable
|
2,045,792 | $ | 1.19 |
F-29
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 7:-
|
STOCKHOLDERS’ EQUITY
(continued)
|
|
i.
|
Option plan:
(continued)
|
December 31, 2009
|
||||||||
Number
of Options
|
Weighted average
Exercise Price
|
|||||||
Outstanding
at the beginning of the year
|
4,432,292 | $ | 1.14 | |||||
Forfeited
|
( 2,353 | ) | $ | 1.49 | ||||
Exercised
|
( 20,000 | ) | $ | 0.88 | ||||
Granted
|
375,500 | $ | 0.65 | |||||
Outstanding
at the end of the year
|
4,785,439 | $ | 1.11 | |||||
Options
exercisable
|
2,701,397 | $ | 1.19 |
The
options outstanding as of December 31, 2009, have been separated into exercise
prices, as follows:
Exercise
|
Remaining Weighted
average contractual life
|
|||||||||||
Price
|
Options Outstanding
|
(years)
|
Options Exercisable
|
|||||||||
0.65
|
375,500 |
9.1
|
- | |||||||||
$ |
0.879
|
1,245,474 |
6.23
|
1,245,474 | ||||||||
$ |
0.90
|
1,950,000 |
8.17
|
487,500 | ||||||||
$ |
0.93
|
25,000 |
8.18
|
8,333 | ||||||||
$ |
1.318
|
435,146 |
3.17
|
435,146 | ||||||||
$ |
1.50
|
130,500 |
8.32
|
40,958 | ||||||||
$ |
2.00
|
475,000 |
7.36
|
341,667 | ||||||||
$ |
2.50
|
148,819 |
3.26
|
142,319 | ||||||||
4,785,439 |
7.05
|
2,701,397 |
Weighted
average fair values and average exercise prices of options at date of grant and
total aggregate intrinsic value of outstanding options are as
follows:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Weighted
average fair value on date of grant
|
$ | 0.71 | $ | 0.72 | ||||
Total
aggregate intrinsic value
|
$ | 6,556,831 | $ | 0.00 |
Stock
based compensation expenses for the years ended December 31, 2009 and 2008 and
for the period from May 31, 2005 (date of inception) through December 31, 2009
were $728,341, $1,039,028 and $7,195,785, respectively. Stock based compensation
for the period from May 31, 2005 (date of inception) through December 31, 2009
include stock based payments in the acquisition of ModigeneTech and deferred
compensation on restricted shares in the amount of
$3,876,960.
F-30
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE 8:-
|
INCOME
TAXES
|
|
a.
|
Losses
for tax purposes:
|
|
Carry-forward
tax losses of the Company and Modigene Inc. total approximately $612,761
as of December 31, 2009. ModigeneTech’s Carry-forward tax losses as of
December 31, 2009 were $12,152,673, which may be carried forward and
offset against taxable income of ModigeneTech in the future for
an indefinite period.
|
|
b.
|
Deferred
income taxes:
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial purposes and
the amounts used for income tax purposes.
|
|
As
of December 31, 2009, the Company has provided full valuation
allowances in respect of deferred tax assets. Management currently
believes that since the Company has a history of losses it is more likely
than not that the deferred tax regarding the loss carry-forward and other
temporary differences will not be realized in the foreseeable
future.
|
NOTE 9:-
|
RESEARCH AND DEVELOPMENT,
NET
|
Period from
May 31, 2005
|
||||||||||||
Year ended
|
(date of inception)
|
|||||||||||
December 31,
|
to December 31,
|
|||||||||||
2009
|
2008
|
2009
|
||||||||||
Research
and development expenses
|
$ | 6,040,235 | $ | 5,527,102 | $ | 15,100,549 | ||||||
Less
– Government grants and participation
|
(484,912 | ) | (746,013 | ) | (1,999,791 | ) | ||||||
$ | 5,555,323 | $ | 4,781,089 | $ | 13,100,758 |
As for
the Company’s government grants and participation – see note 2r.
NOTE 10:-
|
SUBSEQUENT
EVENTS
|
|
a.
|
On
January 11, 2010, 500,000 options were granted to executives with exercise
price of $2.40, ten years term, four years annual
vesting.
|
|
On
January 5, 2010, 55,000 options were granted to non-executive employees
with exercise price of $2.35, ten years term, four years annual
vesting,
|
|
b.
|
On
January 24, 2010 the Company and two of its executives amended their
agreements, pursuant to the terms of the Amendments, effective as of
January 1, 2010; the executives’ annual base salary has been increased as
discussed in note 6 above.
|
F-31
PROLOR
BIOTECH, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
U.S.
dollars
NOTE
10:-
|
SUBSEQUENT EVENTS
(continued)
|
|
c.
|
During
January to March 2010, 60,280 warrants were exercised to purchase 50,996
of Common Stock
|
|
d.
|
During
January to March 2010, 206,989 stock options were exercised into 206,989
of Common Stock.
|
|
e.
|
On
March 11, 2010 and March 17, 2010, the Company entered into each of two
substantially identical securities purchase agreements with certain
private investors (the “Investors”), pursuant to which the Investors
agreed to purchase an aggregate of 10,382,975 shares (the “Shares”) of
Common Stock at a purchase price of $2.35 per share. On March 17, 2010,
the Company closed on the issuance of the Shares for aggregate
consideration of approximately $24.4
million.
|
The
Company issued the Shares in reliance upon the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”),
and Rule 506 of Regulation D promulgated thereunder. Each Investor represented
to the Company that such person was an “accredited investor” as defined in Rule
501(a) under the Securities Act and that such Investor’s Shares were being
acquired for investment purposes.
The
Shares have not been registered under the Securities Act and are “restricted
securities” as that term is defined by Rule 144 under the Securities Act. The
Company has not undertaken to register the Shares, and no registration rights
have been granted to the Investors in respect of the Shares. Additionally, each
Investor entered into a lockup agreement in respect of the Shares, pursuant to
which such Investor may not sell or otherwise transfer such shares for a period
of one-year.
F-32