ITEM 2 — Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis
of our financial condition and results of operations should be read together with our financial statements and related notes appearing
elsewhere in this Quarterly Report on Form 10-Q.
Forward Looking Statements
This quarterly report on Form 10-Q contains
“forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize
or prove incorrect could cause our results to differ materially from those expressed or implied by such forward-looking statements.
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within
the meaning of 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”). Forward-looking statements are often identified by
the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,”
“could,” “estimate,” “expect,” “intend,” “may,” “will,”
“plan,” “project,” “seek,” “should,” “target,” “will,”
“would” and similar expressions or variations intended to identify forward-looking statements. These statements are
based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking
statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors”
in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, and any updates to those risk factors
included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Furthermore, such forward-looking statements speak only as
of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
Overview
We are an autologous protein-therapeutics
medical technology company, developing our Biopump Platform Technology to provide sustained protein therapy to potentially treat
a range of chronic diseases and conditions.
Since our inception on January 27, 2000,
we have focused our efforts on research and development and clinical trials and have received no revenue from product sales. We
have funded our operations principally through equity and debt financings, participation from the Office of the Chief Scientist
(“OCS”) in Israel and a collaborative agreement. Our operations to date have been primarily limited to organizing
and staffing our company, developing the Biopump Platform Technology and its applications, developing and initiating clinical trials
for our product candidates, and improving and maintaining our patent portfolio.
We have generated significant losses to
date, and we expect to continue to generate losses as we progress towards the commercialization of our product candidates. We
have incurred net losses of approximately $12.69 million and $62.62 million for the nine month period ended September 30, 2012
and for the period from inception through September 30, 2012, respectively. As of September 30, 2012, we had stockholders’
equity of approximately $3.21 million. We are unable to predict the extent of any future losses or when we will become
profitable, if at all.
Although we have not yet generated revenues
from product sales, we have generated income from partnering on development programs and we expect to expand our partnering activity.
In 2009, we signed a preclinical development
and option agreement with Baxter Healthcare, a market leader in the field of hemophilia, representing our first collaboration agreement
for the Biopump Platform Technology. The agreement was extended in 2010 and 2011. Pursuant to this agreement, the healthcare
company provided funding for preclinical development of our Biopump Platform Technology to produce and deliver the clotting protein
Factor VIII for the sustained treatment of hemophilia. Under the terms of the collaboration agreement, we received $3.97
million. The agreement, as extended, expired on September 30, 2011.
On June 18, 2012, we completed a private
placement transaction in which we issued an aggregate of 1,944,734 units with each unit consisting of one share of our common stock
and a warrant to purchase 0.75 shares of our common stock. The warrants to purchase an aggregate of 1,458,550 shares of common
stock were issued with an exercise price of $8.34 per share, will become exercisable on December 15, 2012 (which, if all were exercised
in full, would result in the issuance of 1,458,576 shares of common stock due to the rounding of fractional shares) and will expire
on June 18, 2017. In addition, warrants to purchase 194,473 shares of our common stock having an exercise price of $9.17 per share
were issued to the placement agent, will become exercisable on December 18, 2012 and will expire on June 18, 2017. Each unit was
sold for a purchase price of $4.90 for total gross proceeds of approximately $9.53 million, or approximately $8.41 million in net
proceeds after deducting private placement fees of $0.95 million and other offering costs of $0.17 million.
United States Initial Public Offering (“IPO”):
On April 13, 2011, we completed the IPO
of our common stock and redeemable common stock purchase warrants, both listed on the NYSE MKT (formerly the NYSE Amex). We issued
2,624,100 shares of common stock, including 164,100 shares pursuant to the exercise of the underwriters’ over-allotment option,
at a price of $4.54 per share and redeemable common stock purchase warrants to purchase 2,829,000 shares including 369,000 warrants
pursuant to the exercise of the underwriters’ over-allotment option, at a price of $0.46 per warrant for total gross proceeds
of $13.21 million, or approximately $10.39 million in net proceeds after deducting underwriting discounts and commissions
of $1.45 million and other offering costs of approximately $1.37 million.
On the closing date of the IPO (April 13,
2011), $0.57 million of convertible debentures issued in 2009 (the “2009 Debentures”) were automatically converted
at a conversion price of $2.724 per share of common stock into an aggregate 209,656 shares of common stock and we issued 5-year
warrants to purchase 84,693 shares of common stock at an initial exercise price of $4.99 per share in connection with the conversion
of the 2009 Debentures. On the same date, $4.00 million of convertible debentures issued in 2010 (the “2010 Debentures”)
were automatically converted at a conversion price of $3.405 per share of common stock into an aggregate 1,198,242 shares of common
stock. An additional 2,534 share of common stock were issued to the holders of the 2010 Debentures in November 2011 to compensate
the 2010 Debenture holders for a minor portion of the interest which had been accrued but not paid at the time of conversion.
In connection with our IPO, the exercise
price of certain warrants and options which were initially issued with round-down protection mechanism were adjusted based upon
the share value as determined in the IPO.
Financial Operations Overview
Research and Development Expense
Research and development expense consists
of: (i) internal costs associated with our development activities; (ii) payments we make to third party contract research organizations,
contract manufacturers, clinical trial sites, and consultants; (iii) technology and intellectual property license costs; (iv) manufacturing
development costs; (v) personnel related expenses, including salaries, benefits, travel, and related costs for the personnel involved
in product development; (vi) activities related to regulatory filings and the advancement of our product candidates through preclinical
studies and clinical trials; and (vii) facilities and other allocated expenses, which include direct and allocated expenses for
rent, facility maintenance, as well as laboratory and other supplies. All research and development costs are expensed as incurred.
Conducting a significant amount of development
is central to our business model. Through September 30, 2012, we incurred approximately $35.57 million in gross research and development
expenses since our inception on January 27, 2000. Product candidates in later-stage clinical development generally have higher
development costs than those in earlier stages of development, primarily due to the significantly increased size and duration of
the clinical trials. We plan to increase our research and development expenses for the foreseeable future in order to complete
development of our two most advanced product candidates, the EPODURE Biopump and the INFRADURE Biopump, and our earlier-stage research
and development projects including our HEMODURE Biopump producing Factor VIII.
The process of conducting pre-clinical studies
and clinical trials necessary to obtain regulatory approval is costly and time consuming. The probability of success for each product
candidate and clinical trial may be affected by a variety of factors, including, among others, the quality of the product candidate’s
early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of
these uncertainties, together with the uncertainty associated with clinical trial enrollments and the risks inherent in the development
process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates
or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development
timelines, probability of success and development costs vary widely. We are currently focused on developing our two most advanced
product candidates, the EPODURE Biopump and the INFRADURE Biopump, as well as our HEMODURE Biopump producing Factor VIII and associated
devices for implementing the platform technology. We have also begun assessing a range of clinical applications to identify additional
potential targets for the Biopump technology.
Research and development expenses are shown
net of participation by third parties. The excess of the recognized amount received from the healthcare company over the amount
of research and development expenses incurred during the period for the collaboration agreement is recognized as other income within
operating income.
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 our executive,
finance and accounting functions. Other general and administrative expense includes facility-related costs not otherwise included
in research and development expense, costs associated with conferences and industry shows, and professional fees for legal services
and accounting services. We expect that our general and administrative expenses will increase as we add personnel and increase
our activities. Since our inception on January 27, 2000 through September 30, 2012, we have recorded approximately $32.00 million
in general and administrative expense.
Other Income
We have not generated any product revenue
since our inception, but, in connection with our first collaboration agreement, we received $3.97 million from Baxter Healthcare
during 2009 through 2011 of which $2.90 million was recognized as other income. To date, we have funded our operations primarily
through equity and debt financings and funding from the Israeli OCS. If our product development efforts result in clinical success,
regulatory approval and successful commercialization of any of our products, we would expect to generate revenue from sales or
licenses of any such products.
Financial Income and Expenses
Financial expenses consist primarily of
interest and amortization of beneficial conversion feature of convertible note, convertible debentures valuations and interest
incurred on debentures.
Interest income consists primarily of warrant
valuations and interest earned on our cash and cash equivalents and marketable securities.
Results of Operations for the Nine Months Ended September
30, 2012 and 2011
Research and Development Expenses
Gross research and development expenses
for the nine months ended September 30, 2012 were $5.13 million, increasing from $4.50 million for the same period in 2011 due
to an increase in the use of sub-contractors in connection with our ongoing phase II EPODURE clinical trial in Israel and preparations
for our planned EPODURE phase II trial in the United States, and preparations for the trials of INFRADURE in Israel, as well as
an increase in research and development personnel.
Research and development expenses, net for
the nine months ended September 30, 2012 were $3.36 million, decreasing from $3.57 million for the same period in 2011. The decrease
in the research and development expenses, net was due to the participation by the OCS of $1.77 million in the nine months ended
September 30, 2012 compared with $0.86 million for the same period in 2011, which was partially offset by the increase in the gross
research and development expenses as detailed above
.
General and Administrative Expenses
General and administrative expenses for
the nine months ended September 30, 2012 were $5.60 million, increasing from $3.71 million for the same period in 2011 primarily
due to increased legal fees and professional services, increased activities in the United States and stock-based compensation expenses
related to equity granted to consultants and to the newly appointed Chairman of the Board.
Financial Income and Expenses
Financial expenses for the nine months ended
September 30, 2012 were $3.72 million, increasing from $0.20 million for the same period in 2011. This increase of $3.52 million
was mainly due to the change in valuation of the warrant liability during the nine months ended September 30, 2012.
Financial income for the nine months ended
September 30, 2012 was de minimis, decreasing from $1.40 million for the same period in 2011. The financial income of approximately
$1.40 million for the nine months ended September 30, 2011 was primarily due to the change in valuation of the warrant liability
during that period.
Results of Operations for the Three Months Ended September
30, 2012 and 2011
Research and Development Expenses
Gross research and development expenses
for the three months ended September 30, 2012 were $1.89 million, increasing slightly from $1.79 million for the same period in
2011 due to an increase in research and development personnel.
Research and development expenses, net for
the three months ended September 30, 2012 were $1.61 million, increasing from $1.35 million for the same period in 2011. The increase
in the research and development expenses, net was due to the increase in the gross research and development expenses as detailed
above
as well as a decrease in participation by third parties.
General and Administrative Expenses
General and administrative expenses for
the three months ended September 30, 2012 were $1.47 million, decreasing from $1.88 million for the same period in 2011 primarily
due to a decrease in non-cash compensation for professional services.
Financial Income and Expenses
Financial expenses for the three months
ended September 30, 2012 were nil, decreasing from $0.27 million for the same period in 2011. This decrease was mainly due to the
change in valuation of the warrant liability.
Financial income for the three months ended
September 30, 2012 was $0.06 million, decreasing slightly from $0.07 million for the same period in 2011. Financial income is mainly
due to the change in foreign currency exchange rates.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily
through a combination of equity issues, debt issues and grants from the OCS and other third parties.
We recorded $7.06 million from inception
through September 30, 2012 in development grants from the OCS, of which $1.77 million was recorded during the nine months ended
September 30, 2012.
On April 13, 2011, we completed our IPO
in the United States of our common stock and redeemable common stock purchase warrants which are both listed on the NYSE MKT (formerly
the NYSE Amex). We issued 2,624,100 shares of common stock, including 164,100 shares pursuant to the exercise of the underwriters’
over-allotment option, at a price of $4.54 per share and redeemable common stock purchase warrants to purchase 2,829,000 shares,
including 369,000 warrants pursuant to the exercise of the underwriters’ over-allotment option, at a price of $0.46 per warrant
for total gross proceeds of $13.21 million or approximately $10.39 million in net proceeds after deducting underwriting discounts
and commissions of $1.45 million and other offering costs of approximately $1.37 million. To date, 58,400 redeemable common
stock purchase warrants were exercised at an exercise price of $6.00 per share. The cash consideration received was $350,400.
On the closing date of the IPO (April 13,
2011), $0.57 million of 2009 Debentures were automatically converted at a conversion price of $2.724 per share of common stock
into an aggregate amount of 209,656 shares and we issued 5-year warrants to purchase 84,693 shares at an initial exercise price
of $4.99 per share in connection with the conversion of the 2009 Debentures. On the same date, $4.00 million of 2010 Debentures
were automatically converted at a conversion price of $3.405 per share into an aggregate amount of 1,198,242 shares. An additional
2,534 shares of common stock were issued to holders of the 2010 Debentures in November 2011 to compensate the 2010 Debenture holders
for a minor portion of the interest which had been accrued but not paid at the time of conversion.
On June 18, 2012, we completed a private
placement transaction in which we issued an aggregate of 1,944,734 units with each unit consisting of one share of our common stock
and a warrant to purchase 0.75 shares of our common stock. The warrants to purchase an aggregate of 1,458,550 shares of common
stock were issued with an exercise price of $8.34 per share, will become exercisable on December 15, 2012 (which, if all were exercised
in full, would result in the issuance of 1,458,576 shares of common stock due to the rounding of fractional shares) and will expire
on June 18, 2017. In addition, warrants to purchase 194,473 shares of our common stock having an exercise price of $9.17 per share
were issued to the placement agent, will become exercisable on December 18, 2012 and will expire on June 18, 2017. Each unit was
sold for a purchase price of $4.90 for total gross proceeds of approximately $9.53 million, or approximately $8.41 million in net
proceeds after deducting private placement fees of $0.95 million and other offering costs of $0.17 million.
Cash Flows
We had cash and cash equivalents of $9.00
million at September 30, 2012 and $5.00 million at December 31, 2011. The increase in our cash balance during the nine months ended
September 30, 2012 was primarily the result of the private placement transaction completed in June 2012 and funding from the Israeli
OCS.
Net cash used in operating activities of
$5.87 million for the nine months ended September 30, 2012 and $5.46 million for the nine months ended September 30, 2011 primarily
reflected our cash expenses for our operations. The increase in the net cash used in operating activities is due to an increase
in operating activity.
Net cash used in investing activities of
$0.06 million for the nine months ended September 30, 2012 and $0.26 million for the nine months ended September 30, 2011 relates
mainly to our purchases of property and equipment.
Net cash provided by financing activities
was $9.93 million and $10.43 million for the nine months ended September 30, 2012 and September 30, 2011, respectively. Our cash
flows from financing activities during the nine months ended September 30, 2012 were primarily proceeds from the private placement
transaction in June 2012 while our cash flows from financing activities during the nine months ended September 30, 2011 were primarily
proceeds from the IPO.
Funding Requirements
We expect to raise additional funds through
the sale of our securities and through entering into licensing or other commercialization agreements for all or parts of applications
of our Biopump Platform Technology to fund our continuing operations. If we are unable to enter into such agreements on terms acceptable
to us, we will continue to incur losses from operations for the foreseeable future. We expect to incur increasing research and
development expenses, including expenses related to the hiring of personnel and additional clinical trials, as we further develop
the EPODURE Biopump, the INFRADURE Biopump and the HEMODURE Biopump. We expect that our general and administrative expenses will
also increase as we expand our finance and administrative staff and add infrastructure. Our future capital requirements will depend
on a number of factors, including 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 acquisition
of licenses to new products or compounds, the status of competitive products, the availability of financing, and our success in
developing markets for our product candidates.
Without taking into account any revenue
we may receive as a result of licensing or other commercialization agreements we are pursuing, we believe that the net proceeds
we received from our private placement transaction completed in June 2012, plus our existing cash and cash equivalents, will be
sufficient to enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2013. We
have based this estimate on assumptions that may prove to be wrong and we could use our available resources sooner than we currently
expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates,
we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated
clinical trials.
We do not anticipate that we will generate
revenue from the sale of products for at least five years; however, we do intend to seek licensing or other commercialization agreements
similar to our agreement relating to the development of our HEMODURE Biopump producing Factor VIII. We anticipate that the funds
received as a result of such agreements may be sufficient to fund our operations in the future. In the absence of additional equity
or debt funding or adequate funding from commercialization agreements, we expect our continuing operating losses to result in increases
in our cash used in operations over the next several quarters and years.
Absent significant corporate collaboration
and licensing arrangements, we will need to finance our future cash needs through public or private equity offerings, or debt financings
in the near term. We do not currently have any commitments for future external funding. If the trading price of our common stock
remains above $6.00 per share, we anticipate receiving cash exercise proceeds upon the exercise of our outstanding warrants, primarily
the warrants issued in the IPO which have a current exercise price of $6.00 per share (the “IPO Warrants”), over the
next three and a half years. To date, we have received gross proceeds of $350,400 upon the exercise of the IPO warrants. We may
also seek to sell additional equity or debt securities or obtain a bank credit facility. The sale of additional equity or debt
securities, if convertible, could result in dilution to our stockholders. The incurrence of indebtedness would result in increased
fixed obligations and could also result in covenants that would restrict our operations.
These conditions raise doubt about our ability
to continue as a going concern. Our plans include seeking additional investments and commercial agreements to continue our operations.
However, there is no assurance that we will be successful in our efforts to raise the necessary capital and/or reach such commercial
agreements to continue our planned research and development activities.
Critical Accounting Policies
Our management’s discussion and analysis
of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate
these estimates and judgments, including those described below. We base our estimates on our historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
and experiences may differ materially from these estimates.
While our significant accounting policies
are more fully described in Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe
that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial
results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.
Convertible Debentures
We irrevocably elected to initially and
subsequently measure the convertible debentures issued in 2009 and 2010 entirely at fair value, in accordance with Accounting Standards
Codification No. 825-10. As a result, we did not separate the embedded derivative instrument from the host contract and account
for it as a derivative instrument. The convertible debentures were subject to remeasurement at each balance sheet date, and any
change in fair value was recognized as a component of financial income (expense), net in the statements of operations. We estimated
the fair value of these convertible debentures at the respective balance sheet dates using the Binomial option pricing model. We
used a number of assumptions to estimate the fair value, including the remaining contractual terms of the convertible debentures,
risk-free interest rates, expected dividend yield and expected volatility of the price of the underlying common stock.
During the nine months ended September 30,
2011, we recorded financial income of $0.04 million to reflect the decrease in the fair value of the convertible debentures. We
did not record comparable income during the nine months ended September 30, 2012 because all of the convertible debentures were
converted to common stock on the closing date of the IPO (April 13, 2011).
Liability in Respect of Warrants
In 2010 we issued warrants with an exercise
price that is subject to downward adjustment. In addition, in 2006 and 2007, we issued warrants that included price protection
in the event of sales of securities below the then current exercise price. In accordance with Accounting Standards Codification
No. 815-40-15-7I, we classified these warrants as a liability at their fair value. The warrants liability will be remeasured at
each reporting period until exercised or expired. The increase in the fair value of the warrants during the nine months ended September
30, 2012 of $3.63 million and the decrease in the fair value of the warrants during the nine months ended September 30, 2011 of
$1.32 million are reported in the Statements of Operations as financial expense or income, respectively.
We estimate the fair value of these warrants
at the respective balance sheet dates using the Binomial option pricing model. We use a number of assumptions to estimate the fair
value, including the remaining contractual terms of the warrants, risk-free interest rates, expected dividend yield and expected
volatility of the price of the underlying common stock. These assumptions could differ significantly in the future, thus resulting
in variability of the fair value which would impact the results of operations in the future.
Stock-Based Compensation
We account for stock options according to
the Accounting Standards Codification No. 718 (ASC 718) “Compensation – Stock Compensation.” Under ASC 718, stock-based
compensation cost is measured at grant date, based on the estimated fair value of the award, and is recognized as an expense over
the employee’s requisite service period on a straight-line basis.
We account for stock options granted to
non-employees on a fair value basis using an option pricing method in accordance with ASC 718. The initial non-cash charge to operations
for non-employee options with vesting are revalued at the end of each reporting period based upon the change in the fair value
of the options and amortized to consulting expense over the related vesting period.
For the purpose of valuing options and warrants
during the nine months ended September 30, 2012 and 2011, we used the Binomial options pricing model. To determine the risk-free
interest rate, we utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected
term of our awards. We estimated the expected life of the options granted based on anticipated exercises in the future periods
assuming the success of our business model as currently forecast. The expected dividend yield reflects our current and expected
future policy for dividends on our common stock. The expected stock price volatility for our stock options was calculated by examining
historical volatilities for publicly traded industry peers as we do not have sufficient trading history for our common stock. We
will continue to analyze the expected stock price volatility and expected term assumptions as more historical data for our common
stock becomes available. Given the senior nature of the roles of our employees, directors and officers, we currently estimate that
we will experience no forfeitures for those options currently outstanding.
Off-Balance Sheet Arrangements
Pursuant to our license agreement with Yissum
Research Development Company of the Hebrew University (Yissum), Yissum
granted
us a license
of certain patents for commercial development, production, sublicense and marketing of products to be based on its know-how and
research results. In consideration, we agreed to pay Yissum the following amounts, provided, however, that the total aggregate
payment of royalties and sublicense fees by us to Yissum shall not exceed $10 million:
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non-refundable license fee of $0.4 million to be paid in three installments, as follows:
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$0.05 million when the accrued investments in us by any third party after May 23, 2005 equal at least $3 million (paid in 2007);
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$0.15 million when the accrued investments in us by any third party after May 23, 2005 equal at least $12 million (paid in
second quarter of 2010); and
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$0.2 million when the accrued investments in us by any third party after May 23, 2005 equal at least $18 million (paid
in April 2011);
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royalties at a rate of 5% of net sales of product incorporating the licensed technology; and
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sublicense fees at a rate of 9% of sublicense considerations received by us.
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The Yissum license will expire upon the
later of the twentieth anniversary of our first commercial sale of products utilizing the licensed technology and the expiration
of the last Yissum patent licensed to us, which is expected to be approximately July 2022.
In 2007, we signed an agreement with Baylor
College of Medicine (BCM) whereby BCM granted us a non-exclusive worldwide license to use, market, sell, lease and import certain
technology (BCM technology), by way of any product process or service that incorporates, utilizes or is made with the use of the
BCM technology. In consideration we agreed to pay BCM the following amounts:
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a one time, non-refundable license fee of $25,000 which was paid in 2007;
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an annual non-refundable maintenance fee of $20,000;
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a one-time milestone payment of $75,000 upon FDA clearance or equivalent of clearance for therapeutic use (as of September
30, 2012, we have not achieved FDA clearance); and
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an installment of $25,000 upon our executing any sublicenses in respect of the BCM technology.
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All payments to BCM are recorded as research and development
expenses. The license agreement will expire (unless terminated earlier for default or by us at our discretion) on the first day
following the tenth anniversary of our first commercial sale of licensed products. After termination, we will have a perpetual,
royalty free license to the BCM technology.
Under agreements with the OCS in Israel
regarding research and development projects, our Israeli subsidiary is committed to pay royalties to the OCS at rates between 3.5%
and 5% of the income resulting from this research and development, at an amount not to exceed the amount of the grants received
by our subsidiary as participation in the research and development program, plus interest at LIBOR. The obligation to pay these
royalties is contingent on actual income and in the absence of such income no payment is required. As of September 30, 2012, the
aggregate contingent liability amounted to approximately $7.1 million.
Pursuant to an agreement we entered into
on February 11, 2011 (effective as of January 31, 2011), the Regents of the University of Michigan (Michigan) have granted a worldwide
license for patent rights relating to certain uses of variants of clotting Factor VIII. The license agreement covers a portfolio
of two issued and three pending patents. In consideration we agreed to pay Michigan the following amounts:
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an initial license fee of $25,000 which was paid in 2011;
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an annual license fee in arrears of $10,000 rising to $50,000 following the grant by us of a sublicense or (if sooner) from
the sixth anniversary of the license agreement;
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staged milestone payments of $750,000 (in aggregate), of which $400,000 will be recoupable against royalties;
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royalties at an initial rate of 5% of net sales, reducing by a percentage point at predetermined thresholds to 2% upon cumulative
net sales exceeding $50 million;
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sublicense fees at an initial rate of 6% of sublicensing revenues, reducing by a percentage point at predetermined thresholds
to 4% upon cumulative sublicensing revenues exceeding $50 million; and
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patent maintenance costs.
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The exclusive worldwide license from Michigan
is expected to expire in 2026 upon the expiration of the last to expire of the patent rights licensed. As of September 30, 2012,
we have paid the initial license fee and patent maintenance costs and an annual license fee. No royalties or sublicense fees have
yet accrued. Additionally, we cannot estimate when we will begin selling any products that would require us to make any such royalty
payments. Whether we will be obligated to make royalty payments in the future is subject to the success of our product development
efforts and, accordingly, is inherently uncertain.
Subsequent Events
Subsequent to the balance sheet date, in
October 2012, we filed a registration statement on Form S-3 with the SEC. Under this registration statement, which was declared
effective on October 26, 2012, we may offer and sell from time to time in the future, in one or more offerings, Common stock, warrants,
rights or units consisting of any combination of the foregoing. The aggregate offering price of all securities that may be sold
under this registration statement will not exceed $150 million.