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, 2012, 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 a medical technology and therapeutics
company, developing an innovative and proprietary platform technology offering what we believe to be a novel approach for the $100+
billion protein therapeutics market. Our Biopump Platform Technology is designed to provide sustained protein therapy to 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 $5.78 million and $70.78 million for six month period ended June 30, 2013 and for the
period from inception through June 30, 2013, respectively. As of June 30, 2013, we had stockholders’ equity of approximately
$27.07 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 continue to pursue partnering
activity.
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 June 30, 2013, we incurred approximately $41.73 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.
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 focusing on the development of EPODURE and
INFRADURE, as well as the optimization of Biopump performance and, as a result, have scaled back our efforts in some areas including
HEMODURE at this time.
Research and development expenses are shown
net of participation by third parties.
General and Administrative Expense
General and administrative expense consists
primarily of salaries and other related costs, including stock-based compensation expense, for persons serving as our directors
and 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 industry and trade shows, and professional fees
for legal services and accounting services. We expect that our general and administrative expenses will increase as we add personnel.
Since our inception on January 27, 2000 through June 30, 2013, we spent approximately $37.73 million on 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
through December 31, 2011 of which $2.9 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 Expense
Financial expense consists primarily of
interest and amortization of beneficial conversion feature of convertible note, convertible debentures valuations, warrant valuations
and interest incurred on debentures.
Financial income consists primarily of interest
earned on our cash and cash equivalents and marketable securities.
Results of Operations for the Six Months Ended June 30, 2013
and 2012
Research and Development Expenses
Gross research and development expenses
for the six months ended June 30, 2013 were $4.10 million, increasing from $3.23 million for the same period in 2012 due mainly
to an increase in research and development personnel.
Research and development expenses, net for
the six months ended June 30, 2013 were $2.89 million, increasing from $1.75 million for the same period in 2012. The increase
in the research and development expenses, net was due to the participation by the OCS of $1.22 million in the six months ended
June 30, 2013 as opposed to $1.49 million in the same period in 2012 and by the increase in the gross research and development
expenses as explained above.
General and Administrative Expenses
General and administrative expenses for
the six months ended June 30, 2013 were $4.13 million remaining constant as compared to the same period in 2012.
Financial Income and Expenses
Financial expenses for the six months ended
June 30, 2013 were $0.04 million, decreasing from $3.77 million for the same period in 2012. This decrease of $3.73 million was
mainly due to the change in valuation of the warrant liability.
Financial income for the six months ended
June 30, 2013 was $1.29 million, increasing from a de minimis amount for the same period in 2012. The increase was primarily due
to the change in valuation of the warrant liability.
Results of Operations for the Three Months Ended June 30,
2013 and 2012
Research and Development Expenses
Gross research and development expenses
for the three months ended June 30, 2013 were $2.07 million, increasing from $1.64 million for the same period in 2012 due mainly
to an increase in research and development personnel.
Research and development expenses, net for
the three months ended June 30, 2013 were $0.86 million, decreasing from $1.18 million for the same period in 2012. The decrease
in the research and development expenses, net was due to the participation by the OCS of $1.22 million in the three months ended
June 30, 2012 as compare to $0.46 million in the same period in 2012 and by the increase in the gross research and development
expenses as explained above.
General and Administrative Expenses
General and administrative expenses for
the three months ended June 30, 2013 were $1.59 million, decreasing from $2.77 million for the same period in 2012 primarily due
to decreased stock-based compensation expenses related to options and restricted shares granted to directors and consultants.
Financial Income and Expenses
Financial expenses for the three months
ended June 30, 2013 were $0.03 million, decreasing from $2.97 million for the same period in 2012. This decrease was mainly due
to the change in valuation of the warrant liability.
Financial income for the three months ended
June 30, 2013 was $0.37 million, increasing from $0.02 million for the same period in 2012. This increase was primarily due to
the change in valuation of the warrant liability.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily
through a combination of equity, debt issues and grants from the OCS and other third parties.
We recorded $8.27 million from inception
through June 30, 2013 from the OCS in development grants of which nil was received during the six months ended June 30, 2013, and
$0.07 million was received in July 2013, subsequent to the balance sheet date.
On February 13, 2013, we completed a registered public
offering of 5,600,000 shares of common stock and 5,600,000 Series 2013-A warrants to purchase up to an aggregate of 2,800,000 shares
of common stock. The shares of common stock and Series 2013-A warrants were sold together as a fixed combination, each consisting
of one share of common stock and one Series 2013-A warrant to purchase 0.50 of a share of common stock, at a public offering price
of $5.25 per combination, less the underwriting discounts and commissions payable by us, for net proceeds of approximately $26.55
million. We granted the underwriters the option to purchase, at the same price, an aggregate of up to an additional 840,000 shares
of common stock and/or an additional 840,000 Series 2013-A warrants to purchase up to 420,000 shares of common stock as may be
necessary to cover over-allotments made in connection with the offering. The underwriters exercised this option in March 2013 with
respect to an additional 470,000 shares of common stock and an additional 840,000 Series 2013-A warrants to purchase up to 420,000
shares of common stock, for additional net proceeds of approximately $2.27 million.
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 and became 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, became 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 $28.98
million at June 30, 2013 and $6.43 million at December 31, 2012. The increase in our cash balance during the six months ended June
30, 2013 was primarily the result of our registered public offering of common stock and Series 2013-A warrants during the period.
Net cash used in operating activities of
$6.18 million for the six months ended June 30, 2013 and $4.34 million for the six months ended June 30, 2012 primarily reflected
our cash expenses for our operations.
Net cash used in investing activities of
$0.15 million for the six months ended June 30, 2013 and $0.05 million for the six months ended June 30, 2012 relates mainly to
our purchases of property and equipment.
Net cash provided by financing activities
was $28.87 million and $8.44 million for the six months ended June 30, 2013 and 2012, respectively. Our cash flows from financing
activities during the six months ended June 30, 2013 were primarily the result of our registered public offering of common stock
and Series 2013-A warrants during the period. Our cash flows from financing activities during the six months ended June 30, 2012
were primarily proceeds from the private placement transaction in June 2012.
Funding Requirements
We expect to enter 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 investigate additional
applications of the 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 cash on hand, including
the net proceeds we received from our public offering of common stock and Series 2013-A warrants during the three months ended
March 31, 2013, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through 2014.
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 several years; however, we do intend to seek licensing or other commercialization agreements
for existing and new Biopump applications. In the absence of additional funding or adequate funding from commercialization agreements,
we expect our continuing operating losses to result in decreases in our cash balances 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 future. We do not currently have any commitments for future external funding. We may need to raise additional funds more
quickly if one or more of our assumptions prove 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, 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.
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.
Liability in Respect of Warrants
In the past, we issued warrants whose exercise
price is subject to downward adjustment. 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 decrease in the fair value of the warrants during the six months ended June 30, 2013 of $1.28 million and the increase
in the fair value of the warrants during the six months ended June 30, 2012 of $3.72 million are reported in the Statements of
Operations as financial income and expenses, 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
granted to our employees, non-employees and directors and officers during the six months ended June 30, 2013 and 2012, 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 5% annual forfeiture for those options
currently outstanding.
Off-Balance Sheet Arrangements
There have been no material changes to the
discussion of off-balance sheet arrangements included in our Annual Report on Form 10-K for the year ended December 31, 2012.