XASE:PBTH Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                  

 

Commission file number:    000-52691

 

PROLOR BIOTECH, INC.
(Exact name of registrant as specified in its charter)

 

Nevada   20-0854033
(State or other jurisdiction   (I.R.S. Employer Identification
of incorporation or organization)   No.)
     
7 Golda Meir Street    
Weizmann Science Park    
Nes-Ziona, Israel   74140
(Address of principal executive   (Zip Code)
offices)    

 

(866) 644-7811

 (Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

  Large accelerated filer ¨ Accelerated Filer x
  Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 31, 2012, there were 63,408,035 shares of common stock, par value $0.00001 per share (“Common Stock”), outstanding.

 

 
 

 

PROLOR BIOTECH, INC.
INDEX TO FORM 10-Q FILING
FOR THE PERIOD ENDED JUNE 30, 2012

 

Table of Contents

 

    Page
     
PART I    
     
ITEM 1. Financial Statements. 3
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 16
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 24
     
ITEM 4. Controls and Procedures 24
     
PART II    
     
ITEM 1A Risk Factors 25
     
ITEM 6. Exhibits. 25
     
SIGNATURES 26

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. Financial Statements.

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

CONSOLIDATED BALANCE SHEETS

  

   June 30, 2012   December 31, 2011 
   (Unaudited)     
ASSETS          
Current Assets:          
Cash and cash equivalents  $26,617,071   $13,261,687 
Short term deposits   15,836,336    139,000 
Accounts receivable and prepaid expenses   490,860    329,244 
Restricted cash   57,328    98,685 
Total Current Assets   43,001,595    13,828,616 
           
Long-term Assets:          
Property and equipment, net   940,440    898,254 
Assets held for employees’ severance payments   259,280    234,385 
Restricted cash   -    58,858 
Long term deposit   2,239    4,458 
Total Long Term Assets   1,201,959    1,195,955 
           
Total Assets  $44,203,554   $15,024,571 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Current Liabilities:          
Trade payables  $156,722   $358,803 
Related parties payable   58,914    221,339 
Accrued expenses and other liabilities   1,033,127    1,638,470 
Total Current Liabilities   1,248,763    2,218,612 
           
Liability in Respect of Employees Severance Payments   331,844    284,677 
           
Commitments and Contingent Liabilities          
           
Shareholders' Equity:          
Stock capital - Preferred stock of $ 0.00001 par value per share 10,000,000 shares of preferred stock authorized; none issued and outstanding as of June 30, 2012 or December 31, 2011   -    - 
Common shares of $ 0.00001 par value per share  300,000,000 shares of common stock authorized; 63,403,451 and 54,565,358 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively.   634    545 
Additional paid-in capital   100,338,188    62,167,748 
(Deficit) accumulated during the development stage   (57,715,875)   (49,647,011)
Total Shareholders' Equity   42,622,947    12,521,282 
           
Total Liabilities and Shareholders' Equity  $44,203,554   $15,024,571 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

3
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

           Period from
May 31, 2005
 
   For the three months ended   For the six months ended   (date of
inception)
 
   June 30,   June 30,   to June 30, 
   2012   2011   2012   2011   2012 
Revenues  $-   $-   $-   $-   $- 
                          
Operating expenses:                         
                          
In-process research and development write-off   -    -    -    -    3,222,831 
Research and development, net   2,126,339    2,377,205    6,430,409    5,412,466    36,172,877 
General and administrative   858,716    877,956    1,648,496    1,586,852    18,750,465 
Total operating expenses   2,985,055    3,255,161    8,078,905    6,999,318    58,146,173 
                          
Operating (loss)   (2,985,055)   (3,255,161)   (8,078,905)   (6,999,318)   (58,146,173)
                          
Financial income (expense), net   (84,438)   165,230    10,041    442,410    430,298 
                          
Net (loss)  $(3,069,493)  $(3,089,931)  $(8,068,864)  $(6,556,908)  $(57,715,875)
                          
(Loss) per share (basic & diluted)  $(0.05)  $(0.07)  $(0.14)  $(0.15)     
                          
Weighted average number of shares outstanding   59,311,044    43,408,866    57,019,261    43,384,454      

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

4
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  

   For the six months ended
June 30,
   Period from May
31, 2005 (date of
inception)
to June 30,
 
   2012   2011   2012 
Cash flows from operating activities               
Net (loss)  $(8,068,864)  $(6,556,908)  $(57,715,875)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:               
Depreciation   104,045    85,181    563,974 
In-process research and development write-off   -    -    3,222,831 
Stock based compensation   740,401    900,425    10,740,537 
Long term deposit exchange rate differences   2,219    (94)   2,404 
(Increase) decrease in accounts receivable and prepaid expenses   (161,616)   (770,390)   (490,583)
Increase in accrued severance pay, net   47,167    64,597    331,844 
Increase (decrease) in trade payables   (202,081)   5,675    146,618 
Increase (decrease) in related parties   (162,425)   (140,989)   58,914 
Increase (decrease) in accrued expenses and other liabilities   (605,343)   224,358    912,111 
Net cash (used in) operating activities   (8,306,497)   (6,188,145)   (42,227,225)
                
Cash flows from investing activities               
Purchase of property and equipment   (146,231)   (527,516)   (1,490,058)
Payment for the acquisition of Prolor Biotech Ltd.   -    -    (474,837)
Assets held for employees’ severance payments   (24,895)   (38,444)   (259,280)
Long term (deposit)   -    -    (4,643)
Short term (deposit)   (15,697,336)   (1,819,164)   (15,836,336)
Restricted cash   100,215    (71,536)   (57,328)
Net cash (used in) investing activities   (15,768,247)   (2,456,660)   (18,122,482)
                
Cash flows from financing activities               
Short term bank credit   -    -    (2,841)
Proceeds from loans   -    -    (173,000)
Principal payment of loans   -    -    173,000 
Contributed profit from shareholder's transactions   -    17,012    17,012 
Proceeds from issuance of shares   34,855,569    -    82,043,987 
Proceeds from exercise of options   48,879    125,000    1,279,572 
Proceeds from exercise of warrants   2,525,680    39,292    3,629,048 
Net cash provided by financing activities   37,430,128    181,304    86,966,778 
                
Increase (decrease) in cash and cash equivalents   13,355,384    (8,463,501)   26,617,071 
Cash and cash equivalents at the beginning of the period   13,261,687    24,474,458    - 
                
Cash and cash equivalents at the end of the period  $26,617,071   $16,010,957   $26,617,071 

  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

5
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  

   For the six months ended
June 30,
   Period
from May
31, 2005
(date of
inception)
to June 30,
 
   2012   2011   2012 
Non cash transactions:               
                
Employee options exercised into shares  $-      $140 
Issuance of common stock in reverse acquisition  $-   $-   $73 
Conversion of preferred to common stock  $-   $-   $18 
Cashless exercise of  570,702, 90,280 and 1,488,123 outstanding stock warrants to purchase 331,905, 61,632 and 957,702 shares of common stock, respectively  $3   $1   $10 
                
Additional information:               
Cash paid for income taxes  $-   $-   $- 
Cash paid for interest expense  $-   $18   $- 

  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

6
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

 

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 a development stage biopharmaceutical company, utilizing an exclusive license from Washington University to patented technology in the development of longer-acting versions of already-approved therapeutic proteins, through its Israeli subsidiary, Prolor Biotech Ltd.

 

b.The Company currently devotes substantially all of its efforts toward research and development activities. The Company’s activities also include raising capital, recruiting personnel and building infrastructure. In the course of such activities, the Company has sustained operating losses and expects such losses to continue for the foreseeable future. The Company has not generated any revenues or product sales and has not achieved profitable operations or positive cash flow from operations. The Company’s deficit accumulated during the development stage aggregated $57,715,875 as of June 30, 2012. There is no assurance that profitable operations, if ever achieved, could be sustained on a continuing basis. The Company believes that its current cash sources will enable the continuance of the Company’s activities for at least a year with no need for additional funding.

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

a.Basis of presentation:
The accompanying unaudited financial statements of the Company are presented in accordance with the requirements of Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such U.S. Securities and Exchange Commission (“SEC”) rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been made. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2011 and the notes thereto included in the Company’s Report on Form 10-K/A filed with the SEC on March 23, 2012.

 

b.Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Modigene Inc. and Prolor Biotech Ltd.  Intercompany transactions and balances have been eliminated upon consolidation.

 

c.Loss per share:
Basic and diluted losses per share are presented in accordance with ASC No. 260 “Earnings per share”. Outstanding share options and warrants, convertible preferred stock and restricted stock have been excluded from the calculation of the diluted loss per share because all such securities are antidilutive. The number of shares of the Company’s common stock, par value $0.00001 per share (“Common Stock”), issuable upon exercise or conversion of the foregoing securities that have been excluded from calculations for the three months ended June 30, 2012 and 2011, the six months ended June 30, 2012 and 2011 and the period from May 31, 2005 (date of inception) to June 30, 2012 were 6,231,670, 18,414,114, 6,754,504, 18,417,533 and 7,816,341, respectively.

7
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

d.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. 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 June 30, 2012 
       Quoted Prices
in Active
   Significant     
       Markets for
Identical
Assets
   Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Total   (Level 1)   (Level 2)   (Level 3) 
Cash and cash equivalents  $26,617,071   $26,617,071   $-   $- 
Short term deposits   15,836,336    15,836,336    -    - 
Restricted cash   57,328    57,328    -    - 
Total assets at fair value  $42,510,735   $42,510,735   $-   $- 

 

   Fair Value Measurements at December 31, 2011 
       Quoted Prices
in Active
   Significant     
       Markets for
Identical
Assets
   Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Total   (Level 1)   (Level 2)   (Level 3) 
Cash and cash equivalents  $13,261,687   $13,261,687   $-   $- 
Short term deposits   139,000    139,000    -    - 
Restricted cash   157,543    157,543    -    - 
Total assets at fair value  $13,558,230   $13,558,230   $-   $- 

 

8
 

  

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 

e. Recent accounting pronouncements:
In December 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  The ASU requires disclosure of both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.  The ASU will be applied retrospectively and is effective for periods beginning on or after January 1, 2013.  The Company is currently evaluating the impact, if any, of the adoption of this ASU on its consolidated financial statements and related disclosures.
 

In May 2011, the FASB issued an ASU that further addresses fair value measurement accounting and related disclosure requirements.  The ASU clarifies the FASB’s intent regarding the application of existing fair value measurement and disclosure requirements, changes the fair value measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair value measurements.  The ASU is to be applied prospectively and is effective for periods beginning after December 15, 2011.  The Company adopted the ASU effective January 1, 2012.  The adoption of the requirements of the ASU, which expanded disclosures, had no effect on the Company’s results of operations or financial position.

 

There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on the Company's financial position, results of operations or cash flows.

 

NOTE 3 - ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

 

   June 30,   December 31 
   2012   2011 
           
Israeli government authorities  $477,814   $271,219 
           
Prepaid expenses   5,976    58,025 
           
Other   7,070    - 
           
   $490,860   $329,244 

 

9
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

 NOTE 4 - PROPERTY AND EQUIPMENT, NET

 

   June 30,   December 31 
   2012   2011 
           
Cost:          
           
Office furniture and equipment  $44,647   $39,570 
           
Computers and electronic equipment   134,792    131,723 
           
Laboratory equipment   907,857    773,174 
           
Leasehold improvements   355,125    351,723 
           
    1,442,421    1,296,190 
           
Accumulated depreciation:          
           
Office furniture and equipment   7,265    6,170 
           
Computers and electronic equipment   94,886    83,236 
           
Laboratory equipment   345,013    280,347 
           
Leasehold improvements   54,817    28,183 
    501,981    397,936 
           
Depreciated cost  $940,440   $898,254 

 

Depreciation expenses for the three and six months ended June 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through June 30, 2012 were $52,703, $58,257, $104,045, $85,181 and $563,974 respectively.

 

NOTE 5 - ACCRUED EXPENSES AND OTHER LIABILITIES

 

   June 30,   December 31, 
   2012   2011 
           
Employees and payroll accruals  $212,582   $183,761 
           
Accrued expenses   820,545    1,454,709 
           
   $1,033,127   $1,638,470 

 

10
 

 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

NOTE 6 - STOCK OPTION PLANS

 

As of June 30, 2012, the Company had two stock option plans, under which outstanding stock options to purchase 1,155,797 shares of Common Stock had been granted under the Company’s 2005 Stock Incentive Plan (the “2005 Plan”), and outstanding options to purchase 4,354,908 shares had been granted under the Company’s 2007 Equity Incentive Plan (the “2007 Plan” and, together with the 2005 Plan, the “Equity Incentive Plans”). The Company has issued the maximum number of shares authorized under the 2005 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.

 

Options granted under the Equity Incentive Plans and the related award agreements expire ten years from the date of grant, unless earlier terminated in accordance with the terms of such grants. Options no longer vest following the termination of the grant recipient’s employment or other relationship with the Company.

 

The Company accounts for employees’ and directors’ stock-based compensation in accordance with ASC 718-10, "Share-Based Payment". ASC 718-10 requires companies to estimate the fair value of equity-based payment awards at the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements.

The Company recognizes compensation expenses for the value of awards granted based on the straight line method over the requisite service period, net of estimated forfeitures.

 

The Company applies ASC 505-50, “Equity Based Payments to Non Employees” (“ASC 505-50”), with respect to options issued to non-employees. The Company has accounted for these grants under the fair value method of ASC 505-50, and fair value was estimated using a Black-Scholes option-pricing model.

 

The following table summarizes all share-based compensation expenses related to grants under the Equity Incentive Plans to employees, directors and consultants included in the consolidated statements of operations: 

 

                   Period from
May 31, 2005
 
   For the three months ended   For the six months ended   (date of inception) 
   June 30,   June 30,   to June 30, 
   2012   2011   2012       2011 2012 (1) 
Research and development  $115,922   $163,481   $265,014   $313,687   $1,895,612 
General and administrative   232,804    276,543    475,387    586,738    8,844,925 
Total  $348,726   $440,024   $740,401   $900,425   $10,740,537 

 

(1)Stock-based compensation expenses for the period from May 31, 2005 (date of inception) through June 30, 2012 included $3,876,960 expensed in the acquisition of Prolor Biotech Ltd. and on behalf of deferred compensation on restricted shares.


The Company selected the Black-Scholes Merton option pricing model as the most appropriate fair value method for its stock-options awards. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements. The expected term of options granted is based upon historical experience and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has not paid dividends and is not expected to pay dividends in the foreseeable future.

 

11
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

 NOTE 6 - STOCK OPTION PLANS (CONTINUED)

 

On January 24, 2012, the Company’s Board of Directors approved grants to non-management employees under the 2007, which grants have four-year vesting and an exercise price equal to the closing price of the Common Stock on the date of grant.

 

The fair value for options granted January 24, 2012 to employees was estimated at the date of grant using the Black-Scholes Merton options pricing model with the following assumptions:

 

Risk-free interest rate   2.08%
Expected life of options (in years)   9.54 
Expected volatility   55.23%
Expected dividend yield   None 

 

The fair value for options granted April 24, 2012 to a consultant was estimated using the Black-Scholes Merton options pricing model with the following assumptions:

 

Risk-free interest rate   1.64%
Expected life of options (in years)   9.33 
Expected volatility   55.12%
Expected dividend yield   None 

 

The following is a summary of the stock options granted under the 2005 Plan and the 2007 Plan:

 

   For the six months ended
June 30, 2012
 
   Number
of Options
   Weighted Average
Exercise Price
 
Outstanding at the beginning of the period   5,302,905   $2.07 
Exercised   (20,200)  $2.42 
Issued under the 2007 plan   203,000   $6.27 
Issued under the 2007 plan   25,000   $5.71 
Outstanding at the end of the period   5,510,705   $2.24 
           
Options exercisable   4,294,705   $1.32 

 

   For the six months ended
June 30, 2011
 
   Number
of Options
   Weighted Average
Exercise Price
 
Outstanding at the beginning of the period   5,134,346   $1.80 
Exercised   (50,000)  $2.50 
Forfeited   (5,000)  $6.23 
Issued under the 2007 plan   189,000   $6.23 
Outstanding at the end of the period   5,268,346   $1.96 
           
Options exercisable   3,581,411   $1.12 

 

The total unrecognized estimated compensation cost related to non-vested stock options granted through June 30, 2012 was $1,686,723, which is expected to be recognized over a period of four years.

 

12
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

 NOTE 6 - STOCK OPTION PLANS (CONTINUED)

 

The options outstanding as of June 30, 2012 have been separated by exercise prices, as follows:

 

Exercise
Price
   # of Options
Outstanding
   Average
Remaining
Contractual
Life (years)
   # of Options
Exercisable
   Intrinsic
Value of
Options
Outstanding
   Fair value
estimated at
grant day
using Black-
Scholes
option-
pricing
model
 
$0.65    365,000    6.60    356,250   $4.36   $0.53 
$0.88    896,942    3.80    896,942   $4.13   $0.59 
$0.90    1,937,239    5.67    1,937,239   $4.11   $0.74 
$0.93    25,000    5.68    25,000   $4.08   $0.74 
$1.32    93,855    4.01    93,855   $3.69   $0.64 
$1.50    121,169    5.82    121,169   $3.51   $0.58 
$2.00    400,000    4.86    400,000   $3.01   $1.52 
$2.50    19,500    4.87    19,500   $2.51   $1.20 
$2.35    50,000    7.52    25,000   $2.66   $1.98 
$2.40    500,000    7.54    250,000   $2.61   $2.00 
$6.47    500,000    8.51    125,000   $0.00   $3.84 
$5.47    195,000    9.10    -   $0.00   $2.16 
$6.23    179,000    8.55    44,750   $0.00   $3.34 
$6.27    203,000    9.58    -   $0.00   $4.04 
$5.71    25,000    9.82    -   $0.00   $3.03 
      5,510,705         4,294,705           

 

The intrinsic value of the Company’s options is the difference between the Company’s closing share price on the last trading day of the second quarter of 2012 and the respective exercise price.

 

NOTE 7 - STOCK WARRANTS

 

   For the six months ended
June 30, 2012
 
   Number
of warrants
   Weighted Average
Exercise Price
 
Outstanding and exercisable at the beginning of the period   2,007,856   $2.22 
Exercised   (28,502)  $0.88 
Exercised   (1,553,252)  $2.50 
Forfeited   (104,767)  $2.50 
Outstanding and exercisable at the end of the period   321,335   $0.88 

 

   For the six months ended 
June 30, 2011
 
   Number 
of warrants
   Weighted Average
Exercise Price
 
Outstanding and exercisable at the beginning of the period   2,300,231   $2.20 
Exercised   (82,398)  $2.50 
Exercised   (23,299)  $0.88 
Outstanding and exercisable at the end of the period   2,194,534   $2.14 

 

13
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

 NOTE 7 - STOCK WARRANTS (CONTINUED)

 

Proceeds from the exercise of 1,581,754 and 105,697 warrants into 1,342,903 and 77,440 shares of Common Stock for the six months ended June 30, 2012 and 2011 were $2,525,680 and $39,293 respectively.

Proceeds from the exercise of 3,133,336 warrants into 2,543,968 shares of Common Stock for the period from May 31, 2005 (date of inception) to June 30, 2012 were $3,629,048.

Total aggregate intrinsic value of warrants outstanding as of June 30, 2012 and 2011 was $1,327,114 and $ 6,004,781 respectively.

 

NOTE 8 - RELATED PARTY TRANSACTIONS

On May 16, 2012, the Company issued 7,475,000 shares of Common Stock in an underwritten public offering. Refer to Note 10. Of these shares, an aggregate of 1,000,000 shares of Common Stock were purchased by the Frost Gamma Investments Trust, an entity affiliated with Dr. Frost at a price of $5 per share, which was the same price at which the shares were offered and sold to the public. Dr. Frost is the Company’s Chairman of the Board of Directors and principal stockholder.

 

NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES

On March 13, 2011 Prolor Biotech Ltd. entered into a rent agreement for the lease of new office premises. Aggregate minimum rental commitments under the non-cancelable lease as of June 30, 2012 were as follows:

 

Year ended June 30  
     
2013  $49,420 
   $49,420 

 

NOTE 10 - COMMON STOCK

 

On May 16, 2012, the Company issued 7,475,000 shares of Common Stock in an underwritten public offering at a price of $5 per share (before underwriting discounts and commissions). The 7,475,000 shares issued included 975,000 shares issued pursuant to the underwriters’ overallotment option, which was exercised in full.

 

The following table reflects the proceeds received from the issuance of shares:

 

   Number of
shares
   Amount 
         
Original issuance   6,500,000   $32,500,000 
Over allotment   975,000    4,875,000 
Total   7,475,000    37,375,000 
Underwriters discount and commissions (1)   -    (2,104,375)
Offering expenses   -    (415,056)
Net proceeds   7,475,000   $34,855,569 

 

(1)The underwriters did not receive an underwriting discount or commission on the sale of 1,000,000 shares of Common Stock to Frost Gamma Investments Trust, an entity affiliated with Dr. Frost, the Company's Chairman of Board of Directors. Refer to Note 8.

 

14
 

 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

NOTE 10 -COMMON STOCK (CONTINUED)

 

During the six months ended June 30, 2012, the Company issued additional shares of Common Stock as follows:

 

First quarter 2012:
-4,533 shares upon the exercise of 4,533 options at an exercise price of $2.50 per share.
-1,000 shares upon the exercise of 1,000 options at an exercise price of $0.88 per share.
-178,834 shares upon the cash exercise of 178,834 outstanding stock warrants at a price of $2.50 per share.
-1,072 shares upon the cash exercise of 1,072 outstanding stock warrants at a price of $0.88 per share.
-55,004 shares upon the cashless exercise of 92,479 outstanding stock warrants at a price of $2.50 per share.
-4,159 shares upon the cashless exercise of 4,914 outstanding stock warrants at a price of $0.88 per share.

 

Second quarter 2012:

-14,667 shares of upon the exercise of 14,667 options at an exercise price of $2.50 per share.
-831,089 shares upon the cash exercise of 831,089 outstanding stock warrants at a price of $2.50 per share.
-57 shares upon the cash exercise of 57 outstanding stock warrants at a price of $0.88 per share.
-17,266 shares upon the cashless exercise of 22,459 outstanding stock warrants at a price of $0.88 per share.
-255,476 shares upon the cashless exercise of 450,850 outstanding stock warrants at a price of $2.50 per share.

 

NOTE 11 - FINANCIAL (EXPENSES) INCOME, NET

 

                   Period from
May 31, 2005
 
   For the three months ended   For the six months ended   (date of
inception)
 
   June 30,   June 30,   to June 30, 
   2012   2011   2012   2011   2012 
Financial income  $9,301   $32,500   $25,019   $58,595   $1,070,771 
Financial (expenses) and bank fees   (5,195)   (8,560)   (14,857)   (17,934)   (184,427)
Exchange rate differences gain (loss)   (88,544)   141,290    (121)   401,749    (456,046)
   $(84,438)  $165,230   $10,041   $442,410   $430,298 

 

NOTE 12 -SUBSEQUENT EVENTS

 

As defined in FASB ASC 855-10, “Subsequent Events”, subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued.

 

The Company evaluated all events and transactions that occurred subsequent to the balance sheet date and prior to the date on which the financial statements contained in this report were issued, and the Company determined that no such events or transactions necessitated disclosure.

 

15
 

 

ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “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 our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “goal,” “assumes,” “targets” and similar expressions and/or the use of future tense or conditional constructions (such as “will,” “may,” “could,” “should” and the like) and 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 operations or results to differ materially from the operations and results anticipated in forward-looking statements. These factors include, but are not limited to, the factors contained in “Item 1A — Risk Factors” of our most recently filed Annual Report on Form 10-K, as amended, as updated by our subsequently filed Forms 10-Q or other documents we file with the SEC. We do not undertake any obligation to update forward-looking statements, except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto that appear in Item 1 of this Quarterly Report on Form 10-Q.

 

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 (“GAAP”). 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.

 

16
 

 

 

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 also obtained certain exclusive worldwide rights from Yeda Research and Development Company Ltd. (“Yeda”) for a technology that allows elongation of circulation time in the body of therapeutic drugs. This technology is named “Reversible PEGylation”. We plan on using the Reversible PEGylation technology to develop new, proprietary versions of certain existing therapeutic drugs that have longer life spans than therapeutic proteins without Reversible PEGylation. The license to the Reversible PEGylation technology is exclusive, worldwide, and excludes development or commercialization of drug compounds in the following fields: (a) haemophilia A or B; (b) inhibitor haemophilia; (c) haemorrhage; and/or (d) von Willebrand Disease. The license also excludes drugs containing any of the coagulation proteins known as Factors V, VII, VIIa, VIII or IX, including, in each case, any respective functional human protein molecule of any of the foregoing, including any fragment, subunit, derivative or modified form of any of the foregoing (whether recombinant or human plasma derived). Under the Reversible PEGylation license agreement, we are subject to development and commercialization milestones and timelines, and we are obligated to pay Yeda certain annual fees, as well as up to 3.5% on net sales of products developed using the Reversible PEGylation technology.

 

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;

 

·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. Our license for CTP technology extends to all human therapeutic applications other than Follicle Stimulating Hormone (FSH), 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, in an effort to provide patients with improved therapies that may enhance their quality of life:

 

·Human Growth Hormone (hGH)

 

·Factor IX

 

·Diabetes Type II & Obesity Peptide Oxyntomodulin

 

·Factor VIIa

 

·Interferon β and Erythropoietin (EPO)

 

17
 

 

·Atherosclerosis and rheumatoid arthritis long-acting therapies

 

We believe that the CTP technology will be broadly applicable to these, as well as other, best-selling therapeutic proteins in the market.

 

Critical Accounting Policies

 

The historical financial statements of the Company included with this Quarterly Report have been prepared in accordance with GAAP. 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 GAAP 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 U.S. Dollars:  The functional and reporting 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 operate in the foreseeable future. The Company’s R&D subsidiary, PROLOR Biotech Ltd., which we refer to as PROLOR LTD (formerly known as ModigeneTech Ltd.), conducts the majority of its operations 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.

 

Monetary accounts maintained in currencies other than the U.S. 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 the Company’s wholly owned subsidiary, Modigene Delaware, and its wholly owned subsidiary, PROLOR LTD. Intercompany transactions and balances have been eliminated upon consolidation.

 

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.

 

Concentrations of Credit Risk: Financial instruments that potentially subject the Company 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 fully 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.

 

Royalty-bearing Grants: Royalty-bearing grants from the Government of Israel for participation in the development of approved projects are recognized as a reduction of expenses as the related costs are incurred. Funding is recognized at the time PROLOR LTD is entitled to such grants, on the basis of the costs incurred.

 

18
 

 

Research and development grants received by PROLOR LTD for the three and six month periods ended June 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through June 30, 2012 were $622,834, $34,614, $622,834, $ 169,857 and $5,587,528, respectively.

 

Loss per Share: Basic and diluted losses per share are presented in accordance with ASC 260-10 “Earnings per share”. Outstanding share options, warrants and restricted shares have been excluded from the calculation of diluted loss per share because the effect of all such securities is antidilutive. The total weighted average number of shares of Common Stock related to outstanding options, warrants and restricted shares excluded from the calculations of diluted loss per share for the three and six month periods ended June 30, 2012 and 2011 and the period from May 31, 2005 (date of inception) to June 30, 2012 were 6,231,670, 18,414,114, 6,754,504, 18,417,533 and 7,816,341, respectively.

 

Results of Operation

 

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months ended June 30, 2011

 

Revenue

 

The Company has not generated any revenues from operations since its inception. To date, the Company has funded its operations primarily through grants from the Israeli Office of the Chief Scientist (the “OCS”) and the sale of equity securities. If the Company’s development efforts result in clinical success, regulatory approval and successful commercialization of the Company’s products, then the Company could generate revenues from sales of its products.

 

Research and Development Expenses

 

The Company expects its research and development expenses to increase as it continues to develop its product candidates. Research and development expenses consist 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 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.

 

These costs and expenses are partially funded by grants received by the Company from the OCS. There can be no assurance that the Company will continue to receive grants from the OCS in amounts sufficient for its operations, if at all.

 

The Company expects its research and development expenditures to increase 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.

19
 

 

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 three and six month periods ended June 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through June 30, 2012, the Company incurred research and development expenses, net of government grants and participation, of $2,126,339, $2,377,205, $6,430,409, $5,412,466 and $36,172,877, respectively. The decrease for the three month period ended June 30, 2012 as compared to the 2011 period resulted primarily from a decrease in materials consumed. The increase for the six month period ended June 30, 2012 as compared to the 2011 period resulted primarily from an increase in consultation and clinical trials expenses associated with the manufacturing of high quantities of non-GMP and GMP of hGH-CTP.

 

The successful development of the Company’s product candidates is subject to numerous risks, uncertainties and other factors. Beyond the next twelve months, and even during the next twelve months, the Company cannot reasonably estimate the timing or costs of the efforts necessary to complete the remainder of the development of the Company’s product candidates. Additionally, the Company cannot reasonably estimate when it can expect material net cash inflows from the Company’s product candidates or any of the Company’s other development efforts, if at all. The foregoing 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;

 

·adverse medical events or side effects in treated patients;

 

·lack of comparability with complementary technologies;

 

·obtaining capital necessary to fund operations, including 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 expenses of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. The Company may obtain unexpected results from its clinical trials. The Company may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of the foregoing variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the United States Food and Drug Administration (“FDA”) or other regulatory authorities were to require the Company to conduct clinical trials beyond those which it currently anticipates will be required for the completion of the clinical development of a product candidate, or if the Company experiences significant delays in enrollment in any of its clinical trials, the Company could be required to expend significant additional financial resources and time on the completion of clinical development. Drug development may take several years and millions of dollars in development costs. If the Company does not obtain or maintain regulatory approval for its products, its financial condition and results of operations will be substantially harmed.

 

20
 

 

General and Administrative Expenses

 

General and administrative expenses consist 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 expenses include facility-related costs not otherwise included in research and development expense and professional fees for legal and accounting services. For the three and six month periods ended June 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through June 30, 2012, the Company incurred general and administrative expenses of $858,716, $877,956, $1,648,496, $ 1,586,852 and $18,750,465, respectively. The decrease for the three month period ended June 30, 2012 as compared to the 2011 period was primarily due to a decrease in stock-based compensation expenses. The increase for the six month period ended June 30, 2012 period as compared to the 2011 period was primarily due to an increase in professional services fees and an increase in office expenses as the Company expanded its staff.

 

Financial Expenses and Income

 

Financial expenses and income consists of the following:

 

·interest earned on the Company’s cash and cash equivalents;

 

·interest expense on short term bank credit and loans; and

 

·expenses or income resulting from fluctuations of the New Israeli Shekel and the Euro, in which a portion of the Company’s assets and liabilities are denominated, against the U.S. dollar.

 

For the three and six month periods ended June 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through June 30, 2012, the Company incurred net financial income (expense) of $(84,438), $165,230, $10,041, $442,410 and $430,298, respectively. Financial income for the three and six month periods ended June 30, 2012 decreased as compared to the 2011 periods primarily due to currency fluctuations on deposits in Israeli Shekels and Euro.

 

Stock-based Compensation

 

The Company records stock-based compensation expenses 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.

 

The Company applies ASC 505 “Equity” with respect to options issued to non-employees.

 

For the three and six month periods ended June 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through June 30, 2012, the Company incurred stock-based compensation expenses of $348,726, $440,024, $740,401, $900,425, and $10,740,537, respectively. Stock-based compensation expenses for the three and six month periods ended June 30, 2012 decreased as compared to the 2011 periods primarily due to a significantly larger number of stock options granted in prior periods that were unvested as of June 30, 2011 as compared to the number of unvested options as of June 30, 2012.

 

21
 

 

Cash Flows

 

For the six months ended June 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through June 30, 2012, net cash used in operating activities was $8,306,497, $6,188,145 and $42,227,225, respectively. The increase in cash used in operating activities for the six months ended June 30, 2012 as compared to 2011 period was primarily due to increased R&D spending related to the manufacturing of the hGH-CTP product candidate.

 

For the six months ended June 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through June 30, 2012, net cash used in investing activities was $15,768,247, $2,456,660 and $18,122,482, respectively. The increase in net cash used in investing activities for the six months ended June 30, 2012 as compared to 2011 resulted primarily from our deposit of a portion of the cash proceeds from our underwritten public offering of common stock in short-term interest bank deposits.

 

For the six months ended June 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through June 30, 2012, net cash provided by financing activities was $37,430,128, $181,304 and $86,966,778, respectively. The increase for the six months ended June 30, 2012 as compared to 2011 resulted primarily from our receipt of proceeds from our underwritten public offering of common stock, as well as an increase in cash proceeds from the exercise of warrants.

 

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 our 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.

 

At June 30, 2012, we had approximately $26.6 million of cash and cash equivalents, together with approximately $15.8 million of cash in short-term deposit accounts, and we believe that our existing cash and cash equivalents and short-term investments will be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least until December 31, 2013. We have based this estimate on assumptions that may prove to be wrong and are subject to change, and we may be required to use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including the progress and results of our clinical trials, the duration and cost of discovery and preclinical development, and laboratory testing and clinical trials for our product candidates, the timing and outcome of regulatory review of our product candidates, the number and development requirements of other product candidates that we pursue, and the costs of commercialization activities, including product marketing, sales, and distribution. We do not anticipate that we will generate product revenues for at least the next several years, and 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 cannot assure you that we will be able to consummate any such offerings or financings or enter into any such arrangements on terms favorable to us or at all.

22
 

 

Effects of Inflation and Currency Fluctuation

 

Inflation generally affects the Company by increasing costs of labor and clinical trials. The Company does not believe that inflation has had a material effect on its results of operations for the three and six month periods ended June 30, 2012 or 2011.

 

The Company has operations in Israel and has contracts with European companies as well as Euro and Shekel bank deposits. Our foreign contracts with service providers use applicable local currencies, Euros or Shekels. As a result, we are subject to adverse movements in foreign currency exchange rates in countries in which we conduct business. Our results of operations are predominantly affected by fluctuations in the value of the U.S. dollar as compared to the New Israeli Shekel and the Euro.

 

We do not engage in trading of market risk sensitive instruments or purchase hedging or “other than trading” instruments that are likely to expose us to market risk, whether interest rate, commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts, nor do we use derivative financial instruments for speculative trading or any other purpose.

 

Off-Balance Sheet Arrangements

 

The Company had no off-balance sheet arrangements as of June 30, 2012.

 

23
 

 

ITEM 3.Quantitative and Qualitative Disclosures About Market Risk

 

The information in Item 2 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Effects of Inflation and Currency Fluctuation” is incorporated herein by reference. Through the end of the period covered by this Quarterly Report on Form 10-Q, there have been no material changes to the information provided in Item 7A of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011.

 

Interest Rate Risk

 

We have no debt outstanding nor do we have any investments in debt instruments other than highly liquid short-term investments. Accordingly, we consider our interest rate risk exposure to be insignificant at this time.

 

ITEM 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that is designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to management in a timely manner. Our Chief Executive Officer and Chief Financial Officer evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report and, based on such evaluation, concluded that the system was operating effectively as of such date to ensure appropriate disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

24
 

 

PART II OTHER INFORMATION

 

ITEM 1ARisk Factors

 

There have been no material changes to our risk factors since the filing of our Annual Report on Form 10-K for the year ended December 31, 2011.

 

ITEM 6.Exhibits.

 

10.1   Non-Compete Agreement, dated May 9, 2012, by and between Prolor Biotech Ltd. and Fuad Fares D.Sc., filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2012 and incorporated by reference herein.
     
10.2   Non-Compete Agreement, dated May 9, 2012, by and between Prolor Biotech Ltd. and Abraham Havron Ph.D., filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2012 and incorporated by reference herein.
     
10.3   License Agreement, dated December 30, 2010, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2012 and incorporated by reference herein.
     
10.4   First Addendum to License Agreement, dated August 24, 2011, filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2012 and incorporated by reference herein.
     
31.1   Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K.
     
31.2   Certification of Principal Financial Officer pursuant to Item 601(b)(31) of Regulation S-K.
     
32.1   Certification of Chief Executive Officer pursuant to Item 601(b)(32) of Regulation S-K.
     
32.2   Certification of Principal Financial Officer pursuant to Item 601(b)(32) of Regulation S-K.
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase
     
*   Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

25
 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  PROLOR BIOTECH, INC.
   
  /s/ Abraham Havron
Date: August 9, 2012 Abraham Havron
  Chief Executive Officer
   
  /s/ Steve Schaeffer
Date: August 9, 2012 Steve Schaeffer
  Chief Financial Officer
  (Principal Financial Officer and Principal
Accounting Officer)

 

26
 

 

EXHIBIT INDEX

 

10.1   Non-Compete Agreement, dated May 9, 2012, by and between Prolor Biotech Ltd. and Fuad Fares D.Sc., filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2012 and incorporated by reference herein.
     
10.2   Non-Compete Agreement, dated May 9, 2012, by and between Prolor Biotech Ltd. and Abraham Havron Ph.D., filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2012 and incorporated by reference herein.
     
10.3   License Agreement, dated December 30, 2010, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2012 and incorporated by reference herein.
     
10.4   First Addendum to License Agreement, dated August 24, 2011, filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2012 and incorporated by reference herein.
     
31.1   Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K.
     
31.2   Certification of Principal Financial Officer pursuant to Item 601(b)(31) of Regulation S-K.
     
32.1   Certification of Chief Executive Officer pursuant to Item 601(b)(32) of Regulation S-K.
     
32.2   Certification of Principal Financial Officer pursuant to Item 601(b)(32) of Regulation S-K.
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase
     
*   Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

 

XASE:PBTH Quarterly Report 10-Q Filling

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XASE:PBTH Quarterly Report 10-Q Filing - 6/30/2012
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