Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 and other Federal securities laws, and is subject to the safe-harbor created by such Act and laws. Forward-looking statements may include statements regarding our goals, beliefs, strategies, objectives, plans, including product and technology developments, future financial conditions, results or projections or current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms, or other comparable terminology. These statements are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. Such forward-looking statements appear in this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and include, but are not limited to, statements regarding the following: the expected development and potential benefits from our products in treating various medical conditions, the safety and efficacy of our PLX-PAD product as well as the extent to which it is tolerated, our plans, intentions or expectations regarding clinical studies and publication of results of such studies, our expectations regarding our short and long-term capital requirements and sufficiency of our capital resources, our plans to raise additional funding, including non-dilutive funding and governmental grants, the success of our plans to develop in house manufacturing capacity of clinical grade PLX cells in commercial quantities and information with respect to any other plans and strategies for our business. Our business and operations are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011. Readers are also urged to carefully review and consider the various disclosures we have made in that report.
As used in this quarterly report, the terms “we”, “us”, “our”, the “company” and “Pluristem” mean Pluristem Therapeutics Inc. and our wholly owned subsidiary, Pluristem Ltd., unless otherwise indicated or as otherwise required by the context.
We are a leading bio-therapeutic company developing standardized cell therapy products for the treatment of life threatening diseases. We are developing a pipeline of products, stored ready-to-use, derived from human placenta, a non-controversial, non-embryonic, adult cell source. Placental-derived adherent stromal cells are grown in the Company's proprietary PluriX™ three-dimensional process that allows cells to grow in a more natural environment and enable us to produce large quantities of clinical grade cells. We refer to the cells that are grown in the PluriX™ as our PLacental eXpanded cells, or PLX cells. We are expanding our in-house manufacturing capacity so that we will be able to grow large scale quantities of our cells efficiently and without reliance on outside vendors.
Our strategy is to develop and manufacture cell therapy products for the treatment of multiple disorders via several routes of administration. We plan to execute this strategy both independently, using our own personnel and via relationships with research and clinical institutions, or in collaboration with other companies, such as United Therapeutics Corporation, or United. We plan to have in-house manufacturing capacity of clinical grade PLX cells in commercial quantities and to control all of our proprietary manufacturing processes in order to assist in executing this strategy.
We believe that intramuscular administration which means that the cells are administrated locally to the muscle and not systemically, may be suited for a number of different clinical indications. Such indications include peripheral artery disease, or PAD, critical limb ischemia, or CLI, intermittent claudication, muscle injuries, thromboangiitis obliterans, or Buerger's disease, neuropathic pain, wound healing and orthopedic injuries. In addition, we have reported pre-clinical studies utilizing successfully our proprietary PLX cells when administered systemically via the intravenous route in treating multiple sclerosis, ischemic stroke, inflammatory bowel disease and radiation exposure. Under our exclusive license agreement with United, we plan to participate in the development and commercialization of a PLX cell-based product for the treatment of Pulmonary Arterial Hypertension, or PAH.
Our first product in development, called PLX-PAD, is intended to improve the quality of life of millions of people suffering from PAD. In November 2011, following completion of twelve month clinical follow-ups using our PLX cells in CLI, the end-stage of PAD, we announced that the data collected from our two open-label, dose-escalation, Phase I clinical trials conducted in the United States and Germany demonstrated a safe immunologic profile at all dosage levels and found PLX-PAD to be potentially effective in treating patients suffering from CLI. During the Phase I clinical trials we have collected information regarding the Amputation Free Survival (AFS) rate and since our Phase I clinical trials did not include control groups, we compared the data with another published CLI trial's control data (Historical Data). The data showed that from a total of twenty-seven patients, four treatment failures (Event) occurred during the observation period of twelve months, which resulted in an AFS rate of 85.2%, as opposed to Historical Data of 66.8% for the same time period. This corresponded to an Event rate of 14.8%, as opposed to Historical Data showing a 33.2% Event rate.
In June 2011, we entered into an exclusive license agreement, or the License Agreement, with United, for the use of our PLX cells to develop and commercialize a cell-based product for the treatment of PAH. The License Agreement provides that United will receive exclusive worldwide license rights for the development and commercialization of our PLX cell-based product to treat PAH. The License Agreement provides for the following consideration payable to us: (i) $7 million paid to us in August 2011; (ii) up to $37.5 million upon reaching certain regulatory milestones with respect to the development of a product to treat PAH; (iii) reimbursement of up to $10 million of certain of our expenses if we establish a manufacturing facility in North America upon meeting certain milestones; (iv) reimbursement of certain costs in connection with the development of the product; and (v) following commercialization of the product, royalties and the purchase of commercial supplies of the developed product from us at a specified margin over our cost.
In July 2011, we entered into an agreement with MTM – Scientific Industries Center Haifa Ltd. for the lease and construction of a new state-of-the-art GMP manufacturing facility. The new facility will be located near our headquarters and existing facilities in MATAM Park, Haifa, Israel. The lease of the new facility is expected to commence in January 2012 for a period of approximately five years with an option to extend the lease for an additional 5 years.
In August 2011, the U.S. Food and Drug Administration granted our PLX cells orphan status designation for the treatment of Buerger's disease. A concurrent application in Europe at the European Medicine Agencys’s Committee for Orphan Medicinal Products is pending
In September 2011, we announced that animal studies we have conducted suggest that our PLX cells may be effective in treating life threatening hematopoietic complications associated with Acute Radiation Syndrome.
In October 2011, we entered into an agreement for the design and construction of a manufacturing facility of bio-pharmaceutical products, or the Construction Agreement, with Biopharmax Group (1996) Ltd., a company specializing in the design and construction of biotechnological and pharmaceutical facilities, or the Contractor. Under the terms of the Construction Agreement, the Contractor is required to design and construct our new manufacturing facility, in a space to be leased as of January 2012, as a turn key project, or the Project, that will meet the requirements of the U.S., Canadian, Israeli and European regulatory authorities and current Good Manufacturing Practices (cGMP). The Project is planned to be completed in the fourth calendar quarter of 2012. The Contractor is required to pay certain penalties for not meeting the time schedule agreed between the parties.
Pursuant to the terms of the Construction Agreement, the Contractor is eligible to receive an aggregate consideration of NIS 22,800,000 (approximately $6,246,575 based on the then current exchange ratio of $1=NIS3.65) plus value added tax. We have the option to pay a certain portion of the said consideration in up to 2,000,000 shares of our common stock. We may terminate the Construction Agreement at any time by a written notice to the Contractor. In case of termination by us for convenience, we shall be required to pay the Contractor $250,000 in addition to the payment for the services provided by the Contractor prior to the termination date.
Critical accounting policies
Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials statements.
We recognize revenue pursuant to the License Agreement with United in accordance with ASC 625-25 "Revenue Recognition, Multiple-Element Arrangements". Pursuant to this guidance, we determined that our arrangement with United involves multiple revenue-generating deliverables that should be accounted for as separate units of accounting for revenue recognition purposes.
We received an up-front, non-refundable license payment of $5,000,000. Additional payments totaling $37.5 million are subject to our Company's meeting certain milestones. The non-refundable upfront license fee of $5,000,000 is deferred and recognized over the related performance period in accordance with SAB 104 "Revenue Recognition". We estimated the performance period of the development of approximately 5.5 years. Future changes in estimates of the performance period may materially impact the timing and amounts of future revenue recognized. The license fee will be recognized on a straight line basis as revenue over the estimated development period, resulting in revenue of $154,000 for the three months ended September 30, 2011.
The additional milestones payments will be recognized upon the achievement of the specific milestone, in accordance with EITF Issue No. 08-9, “Milestone Method of Revenue Recognition"
We also received a refundable, advance payment on the development, of $2,000,000 that will be deductible against development expenses as it accrued. This upfront payment received and not recognized as revenues is included in the balance sheet as advanced payment. All expenses related to the development, on cost basis, shall be repaid to us by United. We will deduct the payments from the R&D expenses in accordance with ASC 730 "Research and Development".
RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2010.
Revenues for the three months ended September 30, 2011 in the amount of $154,000 are from the United license agreement. We did not generate revenues during the three months ended September 30, 2010.
Research and Development
Research and development expenses, net of participation of the OCS and other grants, for the three months ended September 30, 2011 increased by 185% from $998,000 for the three months ended September 30, 2010 to $2,849,000. This significant increase is attributed to the following reasons: The material increase in our in-house research and development activity, the increase in expenses related to the clinical and preclinical trials we are involved with and timing of approval of the OCS program. The material increase in research and development expenses resulted from increase in our salaries and lab materials expenses due to, among other things, hiring 20 new employees since September 2010. In addition, the OCS program for the year beginning in March 2011 has not yet been approved, resulting in a decrease in the participation of the OCS recorded in the statements of operation of $490,000, compared to the first quarter of the previous year.
General and Administrative
General and administrative expenses for the three months ended September 30, 2011 increased by 116% from $756,000 for the three months ended September 30, 2010 to $1,637,000 mainly due to stock-based compensation expenses related to our employees and consultants which increased by approximately $520,000, and due to general and administrative costs related to the United agreement such as bonuses that our officers and directors were entitled to as part of our bonus plan and legal fees involved.
Financial Income, net
Financial income decreased from an income of $65,000 for the three months ended September 30, 2010 to expense of $161,000 for the three months ended September 30, 2011. This decrease is attributed to exchange rate adjustments and costs of hedging transactions, partially offset by an increase in interest income on bank deposits due to higher cash balances.
Net loss for the three months ended September 30, 2011 was $4,493,000, as compared to net loss of $1,689,000 for the three months ended September 30, 2010. Net loss per share for the three months ended September 30, 2011 was $0.11, as compared to $0.08 for the three months ended September 30, 2010.
For the periods ended September 30, 2011 and September 30, 2010, we had weighted average shares of common stock outstanding of 42,779,293 and 21,012,208, respectively, that were used in the computations of net loss per share. The increase in weighted average common shares outstanding reflects mainly the shares of common stock issued in offerings that took place since September 2010 and shares issued as a result of exercise of warrants and options.
Liquidity and Capital Resources
As of September 30, 2011, total current assets were $46,363,000 and total current liabilities were $5,045,000. On September 30, 2011, we had a working capital surplus of $41,318,000, Stockholders' equity of $40,294,000 and an accumulated deficit of $55,446,000. We finance our operations and plan to continue doing so from our existing cash, licensing agreements, funds from grants from the OCS and issuances of our securities.
Cash and cash equivalents as of September 30, 2011 amounted to $13,633,000. This is a decrease of $29,196,000 from the $42,829,000 reported as of June 30, 2011, which is due, mainly, to our investing in short-term and long-term bank deposits and in marketable securities, as further detailed below. Cash balances decreased in the three months ended September 30, 2011 for the reasons presented below.
Operating activities provided cash of $3,461,000 in the three months ended September 30, 2011. Cash provided by operating activities in the three months ended September 30, 2011 primarily consisted of receiving the upfront payment related to the License Agreement with United in the amount of $7,000,000 partially offset by payments of salaries to our employees, and payments of fees to our consultants, subcontractors and professional services providers including costs of clinical studies.
Investing activities used cash of $32,980,000 in the three months ended September 30, 2011. The investing activities consisted primarily of investing in short-term and long-term bank deposits and in marketable securities. The investments were made in accordance with the policy set by our investment committee which aims to preserve our financial assets, maintain adequate liquidity and maximize return. Such policy further provides that we should hold the vast majority of our current assets in bank deposits and the remainder of our current assets is to be invested in government bonds and a combination of corporate bonds and relatively low risk stocks. As of today, the currency of our financial portfolio is mainly in USD and we use forward and options contracts in order to hedge our exposures to currencies other than the USD.
Financing activities generated cash of $323,000 during the three months ended September 30, 2011 from exercise of warrants by shareholders and exercise of options by employees and consultants.
During the last quarter, 175,200 warrants were exercised in consideration for $315,360, and 60,000 warrants were exercised on a cashless basis for 23,514 shares of stock.
During the three months ended September 30, 2011 we received approximately $16,000 from the OCS towards our research and development expenses. The OCS has supported our activity in the past five years. In March 2011, we filed an application for a sixth year program for the period March 2011 until February 2012. There is no assurance that the OCS will approve a grant for the sixth year's R&D activity. The amount of the grant is also not certain.
We have accumulated a deficit of $55,446,000 since our inception in May 2001. We do not expect to generate any revenues from sales of products in the next twelve months. Our products will likely not be ready for sale for at least three years, if at all. We expect to generate revenues, which in the short and medium terms will unlikely exceed our costs of operations, from sale of licenses to use our technology or products, as we have in the License Agreement we entered into in August 2011 with United. Our management believes that we may need to raise additional funds before we have cash flow from operations that can materially decrease our dependence on our existing cash and other liquidity resources. We are continually looking for sources of funding, including non-diluting sources such as the OCS grants. We have effective shelf registration statement which we may use in the future to raise additional funds.
We believe that the funds we have will be sufficient for operating until approximately the end of fiscal year of 2014.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures - We maintain a system of disclosure controls and procedures that are designed for the purposes of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO and our CFO, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting - There has been no change in our internal control over financial reporting during the first quarter of fiscal 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits.
Summary of Lease Agreement dated January 22, 2003, by and between Pluristem Ltd. and MTM – Scientific Industries Center Haifa Ltd., as supplemented on December 11, 2005, June 12, 2007 and July 19, 2011 (incorporated by reference to Exhibit 10.2 of our annual report on Form 10-K filed on September 12, 2011).
Rule 13a-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a) Certification of Chief Financial Officer.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Statements of Changes in Stockholders (Deficiency) and (v) related notes to these financial statements, tagged as blocks of text.
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PLURISTEM THERAPEUTICS INC.
By: /s/ Zami Aberman
Zami Aberman, Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 2011
By: /s/ Yaky Yanay
Yaky Yanay, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: November 9, 2011