UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

  X .

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

For the quarterly period ended March 31, 2014

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: 000-52545

OPHTHALIX INC.

(Exact name of registrant as specified in its charter)

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.

Large accelerated filer .

      .

Accelerated filer .

      .

Non-accelerated filer .

      .

Smaller reporting company

  X .

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes       .  No   X .

The number of shares outstanding of the registrant’s Common Stock on May 8, 2014, was 10,441,251.

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TABLE OF CONTENTS

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2014

U.S. DOLLARS IN THOUSANDS

UNAUDITED

INDEX

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

U.S. dollars in thousands, except share and per share data

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

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

U.S. dollars in thousands, except share and per share data

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

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY (UNAUDITED)

U.S. dollars in thousands, except share and per share data

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

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

U.S. dollars in thousands, except share and per share data

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

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

U.S. dollars in thousands, except share and per share data

NOTE 1:-

GENERAL

a.

OphthaliX Inc. (the "Company" or "OphthaliX") (formerly: "Denali Concrete Management Inc." or "Denali"), originally incorporated in the State of Nevada on December 10, 1999 under the name Bridge Capital.com Inc. Bridge Capital.com Inc., was a nominally capitalized corporation that did not commence its operations until it changed its name to Denali Concrete Management Inc. in March 2001. Denali was a concrete placement company specializing in providing concrete improvements in the road construction industry. Denali operated primarily in Anchorage, Alaska, placing curb and gutter, sidewalks and retaining walls for state, municipal and military projects.

In December 2005, the Company ceased its principal business operations and focused its efforts on seeking a business opportunity, becoming a public shell company in the U.S.

Eye-Fite Ltd. ("Eye-Fite" or the "Subsidiary") was founded on June 27, 2011 in contemplation of the execution of a transaction between Can-Fite BioPharma Ltd. (the "Parent Company" or "Can-Fite") a public company in Israel and the U.S and Denali, as further detailed in Note 1b below.

The Company and the Subsidiary conduct research and development activities using an exclusive worldwide license for a therapeutic drug CF101 solely for the field of ophthalmic diseases after the consummation of the transaction. See also Note 1b2.

Following the transaction, Denali changed its name to OphthaliX Inc. and also changed its corporate domicile from Nevada to Delaware.

In December 2013, the Company announced that its Phase III study of CF101 for the treatment of dry eye syndrome did not meet the primary and secondary efficacy endpoints.

b.

Reverse Recapitalization and related arrangements:

1.

Recapitalization:

On November 21, 2011 (the "Closing Date"), the Company acquired all the outstanding shares of EyeFite in consideration for the issuance to Can-Fite of 8,000,000 shares (and warrants to purchase shares) of the Company, representing approximately 87% of the fully diluted issued and outstanding share capital of the Company. Immediately prior to and as a condition to the closing of the transaction, OphthaliX entered into subscription agreements with new investors (the "New Investors") pursuant to which, OphthaliX received $3,330 in additional funds (excluding $333 of issuance expenses paid in cash) in consideration for issuing 646,776 shares of Common Stock of OphthaliX at a price per share of $5.148.

The Company also received 714,922 ordinary shares in Can-Fite, representing approximately 7% of Can-Fite's issued and outstanding share capital as of the Closing Date. On June 17, 2013, the Company sold 268,095 Can-Fite ordinary shares for a total consideration of $511. As of March 31, 2014, the Company holds 446,827 Can-Fite ordinary shares, representing approximately 2.4% of Can-Fite's issued and outstanding share capital.

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

U.S. dollars in thousands, except share and per share data

NOTE 1:-

GENERAL (Cont.)

In addition, OphthaliX issued to Can-Fite 466,139 shares of Common Stock of the Company in exchange for Can-Fite ordinary shares valued at $2,400 at the time of the grant.

In accordance with the Israeli Securities Law (1968), Section 15C and related Securities Regulations, the shares issued by Can-Fite to OphthaliX have a “Resale Restriction Period”, which consists of one year of full restriction and a liquidation period of eight consecutive quarters. As such, OphthaliX is able to sell 12.5% of the Can-Fite ordinary shares it holds every quarter since November 21, 2012.

As part of the recapitalization arrangement, Can-Fite made an additional equity investment in OphthaliX in the amount of $500 in consideration for the issuance of an aggregate of 97,113 shares of Common Stock of OphthaliX at a price per share equal to $5.148.

In contemplation of the recapitalization transaction, it was agreed that for every four shares of Common Stock purchased by the New Investors and Can-Fite, they received nine warrants to acquire two share of Common Stock of the Company. The exercise price of such warrants is $7.74 per share of Common Stock. The warrants are exercisable for a period of five years from the date of grant. The warrants do not contain nonstandard anti-dilution provisions.

The transaction was accounted for as a reverse recapitalization which is outside the scope of ASC 805, Business Combinations. Under reverse capitalization accounting, EyeFite is considered the acquirer for accounting and financial reporting purposes, and acquired the assets and assumed the liabilities of the Company. Assets acquired and liabilities assumed are reported at their historical amounts. Consequently, the condensed consolidated financial statements of the Company reflect the operations of the acquirer for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former shareholders of the legal acquirer and a recapitalization of the equity of the accounting acquirer. These condensed consolidated financial statements include the accounts of the Company since the effective date of the reverse capitalization and the accounts of EyeFite since inception.

2.

License and research and development services from Can-Fite:

In connection with the consummation of the recapitalization transaction, the Company and Can-Fite entered into a license agreement, pursuant to which Can-Fite granted EyeFite a sole and exclusive worldwide license for the use of CF101, solely in the field of ophthalmic diseases ("CF101"). EyeFite will be obligated to make to the U.S. National Institutes of Health ("NIH"), with regard to the patents of which are included in the license to EyeFite, for as long as the license agreement between the Company and NIH remains in effect, a nonrefundable minimum annual royalty fee and potential future royalties of 4.0% to 5.5% on net sales.

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

U.S. dollars in thousands, except share and per share data

NOTE 1:-

GENERAL (Cont.)

In addition, the Company will be obligated to make certain milestone payments ranging from $25 to $500 upon the achievement of various development milestones for each indication. As of March 31, 2014, the Company accrual related to its clinical trials totaled $175. EyeFite will also be required to make payments of 20% of sublicensing revenues, excluding royalties and net of the required milestone payments. During the first quarter of 2014, the Company did not reach any milestones or generate revenue that would trigger any such payments to Can-Fite.

In addition, following the closing of the recapitalization transaction, an agreement was signed between Can-Fite, OphthaliX and EyeFite (the "Service Agreement"). According to the Service Agreement, Can-Fite will manage the research and development activities relating to pre-clinical and clinical studies for the development of the ophthalmic indications of CF101. According to the Service Agreement, in consideration for Can-Fite's services, EyeFite will pay to Can-Fite a service fee (consisting of all expenses and costs incurred by Can-Fite plus 15%). In addition, the Company is committed to future additional payments equal to 2.5% of any and all proceeds received by EyeFite relating to the activities regarding the drug (the "Additional Payment").

According to the Service Agreement, Can-Fite will have the right, until the earlier of (a) November 21, 2016, and (b) the closing of the acquisition of our company by another entity, resulting in the exchange of our outstanding shares of common stock such that the stockholders of our company prior to such transaction own, directly or indirectly, less than 50% of the voting power of the surviving entity, to convert the Additional Payment into an additional 480,022 shares of Common Stock of the Company (subject to adjustment in certain circumstances).

c.

The Company devotes most of its efforts toward research and development activities. As of March 31, 2014, the Company does not have sufficient capital resources to conduct its research and development activities until commercialization of the underlying products.

The Company's inability to raise funds to conduct its research and development activities will have a severe negative impact on its ability to remain a viable company.  Liquidity resources, as of March 31, 2014 will be sufficient to continue the development of the Company's products at least for twelve months from the balance sheet date.

The Company is addressing its liquidity issues by implementing initiatives to raise additional funds as well as other measures that will allow it to cover its anticipated budget deficit. Such initiatives may include monetizing the Company's investment in Can-Fite's ordinary shares. In addition, in February 2013, which was updated in March 2014, the Company obtained a formal letter from Can-Fite stating that Can-Fite agrees to defer receiving payments owed under the Services Agreement from January 31, 2013 for the performance of the clinical trials of CF101 in ophthalmic indications until the completion of a fundraising by the Company. Any such deferred payments bear interest at a rate of 3% per annum from the due date of each invoice issued by Can-Fite to the Company until the time of payment by the Company.

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

U.S. dollars in thousands, except share and per share data

NOTE 1:-

GENERAL (Cont.)

As of March 31, 2014, the deferred payments to Can-Fite totaled $1,684.

There are no assurances that the Company will be successful in obtaining an adequate level of financing needed for its long-term research and development activities. If the Company does not have sufficient liquidity resources, the Company may not be able to continue the development of all of its products or may be required to delay part of the development programs.

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the annual financial statements of the Company as of December 31, 2013, are applied consistently in these financial statements.

NOTE 3:-

UNAUDITED CONDENSED FINANCIAL STATEMENTS

The unaudited Condensed Consolidated Financial Statements of OphthaliX Inc. have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information as well as the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Condensed Consolidated Balance Sheet as of December 31, 2013, is derived from the audited Consolidated Financial Statements as of that date, but does not include all disclosures including notes required by GAAP. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, or any future period. The information included in this Quarterly Report on Form 10-Q ("Report") should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates under different assumptions or conditions.

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

U.S. dollars in thousands, except share and per share data

NOTE 4:-

FAIR VALUE MEASUREMENTS

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Since the quoted market value of the Company’s Common Stock was based on a sporadically traded stock with little volume, the Company's management determined the Company's stock price fair value based on ASC 820 Fair Value Measurement using the income approach assisted by a third party specialist. Consequently, the Company used the estimated stock price fair value in the underlying assumptions of the computation of the fair value of the derivative related to the Service Agreement.

In accordance with ASC 820, the Company measures part of its investment in the Parent Company and embedded derivatives in the Service Agreement, at fair value. The investment in the Parent Company fair value is based on quoted prices for identical assets in active markets and other inputs (such as risk free interest and volatility) that are directly or indirectly observable in the marketplace. Shares that are restricted for less than one year should be re-measured to reflect fair value at each cutoff date. As a result of such restrictions, the Company adjusted the quoted market price in the Tel-Aviv Stock Exchange of its investment in the Parent Company's shares, to reflect the discount that results from the resale restriction provisions. In measuring the fair value, the Company used an average of Protective Put and Asian Put Option models. In estimating the fair value, the Company used Black-Scholes option-pricing model. These securities are classified as available-for-sale securities carried at fair value, with unrealized gains and losses reported as a separate component of shareholders' equity under accumulated other comprehensive loss (income) in the consolidated balance sheets. The assets are classified within Level 2 on the fair value hierarchy. Embedded derivatives are classified within Level 3 because they are valued using valuation techniques. Some of the inputs to these models are unobservable in the market and are significant.

The following table provides information by value level for financial assets and liabilities that are measured at fair value, as defined by ASC 820, on a recurring basis as of March 31, 2014 and December 31, 2013.

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

U.S. dollars in thousands, except share and per share data

NOTE 4:-

FAIR VALUE MEASUREMENTS (Cont.)

⁽¹⁾

Represents the portion of the Parent Company's shares that has no trading restrictions.

⁽²⁾

Represents the portion of the Parent Company's shares that has trading restrictions.

⁽³⁾

Fair value measurements using significant unobservable inputs (Level 3).

The following table presents the changes in Level 3 instruments measured on a recurring basis for the three months ended March 31, 2014. The Company's Level 3 instruments consist of derivatives.

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OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

U.S. dollars in thousands, except share and per share data

NOTE 5:-

EQUITY

The following table summarizes the activity of stock options:

⁽¹⁾

The aggregate intrinsic value is calculated as the difference between the exercise price of the stock options and the closing price of the shares of the Company’s Common Stock of $1.85 as of March 31, 2014.

As of March 31, 2014, there was $161 of unrecognized stock-based compensation expense all of which is related to stock options. This unrecognized compensation expense, expected to be recognized over a weighted-average period of approximately two years.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets, statements of income and cash flows.  This section should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 and our interim financial statements and accompanying notes to these financial statements.  All amounts are in U.S. dollars, in thousands, except share and per share data.

Forward-Looking Statement Notice

This quarterly report on Form 10-Q contains forward-looking statements about our expectations, beliefs or intentions regarding, among other things, our product development efforts, business, financial condition, results of operations, strategies or prospects.  In addition, from time to time, we or our representatives have made or may make forward-looking statements, orally or in writing.  Forward-looking statements can be identified by the use of forward-looking words such as “believe,” “expect,” “intend,” “plan,” “may,” “should” or “anticipate” or their negatives or other variations of these words or other comparable words or by the fact that these statements do not relate strictly to historical or current matters.  These forward-looking statements may be included in, but are not limited to, various filings made by us with the United States Securities and Exchange Commission, or the SEC, press releases or oral statements made by or with the approval of one of our authorized executive officers.  Forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made.  Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements, including, but not limited to, those set forth in our most recent annual reports referenced below.

This report identifies important factors which could cause our actual results to differ materially from those indicated by the forward-looking statements, particularly those set forth under Item 1A. “Risk Factors” as disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 27, 2014.  

Such risk factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements.  Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report.  We undertake no obligations to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.  In evaluating forward-looking statements, you should consider these risks and uncertainties.

Description of Business

We are a clinical-stage biopharmaceutical company focused on developing therapeutic products for the treatment of ophthalmic disorders.  We have in-licensed certain patents and patent applications protecting the use in the ophthalmic field of our current pipeline drug under development, a synthetic A₃ adenosine receptor (“A3AR”), agonist, CF101 (known generically as IB-MECA). CF101 is being developed by the Company to treat three ophthalmic indications: dry eye syndrome, or DES; glaucoma and uveitis.  In December 2013, we announced the results of a Phase III study of CF101 for the treatment of DES. In the study, CF101 did not meet the primary efficacy endpoint of complete clearing of corneal staining, nor the secondary efficacy endpoints. Nonetheless, CF101 was found to be well tolerated. The Company is evaluating the results of this study and will provide an update on its plans for the DES indication at a later date. We are also planning to conduct a retrospective analysis of the DES Phase III Study data to determine if there is a correlation between the CF101 target, the A3AR, expression and patients’ response to the drug. This analysis is based on recent positive data from a Phase IIb Rheumatoid Arthritis (“RA”) study of CF101 conducted by our parent company Can-Fite, where patients were enrolled based on the expression level of the A3 adenosine receptor biomarker. We are currently conducting a Phase II trial of CF101 for the treatment of glaucoma or related syndromes of ocular hypertension. We also submitted a protocol for a Phase II uveitis trial, however, we are currently reviewing our clinical development plans and will provide an update on the development for this indication on a later stage.

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CF101 is a highly-selective, orally bioavailable small molecule synthetic drug, which targets the A3AR.  We believe that CF101 has a favorable safety profile and a potent anti-inflammatory activity, mediated via its capability to inhibit the production of inflammatory cytokines, such as TNF-α, MMPs, IL-1 and IL-6.  This is mediated by activation of the A3AR, which is highly expressed in inflammatory tissues in contrast to normal tissues where expression levels of the receptor are very low.  We believe that the anti-inflammatory and neuroprotective effects of CF101 make it a candidate for use in the treatment of ophthalmic indications. While Can-Fite is continuing to develop CF101 for autoimmune inflammatory indications, including RA and psoriasis, we are focusing, under the License Agreement, on the development of CF101 for ophthalmic indications.

Business Developments

During the first quarter of 2014, we had the following major developments:

·

On February 18, 2014, we provided an update that we anticipates that during the third quarter of 2014 we will announce the interim analysis results of the Phase II trial of CF101 for the treatment of Glaucoma.

Results of Operations –Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

For the period from June 27, 2011 (the inception date of Eyefite) to March 31, 2014, we did not generate any revenues from operations. Operating expenses during the three months ended March 31, 2014 were $356,000, compared with $801,000 for the three months ended March 31, 2013, and finance net expenses were $12,000, compared to finance net income of $59,000 for the comparable prior period. Net losses for the three months ended March 31, 2014 and 2013 were $368,000 and $742,000, respectively. Expenses for the periods mentioned above consisted of research and development of $196,000 and $596,000 respectively. The decrease in the research and development expenses was mainly due to the fact that Phase III study in DES was completed in the end of 2013. The general and administrative expenses for the three months ended March 31, 2014 were $160,000, with $205,000 for the comparable prior period. The general and administrative expenses were primarily due to professional, legal and accounting fees relating to our reporting requirements and of directors and managements stock based compensation. The decrease in the general and administrative expenses for the three months ended March 31, 2014 in comparison to the comparable prior period were primarily due to the termination of the Company's former CEO during 2013. The finance expenses during the three months ended March 31, 2014 were mainly due to interest accrued for the deferred payments to Can-Fite.

Plan of Operation

The Company did not generate any revenue in the first quarter of 2014 and does not expect to generate any revenue over the next 12 months.  Through our subsidiary, Eyefite Ltd., or EyeFite, which holds all the intellectual property related to our technology, we are developing therapeutic products for the treatment of ophthalmic disorders.  As of March 31, 2014, we had $266,000 in cash and cash equivalents.  We also held 446,827 ordinary shares of Can-Fite (traded on the Tel Aviv Stock Exchange) presented on the balance sheet as $1,064,000 as investment in Parent Company.  Although we can provide no assurance, we believe that such funds will be sufficient to continue our business and operations as currently conducted.  However, we will require significant additional financing in the future to fund our operations beyond mid- 2015.  See Item 1A. “Risk Factors—Risks Related to the Company and Its Business” as disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 27, 2014.  In addition, in February 2013, which was updated in March 2014, we obtained a formal letter from Can-Fite stating that Can-Fite would defer receiving payments owed to it under the services agreement we entered into with Can-Fite, or the Services Agreement, pursuant to which it manages, as an independent contractor, all activities relating to pre-clinical and clinical studies performed for the development of the ophthalmic indications of CF101, beginning on January 31, 2013 for the performance of such clinical trials until the completion of a certain fundraising by the Company.  Any such deferred payments will bear interest at a rate of 3% per annum from the due date of each invoice issued by Can-Fite to the Company until the time the Company makes such deferred payments.  For a long term solution, we will need to seek additional capital for the purpose of further testing our products, managing our business and obtaining certifications necessary in order to market them.

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Liquidity and Capital Resources

Since our acquisition of all the outstanding interests in EyeFite (the “Transaction”) on November 21, 2011, the closing date of the Transaction, we have funded our operations primarily through the private placement of shares of our common stock which took place on November 21, 2011.  In such private placement, the Company raised approximately $3,500,000 in net proceeds after the deduction of offering expenses.  As of March 31, 2014, we held approximately $266,000 in cash and cash equivalents.  Net cash used in operating activities was approximately $156,000 for the three months ended March 31, 2014, compared with net cash used in operating activities of approximately $195,000 for the comparable for the period for the fiscal quarter ended March 31, 2013. The decrease in net cash used in operating activities during the three months ended March 31, 2014 as compared to the period ended March 31, 2013, was primarily the result of finalizing the clinical trials of Phase III study in DES.

There was no net cash provided by investing and financing activities for the periods ended March 31, 2014 and 2013.

Developing drugs, conducting clinical trials and commercializing products is expensive and we will need to raise substantial additional funds to achieve our strategic objectives. Although we believe our existing cash resources and our letter from our Parent Company will be sufficient to fund our current projected cash requirements to operate our business as currently conducted, we will require significant additional financing in the future to fund our operations beyond mid -2015.  See Item 1A. “Risk Factors—Risks Related to the Company and Its Business” as disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 27, 2014.  Additional financing may not be available on acceptable terms, if at all.  Our future capital requirements will depend on many factors, including:

·

the failure to obtain regulatory approval or achieve commercial success of our product candidates, which currently includes only CF101;

·

the level of research and development investment required to develop our product candidates, and maintain and improve our patented or licensed technology position;

·

the costs of obtaining or manufacturing product candidates for research and development and testing;

·

the results of preclinical and clinical testing, which can be unpredictable in product candidate development and any decision to initiate additional preclinical or clinical studies;

·

changes in product candidate development plans needed to address any difficulties that may arise in manufacturing, preclinical activities or clinical studies;

·

our success in establishing and effecting out-licensing agreements with strategic partners, the terms of these agreements and the success of these potential future licensees and partners in selling our products;

·

our success rate in preclinical and clinical efforts associated with milestones and royalties, if applicable;

·

the costs of investigating patents that might block us from developing potential product candidates;

·

the costs of recruiting and retaining qualified personnel;

·

the costs, timing and outcomes involved in obtaining regulatory approvals;

·

the number of product candidates we pursue in the future;

·

our revenues, if any;

·

the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

·

our need or decision to acquire or license complementary technologies or new platform or product candidate targets; and

·

the costs of financing unanticipated working capital requirements and responding to competitive pressures.

Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through debt or equity financings, or by out-licensing our product candidate.  We cannot be certain that additional funding will be available to us on acceptable terms, or at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts.

We are addressing our liquidity issues by implementing initiatives to raise additional funds as well as other measures that we believe will allow the coverage of our anticipated budget deficit. Such initiatives may include monetizing of our assets, by intention to realize our investment in Can-Fite’s shares.

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In addition, in February 2013, which was updated in March 2014, we received a formal letter from Can-Fite agreeing to defer payments owed to it under the Services Agreement beginning on January 31, 2013 for the performance of the clinical trials of CF101 in ophthalmic indications until the completion of a fundraising by the Company. Any such deferred payments will bear interest at a rate of 3% per annum from the due date of each invoice issued by Can-Fite to the Company until the time of payment by the Company. We believe that the ability to defer such payments will assist us in addressing our liquidity needs.

There can be no assurance that additional capital will be available to us.  We currently have no agreements, arrangements, or understandings with any person to obtain funds through bank loans, lines of credit, or any other sources, other than the formal letter from Can-Fite agreeing to defer payments owed to it under the Services Agreement, as detailed above under “Plan of Operation.  Since we have no such arrangements or plans currently in effect, our inability to raise funds for the above purposes will have a severe negative impact on our ability to remain a viable company beyond mid- 2015.  See Item 1A. “Risk Factors—Risks Related to the Company and Its Business” as disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 27, 2014.  As of the date of this report, we have no material capital commitments.

During the three months ended March 31, 2014 and 2013, changes in inflation and other price changes did not materially affect our financial condition, business or operations.

Critical Accounting Policies

We prepare our unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S., or GAAP.  In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, and expenses, as well as related disclosure of contingent assets and liabilities.  In some cases, we could reasonably have used different accounting policies and estimates.  Changes in the accounting estimates are reasonably likely to occur from period to period.  Accordingly, actual results could differ materially from our estimates.  To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected.  We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.  We have reviewed our critical accounting policies and estimates with our Board.

Holdings in Can-Fite:

In accordance with ASC320, an accounting for the Company’s investment in the equity securities depends on the remaining period of the tradability restriction in its respective market of the shares.

Shares that are restricted for less than one year should be re-measured to reflect fair value each cutoff date.  These securities are classified as available-for-sale securities carried at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity under accumulated other comprehensive income in the consolidated balance sheet. For investments classified as available-for-sale securities, unrealized gains and losses are recorded in accumulated other comprehensive income, a separate component of stockholders’ equity, realized gains and losses on sales of available-for-sale securities, as determined on a specific identification basis, are included in the consolidated statement of operations.

The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities is below the cost basis of such securities is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company’s intent to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized in “other than temporary impairment, net of gain on sale of marketable securities previously impaired” in the statement of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.

The Company currently holds 446,827 shares of Can-Fite’s issued and outstanding ordinary shares which 178,730 of them still have certain resale restriction provisions.  Such restrictions provide that these shares may be sold as follows 89,365 shares not before May 21,2014; and 89,365 shares not before August 21,2014; provided that, the amount to be sold on any one day may not exceed the average daily trading volume during the eight-week period preceding such sale.

As of March 31, 2014, the Company holds $1,064,000 in marketable securities classified in short term assets, designated as available-for-sale.

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Because part of our investment in Can-Fite's shares is restricted, the Company needs to adjust the restricted shares' fair value in order to reflect such restriction on such shares’ price. In estimating the fair value of the Can-Fite restricted shares held by the Company, , the Company used Black-Scholes option-pricing model with the following weighted-average assumptions as of March 31, 2014 and March 31, 2013: risk-free interest rates ranging from 0.63% to 0.69% and 1.55% to 1.69%, respectively; dividend yields of 0%; volatility factors of 74.1% and 76.32%, respectively; and a weighted-average contractual life of the restricted shares of between 0.14 and 0.39 years and 0.14 to 0.9 years.

As a result, the fair value of the Can-Fite shares held by the Company on the transaction date reflects the resale restrictions. The fair value of these shares based on an external expert’s valuation as of March 31, 2014 and 2013 was $1,064,000 and $1,292,000 respectively. For accounting purposes their fair value represents a discount of their shares’ market value of $55,000 and $305,000 respectively.

Income Taxes

The Company and its subsidiary account for income taxes and uncertain tax positions in accordance with ASC 740, “Income Taxes”.  ASC 740 prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

The Company and its subsidiary provide a full valuation allowance to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.

The Company adopted ASC 740-10. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740.  The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.  The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.  As of March 31, 2014, this standard has no effect to the Company’s financial statements.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits, marketable securities, trade receivables and other account receivables.

Cash and cash equivalents are deposited with major banks in Israel.  Such deposits in Israel may be in excess of insured limits and are not insured in other jurisdictions.  Management believes that the financial institutions that hold the Company’s investments are institutions with high credit standing, and accordingly, minimal credit risk exists with respect to these investments.

Derivative Related to Services Agreement

In connection with the recapitalization transaction described in Note 1.b of the consolidated financial statements, on November 21, 2011, the Company entered into the Services Agreement.

According to the Services Agreement, as additional consideration for its services, the Company agreed to pay to Can-Fite additional fees (“Additional Fees”) equal to 2.5% of any revenues received by the Company (or any affiliate of the Company, including its wholly owned subsidiary, EyeFite) for rights to CF101 from third-party sublicensees (including up-front payments, developmental or commercial milestones, royalties on net sales and any similar payments, but not including payments to support or reimburse the Company for research, development, manufacturing or commercial expenses or for equity).  Can-Fite has the right, until the earlier of (a) November 21, 2016 and (b) the closing of the acquisition of our company by another entity, resulting in the exchange of our outstanding shares of common stock such that the stockholders of our company prior to such transaction own, directly or indirectly, less than 50% of the voting power of the surviving entity, to convert its Additional Fees right for royalties into a warrant (the “Warrant”) to purchase 480,022 shares of common stock of the Company (the “Exchange Right”).  The exercise price for the Warrant is an aggregate of $2.5 million, based on a per share exercise price of $5.148. The Warrant may also be exercised on a cashless basis.

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The Company’s management has considered ASC 815 in order to evaluate whether the Exchange Right (contingent call option to holders) instrument is a financial instrument that has the characteristics of a derivative.  In particular, the Company’s management has also evaluated ASC 815-10-15-74(a) scope exception.

Based on the analysis above, the Company’s management concluded that the Exchange Right does not have fixed settlement provisions, and therefore, should be classified as a liability at inception.  The Exchange Right will be re-measured at fair value each reporting period until the date of exercise or expiration with the change in value reported in the statement of operations (as part of financial income/expenses).

Consequently, the Company recorded as part of the recapitalization transaction a liability related to the Exchange Right in the amount of $438,000 based on its fair value on November 21, 2011.  Issuance expenses that were allocated to this component, which amounted to $50,000, were expensed immediately and are included as part of financial expenses in the consolidated statements of operations (see Note 7 to the audited consolidated financial statements as of December 31, 2013 set forth in our Annual Report on Form 10-K, as filed with the SEC on March 27, 2014, for the re-measurement at year end).

The fair value of the derivatives was determined using the binomial option-pricing model.  This option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected term.

The fair value of the Derivative as of March 31, 2014 and 2013 amounted to $6,000 and $411,000, respectively, and was determined using the binomial option-pricing model. The aforementioned option-pricing model requires a number of assumptions, of which most significant are the expected stock price volatility and the expected term.

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.  Since the quoted market value of the Company’s Common Stock was based on a sporadically traded stock with little or no volume, the Company’s management determined the Company’s stock price fair value based on ASC 820 Fair Value Measurement using the income approach assisted by a third party specialist. Consequently, the Company used the estimates stock price fair value in the underlying assumptions of the computation of the fair value of the derivative related to the Services Agreement.

Accounting for Stock-Based Compensation

We account for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation” (“ASC 718”). ASC 718 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 an expense over the requisite service periods in our consolidated statements of comprehensive loss.

We recognize compensation expenses for the value of its awards granted based on the accelerate recognition method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We estimate the fair value of stock options granted using the common option-pricing models (i.e. the Black-Scholes model and the Binomial model). These option-pricing models require 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 historical volatilities of similar entities in the related sector index.

Under the Company’s 2012 Stock Incentive Plan, as amended (including the Israeli Annex), or the 2012 Plan, we may grant, among other awards, stock options, restricted stock and restricted stock units of the Company to our officers, directors, employees and consultants. See “Part II - Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” below.

During the three months ended March 31, 2014, the Company recorded a stock-based compensation expense of $57,000.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources.

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Jumpstart Our Business Startups Act of 2012

We are an emerging growth company within the meaning of the rules under the Securities Act, and we will utilize certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies. For example, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. The JOBS Act also permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with certain new or revised accounting standards if such standards apply to companies that are not issuers. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by issuers. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we have elected not to provide the disclosure required by this item.

Item 4.  Controls and Procedures

Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act, during our most recent fiscal quarter ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1A.  Risk Factors

See Item 1A. “Risk Factors” as disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 27, 2014.

Item 6.  Exhibits

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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.

OphthaliX Inc.

Date: May 8, 2014

By /s/ Barak Singer                                    

Barak Singer, Chief Executive Officer

(Principal Executive Officer)

Date: May 8, 2014

By /s/ Itay Weinstein                                    

Itay Weinstein, Chief Financial Officer

(Principal Financial Officer)

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