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

 

FORM 10-K

 

(Mark One)

 

☒           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
               For the fiscal year ended June 30, 2018

 

☐           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 001-31392

 

PLURISTEM THERAPEUTICS INC.

(Exact name of registrant as specified in its charter)

Nevada		98-0351734
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

MATAM Advanced Technology Park, Building No. 5, Haifa, Israel		31905
(Address of principal executive offices)		(Zip Code)

 

Registrant's telephone number  011-972-74-7107259

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Common Stock, par value $0.00001

Name of each exchange on which registered Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act:

 

None.

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        

 

Yes ☐          No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                 

 

Yes ☐          No ☒

 

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 ☒          No ☐

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

 

☒ Yes           ☐No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒ 

 

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

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).           

 

Yes ☐          No ☐

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter.

 

$140,859,860

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

 

113,595,483 as of September 2, 2018

 

 

TABLE OF CONTENTS

 

		Page
PART I		3
Item 1.	Business.	3
Item 1A.	Risk Factors.	18
Item 1B.	Unresolved Staff Comments.	34
Item 2.	Properties.	34
Item 3.	Legal Proceedings.	34
Item 4.	Mine Safety Disclosures.	34
PART II		35
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	34
Item 6.	Selected financial data.	35
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	36
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	46
Item 8.	Financial Statements and Supplementary Data.	47
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	48
Item 9A.	Controls and Procedures	48
Item 9B.	Other Information	48
PART III		50
Item 10.	Directors, Executive Officers and Corporate Governance.	50
Item 11.	Executive Compensation.	55
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.	66
Item 13.	Certain Relationships and Related Transactions and Director Independence.	67
Item 14.	Principal Accounting Fees and Services	68
PART IV		69
Item 15.	Exhibits.	69
Item 16	Form 10-K Summary.	71

 

 

Our financial statements are stated in thousands United States Dollars, or US$, and are prepared in accordance with United States Generally Accepted Accounting Principles, or U.S. GAAP.

 

In this annual report, unless otherwise specified, all dollar amounts are expressed in U.S. dollars.

 

As used in this annual report, the terms "we", "us", "our", "the Company", and "Pluristem" mean Pluristem Therapeutics Inc. and our wholly owned Israeli subsidiary, unless otherwise indicated or required by the context.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The statements contained in this Annual Report on Form 10-K, or Annual Report, that are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "intends," "plans," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, and similar expressions are intended to identify forward-looking statements.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements appear in Item 1 – "Business" and Item 7 – "Management's discussion and Analysis of Financial Condition and Results of Operations," (especially in the section titled "Outlook") as well as elsewhere in this Annual Report and include, among other statements, statements regarding the following:

 

·

the expected development and potential benefits from our products in treating various medical conditions;

 

·

the clinical trials to be conducted according to our license agreement with CHA Biotech Co. Ltd.;

 

·

our plan to execute our strategy independently, using our own personnel, and through relationships with research and clinical institutions or in collaboration with other companies;

 

·

the prospects of entering into additional license agreements, or other forms of cooperation with other companies and medical institutions;

 

·

our pre-clinical and clinical trials plans, including timing of initiation, enrollment and conclusion of trials;

 

·

achieving regulatory approvals, including under accelerated paths;

 

·

receipt of future funding from the Israel Innovation Authority;

 

·

our marketing plans, including timing of marketing our first product candidate, PLX-PAD;

 

·

developing capabilities for new clinical indications of placenta expanded (PLX) cells and new products;

 

·

the timing and development of our PLX-Immune product candidate;

·

our estimations regarding the size of the global market for our product candidates;

 

·

our expectations regarding our production capacity;

 

·

our expectation to demonstrate a real-world impact and value from our pipeline, technology platform and commercial-scale manufacturing capacity;

 

·

our expectations regarding our short- and long-term capital requirements;

 

·

the proposed joint venture to be established with Sosei Corporate Venture Capital Ltd. for the clinical development and commercialization of Pluristem’s PLX-PAD cell therapy product in Japan, the plan to enter into definitive agreements and the timing of entering such agreements;

 

·

our outlook for the coming months and future periods, including but not limited to our expectations regarding future revenue and expenses; and

 

·

information with respect to any other plans and strategies for our business.

 

The factors discussed herein, including those risks described in Item 1A. "Risk Factors", and expressed from time to time in our filings with the Securities and Exchange Commission, or SEC, could cause actual results and developments to be materially different from those expressed in or implied by such statements.  In addition, historic results of scientific research, clinical and preclinical trials do not guarantee that the conclusions of future research or trials would not suggest different conclusions. Also, historic results referred to in this Annual Report would be interpreted differently in light of additional research, clinical and preclinical trials results. The forward-looking statements are made only as of the date of this filing, and except as required by law we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

PART I

 

Item 1.  Business.

 

Our Current Business

 

Pluristem Therapeutics Inc. is a leading developer of placenta-based cell therapy product candidates for the treatment of multiple ischemic, inflammatory and hematologic conditions. Our lead indications are critical limb ischemia, or CLI, recovery following surgery for hip fracture, and acute radiation syndrome, or ARS.  Each of these indications is a severe unmet medical need. We were incorporated in Nevada in 2001, and have a wholly owned subsidiary in Israel called Pluristem Ltd., or the Subsidiary. We operate in one segment and our operations are focused on the research, development, clinical trials and manufacturing of cell therapeutics and related technologies.

PLX cells are derived from a class of placental cells that are harvested from donated placenta at the time of full term healthy delivery of a baby. PLX cell products require no tissue matching prior to administration. They are produced using our proprietary three-dimensional expansion technology. Our manufacturing facility complies with the European, Japanese, Israeli and U.S. Food and Drug Administration, or FDA’s, current Good Manufacturing Practice requirements and has been approved by the European and Israeli regulators for production of PLX-PAD for late stage trials and marketing. In December 2017, after an audit of our facilities, we were granted manufacturer/importer authorization and Good Manufacturing Practice Certification by Israel’s Ministry of Health. If we obtain FDA and other regulatory approvals to market PLX cells, we expect to have in-house production capacity to grow clinical-grade PLX cells in commercial quantities.

Our goal is to make significant progress with our robust clinical pipeline and our anticipated pivotal trials in order to ultimately bring innovative, potent therapies to patients who need new treatment options. We expect to demonstrate a real-world impact and value from our pipeline, technology platform and commercial-scale manufacturing capacity. Our business model for commercialization and revenue generation includes, but is not limited to, direct sale of our products, partnerships, licensing deals, and joint ventures with pharmaceutical companies.

We aim to shorten the time to commercialization of our product candidates by leveraging unique accelerated regulatory pathways that exist in the United States, Europe and Japan to bring innovative products that address life-threatening diseases to the market efficiently.  We believe that these accelerated pathways create substantial opportunities for us and for the cell therapy industry as a whole.

Two pivotal, Phase III multinational clinical trials are currently being conducted with our PLX-PAD product candidate: one in CLI, and the other in recovery following surgery for hip fracture.

Our PLX-PAD cell program in CLI had been selected for the Adaptive Pathways pilot project of the European Medicines Agency, or EMA, Japan’s Pharmaceuticals and Medical Devices Agency, or PMDA accelerated pathway, the FDA Fast Track Approval and FDA Expanded Access Program, or EAP, in the United States. The CLI program in the European Union was awarded a Euro 7,600,000 (approximately $8,900,000) grant as part of the European Union’s Horizon 2020 program.

Our PLX-PAD cell program in recovery following surgery for hip fracture was also selected for the Adaptive Pathways pilot project of EMA and was awarded a Euro 7,400,000 (approximately $8,600,000) grant, as part of the European Union’s Horizon 2020 program.

Our second product candidate, PLX-R18, is under development in the United States for ARS via the FDA Animal Rule regulatory pathway, which may result in approval without the prior performance of human efficacy trials. The National Institutes of Health’s National Institute of Allergy and Infectious Diseases, or NIAID, has completed a dose selection trial with our PLX-R18 product candidate in the hematologic component of ARS.

Scientific Background

 

Cell therapy is an emerging field within the regenerative medicine area.  The characteristics and properties of cells vary as a function of tissue source and growth conditions.  The human placenta from which our PLX cells are derived provides an uncontroversial source of non-embryonic, adult cells and represents an innovative approach in the cell therapy field. The different factors that PLX cells release suggest that the cells can be used therapeutically for a variety of ischemic, inflammatory, autoimmune and hematological disorders.

 

PLX cells do not require tissue matching prior to administration.  This allows for the development of ready-to-use / "off-the-shelf" allogeneic products.

 

Our Technology

 

We develop, and intend to commercialize, cell therapy production technologies and products that are derived from the human placenta. Our PLX cells are adherent stromal cells, or ASCs, that are expanded using a proprietary 3D process. This system utilizes a synthetic scaffold to create an artificial 3D environment where placental-derived stromal cells can grow. Our 3D process enables the large-scale monitored and controlled production of reproducible, high quality cell products and is capable of manufacturing a large number of PLX doses originating from different placentas. Additionally, our manufacturing process has demonstrated batch-to-batch consistency, an important manufacturing challenge for biological products.

 

 

Product Candidates

 

Our primary objective is to be the leading provider of allogeneic placenta based cell therapy products that are true off-the-shelf products that do not require any matching or additional manipulation prior to administration. From the physician’s and patient’s perspective, we believe that our PLX products are comparable to any other product delivered in a vial. Our PLX products are administered using a standard needle and syringe. Our PLX products are in clinical stage development for multiple indications.

 

Our first product candidate, PLX-PAD, is currently in a Phase III multinational clinical trial in CLI, and in a Phase III multinational clinical trial in recovery following surgery for hip fracture.

Our second product candidate, PLX-R18, is under development in the United States for ARS via the FDA Animal Rule regulatory pathway, as well as in a Phase I trial in the United States and Israel for incomplete hematopoietic recovery following hematopoietic cell transplantation, or HCT.

 

Our third product candidate, PLX-Immune is under pre-clinical development for treatment of certain human cancer types.

We believe that using the placenta as a unique cell source, combined with our innovative research, development and high quality manufacturing capabilities, will be the "engine" that drives this platform technology towards the successful development of additional PLX cell therapy products and indications.

Our Clinical Development Product Candidates

 

Peripheral and Cardiovascular Diseases – We are investigating the use of PLX-PAD cells for the treatment of various stages of peripheral arterial disease, from early stage IC to advanced CLI.

 

In May 2015, we announced that the PLX-PAD cell program in CLI had been selected for the Adaptive Pathways pilot project of the EMA. During fiscal year 2017, the FDA and several EU regulatory agencies cleared our application to begin the pivotal Phase III trial of PLX-PAD cells in the treatment of CLI for patients who are unsuitable for revascularization. This multinational Phase III trial is being conducted in the United States, Europe and Israel. In September 2017, we announced that the FDA granted a fast track designation to our ongoing Phase III study of PLX-PAD cells for the treatment of CLI in patients ineligible for revascularization. The FDA’s fast track designation is a process designed to facilitate the development and expedite the review of drug to treat serious conditions and unmet medical needs. With fast track designation, there is an increased possibility for a priority review by the FDA of PLX-PAD cells for the treatment of CLI.

In addition, our Phase III study of PLX-PAD in CLI is a collaborative project carried out by an international consortium led by the Berlin-Brandenburg Center for Regenerative Therapies together with us and with participation of additional third parties. We have received a grant from the European Union’s Horizon 2020 program for our Phase III study of PLX-PAD in CLI.

Our intention is to file a request for marketing authorization in the United States and in Europe following a successful completion of this 246-patient trial. Based on our discussion with the EMA, we may conduct an interim efficacy analysis based on data of 50% of the patients enrolled in the study. If these trials yield positive results, they could lead to early conditional marketing approval in Europe.

In January 2018, we announced that the FDA cleared our EAP for the use of our PLX-PAD cell treatment in patients with CLI.

We have completed two Phase I safety/dose-escalating clinical trials for CLI, one in the United States and one in Germany. These CLI trials demonstrated that no blood type or human leukocyte antigen matching is required, and that the administration of PLX-PAD cells is safe, even if two doses are administered to a patient on two different occasions.

 

 

In addition, PLX-PAD cells are potentially effective in reducing the frequency of amputations in CLI patients. Generally, the FDA and the EMA require the primary endpoint for pivotal CLI clinical trials to be Amputation Free Survival, or AFS, at one year. The pooled data from the two studies we conducted suggest an AFS rate at one year of 86% in PLX-treated patients versus an AFS ranging between 48% to 66% in patients from placebo arms in other CLI trials.

In June 2018, we announced top-line results from our 172 patients, randomized, double blind, placebo controlled, and multinational Phase II clinical study in Intermittent Claudication (IC). The study’s outcome suggested that a PLX-PAD treatment reduced the incidence of revascularization and improved patients’ mobility. In addition, the study results validate the design of our ongoing pivotal Phase III study in CLI, a more severe stage of peripheral arterial disease, and we believe confirmed our proprietary bio-therapeutic approach.

In April 2015, Japan’s PMDA approved our large-scale manufacturing methods and quality for PLX-PAD cells for use in clinical trials.  In August 2015, the PMDA granted safety clearance to PLX-PAD cells for use in clinical trials in Japan, and in December 2015 we reached an agreement with the PMDA on the design of the final trial needed to apply for conditional marketing approval of PLX-PAD cells in the treatment of CLI. The approval of the protocol for the 75-patient trial was part of a larger agreement on the development of PLX-PAD via Japan’s new accelerated regulatory pathway for regenerative medicine.

Additionally, in May 2015, our CLI clinical development program was selected for the EMA’s Adaptive Pathways pilot project and one of very few companies that successfully passed through the different stages of the project. The goal of the project is to improve timely access for patients to new medicines. It allows for early marketing authorization of a therapy in a restricted patient population, followed by additional assessments and the possibility of later approval for use in broader patient populations.

Orthopedic Diseases – In April 2018, we announced that the FDA cleared our Investigational New Drug, or IND, for our Phase III trial for recovery following surgery for hip fracture. This multinational Phase III trial is being conducted in the United States, Europe and Israel. The EMA confirmed that recovery following surgery for hip fracture is eligible for the Adaptive Pathways pilot project

Our Phase III trial protocol and design was based on our phase I/II, randomized, double-blind, placebo‑controlled study (n=20) to assess the safety and efficacy of intramuscular injections of allogeneic PLX‑PAD cells for the regeneration of injured gluteal musculature after total hip replacement has been conducted in Germany under the approval of PEI. In this study, PLX-PAD cells or placebo were injected into the traumatized gluteal muscle during total hip replacement surgery. The study results met its primary efficacy endpoint, change in maximal voluntary isometric contraction force of the gluteal muscle at six months after total hip replacement. Patients treated with PLX-PAD had a significantly greater improvement of maximal voluntary muscle contraction force than the placebo group (p=0.0067). In addition, the study demonstrated that PLX-PAD was safe and well tolerated by the patients.

 

PLX-R18 is also under development in a Phase I trial in the United States and Israel for incomplete hematopoietic recovery following HCT.

 

 

We initiated the trial in fiscal year 2017 in the United States. In October 2017, we received an approval from the Israeli Ministry of Health to initiate this Phase I trial in Israel as well. In February 2018, we announced that a peer-reviewed journal published key animal findings from a study of PLX-R18 that demonstrate the cells’ efficacy in improving human hematopoietic engraftment.

ARS – We have conducted several animal studies for the evaluation of PLX-R18 for the treatment of ARS, in collaboration with the NIAID. The U.S. National Institutes of Health, or NIH, funded and conducted a pilot study in non-human primates, or NHPs, to evaluate the therapeutic effect of PLX-R18 on hematological aspects of ARS. In May 2017, we announced results of the NHPs pilot study for PLX-R18 as a treatment for ARS. Although study size was not designed to show significance, results showed a trend toward improved survival of PLX-R18 treated animals compared to control, placebo treated animals. The study, conducted and funded by the NIAID, was designed to assess the safety and efficacy of PLX-R18 following intramuscular injection into irradiated and non-irradiated NHPs. Efficacy measures included survival as well as hematological parameters which are affected by exposure to high levels of radiation as may occur in a nuclear accident or attack. These data will help the design of a pivotal study to fulfill the requirements for a Biologics License Application submission under the FDA’s Animal Rule regulatory pathway.

In April 2018, we announced that the FDA approved our IND application for PLX-R18 cell therapy in the treatment of ARS. The IND allows us to treat victims who may have been acutely exposed to high dose radiation due to nuclear attack or accident.

In December 2015, we also signed a Memorandum of Understanding for a collaboration with Fukushima Medical University, Fukushima Global Medical Science Center. The purpose of the collaboration is to develop our PLX-R18 cells for the treatment of ARS, and for morbidities following radiotherapy in cancer patients. In August 2017, we announced that a pilot study of our PLX-R18 cell therapy will be initiated by the U.S. Department of Defense’s Armed Forces Radiobiology Research Institute, part of the Uniformed Services University of Health Sciences. The studies are examining the effectiveness of PLX-R18 as a treatment for ARS prior to exposure to radiation. In June, 2018, we reported positive animal data from studies conducted in collaboration with Fukushima Medical University evaluating PLX-R18 cells as a treatment for radiation damage to the gastrointestinal, or GI, tract and bone marrow. Data from these studies showed that PLX-R18 cells significantly increased survival rates, preserved GI stem cells activity that enhance the recovery of the GI system and prevented severe damage to the intestinal lining, suggesting PLX-R18 potential as a multi-organ therapy for ARS.

In October 2017, we announced that the FDA granted us an orphan drug designation for our PLX-R18 cell therapy for the prevention and treatment of ARS.

In September 2017, we signed an agreement with Tel Aviv Sourasky Medical Center (Ichilov Hospital) to conduct a clinical Phase I/II trial of PLX-PAD cell therapy for the treatment of Steroid-Refractory Chronic Graft-Versus-Host-Disease. This trial is an investigator initiated study.

 

 

As such, Tel Aviv Sourasky Medical Center will support the study and will be responsible for its design and implementation.

In January 2018, we announced the publication of a peer-reviewed article in a journal which examined the effect of PLX-Immune cells on the proliferation of over 50 lines of human cancerous cells. Data showed that the PLX-Immune cells exhibited an anti-proliferative effect on a wide range of human cancer cell types, with a strong inhibitory effect on various lines of breast, colorectal, kidney, liver, lung, muscle and skin cancers. We have also conducted a pre-clinical study of female mice harboring human triple negative breast cancer. In this study, the results showed a statistically significant reduction in tumor size as well as complete tumor remission in 30% of treated recipients.

Regulatory and Clinical Affairs Strategy

Our cell therapy development strategy is to hold open and frequent discussions with regulators at all stages of development from preclinical trials to more advanced regulatory stages. We utilize this strategy in working with the FDA, the EMA, Japan’s PMDA, Germany’s PEI as well as other European national competent authorities and the Israeli Minister of Health, or MOH, and we are also working with the Ministry of Food and Drug Safety, or MFDS, of South Korea authority via our collaborator, CHA.

The Adaptive Pathways pilot project is part of the EMA’s efforts to improve timely access for patients to new therapies. It targets treatments with the potential to heal serious conditions with an unmet medical need, and may reduce the time to a medicine's approval or to its reimbursement for targeted patient groups. The pilot is open to clinical programs in early stages of development only. After a therapy is selected for the program, the Adaptive Pathways Discussion Group provides detailed guidance to the applicant regarding the formal regulatory processes that precede a trial targeting early approval and further expansion of the indications. We have applied early to this program and have been selected for it.

The Japanese PMDA, in the framework of regulations for regenerative therapy effective in November 2014, promotes expedited approval for regenerative therapies that are being developed for seriously debilitating or life-threatening indications for which there is a high unmet medical need. We are developing CLI in Japan under this program.

The U.S. 21st Century Cures Act offers an opportunity for regenerative medicine products, like PLX cells, to bypass the time consuming hurdles on the way to meet patient needs. The Regenerative Medicine Advanced Therapy designation provided by the FDA enables regenerative cell therapies to access the FDA’s existing expedited programs to help foster the development and approval of these novel products. The FDA has pledged to develop a comprehensive and efficient science-based policy with the aim of accelerating the proper development processes to help bring innovative, scientifically proven regenerative cell therapies to patients more rapidly. We have not received such designation from the FDA yet.

In September 2017, we announced that the FDA granted “Fast Track” designation for PLX-PAD in CLI. The FDA’s Fast Track designation is a process designed to facilitate the development and expedite the review of drugs to treat serious conditions and unmet medical needs. With Fast Track designation, there is an increased possibility for a priority review by the FDA of PLX-PAD cells for the treatment of CLI.

In January 2018, we announced that the FDA cleared our EAP for the use of our PLX-PAD cell treatment in patients with CLI. EAP allows the use of an investigational medical product outside of clinical trials and is usually granted in cases where patients are unsuitable for inclusion under the study protocol and the patient’s condition is life-threatening with an unmet medical need. As part of the EAP, our PLX-PAD cell therapy will be made available to a limited number of CLI patients in the United States who are unsuitable for revascularization and cannot take part in the our ongoing Phase III clinical study.

 

Intellectual Property

We understand that our success will depend, in part, on maintaining our intellectual property, and therefore we are committed to protecting our technology and product candidates with patents and other methods described below.

We are the sole owner of 119 issued patents and 93 pending patent applications in the United States, Europe, China and Japan, as well as in additional countries worldwide, including Israel, countries in the Far East and South America (in calculating the number of issued patents, each European patent validated in multiple jurisdictions was counted as a single patent). In April 2016, the Subsidiary entered into a licensing agreement with TES Holdings Co., Ltd., a venture company derived from the University of Tokyo, to obtain a key patent in Japan to cover the treatment of ischemic diseases with placental cell therapy. This license is subject to future single low-digit royalties from sales of our product for treatment in the field of ischemic diseases in Japan, until expiry of the patent in 2023. This license follows the grant of two key patents to us by the Japanese Patent Office, which address three dimensional methods for expanding placental and adipose cells, and specified cell therapies produced from placental tissue using these methods. In February 2017, the Subsidiary signed an agreement with founders of a certain patent for a five year option to purchase the certain patent for an amount of 1 million Euro. The agreement includes yearly payments of 75,000, 75,000 and 100,000 Euros to be paid in February 2017, 2018 and 2019, respectively.  In case we decide to purchase the certain patent, until January 15, 2019, 50% of the yearly payments will be deducted from the amount of 1 million Euro.  We are entitled to terminate the agreement for convenience upon providing the founders 30 days prior notice.

 

Based on the well-established understanding that the characteristics and therapeutic potential of a cell product are largely determined by the source of the cells and by the methods and conditions used during their culturing, our patent portfolio includes different types of claims that protect the various unique aspects of our technology.

 

Our multi-national portfolio of patent and patent applications includes the following claims:

 

·

Our proprietary expansion methods for 3D stromal cells;

·

Composition of matter claims covering the cells;

·

The therapeutic use of PLX cells for the treatment of a variety of medical conditions; and

·

Cell-culture, harvest, and thawing devices.

Through our experience with ASC-based product development, we have developed expertise and know-how in this field and have established procedures for manufacturing clinical-grade PLX cells in our facilities. Certain aspects of our manufacturing process are covered by patents and patent applications. In addition, specific aspects of our technology are retained as know-how and trade secrets that are protected by our confidentiality agreements with our employees, consultants, contractors, manufacturers and advisors. These agreements generally provide for protection of confidential information, restrictions on the use of materials, and an obligation to assign to us inventions conceived during the course of performing services for us.

 

The following table provides a description of our key patents and patent applications and is not intended to represent an assessment of claims, limitations or scope. In some cases, a jurisdiction is listed as both pending and granted for a single patent family. This is due to pending continuation or divisional applications of the granted case.

 

There is a risk that our patents will be invalidated, and that our pending patent applications will not result in issued patents.  We also cannot be certain that we will not infringe on any patents that may be issued to others.  See "Risk Factors - We must further protect and develop our technology and products in order to become a profitable company".  The expiration dates of these patents, based on filing dates, range from 2020 to 2036.

 

 

Actual expiration dates will be determined according to extensions received based on the Drug Price Competition and Patent Term Restoration Act of 1984 (P.L. 98-417), commonly known as the "Hatch-Waxman" Act, that permits extensions of pharmaceutical patents to reflect regulatory delays encountered in obtaining FDA market approval.  The Hatch-Waxman Act is based on a U.S. federal law and therefore only relevant to U.S. patents.

 

Our Patent Portfolio

Patent Name/ Int. App. No.	Pending Jurisdictions	Granted Jurisdictions	Expiry Date
METHOD AND APPARATUS FOR MAINTENANCE AND EXPANSION OF HAEMATOPOIETIC STEM CELLS AND/OR PROGENITOR CELLS PCT/US2000/02688		United States, Japan, Europe, New Zealand, Canada	February 4, 2020
METHODS FOR CELL EXPANSION AND USES OF CELLS AND CONDITIONED MEDIA PRODUCED THEREBY FOR THERAPY PCT/IL2007/000380	United States, Europe, China, Hong Kong, Canada, Brazil	Japan, Europe, Israel, Singapore, Russia, South Africa, Australia, India, South Korea, Mexico, Hong Kong, China	March 23, 2027
ADHERENT CELLS FROM PLACENTA TISSUE AND USE THEREOF IN THERAPY PCT/IL2008/001185	United States, Europe,  Israel,  China, Hong Kong,  Brazil, Russia, Japan	United States, Europe, Singapore, Australia, Hong Kong, South Africa, India, Mexico, Japan, South Korea, Canada, China, Israel	September 2, 2028
METHODS OF TREATING INFLAMMATORY COLON DISEASES PCT/IL2009/000527	United States, Israel	United States, Israel, Russia, South Africa	May 26, 2029
METHODS OF SELECTION OF CELLS FOR TRANSPLANTATION PCT/IL2009/000844	United States	Europe, Israel	September 1, 2029
ADHERENT CELLS FROM PLACENTA TISSUE AND USE THEREOF IN THERAPY PCT/IL2009/000846	India, Hong Kong, China	United States, Russia, Australia, South Africa, Mexico, Europe, Canada, Singapore, Hong Kong	September 1, 2029

ADHERENT CELLS FROM PLACENTA TISSUE AND USE THEREOF IN THERAPY PCT/IL2009/000845		United States, Europe, Israel	September 1, 2029
ADHERENT STROMAL CELLS DERIVED FROM PLANCENTAS OF MULTIPLE DONORS AND USES THEREOF PCT/IB2011/001413	United States	Israel, Europe, Hong Kong	April 21, 2031
ADHERENT CELLS FROM PLACENTA AND USE OF SAME IN DISEASE TREATMENT PCT/IB2010/003219	United States,  China, Europe, Israel, India	United States, Europe, China, Canada, Australia, New Zealand, South Africa, Hong-Kong, Mexico	November 29, 2030
METHODS AND SYSTEMS FOR HARVESTING ADHERENT STROMAL CELLS PCT/IB2012/000933	United States, China, Europe, Hong Kong, Israel, India, South Korea	United States, Canada, Israel, Australia, Mexico, Singapore, South Africa	April 15, 2032
METHODS FOR TREATING RADIATION OR CHEMICAL INJURY PCT/IB2012/000664	United States, Europe, Hong Kong, Israel, South Korea, Japan	Europe, Japan, South Korea, Israel, Hong Kong	March 22, 2032
SKELETAL MUSCLE REGENERATION USING MESENCHYMAL STEM CELLS PCT/EP2011/058730		United States, Europe, Israel, Hong Kong	May 27, 2031
GENE AND PROTEIN EXPRESSION PROPERTIES OF ADHERENT STROMAL CELLS CULTURED IN 3D PCT/IB2014/059114	United States, Israel		February 20, 2034
DEVICES AND METHODS FOR CULTURE OF CELLS PCT/IB2013/058184	Europe, India, Mexico	United States, Canada, China, Israel, Japan, Singapore, Australia, Hong Kong, South Korea, Russia,	August 31, 2033
METHODS FOR PREVENTION AND TREATMENT OF PREECLAMPSIA PCT/IB2013/058186	China, Japan, Korea, Canada, Israel, Singapore, Hong Kong	United States, Europe, Australia, South Africa	August 31, 2033

METHOD AND DEVICE FOR THAWING BIOLOGICAL MATERIAL PCT/IB2013/059808	United States, Europe, China, Japan, Korea, Canada, Israel, India, Hong Kong	Australia, Singapore, Russia	October 31, 2033
SYSTEMS AND METHODS FOR GROWING AND HARVESTING CELLS PCT/IB2015/051559	United States, Europe, Israel		March 3, 2035
METHODS AND COMPOSITIONS FOR TREATING AND PREVENTING MUSCLE WASTING DISORDERS PCT/IB2015/059763	United States, Israel		December 18, 2035
USE OF ADHERENT STROMAL CELLS FOR ENHANCING HEMATOPOIESIS IN A SUBJECT IN NEED THEREOF PCT/IB2016/051585	United States, China, Israel		March 21, 2036
ALTERED ADHERENT STROMAL CELLS AND METHODS OF PRODUCING AND USING SAME PCT/IB2016/053310	Patent Cooperation Treaty		June 6, 2036
METHODS AND COMPOSITIONS FOR TREATING CANCERS AND NEOPLASMS PCT/IB2017/050868	Patent Cooperation Treaty, Australia		February 16, 2037
DRUG CONTAINING HUMAN PLACENTA-ORIGIN MESENCHYMAL CELLS AND PROCESS FOR PRODUCING VEGF USING THE CELLS JP20030579842		Japan	March 28, 2023

 

Research and Development

 

Our research and development expenses were $26,371,000, $24,001,000 and $22,856,000 in fiscal years 2018, 2017 and 2016, respectively, before deducting the participation by the Israel Innovation Authority, or IIA (previously the Office of the Chief Scientist), participation by the European Union research and development consortium under the European Union's Horizon 2020 program and grants by other third parties.

 

 

 

Our initial technology, the PluriX™ Bioreactor system, was invented at the Technion - Israel Institute of Technology's Rappaport Faculty of Medicine, in collaboration with researchers from the Weizmann Institute of Science. This technology has been further significantly developed by our research and development teams over the ensuing years.

 

 

In July 2007, we entered into a five-year collaborative research agreement with the Berlin-Brandenburg Center for Regenerative Therapies at Charité - University Medicine Berlin, or Charité. In August 2012, we extended our collaborative research agreement with Charité for a period of five years through 2017. In June 2017, we extended our collaborative research agreement with Charité for a period of additional five 5 years, through June 2022.  We and Charité are collaborating on a variety of indications utilizing PLX cells. According to the agreement, we will be the exclusive owner of the technology and any products produced as a result of the collaboration. Charité will receive between 1% to 2% royalties from new developments that have been achieved during the joint development.

 

We have performed proof of concept studies from April 2015 to December 2016 in conjunction with the Israeli Duchenne Association, or ADI, to assess the utility of PLX-PAD in alleviating symptoms of Duchenne muscular dystrophy. We signed an MOU for a collaboration with Fukushima Medical University, Fukushima Global Medical Science Center. The purpose of the collaboration is to develop Pluristem's PLX-R18 cells for the treatment of ARS, and for morbidities following radiotherapy in cancer patients.

 

The collaboration will proceed alongside research supported by the NIH, which is studying PLX-R18 as a potential treatment for the hematologic component of ARS. The MOU for a collaboration with Fukushima will be renewed automatically on a yearly basis. Each party is entitled to terminate the agreement for convenience upon providing the other party 30 days prior notice.

 

On June 26, 2013, we entered into an exclusive out-licensing and commercialization agreement, or the CHA Agreement, with CHA, for conducting clinical trials and commercialization of our PLX-PAD product in South Korea in connection with two indications: the treatment of CLI and IC. We will continue to retain rights to our proprietary manufacturing technology and cell-related intellectual property.

 

 

The term of the CHA Agreement extends from June 24, 2013 until the later of the expiration, lapse, cancellation, abandonment or invalidation of the last valid patent claim covering the development of the product indications.  The CHA Agreement contains customary termination provisions, including in the event that the parties do not reach an agreement upon a development plan for conducting the clinical trials.

 

Upon termination of the CHA Agreement, the license granted thereunder will terminate, and all rights included therein will revert to us, whereupon we will be free to enter into agreements with any other third parties for the granting of a license in or outside South Korea or to deal in any other manner with such rights as it shall see fit in our sole discretion.

 

In October 2017, we entered into a collaborative project, the nTRACK, carried out by an international consortium led by Leitat. The aim of this project is to examine gold nano particles labeling of stem cells to enable assessment of cells’ in vivo persistence and distribution in correlation to biological efficacy. Under the project, PLX cells, labeled and non-labeled will be characterized and examined in animal models for muscle injury.

 

In April 2018, NIAID awarded a $2.5 million grant to Indiana University to conduct, together with us, studies of our PLX-R18 cell therapy in the treatment of ARS. The goal of this project is to extend the PLX-R18 ARS studies to include examination of survival in pediatric and geriatric populations as well as the ability of PLX-R18 to alleviate delayed effects of radiation in survivors.

In July 2018, we entered into a strategic collaboration agreement with Thermo Fisher Scientific Inc. with the aim of advancing the fundamental knowledge of cell therapy industrialization and to improve quality control of the end-to-end supply chain. The collaboration will combine Thermo Fisher’s experience in cell therapy development and bioproduction scaleup with our expertise in cell therapy manufacturing, clinical development and quality control.

We plan to continue to collaborate with universities and academic institutions and corporate partners worldwide to fully leverage our expertise and explore the use of our cells in other indications.

 

In recent years we have also engaged in research and development projects with other leading research institutions such as Hadassah University Medical Center, or Hadassah, in Jerusalem, Israel, and the Texas A&M Health Science Center, or Texas A&M in Round Rock, Texas. We used the services of Texas A&M for conducting a pre-clinical trial with PLX cells in a mice model of pre-eclampsia. We have no current or ongoing obligations to Texas A&M. We used the services of Hadassah to conduct pre-clinical trials, mainly in the field of radiation-induced hematopoietic failure. From time to time, we have performed additional studies with Hadassah furthering our understanding of the mechanism of action of the PLX-R18 product. We have no current or ongoing obligations to Hadassah. As of June 30, 2018, both projects with Texas A&M and Hadassah have been completed.

 

Sosei CVC Term Sheet

 

 In December 2016, we announced that we signed a term sheet with Sosei CVC for the establishment of a joint venture for the clinical development and commercialization of our PLX-PAD cell therapy product in Japan for CLI. We extended the deadline to consummate the transaction to December 31, 2017 but have not entered into an additional extension since such time. To date, we have not yet closed on the proposed transaction. We are still in discussions with Sosei CVC and other related investors in order to finalize the terms of a definitive agreement.

 

In-House Clinical Manufacturing

 

We have the in-house capability to perform clinical cell manufacturing. Our state-of-the-art GMP grade manufacturing facility in Haifa has been in use since February 2013 for the main purpose of clinical grade, large-scale manufacturing. The facility’s new automated manufacturing process and products were approved for production of PLX-PAD for clinical use by the FDA, EMA, Korean MFDS, PMDA and the Israeli MOH. Our second product, PLX R18, was cleared by the FDA and the Israeli Ministry of Health for clinical use. Furthermore, the site was inspected and approved by an EU qualified person (European accreditation body), approving that the site and production processes meet the current GMP for the purpose of manufacturing clinical grade products.

 

The site was also inspected and approved by Israel’s Ministry of Health and we received a GMP certification and manufacturer-importer authorization. Following the clinical approval of the facility, we are moving forward with our planned clinical trials based on cells manufactured in the new, efficient and improved manufacturing processes.

We obtain the human placentas used for our research and manufacturing activities from various hospitals in Israel after receiving a written informed consent by the mother and pathogen clearance. Any medical waste related to the use of placentas is treated in compliance with local environmental laws and standards.

 

 

Government Regulation

 

The development, manufacturing, and marketing of our cell therapy product candidates are subject to the laws and regulations of governmental authorities in the United States and the European Union as well as other countries in which our products will be marketed in the future like Japan, Israel and South Korea. In addition, the manufacturing conditions are specifically inspected by the Israeli Ministry of Health.

 

The FDA in the United States and the EMA in Europe must approve the product for marketing.  Furthermore, various governmental statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage and record keeping related to such products and their marketing. Governments in other countries have similar requirements for testing and marketing.

 

The process of obtaining these approvals and the subsequent compliance with appropriate statutes and regulations require the expenditure of substantial time, resources and money. There can be no assurance that our product candidates will ultimately receive marketing approval, or, if approved, will be reimbursed by public and private health insurance.

 

There are several stages every drug has to go through during its development process. Among these are:

 

·

Performance of nonclinical laboratory and animal studies to assess a drug's biological activity and to identify potential safety problems, and to characterize and document the product's chemistry, manufacturing controls, formulation, and stability. In accordance with regulatory requirements, nonclinical safety and toxicity studies are conducted under Good Laboratory Practice requirements to ensure their quality and reliability;

 

·

Conducting adequate and well-controlled human clinical trials in compliance with Good Clinical Practice, or GCP, to establish the safety and efficacy of the product for its intended indication;

 

·

The manufacture of the product according to GMP regulations and standards; and

 

·

Potential post-marketing clinical testing and surveillance of the product after marketing approval, which can result in additional conditions on the approvals or suspension of clinical use.

 

Approval of a drug for clinical studies in humans and approval of marketing are sovereign decisions of states, made by national, or, in case of the European Union, international regulatory competent authorities.

 

 

In the United States, our product candidates are subject to regulation as a biological product under the Public Health Service Act and the Federal Food, Drug and Cosmetic Act. The FDA, regulating the approval of clinical trials and marketing applications in the United States, generally requires the following steps prior to approving a new biological product either for clinical studies or for commercial sale:

 

•	Submission of an Investigational New Drug Application, which must become effective before clinical testing in humans can begin;

 

•	Obtaining approval of Institutional Review Boards, or IRBs, of research institutions or other clinical sites to introduce the drug candidate into humans in clinical trials;

 

•	FDA may grant approval for Expanded Access Program prior to the completion of clinical studies, in order to allow access for the investigational drug, for patients that are excluded from the study.

 

•	FDA may grant priority review status, in order to expedite the Biologics License Application, or BLA, review process. Obtaining of a Fast Track designation allows access for the request of priority review.

 

 

•	Submission to the FDA of a BLA for marketing authorization of the product, which must include adequate results of pre-clinical testing and clinical trials;

 

•	Submission of BLA with a proof of efficacy that is based only on animal studies, where human efficacy studies cannot be conducted because the conduct of such trials is unethical and field trials after an accidental or deliberate exposure are not feasible.

 

•	FDA review of the BLA in order to determine, among other things, whether the product is safe and effective for its intended uses; and

 

•	FDA inspection and approval of the product manufacturing facility at which the product will be manufactured.

 

 

In the European Union, our investigational cellular products are regulated under the Advanced Therapy Medicinal Product regulation, a regulation specific to cell and tissue products.This European Union regulation requires:

 

•	Filing a Clinical Trial Application via a centralized procedure, which makes it possible to obtain a coordinated assessment of an application for a clinical trial that is to take place in several European countries;

 

•	Obtaining approval of affiliated ethics committees of clinical sites to test the investigational product into humans in clinical trials;

 

•	Adequate and well-controlled clinical trials to establish the safety and efficacy of the investigational product for its intended use; and

 

In April 2015, the EMA designated PLX-PAD as a tissue-engineered product.

 

In April 2015, the Pediatric Committee of the EMA granted PLX-PAD a waiver for the requirement to submit a pediatric investigational plan for all indications falling under "treatment of peripheral atherosclerosis", including IC and CLI.

 

In May 2015, we were selected by EMA for development of PLX-PAD cells via the Adaptive Pathways approach, with the potential to reach the market several years faster than the traditional regulatory approval pathway. The Adaptive Pathways group at the EMA is advising us with respect to the clinical development of PLX-PAD in CLI and in recovery following surgery for hip fracture.

 

 

In Japan, we have completed the required regulatory interactions with the PMDA, prior to the submission of clinical trial notification, in the framework of the new regulations for regenerative therapy effective in November 2014, which promote expedited approval for regenerative therapies that are being developed for seriously debilitating/life-threatening indications. We intend to develop PLX-PAD for CLI using this regulatory approach, with the potential to reach the market via conditional approval after a Phase I/II study.

 

 

In general, the approval procedure varies among countries, and may involve additional preclinical testing and clinical trials.  The requirements and time required may differ from those required for FDA or EMA approval. Each country may impose certain procedures and requirements of its own. Most countries other than the United States, the European Union and Japan are willing to consider requests for marketing approval only after the product had been approved for marketing by either the FDA, the EMA or the PMDA.  The decision regarding marketing approval is made following the submission of a dossier that is thoroughly assessed and critically addressed.

 

 

Typically, in the United States, the European Union as well as in Japan, clinical testing involves a three-phase process, although the phases may overlap. In Phase I, clinical trials are conducted with a small number of healthy volunteers, or patients in cases of ethical issues with using healthy volunteers, and are designed to provide information about product safety and to evaluate the pattern of drug distribution and metabolism within the body. In Phase II, clinical trials are conducted with a homogenous group of patients afflicted with the specific target disease, in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In some cases, an initial trial is conducted in diseased patients to assess both preliminary efficacy and preliminary safety and patterns of drug metabolism and distribution, in which case it is referred to as a Phase I/II trial. Phase III clinical trials are generally large-scale, multi-center, controlled trials conducted with a heterogeneous group of patients afflicted with the target disease, in order to provide statistically valid proof of efficacy, as well as safety and potency. The Phase III trials represent the trials that are considered for confirmation of efficacy and safety and are the most important ones for the approval. In some circumstances, a regulatory agency may require Phase IV, or post-marketing trials if it feels that additional information needs to be collected about the drug after it is on the market.

 

During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data and clinical trial investigators to minimize risks. The sponsor of a clinical trial is required to submit an annual safety report to the relevant regulatory agencies, in which serious adverse events must be reported, and also to submit in an expedited manner any individual serious adverse events that are suspected to be related to the tested drug. An agency may, at its discretion, re-evaluate, alter, suspend, or terminate the clinical study based upon the data that have been accumulated to that point and its assessment of the risk/benefit ratio to the patient.

 

Employees

 

We presently employ a total of 172 full-time employees and 8 part-time employees, of whom 147 full-time employees and 8 part-time employees are engaged in research, manufacturing and clinical trials.

 

Competition

 

The regenerative medicine field is characterized by intense competition, as global pharma players are becoming more engaged in the cell therapy field based on the advancements made in clinical trials and due to the new favorable regenerative medicine legislation in certain regions. We face competition from both allogeneic and autologous cell therapy companies, academic, commercial and research institutions, pharmaceutical companies, biopharmaceutical companies, and governmental agencies. Some of the clinical indications we currently have under development are also being investigated in preclinical and clinical programs by others.

 

While there are hundreds of companies in the regenerative medicine space globally, there are multiple participants in the cell therapy field based in the United States, Europe, Japan, Korea, and Australia such as Athersys, Inc., Capricor Therapeutics, Inc., Celularity – a spin-off of Celgene Corporation, Tigenix NV, SanBio Inc., Healios K.K., Cytori Therapeutics, Cesca. and Mesoblast LTD. Among other things, we expect to compete based upon our intellectual property portfolio, our in-house manufacturing efficiencies, and the efficacy of our products.

 

 

Our ability to compete successfully will depend on our continued ability to attract and retain experienced and skilled executives, scientific and clinical development personnel, to identify and develop viable cellular therapeutic candidates, and exploit these products commercially. Given the magnitude of the potential opportunity for cell therapy, we expect competition in this area to intensify.

 

Available Information

 

Additional information about us is contained on our Internet website at www.pluristem.com. Information on our website is not incorporated by reference into this report. Under the "SEC Filings" and “Financial Information” sections, under the "Investors & Media" section of our website, we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (Exchange Act), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  Our reports filed with the SEC are also made available to read and copy at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.  You may obtain information about the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Reports filed with the SEC are also made available on its website at www.sec.gov.  The following Corporate Governance documents are also posted on our website: Code of Business Conduct and Ethics, and the Charters for each of the Committees of our Board of Directors.

 

Item 1A. Risk Factors.

 

The following risk factors, among others, could affect our actual results of operations and could cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and except as required by law we assume no obligation to update this information. You should carefully consider the risks described below and elsewhere in this Annual Report before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Our common stock is considered speculative and the trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. The following risk factors are not the only risk factors facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.

 

Our independent registered public accounting firm’s report states that there is a substantial doubt that we will be able to continue as a going concern.

 

We anticipate that our principal sources of liquidity will only be sufficient to fund our activities into the first quarter of the Company's fiscal year 2020. As of June 30, 2018, we had cash and cash equivalents and short-term bank deposits of $29.9 million.

 

We need to raise additional funds by the first quarter of our fiscal year 2020 in order to continue to fund our operations, and we cannot provide any assurance that we will be successful in doing so.  Our independent registered public accounting firm, Kost Forer, Gabbay & Kassierer, a Member of Ernst & Young Global, has included an explanatory paragraph in their opinion that accompanies our audited consolidated financial statements as of and for the year ended June 30, 2018, indicating that our current liquidity position raises substantial doubt about our ability to continue as a going concern.

 

We may need to raise additional financing to support the research, development and manufacturing of our cell therapy products and our products in the future but we cannot be sure we will be able to obtain additional financing on terms favorable to us when needed.  If we are unable to obtain additional financing to meet our needs, our operations may be adversely affected or terminated.

 

It is highly likely that we will need to raise significant additional capital in the future.  Although we were successful in raising capital in the past, our current financial resources are limited and may not be sufficient to finance our operations until we become profitable, if that ever happens.

 

 

It is likely that we will need to raise additional funds in the near future in order to satisfy our working capital and capital expenditure requirements.  Therefore, we are dependent on our ability to sell our common stock for funds, receive grants or to otherwise raise capital. There can be no assurance that we will be able to obtain financing. Any sale of our common stock in the future will result in dilution to existing stockholders and could adversely affect the market price of our common stock.

 

Also, we may not be able to borrow or raise additional capital in the future to meet our needs or to otherwise provide the capital necessary to conduct the development and commercialization of our potential cell therapy products, which could result in the loss of some or all of one's investment in our common stock.

 

Our likelihood of profitability depends on our ability to license and/or develop and commercialize products based on our cell production technology, which is currently in the development stage. If we are unable to complete the development and commercialization of our cell therapy products successfully, our likelihood of profitability will be limited severely.

 

We are engaged in the business of developing cell therapy products. We have not realized a profit from our operations to date and there is little likelihood that we will realize any profits in the short or medium term. Any profitability in the future from our business will be dependent upon successful commercialization of our potential cell therapy products and/or licensing of our products, which will require significant additional research and development as well as substantial clinical trials.

 

If we are not able to successfully license and/or develop and commercialize our cell therapy product candidates and obtain the necessary regulatory approvals, we may not generate sufficient revenues to continue our business operations.

 

So far, the products we are developing have completed one Phase I/II clinical trial of Gluteal Musculature rehabilitation after total hip arthroplasty (efficacy, ongoing for safety), two Phase I clinical trials for CLI, and one Phase II clinical trial in IC. Our early stage cell therapy product candidates may fail to perform as we expect. Moreover, even if our cell therapy product candidates successfully perform as expected, in later stages of development they may fail to show the desired safety and efficacy traits despite having progressed successfully through pre-clinical or initial clinical testing.  We will need to devote significant additional research and development, financial resources and personnel to develop commercially viable products and obtain the necessary regulatory approvals.

 

If our cell therapy product candidates do not prove to be safe and effective in clinical trials, we will not obtain the required regulatory approvals. If we fail to obtain such approvals, we may not generate sufficient revenues to continue our business operations.

 

Even if we obtain regulatory approval of a product, that approval may be subject to limitations on the indicated uses for which it may be marketed. Even after granting regulatory approval, the FDA, the EMA, the PMDA and regulatory agencies in other countries continue to regulate marketed products, manufacturers and manufacturing facilities, which may create additional regulatory barriers and burdens. Later discovery of previously unknown problems with a product, manufacturer or facility, may result in restrictions on the product or manufacturer, including a withdrawal of the product from the market. Further, regulatory agencies may establish additional regulations that could prevent or delay regulatory approval of our products.

 

We cannot market and sell our cell therapy product candidates in the United States, Europe, Japan, or in other countries if we fail to obtain the necessary regulatory approvals or licensure.

 

We cannot sell our cell therapy product candidates until regulatory agencies grant marketing approval, or licensure. The process of obtaining regulatory approval is lengthy, expensive and uncertain. It is likely to take at least several years to obtain the required regulatory approvals for our cell therapy product candidates, or we may never gain the necessary approvals.

 

 

Any difficulties that we encounter in obtaining regulatory approval may have a substantial adverse impact on our operations and cause our stock price to decline significantly.

 

To obtain marketing approvals in the United States and Europe for cell therapy product candidates we must, among other requirements, complete carefully controlled and well-designed clinical trials sufficient to demonstrate to the FDA, the EMA and the PMDA that the cell therapy product candidates is safe and effective for each disease for which we seek approval.  So far, we have successfully conducted Phase I/II and Phase I clinical trials for our PLX-PAD product. Several factors could prevent completion or cause significant delay of these trials, including an inability to enroll the required number of patients or failure to demonstrate adequately that cell therapy product candidates are safe and effective for use in humans. Negative or inconclusive results from or adverse medical events during a clinical trial could cause the clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful. The FDA, the EMA or the PMDA can place a clinical trial on hold if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury. If safety concerns develop, we, the FDA, the EMA or the PMDA could stop our trials before completion.

 

If we are not able to conduct our clinical trials properly and on schedule, marketing approval by FDA, EMA, PMDA and other regulatory authorities may be delayed or denied.

The completion of our clinical trials may be delayed or terminated for many reasons, such as:

 

•

The FDA, the EMA or the PMDA does not grant permission to proceed or places additional trials on clinical hold;

 

•

Subjects do not enroll in our trials at the rate we expect;

 

•

The regulators may ask to increase subject’s population in the clinical trials;

 

•

Subjects experience an unacceptable rate or severity of adverse side effects;

 

•

Third-party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, GCP and regulatory requirements, or other third parties do not perform data collection and analysis in a timely or accurate manner;

 

•

Inspections of clinical trial sites by the FDA, EMA, PMDA or MFDS and other regulatory authorities find regulatory violations that require us to undertake corrective action, suspend or terminate one or more sites, or prohibit us from using some or all of the data in support of our marketing applications; or

 

•

One or more IRBs suspends or terminates the trial at an investigational site, precludes enrollment of additional subjects, or withdraws its approval of the trial.

 

Our development costs will increase if we have material delays in our clinical trials, or if we are required to modify, suspend, terminate or repeat a clinical trial. If we are unable to conduct our clinical trials properly and on schedule, marketing approval may be delayed or denied by the FDA, EMA, PMDA and other regulatory authorities.

 

 

If our processing and storage facility or our clinical manufacturing facilities are damaged or destroyed, our business and prospects would be adversely affected.

 

If our processing and storage facility, our clinical manufacturing facilities or the equipment in such facilities were to be damaged or destroyed, the loss of some or all of the stored units of our cell therapy drug candidates would force us to delay or halt our clinical trial processes.  We have one clinical manufacturing facilities located in Haifa, Israel. If these facilities or the equipment in them are significantly damaged or destroyed, we may not be able to quickly or inexpensively replace our manufacturing capacity.

 

If we encounter problems or delays in the research and development of our potential cell therapy products, we may not be able to raise sufficient capital to finance our operations during the period required to resolve such problems or delays.

 

Our cell therapy products are currently in the development stage and we anticipate that we will continue to incur substantial operating expenses and incur net losses until we have successfully completed all necessary research and clinical trials.  We, and any of our potential collaborators, may encounter problems and delays relating to research and development, regulatory approval and intellectual property rights of our technology.  Our research and development programs may not be successful, and our cell culture technology may not facilitate the production of cells outside the human body with the expected result.  Our cell therapy products may not prove to be safe and efficacious in clinical trials.  If any of these events occur, we may not have adequate resources to continue operations for the period required to resolve the issue delaying commercialization and we may not be able to raise capital to finance our continued operation during the period required for resolution of that issue.  Accordingly, we may be forced to discontinue or suspend our operations.

 

We may not be able to secure and maintain research institutions to conduct our clinical trials.

 

We rely on research institutions to conduct our clinical trials. Specifically, the limited number of centers experienced with cell therapy product candidates heightens our dependence on such research institutions. Our reliance upon research institutions, including hospitals and clinics, provides us with less control over the timing and cost of clinical trials and the ability to recruit subjects. If we are unable to reach agreements with suitable research institutions on acceptable terms, or if any resulting agreement is terminated, we may be unable to quickly replace the research institution with another qualified institution on acceptable terms. We may not be able to secure and maintain suitable research institutions to conduct our clinical trials.

 

 Our product development programs are based on novel technologies and are inherently risky.

 

We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of our therapeutics creates significant challenges in regards to product development and optimization, manufacturing, government regulation, third-party reimbursement and market acceptance. For example, the FDA, the EMA, the PMDA and other countries’ regulatory authorities have relatively limited experience with cell therapies. Very few cell therapy products have been approved by regulatory authorities to date for commercial sale, and the pathway to regulatory approval for our cell therapy product candidates may accordingly be more complex and lengthy. As a result, the development and commercialization pathway for our therapies may be subject to increased uncertainty, as compared to the pathway for new conventional drugs.

 

There are very few drugs and limited therapies that the FDA or EMA and other regulatory authorities  have approved as treatments for some of the disease indications we are pursuing. This could complicate and delay FDA, EMA or other countries’ regulatory authorities approval of our biologic drug candidates.

 

There are very few drugs and limited therapies currently approved for treatment of CLI, IC, ARS or HCT.

 

 

As a result, the clinical efficacy endpoints, or the criteria to measure the intended results of treatment may be difficult to determine. Despite our eligibility for certain accelerated pathways, this could increase the difficulty of our obtaining FDA, EMA or other countries’ regulatory authorities approval to market our products.

 

Our cell therapy drug candidates represent new classes of therapy that the marketplace may not understand or accept.

 

Even if we successfully develop and obtain regulatory approval for our cell therapy candidates, the market may not understand or accept them. We are developing cell therapy product candidates that represent novel treatments and will compete with a number of more conventional products and therapies manufactured and marketed by others, including major pharmaceutical companies. The degree of market acceptance of any of our developed and potential products will depend on a number of factors, including:

 

•

the clinical safety and effectiveness of our cell therapy drug candidates and their perceived advantage over alternative treatment methods, if any;

 

•

adverse events involving our cell therapy product candidates or the products or product candidates of others that are cell-based; and

 

•

the cost of our products and the reimbursement policies of government and private third-party payers.

 

If the health care community does not accept our potential products for any of the foregoing reasons, or for any other reason, it could affect our sales, having a material adverse effect on our business, financial condition and results of operations.

 

The clinical manufacturing process for cell therapy products is complex and requires meeting high regulatory standards; we have limited manufacturing experience and know-how.  Any delay or problem in the clinical manufacturing of PLX may result in a material adverse effect on our business.

 

Our manufacturing process, controls, equipment and quality system for PLX-PAD have received approval from the FDA, EMA, Germany’s PEI, the Korean MFDS and the PMDA. However, the clinical manufacturing process is complex and we have no experience in manufacturing our product candidates at a commercial level. There can be no guarantee that we will be able to successfully develop and manufacture our product candidates in a manner that is cost-effective or commercially viable, or that our development and manufacturing capabilities might not take much longer than currently anticipated to be ready for the market.  In addition, if we fail to maintain regulatory approvals for our manufacturing facilities, we may suffer delays in our ability to manufacture our product candidates.  This may result in a material adverse effect on our business.

Because we received grants from the IIA we are subject to on-going restrictions.

 

We have received royalty-bearing grants from the IIA, for research and development programs that meet specified criteria. The terms of the IIA’s grants limit our ability to transfer know-how developed under an approved research and development program outside of Israel, regardless of whether the royalties are fully paid. Any non-Israeli citizen, resident or entity that, among other things, becomes a holder of 5% or more of our share capital or voting rights, is entitled to appoint one or more of our directors or our Chief Executive Officer, or CEO, serves as a director of our Company or as our CEO is generally required to notify the same to the IIA and to undertake to observe the law governing the grant programs of the IIA, the principal restrictions of which are the transferability limits described above. For more information, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”.

 

 

We have limited operating history, which raises doubts with respect to our ability to generate revenues in the future.

 

We have a limited operating history in our business of developing and commercializing cell production technology.  Until we entered into the United Agreement, which was terminated in December 2015, we did not generate any revenues.  While we generated minimal revenue for the year ended June 30, 2018, it is not clear when we will generate additional revenues or whether we will experience further delays in recognizing revenues such as if we experienced a clinical hold.  Our primary source of funds has been the sale of our common stock and government grants.  We cannot give assurances that we will be able to generate any significant revenues or income in the future.  There is no assurance that we will ever be profitable.

 

If we do not keep pace with our competitors and with technological and market changes, our technology and products may become obsolete and our business may suffer.

 

The cellular therapeutics industry, of which we are a part, is very competitive and is subject to technological changes that can be rapid and intense. We have faced, and will continue to face, intense competition from biotechnology, pharmaceutical and biopharmaceutical companies, academic and research institutions and governmental agencies engaged in cellular therapeutic and drug discovery activities or funding, both in the United States and internationally. Some of these competitors are pursuing the development of cellular therapeutics, drugs and other therapies that target the same diseases and conditions that we target in our clinical and pre-clinical programs.

 

Many of our competitors have greater resources, more product candidates and have developed product candidates and processes that directly compete with our products.  Our competitors may have developed, or could develop in the future, new products that compete with our products or even render our products obsolete.

We depend to a significant extent on certain key personnel, the loss of any of whom may materially and adversely affect our Company.

Our success depends to a significant extent on the continued services of certain highly qualified scientific and management personnel, in particular, Zami Aberman, our Co-CEO and Chairman, and Yaky Yanay, our Co-CEO and President.  We face competition for qualified personnel from numerous industry sources, and there can be no assurance that we will be able to attract and retain qualified personnel on acceptable terms.  The loss of service of any of our key personnel could have a material adverse effect on our operations or financial condition.  In the event of the loss of services of such personnel, no assurance can be given that we will be able to obtain the services of adequate replacement personnel.  We do not maintain key person insurance on the lives of any of our officers or employees.

 

The market for our products will be heavily dependent on third party reimbursement policies.

 

Our ability to successfully commercialize our product candidates will depend on the extent to which government healthcare programs, as well as private health insurers, health maintenance organizations and other third party payers will pay for our products and related treatments.

 

Reimbursement by third party payers depends on a number of factors, including the payer’s determination that use of the product is safe and effective, not experimental or investigational, medically necessary, appropriate for the specific patient and cost-effective.  Reimbursement in the United States or foreign countries may not be available or maintained for any of our product candidates.  If we do not obtain approvals for adequate third party reimbursements, we may not be able to establish or maintain price levels sufficient to realize an appropriate return on our investment in product development.  Any limits on reimbursement from third party payers may reduce the demand for, or negatively affect the price of, our products.  The lack of reimbursement for these procedures by insurance payers has negatively affected the market for our products in this indication in the past.

 

 

Managing and reducing health care costs has been a general concern of federal and state governments in the United States and of foreign governments.  In addition, third party payers are increasingly challenging the price and cost-effectiveness of medical products and services, and many limit reimbursement for newly approved health care products.  In particular, third party payers may limit the indications for which they will reimburse patients who use any products that we may develop.  Cost control initiatives could decrease the price for products that we may develop, which would result in lower product revenues to us.

 

Our success depends in large part on our ability to develop and protect our technology and our cell therapy products.  If our patents and proprietary rights agreements do not provide sufficient protection for our technology and our cell therapy products, our business and competitive position will suffer.

 

Our success will also depend in part on our ability to develop our technology and commercialize cell therapy products without infringing the proprietary rights of others.  We have not conducted full freedom of use patent searches and no assurance can be given that patents do not exist or could not be filed which would have an adverse effect on our ability to develop our technology or maintain our competitive position with respect to our potential cell therapy products.  If our technology components, devices, designs, products, processes or other subject matter are claimed under other existing United States or foreign patents or are otherwise protected by third party proprietary rights, we may be subject to infringement actions.  In such event, we may challenge the validity of such patents or other proprietary rights or we may be required to obtain licenses from such companies in order to develop, manufacture or market our technology or products.  There can be no assurances that we would be able to obtain such licenses or that such licenses, if available, could be obtained on commercially reasonable terms.  Furthermore, the failure to either develop a commercially viable alternative or obtain such licenses could result in delays in marketing our proposed products or the inability to proceed with the development, manufacture or sale of products requiring such licenses, which could have a material adverse effect on our business, financial condition and results of operations.  If we are required to defend ourselves against charges of patent infringement or to protect our proprietary rights against third parties, substantial costs will be incurred regardless of whether we are successful.  Such proceedings are typically protracted with no certainty of success.  An adverse outcome could subject us to significant liabilities to third parties and force us to curtail or cease our development of our technology and the commercialization our potential cell therapy products.

 

We have built the ability to manufacture clinical grade ASCs in-house. Through our experience with ASC-based product development, we have developed expertise and know-how in this field. To protect these expertise and know-how, our policies require confidentiality agreements with our employees, consultants, contractors, manufacturers and advisors. These agreements generally provide for protection of confidential information, restrictions on the use of materials and assignment of inventions conceived during the course of performance for us. These agreements might not effectively prevent disclosure of our confidential information.

 

The price of our common stock may fluctuate significantly.

 

The market for our shares of common stock may fluctuate significantly. A number of events and factors may have an adverse impact on the market price of our common stock, such as:

 

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results of our clinical trials or adverse events associated with our products;

 

 

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the amount of our cash resources and our ability to obtain additional funding;

 

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changes in our revenues, expense levels or operating results;

 

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entering into or terminating strategic relationships;

 

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announcements of technical or product developments by us or our competitors;

 

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market conditions for pharmaceutical and biotechnology stocks in particular;

 

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changes in laws and governmental regulations, including changes in tax, healthcare, competition and patent laws;

 

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disputes concerning patents or proprietary rights;

 

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new accounting pronouncements or regulatory rulings;

 

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public announcements regarding medical advances in the treatment of the disease states that we are targeting;

 

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patent or proprietary rights developments;

 

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regulatory actions that may impact our products;

 

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disruptions in our manufacturing processes; and

 

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competition.

 

In addition, a market downturn in general and/or in the biopharmaceutical sector in particular, may adversely affect the market price of our securities, which may not necessarily reflect the actual or perceived value of our Company.

 

 

Future sales of our shares may cause the prevailing market price of our shares to decrease.

 

Future sales of our common stock, or the perception that such sales may occur, could cause immediate dilution and adversely affect the market price of our common stock.

We are exposed to fluctuations in currency exchange rates.

 

A significant portion of our business is conducted outside the United States. Therefore, we are exposed to currency exchange fluctuations in other currencies such as the New Israeli Shekel, or NIS, and the Euro, because a portion of our expenses in Israel and Europe are paid in NIS and Euros, respectively, which subjects us to the risks of foreign currency fluctuations. Our primary expenses paid in NIS are employee salaries, fees for consultants and subcontractors and lease payments on our Israeli facilities. During the fiscal year ended June 30, 2018, or fiscal year 2018, we entered into options contracts to hedge against some of the risk of changes in future cash flows from payments of payroll and related expenses and costs of operations denominated in NIS.

 

The dollar cost of our operations in Israel will increase to the extent increases in the rate of inflation in Israel are not offset by a devaluation of the NIS in relation to the dollar, which would harm our results of operations.

 

Since a considerable portion of our expenses such as employees' salaries are linked to an extent to the rate of inflation in Israel, the dollar cost of our operations is influenced by the extent to which any increase in the rate of inflation in Israel is or is not offset by the devaluation of the NIS in relation to the dollar. As a result, we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the dollar. In that event, the dollar cost of our operations in Israel will increase and our dollar-measured results of operations will be adversely affected. We cannot predict whether the NIS will appreciate against the dollar or vice versa in the future. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis by a devaluation of the NIS in relation to the dollar, will increase labor and other costs, which will increase the dollar cost of our operations in Israel and harm our results of operations.

 

Potential product liability claims could adversely affect our future earnings and financial condition.

 

We face an inherent business risk of exposure to product liability claims in the event that the use of our products results in adverse effects.  We may not be able to maintain adequate levels of insurance for these liabilities at reasonable cost and/or reasonable terms.  Excessive insurance costs or uninsured claims would add to our future operating expenses and adversely affect our financial condition.

 

Our principal research and development and manufacturing facilities are located in Israel and the unstable military and political conditions of Israel may cause interruption or suspension of our business operations without warning.

 

Our principal research and development and manufacturing facilities are located in Israel.  As a result, we are directly influenced by the political, economic and military conditions affecting Israel.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. During July and August 2014 and November 2012, Israel was engaged in an armed conflict with a militia group and political party which controls the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel.

 

 

In addition, Israeli-based companies and companies doing business with Israel, have been the subject of an economic boycott by members of the Arab League and certain other predominantly Muslim countries since Israel's establishment.  Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved. Wars and acts of terrorism have resulted in significant damage to the Israeli economy, including reducing the level of foreign and local investment.

 

Furthermore, certain of our officers and employees may be obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called up for active military duty at any time.  All Israeli male citizens who have served in the army are subject to an obligation to perform reserve duty until they are between 40 and 49 years old, depending upon the nature of their military service.

 

The trend towards consolidation in the pharmaceutical and biotechnology industries may adversely affect us.

 

There is a trend towards consolidation in the pharmaceutical and biotechnology industries. This consolidation trend may result in the remaining companies having greater financial resources and technical discovery capabilities, thus intensifying competition in these industries. This trend may also result in fewer potential collaborators or licensees for our therapeutic product candidates. Also, if a consolidating company is already doing business with our competitors, we may lose existing licensees or collaborators as a result of such consolidation.

 

This trend may adversely affect our ability to enter into license agreements or agreements for the development and commercialization of our product candidates, and as a result may materially harm our business.

 

Our cash may be subject to a risk of loss and we may be exposed to fluctuations in the market values of our portfolio investments and in interest rates.

 

Our assets include a significant component of cash and cash equivalents and bank deposits.  We adhere to an investment policy set by our investment committee which aims to preserve our financial assets, maintain adequate liquidity and maximize returns. We believe that our cash is held in institutions whose credit risk is minimal and that the value and liquidity of our deposits are accurately reflected in our consolidated financial statements as of June 30, 2018.  Currently, we hold part of our current assets in bank deposits.  However, nearly all of our cash and bank deposits are not insured by the Federal Deposit Insurance Corporation, or the FDIC, or similar governmental deposit insurance outside the United States.  Therefore, our cash and any bank deposits that we now hold or may acquire in the future may be subject to risks, including the risk of loss or of reduced value or liquidity, particularly in light of the increased volatility and worldwide pressures in the financial and banking sectors.

 

Although our internal control over financial reporting was considered effective as of June 30, 2018, there is no assurance that our internal control over financial reporting will continue to be effective in the future, which could result in our financial statements being unreliable, government investigations or loss of investor confidence in our financial reports.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish an annual report by our management assessing the effectiveness of our internal control over financial reporting. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. In addition, our independent registered public accounting firm must annually provide an opinion on the effectiveness of our internal control over financial reporting.  Management's report as of the end of fiscal year 2018 concluded that our internal control over financial reporting was effective.  In addition, our registered independent public accounting firm provided an opinion that our internal control over financial reporting was effective as of the end of fiscal year 2018.  There is, however, no assurance that we will be able to maintain such effective internal control over financial reporting in the future. Ineffective internal control over financial reporting can result in errors or other problems in our financial statements. In the future, if we or our registered independent public accounting firm are unable to assert that our internal controls are effective, our investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline. Failure to maintain effective internal control over financial reporting could also result in investigation or sanctions by regulatory authorities.

 

 

Because substantially all of our officers and directors are located in non-U.S. jurisdictions, you may have no effective recourse against the management for misconduct and may not be able to enforce judgment and civil liabilities against our officers, directors, experts and agents.

 

Substantially all of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of their assets are located outside the United States.  As a result, it may be difficult to enforce within the United States any judgments obtained against our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any U.S. state.

Because we do not intend to pay any dividends on our common stock, investors seeking dividend income should not purchase shares of our common stock.

We have not declared or paid any dividends on our common stock since our inception, and we do not anticipate paying any such dividends for the foreseeable future.  Investors seeking dividend income should not invest in our common stock.

We are dependent upon third-party suppliers for raw materials needed to manufacture PLX; if any of these third parties fails or is unable to perform in a timely manner, our ability to manufacture and deliver will be compromised.

 

In addition to the placenta used in the clinical manufacturing process of PLX we require certain raw materials. These items must be manufactured and supplied to us in sufficient quantities and in compliance with current GMP. To meet these requirements, we have entered into supply agreements with firms that manufacture these raw materials to current GMP standards. Our requirements for these items are expected to increase if and when we transition to the manufacture of commercial quantities of our cell-based drug candidates.

 

In addition, as we proceed with our clinical trial efforts, we must be able to continuously demonstrate to the FDA, EMA and other regulatory authorities that we can manufacture our cell therapy product candidates with consistent characteristics. Accordingly, we are materially dependent on these suppliers for supply of current GMP-grade materials of consistent quality. Our ability to complete ongoing clinical trials may be negatively affected in the event that we are forced to seek and validate a replacement source for any of these critical materials.

 

We may not be able to take advantage of the new regulatory pathways in the United States, Europe and Japan to shorten our time to market our products.

 

Recent regulatory pathways in United States, Europe and Japan may allow for early commercialization of our products and reducing the time to market our products.

 

The FDA’s Fast Track designation is a process designed to facilitate the development and expedite the review of drugs to treat serious conditions and unmet medical needs. The FDA granted PLX-PAD with “Fast Track” designation for the treatment of CLI.

 

The EAP allows the use of an investigational medical product outside of clinical trials and is usually granted in cases where patients are unsuitable for inclusion under the study protocol and the patient’s condition is life-threatening with an unmet medical need. The FDA has cleared PLX-PAD EAP, for the treatment of patients with CLI. As part of the EAP, our PLX-PAD cell therapy will be made available to a limited number of CLI patients in the United States who are unsuitable for revascularization and cannot take part in the our ongoing Phase III clinical study.

 

 

The purpose of Europe’s Adaptive Pathways is to shorten the time it takes for innovative medicines to reach patients with serious conditions that lack adequate treatment options. After a therapy is selected for the program, the Adaptive Pathways group conducts high level discussions and provides guidance to the applicant regarding the formal regulatory processes that precede a trial targeting early approval and further expansion of the indications. In Japan, a new law regarding regenerative therapies, including cell therapies, came into effect. The new law allows for conditional, time-limited approval of products for marketing after limited proof of efficacy.  The EMA selected our PLX-PAD cell program in CLI and in recovery following surgery for hip fracture for its Adaptive Pathway project.

 

In addition, the PMDA approved the proposed quality and large-scale manufacturing methods for PLX-PAD and has cleared our PLX-PAD cells for use in clinical trials in Japan.

 

However, since these new regulatory pathways are relatively new, we may not be able to meet the regulatory requirements and as a result would not benefit from early access to the market.

 

Favorable results from compassionate use treatment or initial interim results from a clinical trial do not ensure that later clinical trials will be successful and success in early stage clinical trials does not ensure success in later-stage clinical trials.

 

PLX cells have been administered as part of compassionate use treatments, which permit the administration of the PLX cells outside of clinical trials. No assurance can be given that any positive results are attributable to the PLX cells, or that administration of PLX cells to other patients will have positive results. Compassionate use is a term that is used to refer to the use of an investigational drug outside of a clinical trial to treat a patient with a serious or immediately life-threatening disease or condition who has no comparable or satisfactory alternative treatment options. Regulators often allow compassionate use on a case-by-case basis for an individual patient or for defined groups of patients with similar treatment needs.

 

There is no assurance that we will obtain regulatory approval for PLX cells. We will only obtain regulatory approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA, the EMA, the PMDA or other applicable regulatory authorities, in well-designed and conducted clinical trials, that the product candidate is safe and effective and that the product candidate, including the cell production methodology, otherwise meets the appropriate standards required for approval. Clinical trials can be lengthy, complex and extremely expensive processes with uncertain results. A failure of one or more clinical trials may occur at any stage of testing.

 

Success in early clinical trials does not ensure that later clinical trials will be successful, and initial results from a clinical trial do not necessarily predict final results. While results from treating patients through compassionate use have in certain cases been successful, we cannot be assured that further trials will ultimately be successful. Results of further clinical trials may be disappointing.

 

Even if early stage clinical trials are successful, we may need to conduct additional clinical trials for product candidates with patients receiving the drug for longer periods before we are able to seek approvals to market and sell these product candidates from the FDA and regulatory authorities outside the United States. Even if we are able to obtain approval for our product candidates through an accelerated approval review program, we may still be required to conduct clinical trials after such an approval.  If we are not successful in commercializing any of our lead product candidates, or are significantly delayed in doing so, our business will be materially harmed.

 

 

We may not successfully maintain our existing exclusive out-licensing agreement with CHA, or establish new collaborative and licensing arrangements, which could adversely affect our ability to develop and commercialize our product candidates.

 

One of the elements of our business strategy is to license our technology to other companies. Our business strategy includes establishing collaborations and licensing agreements with one or more pharmaceutical or biotechnology companies. To date, we have a strategic partnership with CHA for both the IC and CLI indications in Korea. CHA will conduct PLX clinical studies in South Korea, and, following approval, a joint venture equally owned by both parties will be established to market PLX products in South Korea. Our PLX cells are also being used in South Korean sites participating to our International IC study through our partnership with CHA. Notwithstanding, we may not be able to further establish or maintain such licensing and collaboration arrangements necessary to develop and commercialize our product candidates. Even if we are able to maintain or establish licensing or collaboration arrangements, these arrangements may not be on favorable terms and may contain provisions that will restrict our ability to develop, test and market our product candidates. Any failure to maintain or establish licensing or collaboration arrangements on favorable terms could adversely affect our business prospects, financial condition or ability to develop and commercialize our product candidates.

 

Our agreements with our collaborators and licensees may have provisions that give rise to disputes regarding the rights and obligations of the parties. These and other possible disagreements could lead to termination of the agreement or delays in collaborative research, development, supply, or commercialization of certain product candidates, or could require or result in litigation or arbitration. Moreover, disagreements could arise with our collaborators over rights to intellectual property or our rights to share in any of the future revenues of products developed by our collaborators. These kinds of disagreements could result in costly and time-consuming litigation. Any such conflicts with our collaborators could reduce our ability to obtain future collaboration agreements and could have a negative impact on our relationship with existing collaborators.

 

Although we have entered into a term sheet with Sosei Corporate Venture Capital Ltd. there can be no assurance that a definitive agreement will be signed or that such proposed joint venture will be formed.

 

We have signed a term sheet with Sosei CVC for the establishment of a new Japanese corporation, or NewCo, for the clinical development and commercialization of our PLX-PAD cell therapy product in Japan. We extended the deadline to consummate the transaction to December 31, 2017 but have not entered into an additional extension since such time. While the parties believe definitive agreements will be finalized, there is no guarantee that we will be successful in executing the agreements. It is possible that the definitive agreements will not be executed, or that they may be executed on terms and conditions that are materially different than those set forth in the term sheet. There can be no assurance that we will execute the definitive agreements or that the proposed joint venture with Sosei CVC will be completed.

Failure in our information technology systems, including by cybersecurity attacks or other data security incidents, could significantly disrupt our operations.

Our operations depend, in part, on the continued performance of our information technology systems. Our information technology systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. Failure of our information technology systems could adversely affect our business, profitability and financial condition. Although we have information technology security systems, a successful cybersecurity attack or other data security incident could result in the misappropriation and/or loss of confidential or personal information, create system interruptions, or deploy malicious software that attacks our systems. It is possible that a cybersecurity attack might not be noticed for some period of time. The occurrence of a cybersecurity attack or incident could result in business interruptions from the disruption of our information technology systems, or negative publicity resulting in reputational damage with our shareholders and other stakeholders and/or increased costs to prevent, respond to or mitigate cybersecurity events. In addition, the unauthorized dissemination of sensitive personal information or proprietary or confidential information could expose us or other third-parties to regulatory fines or penalties, litigation and potential liability, or otherwise harm our business.

 

We have limited experience in conducting Phase III trials. If we fail in the conduct of such trials, our business will be materially harmed.

 

Even though we conducted Phase I and Phase II trials and we are currently conducting Phase III for our PLX-PAD product, and Phase I for our PLX-R18 product, and have recruited employees who are experienced in managing and conducting clinical trials, we have limited experience in this area.

We will need to expand our experience and rely on consultants in order to obtain regulatory approvals for our therapeutic product candidates.  The failure to successfully conduct clinical trials could materially harm our business.

Existing government programs and tax benefits may be terminated.

 

We have received certain Israeli government approvals under certain programs and may in the future utilize certain tax benefits in Israel by virtue of these programs. To remain eligible for such tax benefits, we must continue to meet certain conditions. If we fail to comply with these conditions in the future, the benefits we receive could be canceled and have to pay additional taxes. We cannot guarantee that these programs and tax benefits will be continued in the future, at their current levels or at all. If these programs and tax benefits are ended, our business, financial condition and results of operations could be materially adversely affected.

If we fail to obtain or maintain orphan drug exclusivity for our products, our competitors may sell products to treat the same conditions and our revenue will be reduced.

Our business strategy focuses on the development of drugs that are eligible for FDA and European Union orphan drug designation. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is intended to treat a rare disease or condition, defined as a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the European Union, the EMA’s Committee for Orphan Medicinal Products, or COMP, grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention, or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 persons in the European Union Community. Additionally, designation is granted for products intended for the diagnosis, prevention, or treatment of a life threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug or biological product.

 

In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages, and user-fee waivers. In addition, if a product receives the first FDA approval for the indication for which it has orphan designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where the manufacturer is unable to assure sufficient product quantity. In the European Union, orphan drug designation also entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of market exclusivity is granted following drug or biological product approval. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity.

Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties can be approved for the same condition. Even with orphan drug exclusivity, if a third party were to prepare or market a product which infringes upon our intellectual property, we may need to initiate litigation, which may be costly, to enforce our rights against such party. After an orphan drug is approved, the FDA can subsequently approve the same drug with the same active moiety for the same condition if the FDA concludes that the later drug is safer, more effective, or makes a major contribution to patient care. Orphan drug designation on its own neither shortens the development time or regulatory review time for a drug.

While orphan drug products are typically sold at a high price relative to other medications, the market may not be receptive to high pricing of our products.

We develop our product candidates to treat rare and ultra-rare diseases, a space where medications are usually sold at high prices compared with other medications.

Accordingly, even if regulatory authorities approve our product candidates, the market may not be receptive to, and it may be difficult for us to achieve, a per-patient per-year price high enough to allow us to realize a return on our investment.

The patent approval process is complex and we cannot be sure that our pending patent applications or future patent applications will be approved.

 

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and any future licensors' patent rights are highly uncertain.  Our pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States and we may not be able to obtain meaningful patent protection for any of our commercial products either in or outside the United States.

 

No assurance can be given that the scope of any patent protection granted will exclude competitors or provide us with competitive advantages, that any of the patents that have been or may be issued to us will be held valid if subsequently challenged, or that other parties will not claim rights to or ownership of our patents or other proprietary rights that we hold.  Furthermore, there can be no assurance that others have not developed or will not develop similar products, duplicate any of our technology or products or design around any patents that have been or may be issued to us or any future licensors.  Since patent applications in the United States and in Europe are not publicly disclosed until patents are issued, there can be no assurance that others did not first file applications for products covered by our pending patent applications, nor can we be certain that we will not infringe any patents that may be issued to others.

 

 

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on our business.

 

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. We have yet to conduct comprehensive freedom-to-operate searches to determine whether our proposed business activities or use of certain of the patent rights owned by us would infringe patents issued to third parties. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third party's intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. For example, we are aware of issued third party patents directed to placental stem cells and their use for therapy and in treating various diseases.  We may need to seek a license for one or more of these patents.  No assurances can be given that such a license will be available on commercially reasonable terms, if at all.  Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

 

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors are able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

 

We must further protect and develop our technology and products in order to become a profitable company.

 

If we do not complete the development of our technology and products in development by the time our patents expire, create additional sufficient layers of patents or other intellectual property rights, other companies may use the technology to develop competing products.  If this happens, we may lose our competitive position and our business would likely suffer.

 

 

Furthermore, the scope of our patents may not be sufficiently broad to offer meaningful protection.  In addition, our patents could be successfully challenged, invalidated or circumvented so that our patent rights would not create an effective competitive barrier.  We also intend to seek patent protection for any of our potential cell therapy products once we have completed their development. We also rely on trade secrets and unpatentable know-how that we seek to protect, in part, by confidentiality agreements with our employees, consultants, suppliers and licensees.  These agreements may be breached, and we might not have adequate remedies for any breach.  If this were to occur, our business and competitive position would suffer.

 

We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit U.S. companies or their agents and employees from providing anything of value to a foreign official or political party for the purposes of influencing any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person or corporate entity or obtain any unfair advantage. We have operations and agreements with third parties. Our international activities create the risk of unauthorized and illegal payments or offers of payments by our employees or consultants, even though they may not always be subject to our control. We discourage these practices by our employees and consultants. However, our existing safeguards and any future improvements may prove to be less than effective, and our employees or consultants, may engage in conduct for which we might be held responsible for. Any failure by us to adopt appropriate compliance procedures and ensure that our employees and consultants comply with the FCPA and applicable laws and regulations in foreign jurisdictions could result in substantial penalties or restrictions on our ability to conduct business in certain foreign jurisdictions.

Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

Item 1B. Unresolved Staff Comments.

 

Not Applicable.

 

Item 2. Properties.

 

Our principal executive, manufacturing and research and development offices are located at MATAM Advanced Technology Park, Building No. 5, Haifa, Israel, where we occupy approximately 4,389 square meters. Our monthly rent payment for these leased facilities as of July 2018 was 258,000 NIS (approximately $73,000), excluding MTM - Scientific Industries Center Haifa, Ltd., or MTM, participation as described at Item 7. For the fiscal year ended June 30, 2018, we recognized an expense of $878,000, net, for rent of Building No. 5, which was offset by MATAM participation of $239,000 due to renovations made in Building No. 5.

 

We believe that the current space we have is adequate to meet our current and near future needs.

 

Item 3. Legal Proceedings.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

 

PART II

 

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our shares trade on the Nasdaq Capital Market under the symbol PSTI and in the Tel Aviv Stock Exchange under the ticker symbol PLTR.

 

The following table sets forth, for the periods indicated, the high and low sales prices of our common stock, as reported on Nasdaq website and may not necessarily represent actual transactions.

 

Quarter Ended		High				Low
Fiscal Year Ended June 30, 2017
September 30, 2016		$	1.85			$	1.30
December 31, 2016		$	1.65			$	1.38
March 31, 2017		$	1.64			$	1.04
June 30, 2017		$	1.59			$	1.20
Fiscal Year Ended June 30, 2018
September 30, 2017		$	1.62			$	1.06
December 31, 2017		$	2.12			$	1.30
March 31, 2018		$	1.65			$	1.29
June 30, 2018		$	1.52			$	1.14

On September 2, 2018, the per share closing price of our common stock, as reported on Nasdaq website, was $1.33.  As of August 31, 2018, there were 108 holders of record, and 113,595,483 of our common shares were issued and outstanding.

 

American Stock Transfer and Trust Company, LLC is the registrar and transfer agent for our common shares.  Their address is 6201 15th Avenue, 2nd Floor, Brooklyn, NY 11219, telephone: (718) 921-8300, (800) 937-5449.

 

Dividend Policy

 

We have not paid any cash dividends on our common stock and have no present intention of doing so. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our Board of Directors.

 

Item 6. Selected Financial Data.

 

The selected data presented below under the captions "Statements of Operations Data," "Statements of Cash Flows Data" and "Balance Sheet Data" for, and as of the end of, each of the fiscal years in the five-year period ended June 30, 2018, are derived from, and should be read in conjunction with, our audited consolidated financial statements.

 

 

The information contained in this table should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included elsewhere in this report (in thousands of dollars except share and per share data):

 

		2018				2017				2016				2015				2014
Statements of Operations Data:
Revenues		$	50			$	-			$	2,847			$	379			$	379
Cost of revenues			2				-				100				13				11
Gross profit			48				-				2,747				366				368
Research and development expenses			26,371				24,001				22,856				23,416				24,938
Research and development participation grants			3,742				2,909				3,276				4,243				5,396
Research and development expenses, net			22,629				21,092				19,580				19,173				19,542
General and administrative expenses			11,193				6,927				6,486				6,460				8,676
Other income			43				-				-				-				-
Operating loss			33,731				28,019				23,319				25,267				27,850
Financial income, net			7,605				205				73				590				918
Net loss for the period		$	26,126			$	27,814			$	23,246			$	24,677			$	26,932
Basic and diluted net loss per share		$	0.25			$	0.32			$	0.29			$	0.35			$	0.42
Weighted average number of shares used in computing basic and diluted net loss  per share			105,876,763				87,426,208				79,547,989				70,284,337				63,514,405
Statements of Cash Flows Data:
Net cash used in operating activities		$	21,380			$	21,611			$	18,522			$	20,605			$	19,121
Net cash provided by investing activities			5,573				4,298				1,312				21,537				1,983
Net cash provided by financing activities			19,921				15,797				807				17,201				12,624
Net increase (decrease) in cash			4,114				(1,516	)			(16,403	)			18,133				(4,514	)
Cash and cash equivalents at beginning of year			4,707				6,223				22,626				4,493				9,007
Cash and cash equivalents at end of year		$	8,821			$	4,707			$	6,223			$	22,626			$	4,493
Balance Sheet Data:
Cash, cash equivalents, short-term bank deposits, restricted cash and short-term deposits, and marketable securities		$	30,587			$	26,665			$	32,750			$	53,119			$	58,819
Current assets			32,036				29,016				35,596				56,868				61,987
Long-term assets			6,924				8,518				10,345				11,287				12,036
Total assets			38,960				37,534				45,941				68,155				74,023
Current liabilities			8,548				5,414				5,775				6,183				7,397
Long-term liabilities			1,905				1,869				2,010				3,829				4,503
Stockholders’ equity			28,507				30,251				38,156				58,143				62,123

 

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

We are a leading developer of placenta-based cell therapy product candidates for the treatment of multiple ischemic, inflammatory and hematologic conditions. Our lead indications are CLI, recovery following surgery for hip fracture and ARS.  Each of these indications is a severe unmet medical need.

PLX cells are derived from a class of placental cells that are harvested from donated placenta at the time of full term healthy delivery of a baby. PLX cell products require no tissue matching prior to administration. They are produced using our proprietary three-dimensional expansion technology. Our manufacturing facility complies with the European, Japanese, Israeli and FDA’s current Good Manufacturing Practice requirements and has been approved by the European and Israeli regulators for production of PLX-PAD for late stage trials and marketing. In December 2017, after an audit of our facilities, we were granted manufacturer/importer authorization and Good Manufacturing Practice Certification by Israel’s Ministry of Health. If we obtain FDA and other regulatory approvals to market PLX cells, we expect to have in-house production capacity to grow clinical-grade PLX cells in commercial quantities.

 

Our goal is to make significant progress with our robust clinical pipeline and our anticipated pivotal trials in order to ultimately bring innovative, potent therapies to patients who need new treatment options. We expect to demonstrate a real-world impact and value from our clinical pipeline, technology platform and commercial-scale manufacturing capacity. Our business model for commercialization and revenue generation includes, but is not limited to, direct sale of our products, partnerships, licensing deals, and joint ventures with pharmaceutical companies.

We aim to shorten the time to commercialization of our product candidates, by leveraging unique accelerated regulatory pathways that exist in the United States, Europe and Japan to bring innovative products that address life-threatening diseases to the market efficiently.

Two pivotal, Phase III multinational clinical trials are currently being conducted with our PLX-PAD product candidate: one in CLI, and the other in recovery following surgery for hip fracture.

Our second product candidate, PLX-R18, is under development in the United States for ARS via the FDA Animal Rule regulatory pathway, which may result in approval without the prior performance of human efficacy trials.

 

RESULTS OF OPERATIONS – YEAR ENDED JUNE 30, 2018 COMPARED TO YEAR ENDED JUNE 30, 2017 AND YEAR ENDED JUNE 30, 2017 COMPARED TO YEAR ENDED JUNE 30, 2016.

Revenues

 

Revenues for the year ended June 30, 2018 were $50,000, versus no revenues generated in the year ended June 30, 2017. All revenues in the year ended June 30, 2018 were related to the sale of our PLX cells for research use.

 

Revenues for the year ended June 30, 2016 were $2,847,000. All revenues in the year ended June 30, 2016 were derived from a prior license agreement, or the United Agreement, with United Therapeutics Corporation, or United. On December 8, 2015, we received a notice from United terminating the United Agreement, effective immediately. As we had no further obligations towards United, we recognized the remaining upfront payment received in August 2011 as revenues during the year ended June 30, 2016.

 

Cost of revenues

 

Cost of revenues for the year ended June 30, 2018 were $2,000 and we did not recognize cost of revenues in the year ended June 30, 2017. Cost of revenues for the year ended June 30, 2016 were $100,000. All cost of revenues mentioned above are related to the royalties we are obligated to pay to the IIA.

 

Research and Development net

 

Research and development net costs (costs less participation and grants by the IIA, Horizon 2020 and other parties) for the year ended June 30, 2018 increased by 7% to $22,629,000 from $21,092,000 for the year ended June 30, 2017. The increase is mainly attributed to: (1) an increase in payroll expenses related to differences in exchange rates, an increase in the average number of employees and increases in average salaries, (2) an increase in materials consumption, and (3) a decrease in IIA participation ($3,300,000 was approved in calendar year 2016 compared to $1,500,000 that was approved in calendar year 2017 and compared to $900,000 approved in calendar year 2018). The increase was partially offset due to: (1) a higher participation of the European Union with respect to the Horizon 2020 grants which commenced in calendar year 2017, (2) a decrease in stock-based compensation expenses due to the amount of granted restricted stock units and their vesting schedules, (3) a decrease in rent and maintenance expenses, (4) a decrease in depreciation expenses, and (5) a decrease in other research and development expenses and subcontractors’ expenses related to some of our clinical studies.

 

 

Research and development net costs (costs less participation and grants by the IIA, Horizon 2020 and other parties) for the year ended June 30, 2017 increased by 8% to $21,092,000 from $19,580,000 for the year ended June 30, 2016. This increase is attributed to a lower participation of the IIA in fiscal 2017 compared to fiscal 2016 ($2,900,000 was approved in calendar year 2015 compared to $3,300,000 that was approved in calendar year 2016 and $1,500,000 that was approved in calendar year 2017), an increase in payments to consultants and subcontractors related to clinical studies such as our CLI and HCT studies, an increase in stock-based compensation expenses due to an increased number of RSUs granted under our 2016 Equity Compensation Plan, or the 2016 Plan, and an increase in market value of our common stock on the day of the grant. The increase was offset by participation from the European Union with respect to the Horizon 2020 grant for CLI commencing in calendar year 2017 and a decrease in materials consumption.

General and Administrative

General and administrative expenses increased by 63% from $6,927,000 for the year ended June 30, 2017 to $11,193,000 for the year ended June 30, 2018. This increase is attributed to: (1) an increase in stock-based compensation expenses related to the amount of granted restricted stock units and their vesting schedules, (2) an increase in payroll expenses related to an increase in the number of employees, increases in average salaries and differences in exchange rates, and (3) an increase in corporate activities expenses.

 

General and administrative expenses increased by 7% from $6,486,000 for the year ended June 30, 2016 to $6,927,000 for the year ended June 30, 2017. This increase is attributed to an increase in corporate activities expenses and an increase in payroll expenses due to differences in exchange rates as well as an increase in the number of employees.

 

Financial Income, net

Financial income increased from $205,000 for the year ended June 30, 2017 to $7,605,000 for the year ended June 30, 2018. This increase is mainly due to the sale of our investments in marketable securities, specifically the sale of the investment in CHA shares which resulted in a net gain of $6,200,000. The increase was partially offset due to an expense of $850,000 resulting from an other-than-temporary impairment loss recognized and resulting from changes in the fair value of our hedging instruments related to the strength of the U.S. dollar against the NIS.

Financial income increased from $73,000 for the year ended June 30, 2016 to $205,000 for the year ended June 30, 2017. This increase is mainly attributable to income from exchange rates in the year ended June 30, 2017  as compared to expense from exchange rates in the year ended June 30, 2016, since through the year ended June 30, 2017, there was a decrease of 9% in the value of the U.S. dollar against the NIS, compared to an increase of 2% in the value of the U.S. dollar against the NIS through the year ended June 30, 2016, as well as income resulting from the changes in the fair value of our hedging instruments, which is related to the strength of the U.S. dollar against the NIS in the year ended June 30, 2017 as compared to an expense in the year ended June 30, 2016, offset by an expense of $767,000 related to our marketable securities resulting from other-than-temporary impairment loss recognized in the year ended June 30, 2017.

Net Loss

Net loss for the year ended June 30, 2018 was $26,126,000 as compared to a net loss of $27,814,000 for the year ended June 30, 2017. The changes were mainly due to the increases in financial income, net, offset by an increase in general and administrative expenses, as well as for the reasons mentioned above. Net loss per share for the year ended June 30, 2018 was $0.25, as compared to $0.32 for the year ended June 30, 2017.  The net loss per share decreased mainly as a result of an increase in our weighted average number of shares due to the issuance of additional shares during fiscal year 2018.

 

Net loss for the year ended June 30, 2017 was $27,814,000 as compared to a net loss of $23,246,000 for the year ended June 30, 2016. The reasons for the increase in net loss were mainly due to revenues of $2,847,000 in fiscal year 2016 compared to no revenues in fiscal year 2017 and an other-than-temporary impairment loss of $38,000 in fiscal year 2016 compared to $767,000 in fiscal year 2017, as well as for the reasons mentioned above. Net loss per share for the year ended June 30, 2017 was $0.32, as compared to $0.29 for the year ended June 30, 2016.  The net loss per share increased as a result of an increase in our net loss offset by an increase in our weighted average number of shares due to the issuance of additional shares during fiscal year 2017.

Liquidity and Capital Resources

 

As of June 30, 2018, our total current assets were $32,036,000 and our total current liabilities were $8,548,000. On June 30, 2018, we had a working capital surplus of $23,488,000 and an accumulated deficit of $215,697,000.

 

As of June 30, 2017, our total current assets were $29,016,000 and our total current liabilities were $5,414,000. On June 30, 2017, we had a working capital surplus of $23,602,000 and an accumulated deficit of $189,571,000.

 

Our cash and cash equivalents as of June 30, 2018 amounted to $8,821,000.  This is an increase of $4,114,000 from the $4,707,000 reported as of June 30, 2017. Cash balances increased in the year ended June 30, 2018 for the reasons presented below:

 

Operating activities used cash of $21,380,000 in the year ended June 30, 2018. Cash used by operating activities in the year ended June 30, 2018 primarily consisted of payments of salaries to our employees, and payments of fees to our consultants, suppliers, subcontractors, and professional services providers including the costs of clinical studies, offset by IIA and Horizon 2020 grants.

 

Investing activities provided cash of $5,573,000 in the year ended June 30, 2018. The investing activities in the year ended June 30, 2018 consisted primarily of cash provided from the sale and the redemption of marketable securities of $21,890,000, offset by investments in short term deposits of $14,829,000, investment of $1,146,000 in marketable securities and payments of $342,000 related to investments in property and equipment.

 

Financing activities generated cash in the amount of $19,921,000 during the year ended June 30, 2018.

 

The financing activities are primarily attributable to net proceeds of $13,646,000 from issuing shares of our common stock in a public offering we conducted in Israel in October 2017, net proceeds of $1,202,000 from issuing shares of our common stock from the exercise of warrants and options, net proceeds of $4,985,000 from issuing shares of our common stock under our At Market Sales Agreement, or the ATM Agreement, with FBR Capital Markets & Co., MLV & Co. LLC and Oppenheimer & Co. Inc., each an Agent,  and proceeds of $88,000 related to a grant received from the Israel-United States Binational Industrial Research and Development Foundation.

 

In July 2017, we entered into the ATM Agreement, with the Agents which provides that, upon the terms and subject to the conditions and limitations set forth in the ATM Agreement, we may elect, from time to time, to issue and sell shares of common stock having an aggregate offering price of up to $80 million through any of the Agents. We are not obligated to make any sales of common stock under the ATM Agreement. As of June 30, 2018, we had sold 3,599,408 shares of common stock at an average price of $1.43 per share.

 

 

On October 31, 2017, we completed a public offering in Israel, pursuant to our existing shelf registration statement in the United States and a shelf registration statement filed in Israel, pursuant to which we raised aggregate gross proceeds of $15,051,000 through the sale of 9,000,000 shares of our common stock at a purchase price of NIS 5.90 (approximately $1.67 per share). The net proceeds, after deducting fees and expenses related to the offering, were $13,646,000.

During the year ended June 30, 2018, we received cash of approximately $50,000 from a third party from the sale of our PLX cells for research use.

During the year ended June 30, 2018, we were awarded approximately $43,000 (NIS 150,000) by the Israeli Ministry of Labor, Social Affairs and Social Services related to an “Equal Employment” program which aims to reward and honor Israeli employers who demonstrate and promote gender equality in employment.

Our cash and cash equivalents as of June 30, 2017 amounted to $4,707,000.  This is a decrease of $1,516,000 from the $6,223,000 reported as of June 30, 2016. Cash balances decreased in the year ended June 30, 2017 for the reasons presented below:

 

Operating activities used cash of $21,611,000 in the year ended June 30, 2017. Cash used by operating activities in the year ended June 30, 2017 primarily consisted of payments of salaries to our employees, and payments of fees to our consultants, suppliers, subcontractors, and professional services providers including the costs of clinical studies, offset by IIA and Horizon 2020 grants.

 

Investing activities provided cash of $4,298,000 in the year ended June 30, 2017. The investing activities consisted primarily of proceeds of $5,937,000 from the sale and redemption of marketable securities and redemption of short term deposits of $2,316,000, offset by investing $3,607,000 in marketable securities and the purchase of property and equipment for $378,000.

 

Financing activities generated cash in the amount of $15,797,000 during the year ended June 30, 2017. The financing activities are primarily attributable to net proceeds of $15,718,000 from issuing shares of our common stock in the underwritten public offering we closed in January 2017, proceeds related to grant received from the Israel-United States Binational Industrial Research and Development Foundation and exercises of options by employees.

 

On January 25, 2017, we closed the public offering and sold an aggregate of 14,081,633 shares of our common stock and warrants to purchase 8,448,980 shares of our common stock, at an aggregate purchase price of $1.225 per share of common stock and warrant, inclusive of the over-allotment option, which was exercised in full, resulting in aggregate net proceeds of $15,718,000.

During the years ended June 30, 2018, 2017 and 2016, we received approximately $2,328,000, $3,258,000 and $2,526,000, respectively, in cash from the IIA towards our research and development expenses.

 

According to the IIA grant terms, we are required to pay royalties at a rate of 3% on sales of products and services derived from technology developed using this and other IIA grants until 100% of the dollar-linked grants amount plus interest are repaid. In the absence of such sales, no payment is required.  During the year ended June 30, 2018, we paid $2,000 of royalties to the IIA. The IIA may impose certain conditions on any arrangement under which the IIA permits the Company to transfer technology or development out of Israel or outsource manufacturing out of Israel. While the grant is given to the Company over a certain period of time (usually a year), the requirements and restrictions under the Israeli Law for the Encouragement of Industrial Research and Development, 1984 continue and do not have a set expiration period, except for the royalties, which requirement to pay them expires after payment in full.

 

During the years ended June 30, 2018 and 2017, we received total cash grants of approximately $2,265,000 and $965,000, respectively, from the European Union research and development consortiums relating to the Horizon 2020 program.

 

 

In accordance with the CHA Agreement, in December 2013, we issued to CHA 2,500,000 shares of our common stock in consideration for the issuance to us of 1,011,504 common shares of CHA, which reflected total consideration of approximately $10,414,000 to each of us and CHA. The parties also agreed to give an irrevocable proxy to the other party’s management with respect to the shares issued.

 

During March 2015, we sold a portion of the CHA shares received in December 2013, resulting in net proceeds of $5,717,000. The net gain was $282,000 and was presented as “Financial income, net” in fiscal 2015.

 

During January 2018, we sold the remainder of our holdings in CHA, consisting of 400,368 shares of CHA, on the open market for aggregate net proceeds of approximately $10,500,000, representing a net gain of $6,200,000 presented in “Financial income, net”.

 

We adhere to an investment policy set by our investment committee which aims to preserve our financial assets, maintain adequate liquidity and maximize return while minimizing exposure to the NIS.  Such policy further provides that we should hold most of our current assets in bank deposits and the remainder of our current assets is to be invested in other low risk instruments.  As of today, the currency of our financial portfolio is mainly in U.S. dollars and we use options contracts in order to hedge our exposures to NIS.

 

Outlook

 

We have accumulated a deficit of $215,697,000 since our inception in May 2001. We do not expect to generate any revenues from sales of products in the next twelve months. Our cash needs will increase in the foreseeable future. We expect to generate revenues, which in the short and medium terms will unlikely exceed our costs of operations, from the sale of licenses to use our technology or products. We will be required to obtain additional liquidity resources in order to support the commercialization of our products and maintain our research and development and clinical trials activities.

As of June 30, 2018, our cash position (cash and cash equivalents and short-term bank deposits) totaled approximately $29,900,000. We are addressing our liquidity issues by implementing initiatives to allow the continuation of our activities. Our current operating plan includes various assumptions concerning the level and timing of cash outflows for operating activities and capital expenditures.

 

Our ability to successfully carry out our business plan, which includes a cost-reduction plan should we be unable to raise sufficient additional capital, is primarily dependent upon our ability to (1) obtain sufficient additional capital, (2) entering into license agreements to use or commercialize our products and (3) receive other sources of funding, including non-diluting sources such as the IIA grants, the Horizon 2020 grants and other grants. There are no assurances, however, that we will be successful in obtaining an adequate level of financing needed for the long-term development and commercialization of our products.

According to our management’s estimates, liquidity resources as of June 30, 2018 will be sufficient to maintain our operations into the first quarter of fiscal year 2020. Our inability to raise funds to carry out our business plan will have a severe negative impact on its ability to remain a viable company. These conditions raise substantial doubt about our ability to continue as a going concern.

The IIA has supported our activity in the past thirteen years. Our last program, for the thirteenth year, was approved by the IIA in 2018 and relates to an approximately $900,000 grant. The grant will be used to cover research and development expenses for the period January 1, 2018 to December 31, 2018.

 

In June 2015, we were awarded a “Smart Money” grant of approximately $117,559 from Israel’s Ministry of Economy. The program’s aim is to assist companies to extend their activities in international markets. The Israeli government granted us budget resources that we intend to use to advance our product candidate towards marketing in Japan and for regulatory activities there. We will also receive assistance from Israel’s trade attachés stationed in Japan, and from experts appointed especially by the "Smart Money" program.

In July 2017, we were awarded an additional “Smart Money” grant of approximately $229,000 from Israel’s Ministry of Economy. The Israeli government granted us budget resources that we intend to use to advance our product candidate towards marketing in China-Hong Kong markets. We will also receive close support from Israel’s trade representatives stationed in China, including Hong Kong, along with experts appointed by the Smart Money program.

In August 2016, our CLI program in the European Union was awarded a Euro 7,600,000 (approximately $8,900,000) grant. The grant is part of the European Union’s Horizon 2020 program. The Phase III study of PLX-PAD in CLI will be a collaborative project carried out by an international consortium led by the Berlin-Brandenburg Center for Regenerative Therapies together with the Company and with participation of additional third parties. The grant will cover a significant portion of the CLI program costs. An amount of Euro 1,900,000 (approximately $2,200,000) is a direct grant allocated to us, and the Company also expects to benefit from cost savings resulting from grant amounts allocated to the other consortium members. In July 2017, the consortium amended the consortium agreement, pursuant to which the original grant allocation was amended such that we will receive an additional direct grant of Euro 1,000,000 (approximately $1,200,000). The additional direct grant was allocated to us from the total amount of the original grant.

In September 2017, our Phase III study of PLX-PAD cell therapy in the treatment of muscle injury following surgery for hip fracture was awarded a Euro 7,400,000 (approximately $8,600,000) grant, as part of the European Union’s Horizon 2020 program. This Phase III study will be a collaborative project carried out by an international consortium led by Charite Universitätsmedizin Berlin, together with us, and with participation of additional third parties. The grant will cover a significant portion of the project costs. An amount of Euro 2,550,000 (approximately $3,000,000) is a direct grant allocated to us for manufacturing and other costs, and we also expect to have a direct benefit from cost savings resulting from grant amounts allocated to the other consortium members.

In October 2017, the nTRACK, a collaborative project carried out by an international consortium led by Leitat was awarded a Euro 6,800,000 (approximately $7,900,000) non-royalty bearing grant. An amount of Euro 500,000 (approximately $580,000) is a direct grant allocated to us.  We also expect to benefit from cost savings resulting from grant amounts allocated to the other consortium members.

 

Application of Critical Accounting Policies

Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing in this Annual Report. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.

The discussion and analysis of our financial condition and results of operations is based on our financial statements, which we prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue Recognition from the United Agreement

 On July 1, 2017, we adopted Accounting Standards Codification, or ASC, “Revenue from Contracts with Customers”, using the modified retrospective method. Results for reporting periods beginning after July 1, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, “Revenue Recognition,” or ASC 605.

 

Pursuant to ASC 606, revenues from sales of products are recognized when control of the promised goods is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.

 

We determine revenue recognition through the following steps:

 

        

Our contract with the customer includes one type of product and thus has only one performance obligation, which is the transfer of control of the product. Our PLX cells have an alternative use and, as such, the performance obligation is considered to be satisfied at a point in time where the customer obtains control over the product.

 

We recognized revenue in fiscal year 2016 pursuant to the License Agreement with United in accordance with ASC 605-25, "Revenue Recognition, Multiple-Element Arrangements", or ASC 605-25.

Pursuant to ASC 605-25, each deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has “stand-alone value” to the customer. The arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable.

In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables.

We received an up-front, non-refundable license payment of $5,000,000. Additional payments totaling $37,500,000 were subject to the achievement of certain regulatory milestones by United.

Since the deliverables in the United Agreement did not have stand-alone value, none of them qualify as a separate unit of accounting. Accordingly, the non-refundable upfront license fee of $5,000,000 was deferred and was recognized on a straight line basis over the related performance period which was the development period in accordance with Staff Accounting Bulletin, or SAB, No. 104, “Revenue Recognition”.

We also received an advance payment for the development of $2,000,000 that was deductible against development expenses as it accrued.

 

On December 8, 2015, we received a notice from United terminating the United Agreement, effective immediately. Pursuant to the United Agreement termination clause, we regained full rights to PLX in the field of PAH, as well as all clinical data and regulatory submissions. As we have no further obligations towards United, we recognized the remaining upfront payment received in August 2011 as revenues during the year ended June 30, 2016.

 

Stock-based compensation

Stock-based compensation is considered critical accounting policy due to the significant expenses of restricted stock units which were granted to our employees, directors and consultants. In fiscal year 2018, we recorded stock-based compensation expenses related to options, restricted stock and restricted stock units in the amount of $6,548,000.

In accordance with ASC 718, "Compensation-Stock Compensation", or ASC 718, restricted share units granted to employees and directors are measured at their fair value on the grant date. All restricted shares units granted in 2018 and 2017 were granted for no consideration; therefore their fair value was equal to the share price at the date of grant, based on the close trading price of our shares known at the grant date. The restricted shares units to non-employees consultants are remeasured in any future vesting period for the unvested portion of the grants.

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 operations. We have graded vesting based on the accelerated method over the requisite service period of each of the awards. The expected pre-vesting forfeiture rate affects the number of the shares. Based on our historical experience, the pre-vesting forfeiture rate per grant is 7% for the shares granted to employees and 0% for the shares granted to our directors, Co-CEOs and non-employees consultants.

Marketable Securities

Marketable securities consist of corporate bonds, government bonds and stocks. We determine the appropriate classification of marketable securities at the time of purchase and re-evaluate such designation at each balance sheet date. In accordance with ASC 320, "Investment Debt and Equity Securities," we classify marketable securities as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders' equity. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial income.

The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income.

Marketable securities are classified within Level 1 or Level 2 because marketable securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

We recognize an impairment charge when a decline in the fair value of our investments is below the cost basis and 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 our intent to sell, including whether it is more likely than not that we will be required to sell the investment before recovery of cost basis. As such, we recognized an impairment charge of $850,000 on outstanding securities during the year ended June 30, 2018.

During the year ended June 30, 2018, we sold marketable securities for aggregate net proceeds of approximately $21,890, representing a net gain of $8,440.

 

Research and Development Expenses, Net  

 

We expect our research and development expenses to remain our primary expense in the near future as we continue to develop our product candidates. Our research and development expenses consist primarily of clinical trials expenses, consultant and subcontractor expenses, payroll and related expenses, lab material expenses, stock based compensation expenses, rent and maintenance expenses and patent expenses. The following table provides a breakdown of the related costs for fiscal years 2016 through 2018 (in thousands of dollars):

 

		Year ended June 30,
		2018				2017				2016
Payroll and related expenses		$	9,915			$	8,341			$	7,945
Materials expenses			4,521				3,145				3,799
Clinical trials expenses			4,370				4,461				3,048
Depreciation expenses			1,893				2,029				2,006
Consultants and subcontractor expenses			1,469				1,485				1,734
Rent and maintenance expenses			1,429				1,567				1,515
Stock-based compensation expenses			1,423				1,584				1,021
Patent expenses			426				461				640
Other Research and Development expenses			925				928				1,148
Total expenses			26,371				24,001				22,856
Less: Research and Development participation grants			(3,742	)			(2,909	)			(3,276	)
Research and Development Expenses, Net		$	22,629			$	21,092			$	19,580

 

We invest heavily in research and development. Research and development expenses, net, were our major operating expenses, representing 67%, 75% and 75% of the total operating expenses for each of our fiscal years 2018, 2017 and 2016, respectively. We expect that in the upcoming years our research and development expenses, net, will continue to be our major operating expense.

 

Contractual Obligations

 

The following summarizes our contractual obligations and other commitments on June 30, 2018, and the effect such obligations could have on our liquidity and cash flow in future periods:

 

						Payments due by period
Contractual Obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Operating lease obligations		$	3,418,000			$	1,049,000			$	1,936,000			$	433,000
Minimum purchase requirements		$	1,605,000			$	1,605,000
Accrued severance pay, net		$	281,000															$	281,000
Total		$	5,304,000			$	2,654,000			$	1,936,000			$	433,000			$	281,000

 

Off Balance Sheet Arrangements

 

We have no off balance sheet arrangements.

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

We are exposed to a variety of risks, including changes in interest rates, foreign currency exchange rates, changes in the value of our marketable securities and inflation.

 

As of June 30, 2018, we had $8.8 million in cash and cash equivalents and $22.1 million in short-term bank deposits and restricted deposits.

 

We adhere to an investment policy set by our investment committee, which aims to preserve our financial assets, maintain adequate liquidity and maximize return while minimizing exposure to the NIS.  Such policy further provides that we should hold most of our current assets in bank deposits and the remainder of our current assets should be invested in low risk instruments.  As of today, the currency of our financial portfolio is mainly in U.S. dollars and we use options contracts in order to hedge our exposures to currencies other than the U.S. dollar.

 

Interest Rate Risk

 

We invest a major portion of our cash surplus in bank deposits in banks in Israel. Since the bank deposits typically carry fixed interest rates, financial income over the holding period is not sensitive to changes in interest rates. However, our interest gains from future deposits may decline in the future as a result of changes in the financial markets. In any event, given the historic low levels of the interest rate, we estimate that a further decline in the interest rate we are receiving will not result in a material adverse effect to our business.

 

Foreign Currency Exchange Risk and Inflation

 

A significant portion of our expenditures, including salaries, lab materials, consultants’ fees and office expenses relate to our operations in Israel.  The cost of those Israeli operations, as expressed in U.S. dollars, is influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a devaluation of the NIS in relation to the U.S. dollar.  If the U.S. dollar declines in value in relation to the NIS, it will become more expensive for us to fund our operations in Israel. In addition, as of June 30, 2018, we own net financial balances in NIS of approximately ($2,875,000).

 

Assuming a 10% appreciation of the NIS against the U.S. dollar, we would experience exchange rate loss of approximately $261,000, while assuming a 10% devaluation of the NIS against the U.S. dollars, we would experience an exchange rate gain of approximately $319,000, in both cases excluding the effect of our hedging transactions (as described below).

 

The exchange rate of the U.S. dollar to the NIS, based on exchange rates published by the Bank of Israel, was as follows:

 

		Year Ended June 30,
		2016				2017				2018
Average rate for period			3.862				3.741				3.529
Rate at period-end			3.846				3.496				3.650

We use currency transactions of options to decrease the risk of financial exposure from fluctuations in the exchange rate of the U.S. dollar against the NIS.

 

For the year ended June 30, 2018, our net gain from hedging transactions that are non-designated and consist primarily of options strategies to minimize the risk associated with the foreign exchange effects of monetary assets and liabilities denominated in NIS was $270,000.

 

 

Item 8. Financial Statements and Supplementary Data.

 

Our financial statements are stated in thousands United States dollars (US$) and are prepared in accordance with U.S. GAAP.

 

The following audited consolidated financial statements are filed as part of this Annual Report:

 

Reports of Independent Registered Public Accounting Firm, dated September 12, 2018.

 

Consolidated Balance Sheets.

 

Consolidated Statements of Operations.

 

Consolidated Statements of Comprehensive Loss.

 

Statements of Changes in Equity.

 

Consolidated Statements of Cash Flows.

 

Notes to the Consolidated Financial Statements.

	Page
Reports of Independent Registered Public Accounting Firm	F - 2 - F - 5
Consolidated Balance Sheets	F - 6 - F- 7
Consolidated Statements of Operations	F - 8
Consolidated Statements of Comprehensive Loss	F - 9
Statements of Changes in Stockholders' Equity	F - 10 - F - 12
Consolidated Statements of Cash Flows	F - 13
Notes to Consolidated Financial Statements	F - 14 - F - 42

						June 30,
		Note				2018				2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents						$	8,821			$	4,707
Short-term bank deposits							21,079				6,235
Restricted cash and short-term bank deposits		2f					687				559
Marketable securities		3					-				15,164
Accounts receivable from the Israeli Innovation Authority (“IIA”)							58				1,036
Other current assets		5					1,391				1,315
Total current assets							32,036				29,016
LONG-TERM ASSETS:
Long-term deposits and restricted bank deposits		2g					383				403
Severance pay fund							846				804
Property and equipment, net		6					5,678				7,277
Other long-term assets							17				34
Total long-term assets							6,924				8,518
Total assets						$	38,960			$	37,534

						June 30,
		Note				2018				2017
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade payables						$	3,261			$	1,966
Accrued expenses							2,266				1,465
Other accounts payable		7,2n					3,021				1,983
Total current liabilities							8,548				5,414
LONG-TERM LIABILITIES
Accrued severance pay							1,127				940
Other long-term liabilities		8g					778				929
Total long-term liabilities							1,905				1,869
COMMITMENTS AND CONTINGENCIES		8
STOCKHOLDERS’ EQUITY
Share capital:		9
Common stock  $0.00001 par value per share:      Authorized: 200,000,000 shares      Issued and outstanding:  113,565,780 shares as of      June 30, 2018; 96,938,789 shares as of June 30, 2017							1				1
Additional paid-in capital							244,203				217,822
Accumulated deficit							(215,697	)			(189,571	)
Other comprehensive income							-				1,999
Total stockholders' equity							28,507				30,251
Total liabilities and stockholders' equity						$	38,960			$	37,534

						Year ended June 30,
		Note				2018				2017				2016
Revenues		1c, 2i					50				-			$	2,847
Cost of revenues							(2	)			-				(100	)
Gross profit							48				-				2,747
Operating Expenses:
Research and development expenses							(26,371	)			(24,001	)			(22,856	)
Less: participation grants by the IIA, Horizon 2020 and other parties							3,742				2,909				3,276
Research and development expenses, net							(22,629	)			(21,092	)			(19,580	)
General and administrative expenses, net							(11,193	)			(6,927	)			(6,486	)
Other income		10					43				-				-
Total operating loss							(33,731	)			(28,019	)			(23,319	)
Financial income, net		11					7,605				205				73
Net loss for the period						$	(26,126	)		$	(27,814	)		$	(23,246	)
Loss per share:
Basic and diluted net loss per share						$	(0.25	)		$	(0.32	)		$	(0.29	)
Weighted average number of shares used  in computing basic and diluted net loss  per share							105,876,763				87,426,208				79,547,989

		Year ended June 30,
		2018				2017				2016
Net loss		$	(26,126	)		$	(27,814	)		$	(23,246	)
Other comprehensive income (loss), net:
Unrealized gain (loss) on available-for-sale marketable securities, net			6,441				924				(1,071	)
Reclassification adjustment of derivative instruments losses realized in net loss, net			-				-				(46	)
Reclassification adjustment of available-for-sale marketable securities losses (gains) realized in net loss, net			(8,440	)			(405	)			457
Other comprehensive income (loss)			(1,999	)			519				(660	)
Total comprehensive loss		$	(28,125	)		$	(27,295	)		$	(23,906	)

		Common Stock								Additional Paid-in				Receivables on account				Accumulated Other Comprehensive				Accumulated				Total Stockholders’
		Shares				Amount				Capital				of shares				Income (Loss)				Deficit				Equity
Balance as of July 1, 2015			78,771,905			$	1			$	195,303			$	(790	)		$	2,140			$	(138,511	)		$	58,143
Exercise of options by employees and  non-employee consultants			28,000				(*	)			17				-				-				-				17
Stock-based compensation to employees, directors and non-employee consultants			1,379,094				(*	)			3,073				-				-				-				3,073
Proceeds related to issuance of common stock in a private placement (Note 9a)			-				-				-				790				-				-				790
Stock-based compensation to contractor (Note 9b)			90,000				(*	)			39				-				-				-				39
Other comprehensive loss, net			-				-				-				-				(660	)			-				(660	)
Net loss			-				-				-				-				-				(23,246	)			(23,246	)
Balance as of June 30, 2016			80,268,999			$	1			$	198,432			$	-			$	1,480			$	(161,757	)		$	38,156
(*)  Less than $1

		Common Stock								Additional Paid-in				Accumulated Other Comprehensive				Accumulated				Total Stockholders’
		Shares				Amount				Capital				Income (Loss)				Deficit				Equity
Balance as of July 1, 2016			80,268,999			$	1			$	198,432			$	1,480			$	(161,757	)		$	38,156
Exercise of options by employees and  non-employee consultants			17,900				(*	)			10				-				-				10
Stock-based compensation to employees, directors and non-employee consultants			2,570,257				(*	)			3,662				-				-				3,662
Issuance of common stock and warrants related to January 2017 offering,  net of issuance costs of $1,532 (Note 9c)			14,081,633				(*	)			15,718				-				-				15,718
Other comprehensive income, net			-				-				-				519				-				519
Net loss			-				-				-				-				(27,814	)			(27,814	)
Balance as of June 30, 2017			96,938,789			$	1			$	217,822			$	1,999			$	(189,571	)		$	30,251
(*)  Less than $1

		Common Stock								Additional Paid-in				Accumulated Other Comprehensive				Accumulated				Total Stockholders’
		Shares				Amount				Capital				Income (Loss)				Deficit				Equity
Balance as of July 1, 2017			96,938,789			$	1			$	217,822			$	1,999			$	(189,571	)		$	30,251
Exercise of options by employees			50,500				(*	)			42				-				-				42
Stock-based compensation to employees, directors and non-employee consultants			3,148,380				(*	)			6,548				-				-				6,548
Issuance of common stock under At-The Market (“ATM”) Agreement, net of issuance costs of $174 (Note 9e)			3,599,408				(*	)			4,985				-				-				4,985
Issuance of common stock, net of issuance costs of $1,405 (Note 9f)			9,000,000				(*	)			13,646				-				-				13,646
Exercise of warrants by investors (Note 9d)			828,703				(*	)			1,160				-				-				1,160
Other comprehensive income, net			-				-				-				(1,999	)			-				(1,999	)
Net loss			-				-				-				-				(26,126	)			(26,126	)
Balance as of June 30, 2018			113,565,780			$	1			$	244,203			$	-			$	(215,697	)		$	28,507
(*)  Less than $1

		Year ended June 30,
		2018				2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(26,126	)		$	(27,814	)		$	(23,246	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			2,018				2,177				2,150
Loss from sale of property and equipment, net			6				72				82
Accretion of discount, amortization of premium and changes in accrued interest of marketable securities			11				35				(114	)
Loss (gain) from sale of investments of available-for-sale marketable securities			(8,440	)			(362	)			419
Other-than-temporary loss of available-for-sale marketable securities			850				767				38
Stock-based compensation to employees, directors and non-employees consultants			6,548				3,662				3,073
Decrease (increase) in accounts receivable from the IIA			978				1,192				(537	)
Decrease (increase) in other current and other long-term assets			(59	)			(731	)			1,395
Decrease (increase) in trade payables			1,212				(701	)			(77	)
Increase in other accounts payable, accrued expenses, other long-term liabilities and other current liabilities			1,600				138				1,225
Decrease in deferred revenues			-				-				(2,847	)
Decrease in advance payment from United Therapeutics Corporation			-				-				(93	)
Increase in interest receivable on short-term deposits			(128	)			(24	)			(25	)
Linkage differences and interest on short and long-term  deposits and restricted bank deposits			5				(14	)			(3	)
Accrued severance pay, net			145				(8	)			38
Net cash used in operating activities		$	(21,380	)		$	(21,611	)		$	(18,522	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		$	(342	)		$	(378	)		$	(1,750	)
Proceeds from sale of property and equipment			-				30				28
Repayment of (investment in) short-term deposits			(14,829	)			2,316				(849	)
Repayment of long-term deposits and restricted bank deposits			-				-				5
Proceeds from sale of available-for-sale marketable securities			21,881				5,527				6,999
Proceeds from redemption of available-for-sale marketable securities			9				410				1,094
Investment in available-for-sale marketable securities			(1,146	)			(3,607	)			(4,215	)
Net cash provided by investing activities		$	5,573			$	4,298			$	1,312
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds related to issuance of common stock and warrants, net of issuance costs		$	18,631			$	15,718			$	790
Proceeds with respect to Israel-United States Binational Industrial Research and Development Foundation liability			88				69				-
Exercise of warrants and options			1,202				10				17
Net cash provided by financing activities		$	19,921			$	15,797			$	807
Increase (decrease) in cash and cash equivalents			4,114				(1,516	)			(16,403