Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of our balance sheets, statements of
income and cash flows. This section should be read in conjunction with our
Annual Report on Form 10-K for the year ended
Forward-Looking Statement Notice
This quarterly report on Form 10-Q contains forward-looking statements about our expectations, beliefs or intentions regarding, among other things, our product development efforts, business, financial condition, results of operations, strategies or prospects. In addition, from time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Forward-looking statements can be identified by the use of forward-looking words such as "believe," "expect," "intend," "plan," "may," "should" or "anticipate" or their negatives or other variations of these words or other comparable words or by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements may be included in, but are not limited to, various filings made by us with the
This report identifies important factors which could cause our actual results to differ materially from those indicated by the forward-looking statements, particularly those set forth under Item 1A. "Risk Factors" as disclosed in our Annual Report on Form 10-K, as filed with the
Such risk factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligations to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties.
Description of Business
We are a clinical-stage biopharmaceutical company focused on developing therapeutic products for the treatment of ophthalmic disorders. We have in-licensed certain patents and patent applications protecting the use in the ophthalmic field of our current pipeline drug under development, a synthetic A3 adenosine receptor ("A3AR"), agonist, CF101 (known generically as IB-MECA). CF101 is being developed by the Company to treat three ophthalmic indications: dry eye syndrome, or DES; glaucoma and uveitis. In
CF101 is a highly-selective, orally bioavailable small molecule synthetic drug, which targets the A3AR. We believe that CF101 has a favorable safety profile and a potent anti-inflammatory activity, mediated via its capability to inhibit the production of inflammatory cytokines, such as TNF-?, MMPs, IL-1 and IL-6.
This is mediated by activation of the A3AR, which is highly expressed in inflammatory tissues in contrast to normal tissues where expression levels of the receptor are very low. We believe that the anti-inflammatory and neuroprotective effects of CF101 make it a candidate for use in the treatment of ophthalmic indications. While Can-Fite is continuing to develop CF101 for autoimmune inflammatory indications, including RA and psoriasis, we are focusing, under the License Agreement, on the development of CF101 for ophthalmic indications.
During the first quarter of 2014, we had the following major developments:
Results of Operations -Three Months Ended
For the period from
Plan of Operation
The Company did not generate any revenue in the first quarter of 2014 and does not expect to generate any revenue over the next 12 months. Through our subsidiary,
Liquidity and Capital Resources
Since our acquisition of all the outstanding interests in EyeFite (the "Transaction") on
There was no net cash provided by investing and financing activities for the periods ended
Developing drugs, conducting clinical trials and commercializing products is expensive and we will need to raise substantial additional funds to achieve our strategic objectives. Although we believe our existing cash resources and our letter from our Parent Company will be sufficient to fund our current projected cash requirements to operate our business as currently conducted, we will require significant additional financing in the future to fund our operations beyond mid -2015. See Item 1A. "Risk Factors-Risks Related to the Company and Its Business" as disclosed in our Annual Report on Form 10-K, as filed with the
the failure to obtain regulatory approval or achieve commercial success of our product candidates, which currently includes only CF101;
the level of research and development investment required to develop our product candidates, and maintain and improve our patented or licensed technology position;
the costs of obtaining or manufacturing product candidates for research and development and testing;
the results of preclinical and clinical testing, which can be unpredictable in product candidate development and any decision to initiate additional preclinical or clinical studies;
changes in product candidate development plans needed to address any difficulties that may arise in manufacturing, preclinical activities or clinical studies;
our success in establishing and effecting out-licensing agreements with strategic partners, the terms of these agreements and the success of these potential future licensees and partners in selling our products;
our success rate in preclinical and clinical efforts associated with milestones and royalties, if applicable;
the costs of investigating patents that might block us from developing potential product candidates;
the costs of recruiting and retaining qualified personnel;
the costs, timing and outcomes involved in obtaining regulatory approvals;
the number of product candidates we pursue in the future;
· our revenues, if any; ·
the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
our need or decision to acquire or license complementary technologies or new platform or product candidate targets; and
the costs of financing unanticipated working capital requirements and responding to competitive pressures.
Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through debt or equity financings, or by out-licensing our product candidate. We cannot be certain that additional funding will be available to us on acceptable terms, or at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts.
We are addressing our liquidity issues by implementing initiatives to raise additional funds as well as other measures that we believe will allow the coverage of our anticipated budget deficit. Such initiatives may include monetizing of our assets, by intention to realize our investment in Can-Fite's shares.
In addition, in
There can be no assurance that additional capital will be available to us. We currently have no agreements, arrangements, or understandings with any person to obtain funds through bank loans, lines of credit, or any other sources, other than the formal letter from Can-Fite agreeing to defer payments owed to it under the Services Agreement, as detailed above under "Plan of Operation. Since we have no such arrangements or plans currently in effect, our inability to raise funds for the above purposes will have a severe negative impact on our ability to remain a viable company beyond mid- 2015. See Item 1A. "Risk Factors-Risks Related to the Company and Its Business" as disclosed in our Annual Report on Form 10-K, as filed with the
During the three months ended
Critical Accounting Policies
We prepare our unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S., or GAAP. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with our Board.
Holdings in Can-Fite:
In accordance with ASC320, an accounting for the Company's investment in the equity securities depends on the remaining period of the tradability restriction in its respective market of the shares.
Shares that are restricted for less than one year should be re-measured to reflect fair value each cutoff date. These securities are classified as available-for-sale securities carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity under accumulated other comprehensive income in the consolidated balance sheet. For investments classified as available-for-sale securities, unrealized gains and losses are recorded in accumulated other comprehensive income, a separate component of stockholders' equity, realized gains and losses on sales of available-for-sale securities, as determined on a specific identification basis, are included in the consolidated statement of operations.
The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities is below the cost basis of such securities is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company's intent to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized in "other than temporary impairment, net of gain on sale of marketable securities previously impaired" in the statement of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.
The Company currently holds 446,827 shares of Can-Fite's issued and outstanding ordinary shares which 178,730 of them still have certain resale restriction provisions. Such restrictions provide that these shares may be sold as follows 89,365 shares not before
Because part of our investment in Can-Fite's shares is restricted, the Company needs to adjust the restricted shares' fair value in order to reflect such restriction on such shares' price. In estimating the fair value of the Can-Fite restricted shares held by the Company, , the Company used Black-Scholes option-pricing model with the following weighted-average assumptions as of
As a result, the fair value of the Can-Fite shares held by the Company on the transaction date reflects the resale restrictions. The fair value of these shares based on an external expert's valuation as of
The Company and its subsidiary account for income taxes and uncertain tax positions in accordance with ASC 740, "Income Taxes". ASC 740 prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Company and its subsidiary provide a full valuation allowance to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.
The Company adopted ASC 740-10. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. As of
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits, marketable securities, trade receivables and other account receivables.
Cash and cash equivalents are deposited with major banks in
Derivative Related to Services Agreement
In connection with the recapitalization transaction described in Note 1.b of the consolidated financial statements, on
According to the Services Agreement, as additional consideration for its services, the Company agreed to pay to Can-Fite additional fees ("Additional Fees") equal to 2.5% of any revenues received by the Company (or any affiliate of the Company, including its wholly owned subsidiary, EyeFite) for rights to CF101 from third-party sublicensees (including up-front payments, developmental or commercial milestones, royalties on net sales and any similar payments, but not including payments to support or reimburse the Company for research, development, manufacturing or commercial expenses or for equity). Can-Fite has the right, until the earlier of (a)
The Company's management has considered ASC 815 in order to evaluate whether the Exchange Right (contingent call option to holders) instrument is a financial instrument that has the characteristics of a derivative. In particular, the Company's management has also evaluated ASC 815-10-15-74(a) scope exception.
Based on the analysis above, the Company's management concluded that the Exchange Right does not have fixed settlement provisions, and therefore, should be classified as a liability at inception. The Exchange Right will be re-measured at fair value each reporting period until the date of exercise or expiration with the change in value reported in the statement of operations (as part of financial income/expenses).
Consequently, the Company recorded as part of the recapitalization transaction a liability related to the Exchange Right in the amount of
The fair value of the derivatives was determined using the binomial option-pricing model. This option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected term.
The fair value of the Derivative as of
The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Since the quoted market value of the Company's Common Stock was based on a sporadically traded stock with little or no volume, the Company's management determined the Company's stock price fair value based on ASC 820 Fair Value Measurement using the income approach assisted by a third party specialist. Consequently, the Company used the estimates stock price fair value in the underlying assumptions of the computation of the fair value of the derivative related to the Services Agreement.
Accounting for Stock-Based Compensation
We account for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation" ("ASC 718"). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statements of comprehensive loss.
We recognize compensation expenses for the value of its awards granted based on the accelerate recognition method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We estimate the fair value of stock options granted using the common option-pricing models (i.e. the Black-Scholes model and the Binomial model). These option-pricing models require a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon historical volatilities of similar entities in the related sector index.
Under the Company's 2012 Stock Incentive Plan, as amended (including the Israeli Annex), or the 2012 Plan, we may grant, among other awards, stock options, restricted stock and restricted stock units of the Company to our officers, directors, employees and consultants.
During the three months ended
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources.
Jumpstart Our Business Startups Act of 2012
We are an emerging growth company within the meaning of the rules under the Securities Act, and we will utilize certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies. For example, we will not have to provide an auditor's attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. The JOBS Act also permits us, as an "emerging growth company," to take advantage of an extended transition period to comply with certain new or revised accounting standards if such standards apply to companies that are not issuers. We are choosing to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by issuers. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.