10-Q 1 v350722_10q.htm 10-Q
  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
OR

 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                  

Commission file number:     001-34676
 
PROLOR BIOTECH, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
20-0854033
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification
No.)
 
 
 
7 Golda Meir Street
Weizmann Science Park
 
 
Nes-Ziona, Israel
 
74140
(Address of principal executive
offices)
 
(Zip Code)
 
(866) 644-7811
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one): 
 
Large accelerated filer
¨
Accelerated Filer
x
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of August 8, 2013, there were 63,854,883 shares of common stock, par value $0.00001 per share (“Common Stock”), outstanding.
   
 
 
PROLOR BIOTECH, INC.
INDEX TO FORM 10-Q FILING
FOR THE PERIOD ENDED MARCH 31, 2013
 
Table of Contents
 
 
Page
 
 
 
PART I
 
 
 
 
 
ITEM 1.
Financial Statements.
3
 
 
 
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
15
 
 
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
24
 
 
 
ITEM 4.
Controls and Procedures
24
 
 
 
PART II
 
 
 
 
 
ITEM 1A
Risk Factors
25
 
 
 
ITEM 2.
Litigation.
25
 
 
 
ITEM 6.
Exhibits.
25
 
 
 
SIGNATURES
27
 
2

PART I          – FINANCIAL INFORMATION
ITEM 1.         Financial Statements.
 
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
 
CONSOLIDATED BALANCE SHEETS
 
 
 
June 30, 2013
 
December 31, 2012
 
 
 
(Unaudited)
 
 
 
ASSETS
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
19,017,310
 
$
23,848,892
 
Short term deposits
 
 
5,226,625
 
 
10,064,439
 
Accounts receivable and prepaid expenses
 
 
726,093
 
 
395,413
 
Restricted cash
 
 
62,161
 
 
135,837
 
Total Current Assets
 
 
25,032,189
 
 
34,444,581
 
 
 
 
 
 
 
 
 
Long-term Assets:
 
 
 
 
 
 
 
Property and equipment, net
 
 
1,056,634
 
 
1,162,065
 
Assets held for employees’ severance payments
 
 
351,971
 
 
304,477
 
Long term deposit
 
 
5,709
 
 
5,575
 
Total Long Term Assets
 
 
1,414,314
 
 
1,472,117
 
 
 
 
 
 
 
 
 
Total Assets
 
$
26,446,503
 
$
35,916,698
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
Trade payables
 
$
502,219
 
$
913,514
 
Related parties payable
 
 
106,038
 
 
225,480
 
Accrued expenses and other liabilities
 
 
2,543,739
 
 
1,196,034
 
Total Current Liabilities
 
 
3,151,996
 
 
2,335,028
 
 
 
 
 
 
 
 
 
Liability in Respect of Employees Severance Payments
 
 
481,454
 
 
381,399
 
 
 
 
 
 
 
 
 
Commitments and Contingent Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' Equity:
 
 
 
 
 
 
 
Stock capital -
 
 
 
 
 
 
 
Preferred stock of $ 0.00001 par value per share 10,000,000 shares of preferred stock authorized; none issued and outstanding as of June 30, 2013 and December 31, 2012, respectively.
 
 
-
 
 
-
 
Common shares of $ 0.00001 par value per share 300,000,000 shares of common stock authorized; 63,828,463 and 63,405,118 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively
 
 
638
 
 
634
 
Additional paid-in capital
 
 
105,360,815
 
 
101,118,082
 
(Deficit) accumulated during the development stage
 
 
(82,548,400)
 
 
(67,918,445)
 
Total Shareholders' Equity
 
 
22,813,053
 
 
33,200,271
 
 
 
 
 
 
 
 
 
Total Liabilities and Shareholders' Equity
 
$
26,446,503
 
$
35,916,698
 
 
The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
3

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period of 
May 31, 2005
 
 
For the three months ended
 
For the six months ended
 
(date of inception)
 through
 
 
June 30,
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development, net
 
(5,389,203)
 
 
(2,126,339)
 
 
(8,586,803)
 
 
(6,430,409)
 
 
(56,934,963)
 
General and administrative
 
(4,467,615)
 
 
(858,716)
 
 
(5,998,599)
 
 
(1,648,496)
 
 
(26,106,738)
 
Total operating expenses
 
(9,856,818)
 
 
(2,985,055)
 
 
(14,585,402)
 
 
(8,078,905)
 
 
(83,041,701)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss)
 
(9,856,818)
 
 
(2,985,055)
 
 
(14,585,402)
 
 
(8,078,905)
 
 
(83,041,701)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial income (expenses), net
 
(28,329)
 
 
(84,438)
 
 
(44,553)
 
 
10,041
 
 
493,301
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss)
$
(9,885,147)
 
$
(3,069,493)
 
$
(14,629,955)
 
$
(8,068,864)
 
$
(82,548,400)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) per share (basic & diluted)
$
(0.16)
 
$
(0.05)
 
$
(0.23)
 
$
(0.14)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
 
63,521,043
 
 
59,311,044
 
 
63,471,071
 
 
57,019,261
 
 
 
 
 
The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
4

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
For the six months ended  
June 30,
 
Period of  
May 31, 2005  
(date of inception)  
through June 30,
 
 
 
2013
 
2012
 
2013
 
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
Net (loss)
 
$
(14,629,955)
 
$
(8,068,864)
 
$
(82,548,400)
 
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
 
 
 
 
 
 
 
 
 
 
Depreciation
 
 
124,988
 
 
104,045
 
 
725,539
 
In-process research and development write-off
 
 
-
 
 
-
 
 
3,222,831
 
Stock based compensation (options and restricted shares)
 
 
4,075,682
 
 
740,401
 
 
15,593,615
 
Long term deposit exchange rate differences
 
 
(134)
 
 
2,219
 
 
(1,066)
 
(Increase) decrease in accounts receivable and prepaid expenses
 
 
(330,678)
 
 
(161,616)
 
 
(725,814)
 
Increase in accrued severance pay, net
 
 
100,055
 
 
47,167
 
 
481,454
 
Increase (decrease) in trade payables
 
 
(411,295)
 
 
(202,081)
 
 
492,115
 
Increase (decrease) in related parties
 
 
(119,442)
 
 
(162,425)
 
 
106,038
 
Increase (decrease) in accrued expenses and other liabilities
 
 
1,347,705
 
 
(605,343)
 
 
2,422,723
 
Net cash (used in) operating activities
 
 
(9,843,074)
 
 
(8,306,497)
 
 
(60,230,965)
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment
 
 
(19,557)
 
 
(146,231)
 
 
(1,767,817)
 
Payment for the acquisition of Prolor Biotech Ltd.
 
 
-
 
 
-
 
 
(474,837)
 
Assets held for employees’ severance payments
 
 
(47,494)
 
 
(24,895)
 
 
(351,971)
 
Long term (deposit)
 
 
-
 
 
-
 
 
(4,643)
 
Short term (deposit) release
 
 
4,837,814
 
 
(15,697,336)
 
 
(5,226,625)
 
Restricted cash
 
 
73,676
 
 
100,215
 
 
(62,161)
 
Net cash (used in) investing activities
 
 
4,844,439
 
 
(15,768,247)
 
 
(7,888,054)
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Short term bank credit
 
 
-
 
 
-
 
 
(2,841)
 
Proceeds from loans
 
 
-
 
 
-
 
 
(173,000)
 
Principal payment of loans
 
 
-
 
 
-
 
 
173,000
 
Contributed profit from shareholder's transactions
 
 
-
 
 
-
 
 
17,012
 
Proceeds from issuance of shares
 
 
-
 
 
34,855,569
 
 
82,043,987
 
Proceeds from exercise of options
 
 
137,798
 
 
48,879
 
 
1,419,871
 
Proceeds from exercise of warrants
 
 
29,255
 
 
2,525,680
 
 
3,658,300
 
Net cash provided by financing activities
 
 
167,053
 
 
37,430,128
 
 
87,136,329
 
Increase (decrease) in cash and cash equivalents
 
 
(4,831,582)
 
 
13,355,384
 
 
19,017,310
 
Cash and cash equivalents at the beginning of the period
 
 
23,848,892
 
 
13,261,687
 
 
-
 
Cash and cash equivalents at the end of the period
 
$
19,017,310
 
$
26,617,071
 
$
19,017,310
 
 
The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
5
 
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
For the six months ended  
June 30,
 
Period of May 31, 
2005
(date of inception)  
through June 30,
 
 
 
2013
 
2012
 
2013
 
Non cash transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee options exercised into shares
 
$
-
 
$
-
 
$
140
 
Issuance of common stock in reverse acquisition
 
$
-
 
$
-
 
$
73
 
 
 
 
 
 
 
 
 
 
 
 
Conversion of preferred to common stock
 
$
-
 
$
-
 
$
18
 
Cashless exercise of 3,333, 567,040, and 920,754 outstanding warrants to purchase 1,888, 331,905 and 627,685 shares of common stock, respectively.
 
$
-
 
$
3
 
$
10
 
 
 
 
 
 
 
 
 
 
 
 
Additional information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid for income taxes
 
$
-
 
$
-
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid for interest expense
 
$
-
 
$
-
 
$
-
 
 
The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
6

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
   
NOTE 1 -   GENERAL
 
a.    Prolor Biotech, Inc. (the “Company”) was incorporated on August 22, 2003 under the laws of the State of Nevada. The Company is a development stage biopharmaceutical company, utilizing an exclusive license from Washington University to patented technology in the development of longer-acting versions of already-approved therapeutic proteins, through its Israeli subsidiary, Prolor Biotech Ltd.
 
b.   The Company currently devotes substantially all of its efforts toward research and development activities. The Company’s activities also include raising capital, recruiting personnel and building infrastructure. In the course of such activities, the Company has sustained operating losses and expects such losses to continue for the foreseeable future. The Company has not generated any revenues or product sales and has not achieved profitable operations or positive cash flow from operations. The Company’s deficit accumulated during the development stage aggregated $82,548,400 as of June 30, 2013. There is no assurance that profitable operations, if ever achieved, could be sustained on a continuing basis. The Company believes that its current cash sources will enable the continuance of the Company’s activities for at least a year with no need for additional funding.
 
c.    On April 23, 2013, OPKO Health, Inc., (“OPKO"”), a Delaware corporation, POM Acquisition, Inc., (“POM”), a Nevada corporation and a wholly owned subsidiary of OPKO, and the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction of the terms and conditions contained in the Merger Agreement, POM will merge with and into the Company with the Company surviving as a wholly owned subsidiary of OPKO (the “Merger”). The Board of Directors of each of the Company and OPKO approved and adopted the Merger Agreement. If the Merger is completed, holders of the Companys common stock, par value $0.00001 per share (“Common Stock”), will be entitled to receive 0.9951 of a share of OPKO’s common stock for each share of Common Stock they own. The OPKO common stock is listed on the New York Stock Exchange, or the NYSE, and trades under the symbol “OPK.” Upon completion of the Merger, shares of the Company's common stock will be delisted from the NYSE MKT and the Tel Aviv Stock Exchange and there will no longer be a public trading market for the Common Stock. In addition, promptly following the closing of the Merger, the Common Stock will be deregistered under the Securities Exchange Act of 1934, as amended, and the Company will no longer file periodic or other reports with the Securities and Exchange Commission.  At the effective time of the Merger each share of Common Stock issued and outstanding will be cancelled.  On July 24, 2013, the Company filed its definitive Joint Proxy Statement/Prospectus in respect of its proposed transaction with OPKO.

NOTE 2 -   SIGNIFICANT ACCOUNTING POLICIES
 
a.   Basis of presentation:
      The accompanying unaudited financial statements of the Company are presented in accordance with the requirements of Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such U.S. Securities and Exchange Commission (“SEC”) rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been made. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2012 and the notes thereto included in the Company’s Report on Form 10-K filed with the SEC on March 15, 2013.
 
 
7
 
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
 
b.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Modigene Inc. and Prolor Biotech Ltd.  Intercompany transactions and balances have been eliminated upon consolidation.
 
c.
Loss per share:
Basic and diluted losses per share are presented in accordance with ASC No. 260 “Earnings per share”. Outstanding options, warrants and restricted stock have been excluded from the calculation of the diluted loss per share because all such securities are antidilutive. The number of shares of Common Stock issuable upon exercise or conversion of the foregoing securities that have been excluded from calculations for the three and six months ended June 30, 2013 and 2012 was 8,342,958, 6,231,670 , 7,885,881, and 6,754,504, respectively.         
 
d.
Fair value measurements:
As defined in ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
-
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
-
Level 2: Other inputs that are observable, directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.
-
Level 3: Unobservable inputs are used when little or no market data is available, which requires the Company to develop its own assumptions about how market participants would value the assets or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques in its assessment that maximize the use of observable inputs and minimize the use of unobservable inputs. The following table presents the Company’s financial assets and liabilities that are carried at fair value, classified according to the three categories described above:
 
 
 
Fair Value Measurements at June 30, 2013
 
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Cash and cash equivalents
 
$
19,017,310
 
$
19,017,310
 
$
-
 
$
-
 
Short term deposits
 
 
5,226,625
 
 
5,226,625
 
 
-
 
 
-
 
Restricted cash
 
 
62,161
 
 
62,161
 
 
-
 
 
-
 
Total assets at fair value
 
$
24,306,096
 
$
24,306,096
 
$
-
 
$
-
 
 
 
 
Fair Value Measurements at December 31, 2012
 
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Cash and cash equivalents
 
$
23,848,892
 
$
23,848,892
 
$
-
 
$
-
 
Short term deposits
 
 
10,064,439
 
 
10,064,439
 
 
-
 
 
-
 
Restricted cash
 
 
135,837
 
 
135,837
 
 
-
 
 
-
 
Total assets at fair value
 
$
34,049,168
 
$
34,049,168
 
$
-
 
$
-
 
   
e.
Concentrations of credit risk:
Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents. Cash and cash equivalents are invested in major banks in Israel and in the United States. Such deposits in Israel and the United States are not insured. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.
The Company has no off-balance-sheet arrangements or concentrations of credit risk, such as foreign exchange contracts or other foreign hedging arrangements.
 
 
8
 
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
 
f.
Recent accounting pronouncements:
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The objective of ASU 2011-11 is to enhance disclosures by requiring improved information about financial instruments and derivative instruments in relation to netting arrangements. ASU 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013. The adoption of ASU 2011-11 did not have a material impact on its consolidated results of operation and financial condition.
 
On February 5, 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which adds additional disclosure requirements relating to the reclassification of items out of accumulated other comprehensive income.  This ASU is effective for the first quarter of 2013 and affects disclosures only, The adoption of ASU 2013-02 did not have a material impact on its consolidated results of operation and financial condition.
 
There were various other updates recently issued.  None of the updates are expected to a have a material impact on the Company's financial position, results of operations or cash flows.

NOTE 3 -   ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
 
 
 
June 30,
 
December 31,
 
 
 
2013
 
2012
 
Israeli government authorities
 
$
626,578
 
$
276,604
 
Prepaid expenses
 
 
99,515
 
 
118,809
 
 
 
$
726,093
 
$
395,413
 
 
 
9

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
 
NOTE 4 -              PROPERTY AND EQUIPMENT, NET
 
 
June 30,
 
December 31,
 
 
 
2013
 
2012
 
Cost:
 
 
 
 
 
 
 
Office furniture and equipment
 
$
41,767
 
$
41,767
 
Computers and electronic equipment
 
 
155,077
 
 
141,574
 
Laboratory equipment
 
 
1,232,968
 
 
1,226,909
 
Leasehold improvements
 
 
370,136
 
 
370,136
 
 
 
 
1,799,948
 
 
1,780,386
 
Accumulated depreciation:
 
 
 
 
 
 
 
Office furniture and equipment
 
 
9,490
 
 
8,340
 
Computers and electronic equipment
 
 
119,068
 
 
106,750
 
Laboratory equipment
 
 
504,980
 
 
421,137
 
Leasehold improvements
 
 
109,776
 
 
82,094
 
 
 
 
743,314
 
 
618,321
 
Depreciated cost
 
$
1,056,634
 
$
1,162,065
 
 
                     Depreciation expenses for the three and six months ended June 30, 2013 and 2012 and for the period of May 31, 2005 (date of inception) through June 30, 2013 were $62,441, $52,703, $124,988, $104,045, and $725,539, respectively.

NOTE 5 -    ACCRUED EXPENSES AND OTHER LIABILITIES
 
 
 
June 30,
 
December 31,
 
 
 
2013
 
2012
 
Employees and payroll accruals
 
$
285,469
 
$
213,020
 
Accrued expenses
 
 
2,258,270
 
 
983,014
 
 
 
$
2,543,739
 
$
1,196,034
 

NOTE 6 - STOCK OPTION PLANS
 
As of June 30, 2013, the Company had two stock option plans, under which there were outstanding stock options. Outstanding stock options to purchase 1,130,797 shares of Common Stock had been granted under the Company’s 2005 Stock Incentive Plan (the “2005 Plan”), and outstanding options to purchase 6,705,741 shares of Common Stock had been granted under the Company’s 2007 Equity Incentive Plan (the “2007 Plan” and, together with the 2005 Plan, the “Equity Incentive Plans”). The Company has issued the maximum number of shares authorized under the 2005 Plan. On May 22, 2009, the Company approved an amendment to the 2007 Plan, which increased the number of shares of Common Stock authorized for issuance under the 2007 Plan from 3,000,000 shares to 6,000,000 shares. On February 4, 2013, the  Compensation Committee of the Company’s Board of Directors approved an amendment to the 2007 Plan, which increased the number of shares of Common Stock authorized for issuance under the 2007 Plan from 6,000,000 to 10,000,000, and the Company’s stockholders approved this amendment on June 4, 2013 at the Company’s 2013 Annual Meeting of Stockholders. Options granted under the Equity Incentive Plans and the related award agreements expire ten years from the date of grant, unless earlier terminated in accordance with the terms of such grants.  Options no longer vest following the termination of the grant recipient’s employment or other relationship with the Company.
 
 
10
 
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
 
NOTE 6 - STOCK OPTION PLANS (continued)
 
The Company accounts for employees’ and directors’ stock-based compensation in accordance with ASC 718-10, "Share-Based Payment". ASC 718-10 requires companies to estimate the fair value of equity-based payment awards at the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements.
 
The Company recognizes compensation expenses for the value of awards granted based on the straight line method over the requisite service period, net of estimated forfeitures.
 
The Company applies ASC 505-50, “Equity Based Payments to Non Employees” (“ASC 505-50”), with respect to options issued to non-employees. The Company has accounted for these grants under the fair value method of ASC 505-50, using a Black-Scholes option-pricing model.
 
The following table summarizes all share-based compensation expenses related to stock options grants under the Equity Incentive Plans to employees, directors and consultants included in the consolidated statements of operations: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period of May
31, 2005 (date
 
 
 
For the three months ended
 
For the six months ended
 
of inception)
 
 
 
June 30,
 
June 30,
 
through June 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
2013
 
Research & development
 
$
459,779
 
$
115,922
 
$
795,109
 
$
265,014
 
$
7,425,442
 
General & administrative
 
 
2,358,659
 
 
232,804
 
 
2,786,823
 
 
475,387
 
 
7,674,423
 
Total
 
$
2,818,437
 
$
348,726
 
$
3,581,932
 
$
740,401
 
$
15,099,865
 
 
The Company selected the Black-Scholes Merton option pricing model as the most appropriate fair value method for its stock-options awards. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements. The expected term of options granted is based upon historical experience and represents the period of time that options granted are expected to be outstanding.
 
The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has not paid dividends and is not expected to pay dividends in the foreseeable future. 
 
The following is a summary of the stock options granted under the Equity Incentive Plans:
 
 
 
For the six months ended
June 30, 2013
 
 
 
Number of Options
 
Weighted Average
Exercise Price
 
Outstanding at the beginning of the period
 
 
5,514,038
 
$
2.24
 
Exercised
 
 
(134,213)
 
$
0.88
 
Exercised
 
 
(2,000)
 
$
0.65
 
Exercised
 
 
(2,000)
 
$
1.50
 
Forfeited
 
 
(25,000)
 
$
1.50
 
Issued under the 2007 Plan
 
 
2,374,500
 
$
4.74
 
Outstanding at the end of the period
 
 
7,725,325
 
$
2.97
 
Options exercisable at the end of the period
 
 
5,334,825
 
$
2.00
 
 
11
 
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
 
NOTE 6 - STOCK OPTION PLANS (continued)
 
 
 
For the six months ended
June 30, 2012
 
 
 
Number of Options
 
Weighted Average
Exercise Price
 
Outstanding at the beginning of the period
 
 
5,302,905
 
$
2.07
 
Exercised
 
 
(20,200)
 
$
2.42
 
Issued under the 2007 Plan
 
 
203,000
 
$
6.27
 
Issued under the 2007 Plan
 
 
25,000
 
$
5.71
 
Outstanding at the end of the period
 
 
5,510,705
 
$
2.24
 
Options exercisable at the end of the period
 
 
4,294,705
 
$
1.32
 
 
The total unrecognized estimated compensation cost related to non-vested stock options granted through June 30, 2013 was $5,663,045, which is expected to be recognized over a period of up to four years.
 
                      The options outstanding as of June 30, 2013 have been separated by exercise prices, as follows:
 
Exercise
Price
 
# of Options
Outstanding
 
Average
Remaining
Contractual
Life (years)
 
# of Options
Exercisable
 
Intrinsic
Value of
Options
Outstanding
 
Fair value
estimated at
grant day
 
$
0.65
 
363,000
 
5.60
 
363,000
 
5.64
 
0.53
 
$
0.88
 
805,390
 
2.85
 
805,390
 
5.41
 
0.61
 
$
0.90
 
1,937,239
 
4.67
 
1,937,239
 
5.39
 
0.74
 
$
0.93
 
25,000
 
4.68
 
25,000
 
5.36
 
0.74
 
$
1.32
 
51,194
 
3.32
 
51,194
 
4.97
 
0.64
 
$
1.50
 
92,502
 
4.82
 
92,502
 
4.79
 
0.58
 
$
2.00
 
400,000
 
3.86
 
400,000
 
4.29
 
1.52
 
$
2.35
 
50,000
 
6.52
 
37,500
 
3.94
 
1.98
 
$
2.40
 
500,000
 
6.54
 
375,000
 
3.89
 
2.00
 
$
2.50
 
19,500
 
3.87
 
19,500
 
3.79
 
1.20
 
$
4.52
 
10,000
 
9.38
 
-
 
1.77
 
3.20
 
$
4.74
 
2,374,500
 
9.61
 
672,000
 
3.25
 
3.42
 
$
5.47
 
190,000
 
8.10
 
160,000
 
0.82
 
1.93
 
$
5.71
 
25,000
 
8.82
 
6,250
 
0.58
 
4.52
 
$
6.23
 
179,000
 
7.55
 
89,500
 
0.06
 
2.44
 
$
6.27
 
203,000
 
8.58
 
50,750
 
0.02
 
4.06
 
$
6.47
 
500,000
 
7.51
 
250,000
 
-
 
3.84
 
 
 
 
7,725,325
 
 
 
5,334,825
 
 
 
 
 
     
 
12
 

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
 
NOTE 7 -  WARRANTS
 
 
For the six months ended  
June 30, 2013
 
 
 
Number
of warrants
 
Weighted Average 
Exercise Price
 
Outstanding and exercisable at the beginning of the period
 
321,335
 
$
0.88
 
Exercised
 
(33,244)
 
$
0.88
 
Forfeited
 
-
 
 
-
 
Outstanding and exercisable at the end of the period
 
288,091
 
$
0.88
 
   
 
On June 4, 2013 the Company issued 1,888 shares of Common Stock upon the cashless exercise of 3,333 warrants with an exercise price of $2.50.
 
 
 
For the six months ended  
June 30, 2012
 
 
 
Number  
of warrants
 
Weighted Average 
Exercise Price
 
Outstanding and exercisable at the beginning of the period
 
2,007,856
 
$
2.22
 
Exercised
 
(28,502)
 
 
0.88
 
Exercised
 
(1,553,252)
 
 
2.50
 
Forfeited
 
(104,767)
 
 
2.50
 
Outstanding and exercisable at the end of the period
 
321,335
 
 
0.88
 
 
Proceeds from the exercise of 36,577 and 1,581,754 warrants into 35,132 and 1,342,903 shares of Common Stock for the six months ended June 30, 2013 and 2012, were $29,255 and $2,525,680, respectively. Proceeds from the exercise of 3,165,683 warrants into 2,579,090 shares of Common Stock for the period of May 31, 2005 (date of inception) through June 30, 2013 were $3,658,300.
Total aggregate intrinsic value of warrants outstanding as of June 30, 2013 and 2012 was $1,554,628 and $1,327,114, respectively.

NOTE 8 -  COMMITMENTS AND CONTINGENT LIABILITIES
 
 a.     On March 13, 2011 Prolor Biotech Ltd. entered into a rental agreement for the lease of new office premises for a period ending March 2013 .The lease contract is renewed yearly for a period of up to five years unless terminated earlier. Aggregate minimum rental commitments under the non-cancelable lease as of June 30, 2013 were as follows:
 
Year ended June 30,
 
 
 
 
 
 
2014
 
$
160,759
 
 
b.     As described in Note 1.c. above, on April 23, 2013 the Company entered into the Merger Agreement with OPKO and POM, pursuant to which POM will be merged with and into the Company and the Company will be the surviving corporation and OPKO’s wholly owned subsidiary. Six putative class action lawsuits have been filed in connection with the Merger, and, on July 17, 2013, these six suits were consolidated, for all purposes, into an amended class action complaint. The lawsuit names the Company, the members of the Company’s Board of Directors, OPKO, and POM as defendants.
 
 
13
 
PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
 
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES (continued) 
 
b.   The lawsuit is brought by purported holders of Common Stock, both individually and on behalf of a putative class of the Company’s stockholders, asserting claims that (i) the Company’s Directors breached their fiduciary duties in connection with the proposed Merger by, among other things, purportedly failing to maximize stockholder value, (ii) that the Company and its Board of Directors failed to disclose material information concerning the proposed Merger and (iii) that OPKO and POM aided and abetted the Company’s Directors’ alleged breach of their fiduciary duties. The lawsuit seeks various damages, an award of all costs, and reasonable attorneys’ fees, as well as certain equitable relief, including enjoining consummation of the Merger and, alternatively, rescinding the Merger in the event it is consummated. The Company believes that the claims made in this lawsuit are without merit and intend to defend such claims vigorously; however, there can be no assurance that the Company will prevail in defense of this lawsuit. Due to the preliminary nature of the lawsuit, the Company is not able at this time to estimate its outcome.

NOTE 10 - COMMON STOCK
 
On February 4, 2013 the Company awarded its President, Chief Executive Officer and its Chief Operating Officer, an aggregate of 100,000, 100,000 and 50,000 shares of restricted stock, subject to the terms and conditions of the 2007 Plan. The shares of restricted stock vest in equal monthly installments over 12 months following  the date of grant. The shares of restricted stock were valued at $4.74 per share at date of grant, and the Company recorded $493,750 as stock-based compensation expense for the six months ended June 30, 2013. The total unrecognized estimated compensation cost related to these grants of restricted stock through June 30, 2013 was $691,250, which is expected to be recognized over a period of 7 months.
 
                    During the six months ended June 30, 2013, the Company issued shares of Common Stock as follows:
 
-
25,000 shares upon the exercise of 25,000 options at an exercise price of $0.88 per share.
 
-
109,213 shares upon the exercise of 109,213 options at an exercise price of $0.88 per share.
 
-
-
2,000 shares upon the exercise of 2,000 options at an exercise price of $0.65 per share.
2,000 shares upon the exercise of 2,000 options at an exercise price of $1.50 per share.
- 33,244 shares upon the exercise of 33,244 warrants at an exercise price of 0.88 per share. 
- 1,888 shares upon a cashless exercise of 3,333 warrants at an exercise price of 2.50 per share.

NOTE 11 -  FINANCIAL (EXPENSES) INCOME, NET
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period of May
31, 2005
 
 
 
For the three months ended
 
For the Six months ended
 
(date of inception)
 
 
 
June 30,
 
June 30,
 
through June 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial income
 
$
10,457
 
$
9,301
 
$
32,752
 
$
25,019
 
$
1,193,442
 
Financial (expenses) and bank fees
 
 
(9,203)
 
 
(5,195)
 
 
(16,398)
 
 
(14,857)
 
 
(209,707)
 
Exchange rate differences gain (loss)
 
 
(29,583)
 
 
(88,544)
 
 
(60,907)
 
 
(121)
 
 
(490,434)
 
 
 
$
(28,329)
 
$
(84,438)
 
$
(44,553)
 
$
10,041
 
$
493,301
 
 
 
14

PROLOR BIOTECH, INC. AND SUBSIDIARIES
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
 
NOTE 12 -SUBSEQUENT EVENTS                     
   
As defined in FASB ASC 855-10, “Subsequent Events”, subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued.
 
The Company evaluated all events and transactions that occurred subsequent to the balance sheet date and prior to the date on which the financial statements contained in this report were issued, and the Company determined that following events necessitated disclosure:
 
Subsequent to June 30, 2013 and through August 8, 2013, 26,420 new shares of Common Stock were issued in connection with the exercise of outstanding warrants and options. 
 
On July 24, 2013, the Company filed its definitive Joint Proxy Statement/Prospectus in respect of its proposed transaction with OPKO.

 
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “goal,” “assumes,” “targets” and similar expressions and/or the use of future tense or conditional constructions (such as “will,” “may,” “could,” “should” and the like) and by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual operations or results to differ materially from the operations and results anticipated in forward-looking statements. These factors include, but are not limited to, the factors contained in “Item 1A — Risk Factors” of our most recently filed Annual Report on Form 10-K, as updated by our subsequently filed Forms 10-Q or other documents we file with the SEC. We do not undertake any obligation to update forward-looking statements, except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto that appear in Item 1 of this Quarterly Report on Form 10-Q.
  
The discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s financial statements, which the Company has prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, the Company evaluates such estimates and judgments, including those described in greater detail below. The Company bases its estimates on historical experience and on various other factors that the Company believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
  
 
15
  
Proposed Merger with OPKO
 
On April 23, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OPKO Health, Inc. a Delaware corporation (“OPKO”), pursuant to which, upon the terms and subject to the conditions set forth therein, a newly formed, wholly owned subsidiary of OPKO will merge with and into the Company with the Company continuing as the surviving corporation and a wholly owned subsidiary of OPKO (the “Merger”). At the effective time of the Merger (the “Effective Time”), each share of our common stock, par value $0.00001 per share (“Common Stock”), issued and outstanding at the Effective Time will be cancelled and converted into the right to receive 0.9951 shares of OPKO common stock, par value $0.01 per share. Closing of the transaction is subject to certain conditions, including the approval of OPKO’s and our stockholders and other customary closing conditions. On July 24, 2013, the we filed our definitive Joint Proxy Statement/Prospectus in respect of the proposed Merger. Promptly following consummation of the Merger, our Common Stock will be deregistered under the Securities Exchange Act of 1934, as amended, and we will no longer file periodic or other reports with the Securities and Exchange Commission.
 
Overview
 
We are a development stage biopharmaceutical company utilizing patented technology to develop longer-acting, proprietary versions of already-approved therapeutic proteins that currently generate billions of dollars in annual global sales. We have obtained certain exclusive worldwide rights from Washington University in St. Louis, Missouri to use a short, naturally-occurring amino acid sequence (peptide) that has the effect of slowing the removal from the body of the therapeutic protein to which it is attached. This Carboxyl Terminal Peptide (CTP) can be readily attached to a wide array of existing therapeutic proteins, stabilizing the therapeutic protein in the bloodstream and extending its life span without additional toxicity or loss of desired biological activity. We are using the CTP technology to develop new, proprietary versions of certain existing therapeutic proteins that have longer life spans than therapeutic proteins without CTP. We believe that our products will have greatly improved therapeutic profiles and distinct market advantages.
 
We also obtained certain exclusive worldwide rights from Yeda Research and Development Company Ltd. (“Yeda”) for a technology that allows elongation of circulation time in the body of therapeutic drugs. This technology is named “Reversible PEGylation”. We plan on using the Reversible PEGylation technology to develop new, proprietary versions of certain existing therapeutic drugs that have longer life spans than therapeutic proteins without Reversible PEGylation. The license to the Reversible PEGylation technology is exclusive, worldwide, and excludes development or commercialization of drug compounds in the following fields: (a) haemophilia A or B; (b) inhibitor haemophilia; (c) haemorrhage; and/or (d) von Willebrand Disease. The license also excludes drugs containing any of the coagulation proteins known as Factors V, VII, VIIa, VIII or IX, including, in each case, any respective functional human protein molecule of any of the foregoing, including any fragment, subunit, derivative or modified form of any of the foregoing (whether recombinant or human plasma derived). Under the Reversible PEGylation license agreement, we are subject to development and commercialization milestones and timelines, and we are obligated to pay Yeda certain annual fees, as well as up to 3.5% on net sales of products developed using the Reversible PEGylation technology.
 
We believe our products in development will provide several key advantages over our competitor’s existing products:
 
 
⋅
significant reduction in the number of injections required to achieve the same or superior therapeutic effect from the same dosage;
 
 
 
 
⋅
faster commercialization with greater chance of success and lower costs than those typically associated with a new therapeutic protein; and
 
 
 
 
⋅
manufacturing using industry-standard biotechnology-based protein production processes.
 
 
16
 
Merck & Co. has developed the first novel protein containing CTP, named ELONVA®, a long-acting CTP-modified version of the fertility drug follicle stimulating hormone (FSH). On January 28, 2010, Merck received marketing authorization from the European Commission for ELONVA® with unified labeling valid in all European Union Member States. Our license for CTP technology extends to all human therapeutic applications other than Follicle Stimulating Hormone (FSH), human Chorionic Gonadotropin (hCG), Luteinizing Hormone (LH) and Thyroid-Stimulating Hormone (TSH).
 
Our internal product development program is currently focused on extending the life span of the following biopharmaceuticals, in an effort to provide patients with improved therapies that may enhance their quality of life:
 
 
⋅
Human Growth Hormone (hGH) 
 
 
  
 
⋅
Factor IX
 
 
 
 
⋅
Diabetes Type II & Obesity Peptide Oxyntomodulin
 
 
 
 
⋅
Factor VIIa
 
 
 
 
⋅
Interferon β and Erythropoietin (EPO)
 
 
 
 
⋅
Atherosclerosis and rheumatoid arthritis long-acting therapies
 
We believe that the CTP technology will be broadly applicable to these, as well as other, best-selling therapeutic proteins in the market.
 
Critical Accounting Policies
 
The historical financial statements of the Company included with this Quarterly Report have been prepared in accordance with GAAP. The significant accounting policies followed in the preparation of the financial statements, on a consistent basis, are described below.
 
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
Financial Statements in U.S. Dollars:   The functional and reporting currency of the Company is the U.S. dollar, as the U.S. dollar is the primary currency of the economic environment in which the Company has operated and expects to operate in the foreseeable future. The Company’s R&D subsidiary, PROLOR Biotech Ltd., which we refer to as PROLOR LTD (formerly known as ModigeneTech Ltd.), conducts the majority of its operations in Israel. Most of the Israeli expenses are currently determined and paid in U.S. dollars. Financing and investing activities including loans and equity transactions are made in U.S. dollars.
 
Monetary accounts maintained in currencies other than the U.S. dollar are remeasured into U.S. dollars. All transaction gains and losses from the remeasurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.
 
Principles of Consolidation: The consolidated financial statements include the accounts of the Company’s wholly owned subsidiary, Modigene Delaware, and its wholly owned subsidiary, PROLOR LTD. Intercompany transactions and balances have been eliminated upon consolidation.
 
 
17
 
Research and Development Costs and Participation: Research and development (“R&D”) costs are expensed as they are incurred and consist of salaries, benefits and other personnel-related costs, fees paid to consultants, clinical trials and related clinical manufacturing costs, license and milestone fees, and facilities and overhead costs. R&D expenses consist of independent R&D costs and costs associated with collaborative R&D and in-licensing arrangements. Participation from government for development of approved projects are recognized as a reduction of expenses as the related costs are incurred.
 
Concentrations of Credit Risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents.
 
Cash and cash equivalents are invested in major banks in Israel and the United States. Such deposits in the United States are not fully insured. Management believes that the financial institutions that hold the Company’s investments are financially sound, and, accordingly, minimal credit risk exists with respect to these investments.
 
The Company has no off-balance sheet concentration of credit risk, such as foreign exchange contracts or other foreign hedging arrangements.
 
Royalty-bearing Grants: Royalty-bearing grants from the Government of Israel for participation in the development of approved projects are recognized as a reduction of expenses as the related costs are incurred. Funding is recognized at the time PROLOR LTD is entitled to such grants, on the basis of the costs incurred.
 
Research and development grants received by PROLOR LTD for the three and six month periods ended June 30, 2013 and 2012 and for the period from May 31, 2005 (inception date) through June 30, 2013 were $0, $0, $0, $622,834, and $5,922,588, respectively. We expect to receive the research and development grants for the first and second quarters of 2013 during the third quarter.
 
Loss per Share: Basic and diluted losses per share are presented in accordance with ASC 260-10 “Earnings per share”. Outstanding share options, warrants and restricted shares have been excluded from the calculation of diluted loss per share because the effect of all such securities is antidilutive. The total weighted average number of shares of Common Stock related to outstanding options and warrants excluded from the calculations of diluted loss per share for the three and six month periods ended June 30, 2013 and 2012 and for the period from May 31, 2005 (date of inception) to June 30, 2013 was 8,342,958, 7,885,881, 6,231,670, 6,754,504 and 7,696,453, respectively.
 
Results of Operation
 
Three and Six Months Ended June 30, 2013 Compared to the Three and Six Months ended June 30, 2012
 
Revenue
 
The Company has not generated any revenues from operations since its inception. To date, the Company has funded its operations primarily through grants from the Israeli Office of the Chief Scientist (the “OCS”) and the sale of equity securities. If the Company’s development efforts result in clinical success, regulatory approval and successful commercialization of the Company’s products, then the Company could generate revenues from sales of its products.
 
Research and Development Expenses
 
The Company expects its research and development expenses to increase as it continues to develop its product candidates. Research and development expenses consist of:
 
 
18
 
 
⋅
internal costs associated with research and development activities;
 
 
 
 
⋅
payments made to third party contract research organizations, contract manufacturers, investigative sites and consultants;
 
 
 
 
⋅
manufacturing development costs;
 
 
 
 
⋅
personnel-related expenses, including salaries, benefits, travel and related costs for the personnel involved in research and development;
 
 
 
 
⋅
activities relating to the advancement of product candidates through preclinical studies and clinical trials; and
 
 
 
 
⋅
facilities and other expenses, which include expenses for rent and maintenance of facilities, as well as laboratory and other supplies.
 
These costs and expenses are partially funded by grants received by the Company from the OCS. There can be no assurance that the Company will continue to receive grants from the OCS in amounts sufficient for its operations, if at all.
 
The Company expects its research and development expenditures to increase significantly in the near future in connection with the ongoing production of its protein drug candidates. The Company intends to continue to hire new employees, in research and development, in order to meet its operation plans.
 
The Company has multiple research and development projects ongoing at any one time. The Company utilizes its internal resources, employees and infrastructure across multiple projects and tracks time spent by employees on specific projects. The Company believes that significant investment in product development is a competitive necessity and plans to continue these investments in order to realize the potential of its product candidates.
  
For the three and six month periods ended June 30, 2013 and 2012 and for the period from May 31,2005 (inception date) through June 30, 2013, the Company incurred research and development expenses, net of government grants and participation, of $5,389,203, $2,126,339, $8,586,803, $6,430,409 and $56,934,963, respectively. The increase for the three and six month periods ended June 30, 2013 as compared to the 2012 period resulted primarily from an increase in clinical trials expenses, as we initiated pediatric phase II trials and Preparation for the production of material for Toxicology and phase I clinical studies for Factor VIIa
 
The successful development of the Company’s product candidates is subject to numerous risks, uncertainties and other factors. Beyond the next twelve months, and even during the next twelve months, the Company cannot reasonably estimate the timing or costs of the efforts necessary to complete the remainder of the development of the Company’s product candidates. Additionally, the Company cannot reasonably estimate when it can expect material cash inflows from the Company’s product candidates or any of the Company’s other development efforts, if at all. The foregoing is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of differences arising during clinical development, including:
 
  
⋅
completion of such preclinical and clinical trials;
 
 
 
 
⋅
receipt of necessary regulatory approvals;
 
 
 
 
⋅
the number of clinical sites included in the trials;
 
 
19
 
  
⋅
the length of time required to enroll suitable patients;
 
 
 
 
⋅
the number of patients that ultimately participate in the trials;
 
 
 
 
⋅
adverse medical events or side effects in treated patients;
 
 
 
 
⋅
lack of comparability with complementary technologies;
 
 
 
 
⋅
obtaining capital necessary to fund operations, including research and development efforts; and
 
 
 
 
⋅
the results of clinical trials.
 
The Company’s expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expenses of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. The Company may obtain unexpected results from its clinical trials. The Company may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of the foregoing variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the United States Food and Drug Administration (“FDA”) or other regulatory authorities were to require the Company to conduct clinical trials beyond those which it currently anticipates will be required for the completion of the clinical development of a product candidate, or if the Company experiences significant delays in enrollment in any of its clinical trials, the Company could be required to expend significant additional financial resources and time on the completion of clinical development. Drug development may take several years and millions of dollars in development costs. If the Company does not obtain or maintain regulatory approval for its products, its financial condition and results of operations will be substantially harmed.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation expense for persons serving in the Company’s executive and administration functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development expense and professional fees for legal and accounting services. For the three and six month periods ended June 30, 2013 and 2012 and for the period from May 31, 2005 (inception date) through June 30, 2013, the Company incurred general and administrative expenses of $4,467,615, $858,716, $5,998,599, $1,648,496 and $26,106,736, respectively. The increase for the six month period ended June 30, 2013 as compared to the comparable 2012 period was primarily due to an increase in professional services fees of $2,024,090 as a result of the transactions contemplated by Merger Agreement with OPKO, as described above, as compared to $429,535, respectively, and an increase in stock-based compensation expenses of $3,236,607 due to grants of restricted stock and stock options to management and directors as compared to $475,387, respectively. For the three month period ended June 30, 2013, the increase resulted mainly from professional service fees of $1,530,252 as a result of the Merger Agreement with OPKO, as compared to $233,833 for the 2012 period, and from stock-based compensation expenses of $2,623,213 due to grants of restricted stock and stock options to management and directors, as compared to $232,729 for the 2012 period.
 
 
20
 
Financial Expenses and Income
 
Financial expenses and income consists of the following:
 
 
⋅   
 interest earned on the Company’s cash and cash equivalents;
 
 
 
 
⋅
 interest expense on short term bank credit and loans; and
 
 
 
 
⋅
 expenses or income resulting from fluctuations of the New Israeli Shekel and the Euro, in which a portion of the Company’s assets and liabilities are denominated, against the U.S. dollar.
 
For the three and six month periods ended June 30, 2013 and 2012 and for the period from May 31, 2005 (inception date) through June 30, 2013, the Company incurred net financial income (expense) of $(28,329), $(84,438), $(44,553), $10,041 and $493,301, respectively. Financial expense for the three and six months ended June 30, 2013 increased as compared to the 2012 periods primarily due to currency fluctuations on deposits in Israeli Shekels and Euros.
 
Stock-based Compensation
 
The Company records stock-based compensation expenses according to ASC 718-10, “Compensation - Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including employee stock options under the Company’s stock plans, based on estimated fair values.
 
ASC 718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model.
 
The Company applies ASC 505 “Equity” with respect to options issued to non-employees.
 
For the three and six month periods ended June 30, 2013 and 2012 and for the period from May 31, 2005 (inception date) through June 30, 2013, the Company incurred stock-based compensation expenses of $3,114,869, $348,726, $4,075,682, $740,401 and $15,593,615, respectively. Stock-based compensation expenses for the three and six months ended June 30, 2013 increased as compared to the 2012 periods primarily due to the grant of 2,374,500 stock options and 250,000 shares of restricted stock on February 4, 2013. Of the options granted, 1,242,000 were granted subject to approval of the Company’s stockholders, which approval was obtained at the Company’s 2013 Annual Meeting.
 
Cash Flows
 
For the six months ended June 30, 2013 and 2012 and for the period from May 31, 2005 (inception date) through June 30, 2013, net cash used in operating activities was $9,843,074, $8,306,497 and $60,230,965, respectively. The increase in cash used in operating activities for the six months ended June 30, 2013 as compared to the 2012 period was primarily due to an increase in R&D expense related to the manufacturing of the hGH-CTP product candidate.
 
For the six months ended June 30, 2013 and 2012 and for the period from May 31, 2005 (inception date) through June 30, 2013, net cash (used in) investing activities was $4,844,439, $(15,768,247) and $(7,888,054), respectively. The decrease in net cash used in investing activities for the six months ended June 30, 2013 as compared to 2012 resulted primarily from our release of a short-term interest bank deposit.
 
For the six months ended June 30, 2013 and 2012 and for the period from May 31, 2005 (inception date) through June 30, 2013, net cash provided by financing activities was $167,053, $37,430,128 and $87,136,329, respectively. The decrease for the six months ended June 30, 2013 as compared to 2012 resulted primarily from our receipt of proceeds from our underwritten public offering of Common Stock, as well as a decrease in cash proceeds from the exercise of warrants in the 2013 period.
 
 
21
 
Liquidity and Capital Resources
 
The Company expects to incur losses from operations for the foreseeable future. The Company has incurred, and expects to continue to incur, increasing research and development expenses, including expenses related to the hiring of personnel and additional clinical trials. General and administrative expenses have increased, and the Company expects that they will continue to increase, as the Company continues to expand its finance and administrative staff, add infrastructure and incur additional costs related to being a public company in the United States, including the costs of directors’ and officers’ insurance, investor relations programs and increased professional fees. Our future capital requirements will depend on a number of factors, including the continued progress of our research and development of product candidates, the timing and outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the status of competitive products, the availability of financing and our success in developing markets for our product candidates.
 
At June 30, 2013, we had approximately $19.0 million of cash and cash equivalents, together with approximately $5.2 million of cash in short-term deposit accounts, and we believe that our existing cash and cash equivalents and short-term investments will be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least until December 31, 2013. We have based this estimate on assumptions that may prove to be wrong and are subject to change, and we may be required to use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including the progress and results of our clinical trials, the duration and cost of discovery and preclinical development, and laboratory testing and clinical trials for our product candidates, the timing and outcome of regulatory review of our product candidates, the number and development requirements of other product candidates that we pursue, and the costs of commercialization activities, including product marketing, sales, and distribution. We do not anticipate that we will generate product revenues for at least the next several years, and we expect continuing operating losses to result in increases in our cash used in operations over the next several years. To the extent that our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We cannot assure you that we will be able to consummate any such offerings or financings or enter into any such arrangements on terms favorable to us or at all.
 
Effects of Inflation and Currency Fluctuation
   
Inflation generally affects the Company by increasing costs of labor and clinical trials. The Company does not believe that inflation had a material effect on its results of operations for the three or six month periods ended June 30, 2013 or 2012.
 
The Company has operations in Israel and has contracts with European companies as well as Euro and Shekel bank deposits. Our foreign contracts with service providers use applicable local currencies, Euros or Shekels. As a result, we are subject to adverse movements in foreign currency exchange rates in countries in which we conduct business. Our results of operations are predominantly affected by fluctuations in the value of the U.S. dollar as compared to the New Israeli Shekel and the Euro.
 
 
22
 
We do not engage in trading of market risk sensitive instruments or purchase hedging or “other than trading” instruments that are likely to expose us to market risk, whether interest rate, commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts, nor do we use derivative financial instruments for speculative trading or any other purpose.
 
Off-Balance Sheet Arrangements
 
The Company had no off-balance sheet arrangements as of June 30, 2013.
 
 
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ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
The information in Item 2 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Effects of Inflation and Currency Fluctuation” is incorporated herein by reference. Through the end of the period covered by this Quarterly Report on Form 10-Q, there have been no material changes to the information provided in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2012.
 
Interest Rate Risk
 
We have no debt outstanding nor do we have any investments in debt instruments other than highly liquid short-term investments. Accordingly, we consider our interest rate risk exposure to be insignificant at this time.
 
ITEM 4.
 Controls and Procedures
   
Evaluation of Disclosure Controls and Procedures
 
We maintain a system of disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that is designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to management in a timely manner. Our Chief Executive Officer and Chief Financial Officer evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report and, based on such evaluation, concluded that the system was operating effectively as of such date to ensure appropriate disclosure.
   
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 
 
 
24
   
PART II
OTHER INFORMATION
 
ITEM 1A
Risk Factors
 
There have been no material changes to our risk factors since the filing of our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.
 
ITEM 2.
Litigation.
 
As previously reported, On April 23, 2013, we entered into an agreement and plan of merger with OPKO Health, Inc., a Delaware corporation (“OPKO”), and POM Acquisition, Inc., a Nevada corporation and a direct wholly owned subsidiary of OPKO (“POM”), pursuant to which POM will be merged with and into us (the “Merger”) and we will be the surviving corporation and OPKO’s wholly owned subsidiary.
 
Six putative class action lawsuits have been filed in connection with the Merger: (i) Peter Turkell v. Prolor Biotech, Inc., et al. (Case No. A-13-680860-B), filed April 29, 2013 in the Eighth Judicial District Court in and for Clark County, Nevada; (ii) Floyd A. Fried v. Prolor Biotech, Inc., et al., (Case No. A-13-681060), filed May 1, 2013 in the Eighth Judicial District Court in and for Clark County, Nevada; (iii) Marc Henzel v. Prolor Biotech, Inc., et al. (Case No. A-13-681020-C), filed May 1, 2013, in the Eighth Judicial District Court in and for Clark County, Nevada; (iv) Bradford W. Baer, et al., v. Prolor Biotech, Inc. et al. (Case No. A-13-681218-B, filed May 3, 2013 in the Eighth Judicial District Court in and for Clark County, Nevada; (v) James Hegarty v. Prolor Biotech, Inc., et al (Case No. A-13-681250-C), filed May 6, 2013 in the Eighth Judicial District Court in and for Clark County, Nevada; and (vi) Jorge L. Salas, et al. v. Prolor Biotech, Inc., et al. (Case No. A-13-681279-C), filed May 6, 2013 in the Eighth Judicial District Court in and for Clark County, Nevada.
 
On July 17, 2013, these six suits were consolidated, for all purposes, into an amended class action complaint as part of the In re PROLOR Biotech, Inc. Shareholders’ Litigation (Case No. A-13-680860-B). The lawsuit names us, the members of our Board of Directors, OPKO, and POM as defendants. The lawsuit is brought by purported holders of our common stock, both individually and on behalf of a putative class of our stockholders, asserting claims that (i) the our Directors breached their fiduciary duties in connection with the proposed Merger by, among other things, purportedly failing to maximize stockholder value, (ii) that we and our Board of Directors failed to disclose material information concerning the proposed Merger and (iii) that OPKO and POM aided and abetted our Directors’ alleged breach of their fiduciary duties. The lawsuit seeks various damages, an award of all costs, and reasonable attorneys’ fees, as well as certain equitable relief, including enjoining consummation of the Merger and, alternatively, rescinding the Merger in the event it is consummated.
 
We believe that the claims made in this lawsuit are without merit and intend to defend such claims vigorously; however, there can be no assurance that we will prevail in our defense of this lawsuit. Due to the preliminary nature of the lawsuit, we are not able at this time to estimate its outcome.
   
ITEM 6.
Exhibits.
 
2.1
Agreement and Plan of Merger by and among OPKO Health, Inc., POM Acquisition, Inc. and PROLOR Biotech, Inc. dated as of April 23, 2013, filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 29, 2013 and incorporated by reference herein.
 
 
31.1
Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K.
 
 
25
 
31.2
Certification of Principal Financial Officer pursuant to Item 601(b)(31) of Regulation S-K.
 
 
32.1
Certification of Chief Executive Officer pursuant to Item 601(b)(32) of Regulation S-K.
 
 
32.2
Certification of Principal Financial Officer pursuant to Item 601(b)(32) of Regulation S-K.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
26
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
PROLOR BIOTECH, INC.
 
 
 
/s/ Abraham Havron
Date: August 9, 2013
Abraham Havron
 
Chief Executive Officer
 
 
 
/s/ Steve Schaeffer
Date: August 9, 2013
Steve Schaeffer
 
Chief Financial Officer
 
(Principal Financial Officer and Principal Accounting Officer)
 
 
27
 
EXHIBIT INDEX
 
2.1
Agreement and Plan of Merger by and among OPKO Health, Inc., POM Acquisition, Inc. and PROLOR Biotech, Inc. dated as of April 23, 2013, filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 29, 2013 and incorporated by reference herein.
 
 
31.1
Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K.
 
 
31.2
Certification of Principal Financial Officer pursuant to Item 601(b)(31) of Regulation S-K.
 
 
32.1
Certification of Chief Executive Officer pursuant to Item 601(b)(32) of Regulation S-K.
 
 
32.2
Certification of Principal Financial Officer pursuant to Item 601(b)(32) of Regulation S-K.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
28