UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER 333-61610
BRAINSTORM CELL THERAPEUTICS INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-2061053
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
110 EAST 59th STREET
NEW YORK, NY 10022
(Address of principal executive offices)
(212) 557-9000
(Registrant's telephone number)
1350 AVENUE OF THE AMERICAS
NEW YORK, NY 10019
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes[ ] No [X]
As of August 10, 2006, the number of shares outstanding of the Registrant's
Common Stock, $0.00005 par value per share, was 23,429,961.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
TABLE OF CONTENTS
Page Number
-----------
PART I
Item1. Financial Statements 1
Item 2. Plan of Operation 19
Item 3. Controls and Procedures 34
PART II
Item 6. Exhibits 35
PART I: FINANCIAL INFORMATION
SPECIAL NOTE
Unless otherwise specified in this report, all references to currency, monetary
values and dollars set forth herein shall mean United States (U.S.).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains numerous statements, descriptions, forecasts and
projections, regarding Brainstorm Cell Therapeutics Inc. and its potential
future business operations and performance. These statements, descriptions,
forecasts and projections constitute "forward-looking statements," and as such
involve known and unknown risks, uncertainties, and other factors that may cause
our actual results, levels of activity, performance and achievements to be
materially different from any results, levels of activity, performance and
achievements expressed or implied by any such "forward-looking statements." Some
of these are described under "Certain Risk Factors That May Affect Future
Results" in this report. In some cases you can identify such "forward-looking
statements" by the use of words like "may," "will," "should," "could,"
"expects," "hopes," "anticipates," "believes," "intends," "plans," "estimates,"
"predicts," "likely," "potential," or "continue" or the negative of any of these
terms or similar words. These "forward-looking statements" are based on certain
assumptions that we have made as of the date hereof. To the extent these
assumptions are not valid, the associated "forward-looking statements" and
projections will not be correct. Although we believe that the expectations
reflected in these "forward-looking statements" are reasonable, we cannot
guarantee any future results, levels of activity, performance or achievements.
It is routine for our internal projections and expectations to change as the
year or each quarter in the year progresses, and therefore it should be clearly
understood that the internal projections and beliefs upon which we base our
expectations may change prior to the end of each quarter or the year. Although
these expectations may change, we may not inform you if they do and we undertake
no obligation to do so. We caution investors that our business and financial
performance are subject to substantial risks and uncertainties. In evaluating
our business, prospective investors should carefully consider the information
set forth under the caption "Certain Risk Factors That May Affect Future
Results" in addition to the other information set forth herein and elsewhere in
our other public filings with the Securities and Exchange Commission.
Item 1. Financial Statements.
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage Company)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006
IN U.S. DOLLARS
UNAUDITED
INDEX
Page
-----------
Consolidated Balance Sheets
Consolidated Statements of Operations
Statements of Changes in Stockholders' Equity (Deficiency)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- - - - - - - - - - - - - - - - - - -
1
RAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
In U.S. dollars (except stock data)
June 30, March 31,
2006 2006
----------- -----------
Unaudited
-----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 289,515 290,219
Restricted cash 30,405 28,939
Accounts receivable and prepaid expenses 62,908 45,451
----------- -----------
Total current assets 382,828 364,609
----------- -----------
LONG-TERM INVESTMENTS:
Prepaid expenses 7,425 7,067
Severance pay fund 21,925 19,093
----------- -----------
29,350 26,160
----------- -----------
PROPERTY AND EQUIPMENT, NET 489,329 411,454
----------- -----------
OTHER ASSETS 76,850 57,590
----------- -----------
Total assets 978,357 859,813
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Trade payables 347,901 200,624
Other accounts payable and accrued expenses 369,874 370,445
Short-term convertible loans (Note 4) 768,755 367,292
Short-term loan (Note 5) 190,709 128,559
----------- -----------
Total current liabilities 1,677,239 1,066,920
----------- -----------
OPTIONS AND WARRANTS (Note 4b) -- 7,679,009
----------- -----------
ACCRUED SEVERANCE PAY 25,128 24,563
----------- -----------
Total liabilities 1,702,367 8,770,492
----------- -----------
STOCKHOLDERS' DEFICIENCY:
Stock capital:
Common stock of $ 0.00005 par value - Authorized: 200,000,000 stocks at
June 30, 2006 and March 31, 2006; Issued and outstanding: 23,329,961 and
22,854,587 stocks at June 30, 2006 and March 31, 2006, respectively 1,167 1,144
Preferred stock of $ 0.00005 par value - Authorized: 40,000,000 stocks at
June 30, 2006 and March 31, 2006; none issued -- --
Additional paid-in capital 22,443,474 15,802,847
Deferred stock-based compensation -- (1,395,439)
Deficit accumulated during the development stage (23,168,651) (22,319,231)
----------- -----------
Total stockholders' deficiency (724,010) (7,910,679)
----------- -----------
Total liabilities and stockholders' deficiency 978,357 859,813
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
2
RAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
In U.S. dollars (except stock data)
Period from
September 22,
Three months ended 2000 (inception
June 30, Year ended date) through
---------------------------- March 31, June 30,
2006 2005 2006 2006
------------ ------------ ------------ ------------
Unaudited Unaudited
---------------------------- -------------
Operating costs and expenses:
Research and development 242,930 180,637 970,891 1,685,863
Research and development expenses (income)
related to stocks ,warrants and options
granted to employees and service providers (341,111) 9,855 (123,944) 15,413,396
General and administrative 244,641 234,708 817,366 1,327,138
General and administrative expenses related to
stocks ,warrants and options granted to
employees and service providers 597,133 307,600 1,636,692 4,445,247
------------ ------------ ------------ ------------
Total operating costs and expenses 743,593 732,800 3,301,005 22,871,644
Financial income (expenses), net (97,143) (2,379) 14,689 (72,559)
------------ ------------ ------------ ------------
(840,736) (735,179) (3,286,316) (22,944,203)
Income taxes 8,684 4,609 30,433 44,586
------------ ------------ ------------ ------------
Loss from continuing operations (849,420) (739,788) (3,316,749) (22,988,789)
Net loss from discontinued operations -- -- -- (163,971)
------------ ------------ ------------ ------------
Net loss (849,420) (739,788) (3,316,749) (23,152,760)
============ ============ ============ ============
Basic and diluted net loss per share from
continuing operations (0.04) (0.04) (0.15)
============ ============ ============
Weighted average number of stocks outstanding
used in computing basic and diluted net loss
per stock 23,031,834 21,137,142 22,011,370
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
RAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
--------------------------------------------------------------------------------
In U.S. dollars (except stock data)
Deficit
accumulated Total
Common stock Additional Deferred during the stockholders'
----------------------- paid-in stock-based development equity
Number Amount capital compensation stage (deficiency)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of September 22, 2000 (date of
inception) -- -- -- -- -- --
Stock issued on September 22, 2000 for
cash at $ 0.00188 per stock 8,500,000 850 15,150 -- -- 16,000
Stock issued on March 31, 2001 for cash
at $ 0.0375 per stock 1,600,000 160 59,840 -- -- 60,000
Contribution of capital -- -- 7,500 -- -- 7,500
Net loss -- -- -- -- (17,026) (17,026)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of March 31, 2001 10,100,000 1,010 82,490 -- (17,026) 66,474
Contribution of capital -- -- 11,250 -- -- 11,250
Net loss -- -- -- -- (25,560) (25,560)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of March 31, 2002 10,100,000 1,010 93,740 -- (42,586) 52,164
Contribution of capital -- -- 15,000 -- -- 15,000
Net loss -- -- -- -- (46,806) (46,806)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of March 31, 2003 10,100,000 1,010 108,740 -- (89,392) 20,358
2 for 1 stock split 10,100,000 -- -- -- -- --
Stock issued on August 31, 2003 to
purchase mineral option at $ 0.065
per stock 100,000 5 6,495 -- -- 6,500
Cancellation of stocks granted to
Company's President (10,062,000) (503) 503 -- -- --
Contribution of capital -- -- 15,000 -- -- 15,000
Net loss -- -- -- -- (73,295) (73,295)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of March 31, 2004 10,238,000 512 130,738 -- (162,687) (31,437)
Stock issued on June 24, 2004 for
private placement at $ 0.01 per
stock, net of $ 25,000 issuance
expenses (Note 6d(1)(a)) 8,510,000 426 59,749 -- -- 60,175
Contribution capital (Note 6c) -- -- 7,500 -- -- 7,500
Stock issued in 2004 for private
placement at $ 0.75 per unit (Note
6d(1)(b)) 1,894,808 95 1,418,042 -- -- 1,418,137
Cancellation of stocks granted to
service providers (1,800,000) (90) 90 -- -- --
Deferred stock-based compensation
related to options granted to
employees -- -- 5,978,759 (5,978,759) -- --
Amortization of deferred stock-based
compensation related to stocks and
options granted to employees -- -- -- 584,024 -- 584,024
Compensation related to stocks and
options granted to service providers 2,025,000 101 17,505,747 -- -- 17,505,848
Net loss -- -- -- -- (18,839,795) (18,839,795)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of March 31, 2005 20,867,808 1,044 25,100,625 (5,394,735) (19,002,482) 704,452
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
RAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
--------------------------------------------------------------------------------
In U.S. dollars (except stock data)
Deficit
accumulated Total
Common stock Additional Deferred during the stockholders'
----------------------- paid-in stock-based development equity
Number Amount capital compensation stage (deficiency)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of March 31, 2005 20,867,808 1,044 25,100,625 (5,394,735) (19,002,482) 704,452
Stock issued on May 12, 2005 for
private placement at $ 0.8 per stock
(Note 6d(1)(d)) 186,875 9 149,491 -- -- 149,500
Stock issued on July 27, 2005 for
private placement at $ 0.6 per stock
(Note 6d(1)(e)) 165,000 8 98,992 -- -- 99,000
Stock issued on September 30, 2005 for
private placement at $0.8 per share
(Note 6d(1)(f)) 312,500 16 224,984 -- -- 225,000
Stock issued on December 17, 2005 for
private placement at $0.8 per share
(Note 6d(1)(f)) 187,500 10 134,990 -- -- 135,000
Forfeiture of options granted to
employees -- -- (3,363,296) 3,363,296 -- --
Deferred stock-based compensation
related to stocks and options granted
to directors and employees 200,000 10 486,490 (486,500) -- --
Amortization of deferred stock-based
compensation related to options and
stocks granted to employees and
directors (Note 6d(2)) -- -- 51,047 1,122,500 -- 1,173,547
Stock-based compensation related to
options and stocks granted to service
providers (Note 6d(3)(c)) 934,904 47 662,069 -- -- 662,116
Reclassification due to application of
EITF 00-19 (Note 6a) (7,906,289) (7,906,289)
Beneficial conversion feature related
to a convertible bridge loan -- -- 163,744 -- -- 163,744
Net loss -- -- -- -- (3,316,749) (3,316,749)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of March 31, 2006 22,854,587 1,144 15,802,847 (1,395,439) (22,319,231) (7,910,679)
Elimination of deferred stock
compensation due to implementation of
FAS 123R (Note 2b) -- -- (1,395,439) 1,395,439 -- --
Stock-based compensation related to
stocks and options granted to
directors and employees (Note
6d(3)(c)) 100,000 5 396,093 -- -- 396,098
Reclassification due to application of
EITF 00-19 (Note 6a) -- -- 7,190,829 -- -- 7,190,829
Stock-based compensation related to
options and stocks granted to service
providers (Note 6d(3)(c)) 375,374 18 282,477 -- -- 282,495
Beneficial conversion feature related
to a convertible bridge loan (Note 4a) -- -- 167,667 -- -- 166,667
Net loss -- -- -- -- (849,420) (849,420)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of June 30, 2006 (unaudited) 23,329,961 1,167 22,443,474 -- (23,168,651) (724,010)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
RAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
In U.S. dollars
Period from
September 22,
Three months ended 2000 (inception
June 30, Year ended date) through
----------------------------- March 31, June 30,
2006 2005 2006 2006
------------- ------------- ------------- -------------
Unaudited Unaudited
------------------------------ -------------
Cash flows from operating activities:
Net loss (849,420) (739,788) (3,316,749) 23,168,651
Less - loss for the period from discontinued
operations -- -- -- 163,971
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 48,777 5,374 72,318 106,430
Accrued severance pay, net (2,267) -- 5,470 3,203
Accrued interest on loans 25,650 -- 13,210 38,859
Amortization of discount on short-term loans 104,630 -- 50,765 155,395
Change in fair value of options and warrants (488,180) -- (306,660) (794,840)
Expenses related to stocks and options granted to
service providers 282,495 101,501 631,216 18,791,457
Stock-based compensation related to options granted
to employees 396,098 215,954 1,173,547 1,757,571
Decrease (increase) in accounts receivable and
prepaid expenses (17,457) (28,893) 37,525 (62,754)
Increase in trade payables 147,277 173,767 162,774 347,901
Increase (decrease) in other accounts payable and
accrued expenses (571) 85,148 239,213 364,724
------------- ------------- ------------- -------------
Net cash used in continuing operating activities (352,968) (186,937) (1,237,371) (2,296,733)
Net cash used in discontinued operating activities -- -- -- (22,766)
------------- ------------- ------------- -------------
Total net cash used in operating activities (352,968) (186,937) (1,237,371) (2,319,493)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (95,912) (185,156) (209,647) (534,119)
Restricted cash (1,466) 1,619 2,195 (30,405)
Investment in lease deposit (358) -- (2,477) (7,425)
------------- ------------- ------------- -------------
Net cash used in continuing investing activities (97,736) (183,537) (209,929) (571,949)
Net cash used in discontinued investing activities -- -- -- (16,000)
------------- ------------- ------------- -------------
Total net cash used in investing activities (97,736) (183,537) (209,929) (587,949)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Common stock and warrants,
net -- 149,500 608,500 2,086,812
Proceeds from loans, net 450,000 -- 602,500 1,067,410
------------- ------------- ------------- -------------
Net cash provided by continuing financing activities 450,000 149,500 1,211,000 3,154,222
Net cash provided by discontinued financing activities -- -- -- 42,741
------------- ------------- ------------- -------------
Total net cash provided by financing activities 450,000 149,500 1,211,000 3,196,963
------------- ------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (704) (220,974) (236,300) 289,515
Cash and cash equivalents at the beginning of the
period 290,219 526,519 526,519 --
------------- ------------- ------------- -------------
Cash and cash equivalents at end of the period 289,515 305,545 290,219 289,515
============= ============= ============= =============
Non-cash financing activities:
Non-cash financing activities from continued
operations: -- -- 30,900 30,900
============= ============= ============= =============
Cash paid during the period for:
Taxes -- -- 2 2
============= ============= ============= =============
Interest -- -- 1 1
============= ============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
6
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 1:- GENERAL
a. Brainstorm Cell Therapeutics Inc. (formerly: Golden Hand Resources
Inc.) ("the Company") was incorporated in the State of Washington on
September 22, 2000.
b. On September 22, 2000, the Company acquired the right to market and
sell a digital data recorder product in certain states in the U.S.
c. On July 8, 2004, the Company entered into a licensing agreement with
Ramot of Tel Aviv University Ltd. ("Ramot"), an Israeli corporation,
to acquire certain stem cell technology. Subsequent to this
agreement, the Company decided to change its line of business and to
focus on the development of novel cell therapies for
neurodegenerative diseases, particularly, Parkinson's disease, based
on the acquired technology and research to be conducted and funded
by the Company.
Following the licensing agreement dated July 8, 2004, the management
of the Company has decided to abandon all activities related to the
sale of the digital data recorder product. The discontinuation of
this activity was accounted for under the provision of SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".
d. On October 25, 2004, the Company formed a wholly-owned subsidiary in
Israel, Brainstorm Cell Therapeutics Ltd. ("BCT"). On March 14,
2005, the Company signed an agreement with its subsidiary effective
as of November, 2004, according to which the subsidiary will provide
research, development and other services to the Company. In return,
the subsidiary will be entitled to receive reimbursement of expenses
incurred by it in the process of performing the research and
development services plus 10% of such reimbursement amounts.
e. As of June 30, 2006, the Company had accumulated a deficit of
$23,168,651, and working capital deficiency of $1,294,411,
respectively, and incurred net loss of $849,420 and negative cash
flows from operating activities in the amount of $352,968 for the
three months ended June 30, 2006. In addition, the Company has not
generated any revenues yet. The Company's ability to continue to
operate as a going concern is dependent upon additional financial
support.
These financial statements do not include any adjustments relating
to the recoverability and classification of assets' carrying amounts
or the amount and classification of liabilities that may be required
should the Company be unable to continue as a going concern.
The Company intends to raise additional capital to fund its
operations. In the event the Company is unable to successfully raise
capital and generate revenues, it is unlikely that the Company will
have sufficient cash flows and liquidity to finance its business
operations as currently contemplated. Accordingly, the Company will
likely reduce general and administrative expenses and cease or delay
the development project until it is able to obtain sufficient
financing. There can be no assurance that sufficient revenues will
be generated and that additional funds will be available on terms
acceptable to the Company, or at all.
7
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 1:- GENERAL (Cont.)
f. Risk factors:
The Company depends on Ramot to conduct its research and development
activities (See Note 3 to the financial statements as of March 31,
2006). Termination of the research and license agreement may impact
the Company's ability to continue to operate as a going concern.
The Company's total current obligation to Ramot as of June 30, 2006
is in the amount of $162,469. Ramot agreed to postpone the payment
until September 15, 2006.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. The significant accounting policies applied in the annual financial
statements of the Company as of March 31, 2006, are applied
consistently in these financial statements.
b. Accounting for stock-based compensation:
On April 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment,"
("SFAS 123(R)") which requires the measurement and recognition of
compensation expense for all share-based payment awards made to
employees and directors including employee stock options under the
Company's stock plans based on estimated fair values. SFAS 123(R)
supersedes the Company's previous accounting under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") for periods beginning in fiscal 2006. In March
2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company
has applied the provisions of SAB 107 in its adoption of SFAS
123(R).
SFAS 123(R) 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. Prior to the adoption of SFAS 123(R), the Company
accounted for equity-based awards to employees and directors using
the intrinsic value method in accordance with APB 25 as allowed
under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Under the
intrinsic value method, a compensation expense in the amount of
$1,223 thousands was recognized in the Company's results of
operations for the year ended March 31, 2006.
8
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the accounting
standard as of April 1, 2006, the first day of the Company's fiscal
year 2006. Under that transition method, compensation cost
recognized in the three months period ended June 30, 2006, includes:
(a) compensation cost for all share- based payments granted prior
to, but not yet vested as of April 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of
Statement 123, and (b) compensation cost for all share-based
payments granted subsequent to April 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of
SFAS 123(R). As required by the modified prospective method results
for prior periods have not been restated.
The Company recognized compensation expenses for the value of these
awards, based on the straight line method over the requisite service
period of each of the award.
As a result of adopting SFAS 123(R) on April 1, 2006, the Company's
loss before income taxes and net loss for the three months ended
June 30, 2006, are $151,109 over than if it had continued to account
for share-based compensation under Opinion 25. Basic and diluted
loss per share for the three months period ended June 30, 2006,
would have been $ 0.03, had the Company not adopted SFAS 123(R),
compared to reported basic and diluted loss per share of $0.04.
The Company estimates the fair value of stock options granted using
the Black-Scholes-Merton option-pricing model. The option-pricing
model requires a number of assumptions, of which the most
significant are, expected stock price volatility and the expected
option term (the amount of time from the grant date until the
options are exercised or expire). Expected volatility was calculated
based upon actual historical stock price movements over the period
ending June 30, 2006, equal to the expected option term. The
expected option term represents the period that the Company's stock
options are expected to be outstanding and was determined based on
historical experience of similar options, giving consideration to
the contractual terms of the stock options. The Company has
historically not paid dividends and has no foreseeable plans to
issue dividends. The risk-free interest rate is based on the yield
from U.S. Treasury zero-coupon bonds with an equivalent term.
9
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following table illustrates the effect on net loss and net loss
per share, assuming that the Company had applied the fair value
recognition provision of SFAS No. 123 on its stock-based employee
compensation. For purposes of this pro-forma disclosure, the value
of the options is estimated using a Black-Scholes option pricing
formula and amortized to expense over the options vesting period.
Three months Year ended
ended June 30, March 31,
Employee stock options 2006 2006
------------------------------ ------------ ------------
Expected volatility 112% 110%
Risk-free interest 4.56% 4.46%
Dividend yield 0% 0%
Expected life of up to (years) 7.67 7.53
The following table illustrates the effect on net loss and net loss
per share, assuming that the Company had applied the fair value
recognition provision of SFAS No. 123 on its stock-based employee
compensation.
Year ended
March 31,
2006
---------------
Net loss as reported (3,316,749)
Add: stock based employee compensation intrinsic value 1,122,500
Deduct: stock-based compensation expense determined under fair value method (1,330,447)
---------------
Pro forma net loss (3,524,696)
===============
Basic and diluted net loss per share, as reported (0.15)
===============
Basic and diluted net loss per share, pro forma (0.16)
===============
10
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 3:- UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Interim financial statements:
The accompanying unaudited interim financial statements have been
prepared in a condensed format and include the consolidated
financial operations of the Company and its fully owned subsidiary
as of June 30, 2006 and for the three months then ended, in
accordance with accounting principles generally accepted in the
United States relating to the preparation of financial statements
for interim periods. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended June
30, 2006 are not necessarily indicative of the results that may be
expected for the year ended March 31, 2007.
NOTE 4:- SHORT-TERM CONVERTIBLE LOANS
a. On June 5, 2006, the Company issued a $500,000 Convertible
Promissory Note ("the Note") to a third party under the same terms
as the convertible loan dated February 7, 2006. (See also Note 8 to
the financial statements as of March 31, 2006).
The Company agreed to pay finder's fee of 10% of the loan. The
finder fee totaling $50,000 were charged to deferred charges and are
amortized over the Note period (12 months).
The beneficial conversion feature embedded in the Note amounted to
$166,667.
Such amount was recorded as discount against additional paid-in
capital and is amortized to financial expenses over a 12 month
period.
The balance of such loan as of June 30, 2006 is comprised as
follows:
Loan 500,000
Discount (155,251)
Accrued interest 3,425
---------------
348,174
===============
On June 14, 2006, the loan was amended (see also b below). According
to the amendment, the Company limited the number of stocks to be
issued upon conversion of such loan amount of 50,000,000 stocks of
Common stock.
11
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 4:- SHORT-TERM CONVERTIBLE LOANS (Cont.)
b. On June 14, 2006, the Company signed amendments to the convertible
loan agreements dated February 7, 2006 (see also Note 8a to the
financial statements as of March 31, 2006) and June 5, 2006 (see 4a
above), according to which the Company limited the number of stocks
to be issued upon conversion of such loans to an amount of
50,000,000 stocks of Common stock each. As a consequence, the
Company reclassified the fair value of options and warrants
previously granted to service providers and investors from liability
to equity. Such fair value amounted to $7,190,829 as of June 14,
2006.
NOTE 5:- SHORT-TERM LOAN
On February 8, 2006, the Company issued a $189,000 Promissory Note
due June 8, 2006 (the "Note"), with an interest of 8% to a third
party (see also Note 9 to the financial statements as of March 31,
2006). In addition, the Company granted the third party warrants to
purchase 189,000 of the Company's Common stock at an exercise price
of $0.50 per stock. The warrants are fully vested and are
exercisable at any time after February 8, 2006 until the third
anniversary of the issue date.
The Company agreed to pay $22,500 for due diligence and legal fees
.The fees were recorded to deferred charges and are amortized over a
four month period.
The fair value of the warrant amounted to approximately $79,380. The
Company estimated the fair value of the warrants using a Black and
Scholes option pricing model, with the following assumptions:
volatility of 119%, risk free interest rate of 4.66%, dividend yield
of 0%, and an expected life of 36 months.
In accordance with EITF 00-19, the warrants were recorded as a
liability at their entire fair value and the residual amount (the
difference between the amounts invested and the fair value of the
warrants at the date of issuance) was allocated to the Note as
follows: $79,380 to the warrants and $95,620 to the Note.
As a result, an amount equal to the fair value allocated to the
warrants was recorded as discount on the Note, and is amortized to
financial expenses over a four month period.
The balance as of June 30, 2006 is comprised as follows:
Loan 175,000
Discount --
Accrued interest 15,709
---------------
190,709
===============
The Company recorded, in the period ended June 30, 2006, $62,150 as
financial expenses in respect to the discount amortization and
accrued interest.
The Company is negotiating with the lender the postponement of the
due date of the loan. As of today the parties have not yet come to
an agreement. The Company accrues additional interest according to
the terms of the agreement (annual interest of 15%).
12
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 6:- STOCK CAPITAL
a. Classification of options and warrants to consultants and investors:
According to EITF 00-19 "Accounting for Derivative Financial
Instruments Indexed to, and potentially settled in a Company's Own
Stock" (EITF 00-19), in order to classify warrants and options
(other than employee stock options) as equity and not as
liabilities, the Company must have sufficient authorized and
unissued shares of common stock to provide for settlement of those
instruments that may require share settlement. Under the terms of
the Note dated February 7, 2006, the Company may be required to
issue an unlimited number of shares to satisfy the Note's
contractual requirements. As such, the Company's warrants and
options (other than employee stock options) are required to be
classified as liabilities and measured at fair value with changes
recognized currently in earnings.
Consequently, on February 7, 2006, the Company reclassified at fair
value, options and warrants previously issued to consultants and
investors from equity to liability. Such reclassification amounted
to $7,906 thousand.
On June 14, 2006, the Company signed amendments to the convertible
loan agreements dated February 7, 2006 and June 5, 2006, according
to which the Company limited the number of stocks to be issued upon
conversion of such loans to an amount of 50,000,000 stocks of Common
stock each. As a consequence, the Company reclassified the fair
value of options and warrants previously granted to service
providers and investors from liability to equity. The fair value as
of June 14, 2006, amounted to $7,190,829.
b. The rights of Common stock are as follows:
Common stocks confer their holders the right to receive notice to
participate and vote in general meetings of the Company, the right
to a stock in the excess of assets upon liquidation of the Company
and the right to receive dividends, if declared.
The Common stock are registered and publicly traded on the
Over-the-Counter Bulletin Board service of the National Association
of Securities Dealers, Inc. under the symbol BCLI.
c. The former president of the Company donated services valued at
$6,000 and rent valued at $1,500 for the six months ended September
30, 2004. These amounts were charged to the statement of operations
as part of discontinued operations and classified as additional paid
in capital in the stockholders' equity.
d. Issuance of stocks, warrants and options:
1. Private placements
a) On June 24, 2004, the Company issued to
investors 8,510,000 Common stocks for total
proceeds of $60,175 (net of $25,000 issuance
expenses).
13
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 6:- STOCK CAPITAL (Cont.)
b) On February 23, 2005, the Company completed a private placement
round for sale of 1,894,808 units for total proceeds of $1,418,137.
Each unit consists of one stock of Common stock and a three year
warrant to purchase one stock of Common stock at $2.50 per stock.
This private placement was consummated in four trances which closed
in October 2004, November 2004 and February 2005.
c) On March 21, 2005, the Company entered into lock up agreements with
its 29 stockholders with respect to 15,290,000 stocks held by them
.Under these lock-up agreements, these security holders may not
transfer their stocks to anyone other than permitted transferees
without the prior consent of the Company's Board of Directors, for
the period of time as follows: (i) 85% of the securities shall be
restricted from transfer for the twenty-four month period following
July 8, 2004 and (ii) 15% of the securities shall be restricted from
transfer for the twelve month period following July 8, 2004.
On March 26, 2005, the Company completed Amended lock up agreements
with five from the twenty nine stockholders mentioned above with
respect to 7,810,000 stocks held by them. These Lock-Up Agreements
amend and restate the previous lock-up agreements.
Under the Lock-Up Agreements, these stockholders may not sell or
otherwise transfer their stocks to anyone other than permitted
transferees without the prior written consent of the Company's Board
of Directors, as follows: (i) 85% of the stocks will be restricted
from transfer until December 31, 2006 and (ii) 15% of the stocks
will be free from the transfer restrictions. All of the restrictions
under the Lock-Up Agreements will automatically terminate upon the
effectiveness of any registration statement filed by the Company for
the benefit of Ramot.
d) On May 12, 2005, the Company issued to a certain investor 186,875
stocks of its Common stock for total proceeds of $149,500 at a price
per stock of $0.8.
e) On July 27, 2005, the Company issued to certain investors 165,000
stocks of its Common stock for total proceeds of $99,000 at a price
per stock of $0.6.
f) On August 11, 2005, the Company signed a private placement agreement
("PPM") with investors for the sale of up to 1,250,000 units at a
price per unit of $0.8. Each unit consists of one Common stock and
one warrant to purchase one Common stock at $1.00 per stock. The
warrants are exercisable for a period of three years from issuance.
On September 30, 2005 the Company sold 312,500 units for total net
proceeds of $225,000. On December 7, 2005, the Company sold 187,500
units for total net proceeds of $135,000.
14
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 6:- STOCK CAPITAL (Cont.)
2. Options and stocks to employees and to directors:
On November 25, 2004, the Company's stockholders approved the 2004
Global Stock Option Plan and the Israeli Appendix thereto (which
applies solely to participants who are residents of Israel) and on
March 28, 2005, the Company's stockholders approved the 2005 U.S.
Stock Option and Incentive Plan, and the reservation of 9,143,462
stocks of Common stock for issuance in aggregate under these stock
option plans.
Each option granted under the plans is exercisable until the earlier
of ten years from the date of grant of the option or the expiration
dates of the respective option plans. The 2004 and 2005 options
plans will expire on November 25, 2014 and March 28, 2015,
respectively. The exercise price of the options granted under the
plans may not be less than the nominal value of the stocks into
which such options are exercised. The options vest primarily over
three or four years. Any options, which are canceled or forfeited
before expiration, become available for future grants.
As of June 30, 2006, 3,865,039 stocks are available for future
grants.
On May 27, 2005, the Company granted two of its directors 200,000
restricted stocks (100,000 each). The restricted stocks are subject
to the Company's right to repurchase them at a purchase price of par
value ($0.00005). The restrictions of the stocks shall lapse in
three annual and equal portions commencing the grant date.
On May 2, 2006, the Company granted two of its directors 200,000
restricted shares (100,000 each). The restricted shares are subject
to the Company's right to repurchase them at a purchase price of par
value ($0.00005). The restrictions of the shares shall lapse in
three annual and equal portions commencing the grant date. The
shares were issued on June 7, 2006 to one director and on July 2,
2006 to the second director. The compensation related to the stocks
issued on June 7, 2006, in the amount of $49,000 will amortized over
the vesting period as general and administrative expenses.
On May 2, 2006, the Company granted one of its directors an option
to purchase 100,000 shares of its Common stock, at an exercise price
of $0.15. The options are fully vested and expire after 10 years.
The compensation related to the options, in the amount of $48,000
was recorded as general and administrative expenses.
Compensation expenses recorded by the Company in respect of its
stock-based employee compensation awards amounted to $396,093,
$1,173,547 and $215,954 for the periods ended June 30, 2006, March
31, 2006 and June 30, 2005, respectively.
On February 6, 2006, the Company entered into an amendment to the
Company's option agreement with Mr. David Stolick, the Company's
Chief Financial Officer. The amendment changes the exercise price of
the 400,000 options granted to him on March 29, 2005 to $0.15 per
stock from $0.75 per stock. Due to the modification, the award is
accounted for as a variable from the date of modification.
15
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 6:- STOCK CAPITAL (Cont.)
On June 22, 2006, the Company entered into an amendment to the
Company's option agreement with two of its employees. The amendment
changes the exercise price of 270,000 options granted to them to
$0.15 per stock from $0.75 per stock. Due to the modification, the
awards are accounted for as a variable from the date of
modification.
3. Stocks and warrants to service providers:
a) Warrants:
Number of Exercise Warrants Exercisable
Issuance date warrants price exercisable through
----------------------------- ------------------- ---------------- ----------------- ---------------------------
November 2004 12,800,845 $ 0.01 - November 2009
December 2004 1,800,000 $ 0.00005 1,800,000 December 2014
February 2005 1,894,808 $ 2.5 1,894,808 February 2008
May 2005 47,500 $ 1.62 47,500 May 2010
June 2005 30,000 $ 0.75 30,000 June 2010
August 2005 70,000 $ 0.15 70,000 August 2008
September 2005 3,000 $ 0.15 3,000 September 2008
September 2005 36,000 $ 0.75 10,000 September 2010
September - December 2005 500,000 $ 1 500,000 September - December 2008
December 2005 20,000 $ 0.15 20,000 December 2008
December 2005 457,163 $ 0.7 80,427 July 2010
February 2006 230,000 $ 0.65 - January-February 2008
February 2006 40,000 $ 1.5 40,000 February 2011
February 2006 8,000 $ 0.15 - February 2011
February 2006 189,000 $ 0. 5 189,000 February 2009
May 2006 6,000 $ 0.35 6,000 May 2011
May 2006 6,000 $ 0.75 6,000 May 2011
May 2006 200,000 $ 1 200,000 May 2011
June 2006 24,000 $ 0.15 24,000 June 2011
------------ -----------
18,362,316 4,920,735
============ ===========
The fair value for the warrants to service providers was estimated
on the date of grant using Black-Scholes option pricing model, with
the following weighted-average assumptions for the periods ended
June 30, 2006, March 31, 2006 and June 30, 2005; weighted average
volatility of 118%, 115% and 109% respectively, risk- free interest
rates of 4.831%, 4.605% and 3.9% respectively dividend yields of 0%
and a weighted average life of the options of 4, 4 and 2.5 years,
respectively.
b) Stocks:
On June 1 and June 4, 2004, the Company issued 40,000 and 150,000
Common stocks for 12 months filing services and legal and
due-diligence services with respect to private placement,
respectively. Compensation expenses related to filing services,
totaling $26,400, are amortized over a 12-month period. Compensation
related to legal services, totaling $105,000 were recorded as equity
issuance cost and did not affect the statement of operations.
16
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 6:- STOCK CAPITAL (Cont.)
On July 1 and September 22, 2004, the Company issued 20,000 and
15,000 stocks to a former director for financial services for the
first and second quarters of 2004, respectively. Compensation
expenses of $38,950 were recorded as general and administrative
expenses.
On February 10, 2005, the Company signed an agreement with one of
its service providers according to which the Company issued the
service provider 100,000 stocks of restricted stock at a purchase
price of $0.00005 par value under the U.S Stock Option and Incentive
Plan of the Company. The restricted stocks are subject to the
Company's right to repurchase them within one year of the grant date
as follows: (i) in the event that service provider breaches his
obligations under the agreement, the Company shall have the right to
repurchase the restricted stocks at a purchase price equal to par
value; and (ii) in the event that the service provider has not
breached his obligations under the agreement, the Company shall have
the right to repurchase the restricted stocks at a purchase price
equal to the then fair market value of the restricted stocks.
In March and April 2005, the Company signed an agreement with four
members of its Scientific Advisory Board according to which the
Company issued to the members of the Scientific Advisory Board
400,000 restricted stock at a purchase price of $0.00005 par value
under the U.S Stock Option and Incentive Plan (100,000 each). The
restricted stocks will be subject to the Company's right to
repurchase them if the grantees cease to be members of the Company's
Advisory Board for any reason. The restrictions of the stocks shall
lapse in three annual and equal portions commencing with the grant
date.
In July 2005, the Company issued to its legal advisors 50,000 stocks
for legal past services for 12 months. The compensation related to
the stocks in the amount of $37,500 was recorded as general and
administrative expenses.
In January 2006, the Company issued to two service providers 350,000
restricted stocks at a purchase price of $ 0.00005 par value under
the U.S Stock Option and Incentive Plan of the Company. The
restricted stocks are subject to the company's right to repurchase
them within 12 months of the grant date as follows: (i) in the event
that the service providers breach their obligations under the
agreement, the Company shall have the right to repurchase the
restricted stocks at a purchase price equal to the par value ;and
(ii)in the event that the service providers have not breached their
obligations under the service agreements the Company shall have the
right to repurchase the restricted stocks at a purchase price equal
to the fair market value of the restricted stocks. The compensation
related to the stocks in the amount of $23,343 was recorded as
general and administrative expenses.
17
BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARY
(A development stage company)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars (except stock data)
NOTE 6:- STOCK CAPITAL (Cont.)
On March 6, 2006, the Company issued to its legal advisor 34,904
stocks of the Company common stock. The stocks are in lieu of
$18,500 payable to the legal advisor. The compensation related to
the stocks, in the amount of $18,500 was recorded as general and
administrative expenses.
On April 13, 2006, the Company issued to service providers 60,000
stocks at a purchase price of $0.00005 par value under the U.S Stock
Option and Incentive Plan of the Company. The compensation related
to the stocks, in the amount of $25,800 was recorded as general and
administrative expenses.
On April 14, 2006, the Company signed an agreement with a service
provider. According to the agreement the Company is obligated to
issue 200,000 stocks of restricted stock at a purchase price of
$0.00005 par value under the U.S Stock Option and Incentive Plan of
the Company with some purchase rights. The issue of these shares is
subject to an approval of the Company's board of directors. The
restricted stocks are subject to the Company's right to repurchase
them within one year of the grant date. If the agreement is
terminated on or prior to July 31, 2006, then the company may
repurchase up to 9/12 of the original number of stocks. Each month
thereafter the Company shall have the right purchase a lesser amount
by 1/12 of the original number of stocks, until the stocks are fully
vested in not subject to forfeiture. The restrictions of the stocks
shall lapse in twelve monthly in equal portions commencing with the
grant date.
On May 9, 2006, the Company issued to its legal advisor 65,374
stocks of the Company's common stock in lieu of legal services. The
compensation related to the stocks, in the amount of $ 33,341 was
recorded as general and administrative expenses.
On June 7, 2006, the Company issued 50,000 Common shares for filing
services for 12 months. The compensation related to the stocks, in
the amount of $24,500 was recorded as general and administrative
expenses.
c) Stock-based compensation recorded by the Company in respect of t 6
12 stocks and warrants granted to service providers amounted to
$282,477, $662,069 and $101,476 for the periods ended June 30, 2006,
March 31, 2006 and June 30, 2005, respectively.
- - - - - - - - - - - - - - - - - - -
18
Item 2. Plan of Operation.
Company Overview
Since July 8, 2004, the Company's business has focused on the development of
adult stem cell therapies for treatment of neurodegenerative diseases. The
Company's business activities are based on technology, know-how and patent
applications exclusively licensed world-wide from Ramot at Tel Aviv University
Ltd. ("Ramot"). Under the terms of the Research and License Agreement with
Ramot, Ramot granted to us an exclusive license to (i) certain stem cell
technology developed at the Felsenstein Medical Research Center of Tel Aviv
University and related patent applications and (ii) the results of further
research to be performed at Tel Aviv University relating to this technology
under the supervision of Professor Eldad Melamed and Dr. Daniel Offen, the lead
inventors.
Stem Cell Therapy
Our activities are within the stem cell therapy field. Stem cells are
non-specialized cells with a potential for both self-renewal and differentiation
into cell types with a specialized function, such as muscle, blood or brain
cells. The cells have the ability to undergo asymmetric division such that one
of the two daughter cells retains the properties of the stem cell, while the
other begins to differentiate into a more specialized cell type. Stem cells are
therefore central to normal human growth and development, and also are a
potential source of new cells for the regeneration of diseased and damaged
tissue. Stem cell therapy aims to restore diseased tissue function by the
replacement and/or addition of healthy cells by stem cell transplants.
19
Currently, two principal platforms for cell therapy products are being explored:
(i) embryonic stem cells ("ESC"), isolated from the inner mass of a few days old
embryo; and (ii) adult stem cells, sourced from bone marrow, cord blood and
various organs. Although ESCs are the easiest to grow and differentiate, their
use in human therapy is limited by safety concerns associated with their
tendency to develop Teratomas (a form of tumor) and their potential to elicit an
immune reaction. In addition, ESC has generated much political and ethical
debate due to their origin in early human embryos.
Cell therapy using adult stem cells does not suffer from the same concerns. Bone
marrow is the tissue where differentiation of stem cells into blood cells
(haematopoiesis) occurs. In addition, it harbors stem cells capable of
differentiation into mesenchymal (muscle, bone, fat and other) tissues. Such
mesenchymal stem cells have also been shown capable of differentiating into
nerve, skin and other cells. In fact, bone marrow transplants have been safely
and successfully performed for many years, primarily for treating leukemia,
immune deficiency diseases, severe blood cell diseases, lymphoma and multiple
myeloma. Moreover, bone marrow may be obtained through a simple procedure of
aspiration, from the patient himself, enabling autologous cell therapy, thus
obviating the need for donor matching, circumventing immune rejection and other
immunological mismatch risks, as well as avoiding the need for immunosuppressive
therapy. Thus, we believe bone marrow, in particular autologous bone marrow,
capable of in vitro growth and multipotential differentiation, presents a
preferable source of therapeutic stem cells.
Parkinson's Disease ("PD")
Background
PD is a chronic, progressive disorder, affecting certain nerve cells, which
reside in the Substantia Nigra of the brain and which produce dopamine, a
neurotransmitter that directs and controls movement. In PD, these
dopamine-producing nerve cells break down, causing dopamine levels to drop below
the threshold levels and resulting in brain signals directing movement to become
abnormal. The cause of the disease is unknown.
Over four million people suffer from PD in the western world, of whom about 1.5
million are in the United States. In over 85% of cases, PD occurs in people over
the age of 65. Thus, prevalence is increasing in line with the general aging of
the population. We believe the markets for pharmaceutical treatments for PD have
a combined value of approximately $4 billion per year. However, these costs are
dwarfed when compared to the total economic burden of the disease, which has
been estimated by the National Institute of Neurological Disease (NINDS) to
exceed $26 billion annually in the U.S. alone, including costs of medical
treatment, caring, facilities and other services, as well as loss of
productivity of both patients and caregivers.
Description
The classic symptoms of PD are shaking (tremor), stiff muscles (rigidity) and
slow movement (bradykinesia). A person with fully developed PD may also have a
stooped posture, a blank stare or fixed facial expression, speech problems and
difficulties with balance or walking. Although highly debilitating, the disease
is not life threatening and an average patient's life span is approximately 15
years.
Current Treatments
Current drug therapy for PD comprises dopamine replacement, either directly
(levodopa), with dopamine mimetics or by inhibition of its breakdown. Thus, the
current drugs focus on treating the symptoms of the disease and do not presume
to provide a cure.
20
Levodopa, which remains the standard and most potent PD medication available,
has a propensity to cause serious motor response complications (MRCs) with
long-term use. Moreover, effective drug dosage often requires gradual increase,
leading to more adverse side effects and eventual resistance to their
therapeutic action. This greatly limits patient benefit. Therefore, physicians
and researchers are continuously seeking levodopa-sparing strategies in patients
with early-stage disease to delay the need for levodopa, as well as in patients
with late stage disease who no longer respond to therapy.
Prescription drugs to treat PD currently generate sales of over $1 billion and
the market is expected to grow to approximately $2.3 billion by 2010, driven by
the increase in size of the elderly population and the introduction of new PD
therapies that carry a higher price tag than the generic levodopa.
There is a greatly unsatisfied need for novel approaches towards management of
PD. These include development of neurotrophic agents for neuroprotection and/or
neurorestoration, controlling levodopa-induced adverse side effects, developing
compounds targeting nondopaminergic systems (e.g., glutamate antagonists)
controlling the motor dysfunction such as gait, freezing, and postural
imbalance, treating and delaying the onset of disease-related dementia and
providing simplified dosing regimens.
In addition to the symptomatic drug development approaches, there is an intense
effort to develop cell and gene therapeutic "curative" approaches to restore the
neural function in patients with PD, by (i) replacing the dysfunctional cells
with dopamine producing cell transplant, or by (ii) providing growth factors and
proteins, such as glial derived neurotrophic factor (GDNF), that can maintain or
preserve the patient's remaining dopaminergic cells, protecting them from
further degeneration. Preclinical evaluation of cell therapeutic approaches
based on transplantation of dopaminergic neurons differentiated in vitro from
ESC, have been successful in ameliorating the parkinsonian behavior of animal
models, as has direct gene therapy with vectors harboring the GDNF gene.
However, these approaches are limited, in the first case, by the safety and
ethical considerations associated with use of ESC, and, in the second case, by
the safety risks inherent to gene therapy.
In fact, PD is the first neurodegenerative disease for which cell
transplantation has been attempted in humans, first with adrenal medullary cells
and, later, with tissue grafts from fetal brain. About 300 such fetal
transplants have already been performed and some benefits have been observed,
mainly in younger patients. However, this approach is not only impractical but
greatly limited by the ethical issues influencing the availability of human
fetuses. The above considerations have led to intensive efforts to define and
develop appropriate cells from adult stem cells.
Amyotrophic Lateral Sclerosis ("ALS")
ALS, often referred to as "Lou Gehrig's disease," is a progressive
neurodegenerative disease that affects nerve cells in the brain and the spinal
cord. Motor neurons reach from the brain to the spinal cord and from the spinal
cord to the muscles throughout the body. The progressive degeneration of the
motor neurons in ALS eventually leads to death. As motor neurons degenerate,
they can no longer send impulses to the muscle fibers that normally result in
muscle movement. With voluntary muscle action progressively affected, patients
in the later stages of the disease may become completely paralyzed. However, in
most cases, mental faculties are not affected.
Approximately 5,600 people in the U.S. are diagnosed with ALS each year. It is
estimated that as many as 30,000 Americans may have the disease at any given
time, with 100,000 across the western world. Consequently, the total estimated
cost of treating ALS patients is approximately $1.25 billion per year.
21
Description
Early symptoms of ALS often include increasing muscle weakness or stiffness,
especially involving the arms and legs, speech, swallowing or breathing.
ALS is most often found in the 40 to 70 year age group, where it is actually
quite common, with the same incidence as Multiple Sclerosis (MS). There appear
to be more MS sufferers because MS patients tend to live much longer, some for
30 years or more. The life expectancy of an ALS patient averages about two to
five years from the time of diagnosis. However, up to 10% of ALS patients will
survive more than ten years.
Current Treatment
The physician bases medication decisions on the patient's symptoms and the stage
of the disease. Some medications used for ALS patients include:
o Riluzole - the only medication approved by the FDA to slow the
progress of ALS. While it does not reverse ALS, riluzole has been
shown to reduce nerve damage. Riluzole may extend the time before a
patient needs a ventilator (a machine to help breathe) and may
prolong the patient's life by several months;
o Baclofen or Diazepam - these medications may be used to control
muscle spasms, stiffness or tightening (spasticity) that interfere
with daily activities; and
o Trihexyphenidyl or Amitriptyline - these medications may help
patients who have excess saliva or secretions, and emotional
changes.
Other medications may be prescribed to help reduce such symptoms as fatigue,
pain, sleep disturbances, constipation, and excess saliva and phlegm.
Our Approach
We intend to focus our efforts to develop cell therapeutic treatments for PD
based on the expansion of human mesenchymal stem cells from adult bone marrow
and their differentiation into neuron like cells, such as neurons that produce
dopamine and astrocytes (glial cells) that produce neurotrophic factors (NTF)
including GDNF, BDNF, NGF, IGF-1, etc. Our aim is to provide neural stem cell
transplants that (i) "replace" damaged dopaminergic nerve cells and diseased
tissue by augmentation with healthy dopamine producing cells; and (ii) maintain,
preserve and restore the damaged and remaining dopaminergic cells in the
patient's brain, protecting them from further degeneration.
In parallel, we will use the NTF-secreted cells for cell therapy in ALS
patients. The motoneurons in those patients are rapidly degenerated in the limbs
followed by cell destruction in the spinal cords. In several studies over the
world, GDNF have been shown to be highly protective, in both in vitro and in
vivo models of ALS. Therefore, we intend to restore the motoneurons cell bodies
by injecting the GDNF-secreted cells into the muscles and/or the spinal cords in
ALS patients.
The research team led by Prof. Melamed and Dr. Offen has achieved expansion of
human bone marrow mesenchymal stem cells and their differentiation into both
types of brain cells, neurons and astrocytes, each having therapeutic potential,
as follows:
NurOwnTM program 1 - DA neuron-like cells - human bone marrow derived
dopamine producing neural cells for restorative treatment in PD. Human
bone marrow mesenchymal stem cells were isolated and expanded.
Subsequent differentiation of the cell cultures in a proprietary
differentiation medium generated cells with neuronal-like morphology
and showing protein markers specific to neuronal cells. Moreover, the
in vitro differentiated cells were shown to express enzymes and
proteins required for dopamine metabolism, particularly the enzyme
tyrosine hydroxylase. Most importantly, the cells produce and release
dopamine in vitro. Further research consisting of implanting these
cells in an animal model of PD (6-OHDA induced lesions), showed the
differentiated cells exhibit long-term engraftment, survival and
function in vivo. Most importantly, such implantation resulted in
marked attenuation of their symptoms, essentially reversing their
Parkinsonian movements.
22
NurOwnTM program 2 - Astrocyte-like cells - human bone marrow derived
NTF producing astrocyte for treatment of PD, ALS and spinal cord
injury. In vitro differentiation of the expanded human bone marrow
derived mesenchymal stem cells in a special proprietary medium and
generated cells with astrocyte-like morphology that expressed astrocyte
specific markers. Moreover, the in vitro differentiated cells were
shown to express and secrete GDNF, as other NTF, into the growth
medium. GDNF is a protein, previously been shown to protect, preserve
and even restore neurons, particularly dopaminergic cells in PD, but
also neuron function in other neurodegenerative pathologies such as ALS
and Huntington's. Unfortunately, therapeutic application of GDNF is
hampered by its poor brain penetration and stability. Attempting to
infuse the protein directly to the brain is impractical and the
alternative, using GDNF gene therapy, suffers from the limitations and
risks of using viral vectors. Our preliminary results show that our
astrocyte-like cells, when transplanted into PD rats with a 6-OHDA
lesion, show significant efficacy. Within weeks of the transplantation,
there was an improvement of more than 50% in the animals'
characteristic disease symptoms.
We intend to optimize the proprietary processes for transformation of human bone
marrow expanded mesenchymal stem cells into differentiated cells that produce
dopamine and/or NTF for implantation to PD and ALS patients. The optimization
and process development will be conducted in an effort to comply with FDA
guidelines for Good Tissue Practice (GTP) and Good Manufacturing Practice (GMP).
Once the optimization of the process is completed, we intend to evaluate the
safety and efficacy of our various cell transplants in animal models,
(separately and in combination). Based on the results in animals we intend to
use the differentiated cell products for conducting clinical trials to assess
the efficacy of the cell therapies in PD and ALS patients.
Our technology is based on the NurOwnTM products - an autologous cell
therapeutic modality, comprising the extraction of the patient bone marrow,
processed into the appropriate neuronal cells and re-implanted into the
patient's brain. This approach is taken in order to increase patient safety and
minimize any chance of immune reaction or cell rejection.
We believe that the therapeutic modality will comprise the following:
o Bone marrow aspiration from patient;
o Isolating and expanding the mesenchymal stem cells;
o Differentiating the expanded stem cells into neuronal-like dopamine
producing cells and/or astrocytes-like NTF producing cells; and
o Implantation of the differentiated cells into patient from whom the
bone marrow was extracted.
Business Strategy
Our efforts are currently focused on the development of the technology to
convert the process from the lab stage to the clinical stage, with the following
main objectives:
23
o Developing the cell differentiation process according to health
regulation guidelines;
o Demonstrating safety and efficacy, first in animals and then in
patients; and
o Setting up centralized facilities to provide NurOwnTM therapeutic
products and services for transplantation in patients.
We intend to enter into strategic partnerships as we progress towards advanced
clinical development and commercialization with companies responsible for
advanced clinical development and commercialization. We intend to provide
strategic partners with services required to process the NurOwnTM products for
the clinical trials. This approach is intended to generate an early inflow of
up-front and milestone payments and to enhance our capacities in regulatory and
clinical infrastructure while minimizing expenditure and risk.
Intellectual Property
o The NurOwnTM technology for differentiation of dopamine producing
neuron-like cells is covered by PCT patent application number
PCT/IL03/00972 filed on November 17, 2003.
o The NurOwnTM technology for differentiating astrocyte-like cells is
covered by PCT patent application number PCT/IL2006/000699 filed on
June 18, 2006.
o A provisional patent application 60/748,219 was filed for covering
methods of generating oligodendrocytes astrocytes from bone marrow
stem cells on December 8, 2005.
o The Company has filed for a trademark on NurOwnTM.
The patent applications, as well as relevant know-how and research results are
licensed from Ramot. Brainstorm intends to work with Ramot to protect and
enhance its intellectual property rights by filing continuations and new patent
applications on any improvements to NurOwnTM and any new discoveries arising in
the course of research and development.
Research and License Agreement with Ramot
On July 8, 2004, we entered into our Research and License Agreement (the
"Original Ramot Agreement") with Ramot at Tel Aviv University Ltd. ("Ramot"),
the technology licensing company of Tel Aviv University, which Agreement was
amended on March 30, 2006 by the Amended Research and License Agreement
(described below). Under the terms of the Original Ramot Agreement, Ramot
granted to us an exclusive license to (i) the know how and patent applications
on the above mentioned stem cell technology developed by the team led by Prof.
Melamed and Dr. Offen, and (ii) the results of further research to be performed
by the same team on the development of the stem cell technology. Simultaneously
with the execution of the Original Ramot Agreement, we entered into individual
consulting agreements with Prof. Melamed and Dr. Offen pursuant to which all
intellectual property developed by Prof. Melamed or Dr. Offen in the performance
of services thereunder will be owned by Ramot and licensed to us under the
Original Ramot Agreement.
As of November 4, 2004, we entered into consulting agreements with Prof. Melamed
and Dr. Offen, under which we pay each of them an annual consulting fee of
$72,000 and we issued each of them warrants to purchase 1,097,215 shares of our
Common Stock (3% of our issued and outstanding shares at such time).
Each of the warrants is exercisable for a five-year period beginning on November
4, 2005.
24
Under the Original Ramot Agreement, we agreed to fund further research relating
to the licensed technology in an amount of $570,000 per year for an initial
period of two years, and for an additional two-year period if certain research
milestones are met.
In consideration for the license, we originally agreed to pay Ramot:
o An up-front license fee payment of $100,000;
o An amount equal to 5% of all Net Sales of Products as those terms
are defined in the Original Ramot Agreement; and
o An amount equal to 30% of all Sublicense Receipts as such term is
defined in the Original Ramot Agreement.
In addition, under the Original Ramot Agreement, we issued to Ramot and its
designees, warrants to purchase an aggregate of 10,606,415 shares of our Common
Stock (29% of our issued and outstanding shares as of November 4, 2004). Each of
the warrants is exercisable for a five-year period beginning on November 4,
2005.
On March 30, 2006, we entered into an Amended Research and License Agreement
(the "Amended Research and License Agreement") with Ramot. Under the Amended
Research and License Agreement, the funding of further research relating to the
licensed technology in an amount of $570,000 per year has been reduced to
$380,000 per year. Moreover, under the Amended Research and License Agreement,
the initial period of time that the Company has agreed to fund the research has
been extended from an initial period of two (2) years to an initial period of
three (3) years. The Amended Research and License Agreement also extends the
additional two-year period in the Original Ramot Agreement to an additional
three-year period, if certain research milestones are met. In addition, the
Amended Research and License Agreement reduces certain royalties payments that
the Company may have to pay from five percent (5%) to three percent (3%) of all
Net Sales (as defined therein) in cases of third party royalties. The Amended
Research and License Agreement also reduces potential payments concerning
sublicenses from 30% to 20-25% of Sublicense Receipts (as defined therein).
Employees
As of August 10, 2006, we have two executive officers, Yoram Drucker, our Chief
Operating Officer, and David Stolick, our Chief Financial Officer. We are
currently conducting a search for a Chief Executive Officer. We have engaged
consultants, attorneys and accountants as necessary. We currently have seven
scientific and administrative employees. Assuming we consummate our intended
financings, we expect to increase our staff significantly in the near future.
None of our employees is represented by a labor union and we believe that we
have good relations with our employees.
Facilities; Equipment
On December 1, 2004, our Israeli subsidiary, Brainstorm Cell Therapeutics Ltd.
(the "Subsidiary") entered into a lease agreement for the lease of premises in
12 Basel Street, Petach Tikva, Israel, which include approximately 600 square
meters of office and laboratory space. The term of the lease is 36 months, with
two options to extend: one for an additional 24 months (the "First Option"); and
one for an additional 36 months (the "Second Option"). Rent is to be paid on a
quarterly basis in the following amounts: (i) NIS 17,965 (approximately $4,046)
per month during the first 12 months of the lease; (ii) NIS 19,527
(approximately $4,398) per month during the following 24 months of the lease;
(iii) NIS 22,317 (approximately $5,026) per month during the First Option
period; and (iv) NIS 23,712 (approximately $5,340) per month during the Second
Option period.
25
In May 2005, we completed leasehold improvements of the Petach Tikva facility
for which we paid the contractor approximately $368,000 and issued it
fully-vested options to purchase 30,000 shares of our Common Stock at an
exercise price of $0.75 per share. The lessor has reimbursed us $82,000 in
connection with these improvements. We relocated to the new facility in May 2005
and, assuming we complete additional financings, we intend to purchase certain
additional laboratory equipment at an estimated cost of $200,000.
The address of our principal executive offices is 110 East 59th Street, New
York, NY 10022.
Plan of Operations
Assuming we can successfully complete our additional necessary financings, our
primary objectives over the next twelve (12) months will be:
o To define and optimize our NurOwnTM technology in human bone marrow
cells in order to prepare the final process and production for
clinical studies in accordance with health authorities' guidelines.
We intend to perfect methods for the stem cell growth and
differentiation in specialized growth media, as well as methods for
freezing, thawing, storing and transporting the expanded mesenchymal
stem cells, as well as the differentiated neuronal cells;
o To verify the robustness and the reproducibility of the process;
o To further repeat the process using bone marrow from Parkinson's
patients;
o To conduct further studies in animal models of PD (mice and rats) to
evaluate the engraftment, survival and efficacy of our cell implants
for our astrocyte-like cells;
o To set up standard and reproducible production procedures;
o To develop analytical methodology and specifications to be used as
release criteria;
o To set up a quality control system for the processing of our cells;
o To conduct a full safety study of the final cell product for
clinical trials in humans; and
o To write up clinical protocols for phase I & II clinical studies.
All of these activities will be coordinated with a view towards the execution of
clinical trials of the dopamine and/or astrocyte-like-producing differentiated
cell implants in humans. We intend to crystallize our development plans with the
assistance of our scientific advisory board members as well as to retain
external regulatory consultants, expert in the FDA cell therapy regulation
guidelines.
We also intend to continue our close cooperation and funding of the research
programs conducted by the scientific team led by Prof. Melamed and Dr. Offen at
the Tel-Aviv University. These programs will focus on further understanding and
optimization of the technology towards the generation of better processes for
generation of dopaminergic and other neurons as well as Oligodendrocytes to
target additional neurodegenerative diseases, such as ALS and Multiple Sclerosis
(MS).
In addition, we intend to identify and evaluate in-licensing opportunities for
development of innovative technologies utilizing cell and gene therapy for
diabetes, cardiac disease and other indications.
26
Cash Requirements
At June 30, 2006, we had $382,828 in total current assets and $1,677,239 in
total current liabilities and on August 10, 2006, we had approximately $130,000
in cash. We will need to raise additional funds through public or private debt
or equity financings within the next month to meet our anticipated expenses so
that we can execute our business plan. Although we have been seeking such
additional financings, no commitments to provide additional funds have been made
by management, other shareholders or third parties. We may not be able to raise
additional funds on favorable terms, or at all. If we are unable to obtain
additional funds in a timely manner, we will be unable to execute our business
plan and we may be forced to cease our operations.
On February 7, 2006, we borrowed a net amount of $450,000 from an investor. In
connection with such loan, the Company issued said investor a $500,000 10%
Convertible Promissory Note due February 7, 2007 (the "February Note"). On June
5, 2006, we borrowed an additional net amount of $450,000 from said investor. In
connection with such loan, the Company issued said investor a $500,000 10%
Convertible Promissory Note due June 5, 2007 (the "June Note," and, together
with the February Note, the "Notes"). Interest on the February Note will accrue
at the rate of ten percent (10%) per annum and will be due and payable in full
on February 7, 2007 (the "February Maturity Date"). Interest on the June Note
will accrue at the rate of ten percent (10%) per annum and will be due and
payable in full on June 5, 2007 (the "June Maturity Date"). Any amount overdue
on the February Note or the June Note shall bear interest from the date it
became overdue at an annual rate of fifteen percent (15%) per annum. The Notes
will become immediately due and payable upon the occurrence of certain Events of
Default, as defined in the respective Note. Under the Notes, the Holder has the
right at any time prior to the close of business on the February Maturity Date
or the June Maturity Date, as applicable, to convert all or part of the
outstanding principal and interest amount of the February Note or the June Note,
as applicable, into shares of our Common Stock, $0.00005 par value per share
(the "Common Stock"). The Conversion Price, as defined in the Notes, will be 75%
(50% upon the occurrence of an Event of Default) of the average of the last bid
and ask price of the Common Stock as quoted on the Over-the-Counter Bulletin
Board for the five trading days prior to the Company's receipt of the Holder's
written notice of election to convert. The Conversion Price will be adjusted in
the event of a stock dividend or reclassification.
On June 14, 2006, we entered into an Amendment of Convertible Promissory Notes
(the "Amendment") with said investor. Under the Amendment, a cap of 50,000,000
shares of Common Stock in the aggregate was placed on the number of shares that
may be acquired by said investor upon conversion of the February Note and the
June Note.
On February 8, 2006, we borrowed a net amount of $152,500 from an additional
investor. In connection with such loan, we entered into a subscription agreement
with said investor (the "Subscription Agreement") pursuant to which the Company
sold and issued a promissory note to the investor in the original principal
amount of $189,000 (the "Principal Amount") with an original issue discount of
8% (the "Promissory Note") and warrants to purchase shares of our Common Stock
for every one dollar of the Principal Amount (the "Warrants"). Under the
Promissory Note, any amount overdue shall bear interest from the date it became
overdue at an annual rate of fifteen percent (15%) per annum. The Promissory
Note shall become immediately due and payable upon the occurrence of certain
Events of Default, as defined therein. The Promissory Note was due and payable
within 120 days after the original date of issuance. The warrants have an
exercise price of $0.50 per share and are exercisable for a three-year period
from the date of the issuance thereof. The Company did not repay the amounts due
on the maturity date; however, we are currently negotiating with the investor
the postponement of the due date of the Promissory Note. As of the date of this
report, the parties have not yet come to an agreement.
On December 7, 2005, we raised an additional $135,000 (net of expenses) in
connection with a closing in a private placement of 187,500 units comprising
shares of our Common Stock and warrants for our Common Stock at $0.80 per unit.
In September 2005, we raised an additional $225,000 (net of expenses) in
connection with a closing in a private placement of 312,500 units comprising
shares of our Common Stock and warrants for our Common Stock at $0.80 per unit.
In May 2005, we raised $149,500 through a private placement of our Common Stock
at $0.80 per share. In July 2005, we raised $99,000 through a private placement
of our Common Stock at $0.60 per share. Those followed a private placement in
which we raised about $1.4 million that closed in three tranches in October and
November 2004 and February 2005.
27
In late 2004 and throughout 2005, we began to increase our spending
significantly to execute our development programs. In October 2004, we made a
$402,000 payment to Ramot to cover the up-front license fee, reimbursement of
certain patent expenses and initial research funding obligations under our
agreement. We have also made capital expenditures of approximately $335,000 to
build out our laboratory and office facilities.
Under the Amended Research and License Agreement, we are obligated to pay Ramot
$95,000 on a quarterly basis through April 2007, and, if certain research
milestones are met, for an additional three-year period. If we fail to comply
with these obligations to Ramot, Ramot may have the right to terminate the
license. As of June 30, 2006, the Company owed Ramot $162,469 in overdue
payments under the Amended Research and License Agreement. Ramot has agreed to
defer these payments until September 15, 2006. If we fail to make these payments
by such time (for which we will need to consummate additional financings), or to
obtain an additional deferral from Ramot until we raise such capital, and Ramot
elects to terminate our license, we would need to change our business strategy
entirely or would be forced to cease our operations.
Our other material cash needs for the next 12 months will include, among others,
employee salaries and benefits, facility lease, capital equipment expenses,
legal and audit fees, patent prosecution fees, consulting fees, payments for
outsourcing of certain animal experiments and, possibly, upfront payments for
in-licensing opportunities and payment for clinical trials in Europe.
Research and Development
Our research and development efforts have focused on improving growth conditions
and developing tools to evaluate the differentiation of bone marrow stem cells,
into neural-like cells, suitable for transplantation as a restorative therapy
for neurodegenerative diseases. Some highlights achieved in this research
include:
o Improving the bone marrow stem cells expansion prior to
differentiation;
o Evaluation of methodologies for cryo-preservation of the expanded
bone marrow cells prior to differentiation;
o Characterization of the propagated mesenchymal stem according to
established CD-markers;
o Determination of timing and growth conditions for the
differentiation process;
o Development of molecular tools and cell surface markers to evaluate
cell differentiation;
o Demonstrating that the bone marrow derived differentiated cells do
produce and secrete several specific neuron-specific markers;
o Transplantation of the bone marrow derived neural-like cells in the
striatum of model animals resulting in long term engraftment; and
o Parkinson's model animals transplanted with the bone marrow derived
neural-like cells show significant improvement in their rotational
behavior.
28
For the twelve months ending June 30, 2007, we estimate that our research and
development costs will be approximately $3,000,000. We intend to spend our
research and development costs on the development of our core NurOwn(TM)
technology by developing the cell differentiation process according to FDA
guidelines. We intend to continue to fund our collaborators at the university
lab and in parallel, we have constructed and set up a facility, which includes
laboratories for continued development of our proprietary processes. We also
intend to fund and finance collaborations with medical centers for future
clinical trials.
General and Administrative Expenses
If we can successfully complete our financings, for the twelve months ending
June 30, 2007, we estimate that our general and administrative expenses will be
approximately $1,000,000. These expenses will include, among others, salaries,
legal and audit expenses, business development, investor and public relations
and office maintenance.
We do not expect to generate any revenues in the 12-month period ending June 30,
2007.
In management's opinion, we need to achieve the following events or milestones
in the next twelve months in order for us to reach clinical trials for our
NurOwn(TM) dopamine or astrocyte-like producing cell differentiation process as
planned within one to two years:
o Raise equity or debt financing or a combination of equity and debt
financing of at least $13,000,000.
o Complete preclinical studies in rodents to confirm safety and
efficacy.
o Complete preclinical studies to confirm safety in monkeys.
o Conduct full safety study of the final cell product for PD.
o Write up clinical protocols for Phase I & II clinical studies.
Purchase or Sale of Equipment
The Company's subsidiary leases a facility in Petach Tikva, Israel, which
includes approximately 600 square meters of laboratory and office space. In May
2005, we completed leasehold improvements of the facility for which we paid the
contractor approximately $368,000 and issued it fully vested options to purchase
30,000 shares of our Common Stock at an exercise price of $0.75 per share. The
lessor has reimbursed us $82,000 in connection with these improvements. We
relocated to the new facility in May 2005. As of June 30, 2006, the Company has
purchased laboratory equipment and furniture for a total sum of approximately
$202,000 and assuming we complete additional financings, we intend to purchase
certain additional laboratory equipment at an estimated cost of $200,000.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements that have or are reasonably likely to
have a current or future material effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources.
Certain Risk Factors That May Affect Future Results
Any investment in our Common Stock involves a high degree of risk. You should
consider carefully the risks described below, together with the other
information contained in this report. If any of the following events actually
occurs, our business, financial condition and results of operations may suffer
materially. As a result, the market price of our Common Stock could decline, and
you could lose all or part of your investment in our Common Stock.
29
In order to execute our business plan, we will need to raise additional capital
in the coming month. If we are unable to raise additional capital on favorable
terms and in a timely manner, we will not be able to achieve our business and we
could be forced to restrict or cease our operations. We will need to raise
additional funds within the coming month to meet our anticipated expenses so
that we can execute our business plan. We expect to incur substantial and
increasing net losses for the foreseeable future as we increase our spending to
execute our development programs. Our auditors have expressed in their audit
report that there is substantial doubt regarding our ability to continue as a
going concern.
We continue to seek additional financings although we have so far been
unsuccessful in our efforts to raise sufficient amounts to allow us to execute
on our business plan. Even if we complete an interim or bridge financing we
would still need to secure additional funds to effect our plan of operations. We
may not be able to raise additional funds on favorable terms, or at all. If we
are unable to obtain additional funds on favorable terms and in a timely
fashion, we will be unable to execute our business plan and we will be forced to
restrict or cease our operations.
Assuming we raise additional funds through the issuance of equity,
equity-related or convertible debt securities, these securities may have rights,
preferences or privileges (including registrations rights) senior to those of
the rights of our Common Stock and our stockholders will experience additional
dilution.
Our company has a history of losses and we expect to incur losses for the
foreseeable future. We had no revenues for the fiscal years ended March 31,
2004, March 31, 2005 or March 31, 2006 or for any interim period since then. As
a development stage company, we are in the early stages of executing against our
business plan. Our ability to operate successfully is materially uncertain and
our operations are subject to significant risks inherent in a developing
business enterprise. Most notably, we do not expect that any therapies resulting
from our or our collaborators' research and development efforts will be
commercially available for a significant number of years, if at all. We also do
not expect to generate revenues from strategic partnerships or otherwise for at
least the next 12 months, and likely longer. Furthermore, we expect to incur
substantial and increasing operating losses for the next several years as we
increase our spending to execute our development programs. These losses are
expected to have an adverse impact on our working capital, total assets and
stockholders' equity, and we may never achieve profitability.
We have a limited operating history, which will limit your ability to evaluate
our operations and prospects. We were incorporated under the laws of the State
of Washington on September 22, 2000, but only changed our business model to
focus on stem cell research in connection with the signing of the Original Ramot
Agreement in July 2004. We have a limited operating history upon which you may
evaluate our operations and prospects. Our limited operating history makes it
difficult to evaluate our commercial viability. Our potential success should be
evaluated in light of the problems, expenses and difficulties frequently
encountered by new businesses in general and biotechnology businesses
specifically.
Our business in the foreseeable future will be based on technology licensed from
Ramot and if this license were to be terminated for any reason, including
failure to pay the required research funding or royalties, we would need to
change our business strategy and we may be forced to cease our operations. The
Original Ramot Agreement imposes on us development and commercialization
obligations, milestone and royalty payment obligations and other obligations. In
October 2004, we made payments to Ramot to cover the up-front license fee,
reimbursement of certain patent expenses and initial research funding. Under the
Amended Research and License Agreement, we are obligated to pay Ramot $95,000 on
a quarterly basis through April 2007, and, if certain research milestones are
met, we are obligated to pay Ramot such amount for an additional three-year
period. If we fail to comply with these obligations to Ramot, Ramot may have the
right to terminate the license. If Ramot elects to terminate our license, we
would need to change our business strategy and we may be forced to cease our
operations.
30
The field of stem cell therapy is new and our development efforts may not yield
an effective treatment of human diseases. The field of stem cell therapy is new
and, except for bone marrow transplants for neoplastic disease, it remains
largely untested in the clinical setting. Our intended cell therapeutic
treatment methods for PD and ALS involve a new approach that has never proven to
work in human testing. We are still conducting experimental testing in animals
for our treatment, which, together with other stem cell therapies, may
ultimately prove ineffective in treatment of human diseases. If we cannot
successfully implement our stem cell therapy in human testing, we would need to
change our business strategy and we may be forced to cease our operations.
Our ability to commercialize the products we intend to develop will depend upon
our ability to prove the efficacy and safety of these products according to
government regulations. Our present and proposed activities are subject to
extensive and rigorous regulation by governmental authorities in the U.S. and
other countries. To clinically test, produce and market our proposed future
products for human use, we must satisfy mandatory procedural and safety and
efficacy requirements established by the FDA and comparable state and foreign
regulatory agencies. Typically, such rules require that products be approved by
the government agency as safe and effective for their intended use prior to
being marketed. The approval process is expensive, time consuming and subject to
unanticipated delays. It takes years to complete the testing of a product, and
failure can occur at any stage of testing. Our product candidates may not be
approved. In addition, our product approvals could be withdrawn for failure to
comply with regulatory standards or due to unforeseen problems after the
product's marketing approval.
Testing is necessary to determine safety and efficacy before a submission may be
filed with the FDA to obtain authorization to market regulated products. In
addition, the FDA imposes various requirements on manufacturers and sellers of
products under its jurisdiction, such as labeling, GMP, record keeping and
reporting requirements. The FDA also may require post-marketing testing and
surveillance programs to monitor a product's effects. Furthermore, changes in
existing regulations or the adoption of new regulations could prevent us from
obtaining, or affect the timing of, future regulatory approvals or could
negatively affect the marketing of our existing products.
We may not be able to obtain regulatory approval of potential products, or may
experience delays in obtaining such approvals, and we may consequently never
generate revenues from product sales because of any of the following risks
inherent in the regulation of our business:
o We may not be successful in obtaining the approval to perform
clinical studies, an investigational new drug application, or IND,
with respect to a proposed product;
o Preclinical or clinical trials may not demonstrate the safety and
efficacy of proposed products satisfactory to the FDA or foreign
regulatory authorities; or
o Completion of clinical trials may be delayed, or costs of clinical
trials may exceed anticipated amounts (for example, negative or
inconclusive results from a preclinical test or clinical trial or
adverse medical events during a clinical trial could cause a
preclinical study or clinical trial to be repeated, additional tests
to be conducted or a program to be terminated, even if other studies
or trials relating to the program are successful).
We may not be able to succeed in our business model of seeking to enter into
collaborations at appropriate stages of development. We intend to enter into
strategic partnerships as we progress towards advanced clinical development and
commercialization with companies responsible for such activities. We intend to
provide strategic partners with services required to process the NurOwnTM
products for the clinical trials. It may be difficult for us to find third
parties that are willing to enter into collaborations for our potential products
at the appropriate stage of development, on economic terms that are attractive
to us or at all. If we are not able to continue to enter into acceptable
collaborations, we could fail in our strategy of generating an early inflow of
up-front and milestone payments and to enhance our capacities in regulatory and
clinical infrastructure while minimizing expenditure and risk and we could be
required to undertake and fund further development, clinical trials,
manufacturing and marketing activities solely at our own expense.
31
We may be dependent upon a company with which we enter into collaborations to
conduct clinical trials and to commercialize our potential products. If we are
ultimately successful in executing our strategy of securing collaborations with
companies that would undertake advanced clinical development and
commercialization of our products, we may not have day-to-day control over their
activities. Any such collaborator may adhere to criteria for determining whether
to proceed with a clinical development program under circumstances where we
might have continued such a program. Potential collaborators may have
significant discretion in determining the efforts and amount of resources that
they dedicate to our collaborations or may be unwilling or unable to fulfill
their obligations to us, including their development and commercialization.
Potential collaborators may underfund or not commit sufficient resources to the
testing, marketing, distribution or other development of our products. They may
also not properly maintain or defend our intellectual property rights or they
may utilize our proprietary information in such a way as to invite litigation
that could jeopardize or potentially invalidate our proprietary information or
expose us to potential liability. Potential collaboration partners may have the
right to terminate the collaboration on relatively short notice and if they do
so or if they fail to perform or satisfy their obligations to us, the
development or commercialization of products would be delayed and our ability to
realize any potential milestone payments and royalty revenue would be adversely
affected.
We face significant competition in our efforts to develop cell therapies for PD,
ALS and other neurodegenerative diseases. We face significant competition in our
efforts to develop cell therapies and other treatment or procedures to cure or
slow the effects of PD, ALS and other neurodegenerative diseases. Among our
competitors are companies that are involved in the fetal cell transplant or
embryonic stem cell derived cell therapy and companies developing adult stem
cells. Other companies are developing traditional chemical compounds, new
biological drugs, cloned human proteins and other treatments, which are likely
to impact the markets, which we intend to target. Many of our competitors
possess longer operating histories and greater financial, managerial, scientific
and technical resources than we do and some possess greater name recognition and
established customer bases. Many also have significantly more experience in
preclinical testing, human clinical trials, product manufacturing, the
regulatory approval process and marketing and distribution than we do. All of
these factors put us at a competitive disadvantage.
If Ramot is unable to obtain patents on the patent applications and technology
exclusively licensed to us or if patents are obtained but do not provide
meaningful protection, we may not be able to successfully market our proposed
products. We rely upon the patent application as filed by Ramot and the license
granted to us by Ramot under the Original Ramot Agreement. We agreed under the
Original Ramot Agreement to seek comprehensive patent protection for all
inventions licensed to us under the Original Ramot Agreement. However, we cannot
be sure that any patents will be issued to Ramot as a result of its domestic or
future foreign patent applications or that any issued patents will withstand
challenges by others.
We also rely upon unpatented proprietary technology, know-how and trade secrets
and seek to protect them through confidentiality agreements with employees,
consultants and advisors. If these confidentiality agreements are breached, we
may not have adequate remedies for the breach. In addition, others may
independently develop or otherwise acquire substantially the same proprietary
technology as our technology and trade secrets.
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As a result of our reliance on consultants, we may not be able to protect the
confidentiality of our technology, which, if disseminated, could negatively
impact our plan of operations. We currently have relationships with two academic
consultants who are not employed by us, and we may enter into additional
relationships of such nature in the future. We have limited control over the
activities of these consultants and can expect only limited amounts of their
time to be dedicated to our activities. These persons may have consulting,
employment or advisory arrangements with other entities that may conflict with
or compete with their obligations to us. Our consultants typically sign
agreements that provide for confidentiality of our proprietary information and
results of studies. However, in connection with every relationship, we may not
be able to maintain the confidentiality of our technology, the dissemination of
which could hurt our competitive position and results of operations. To the
extent that our scientific consultants develop inventions or processes
independently that may be applicable to our proposed products, disputes may
arise as to the ownership of the proprietary rights to such information, we may
expend significant resources in such disputes and we may not win those disputes.
The price of our stock is expected to be volatile. The market price of our
Common Stock has fluctuated significantly in the short time it has been traded,
and is likely to continue to be highly volatile. To date, the trading volume in
our stock has been relatively low and significant price fluctuations can occur
as a result. An active public market for our Common Stock may not continue to
develop or be sustained. If the low trading volumes experienced to date
continue, such price fluctuations could occur in the future and the sale price
of our Common Stock could decline significantly. Investors may therefore have
difficulty selling their shares.
Your percentage ownership will be diluted by future offerings of our securities
and by options, warrants or shares we grant to management, employees, directors
and consultants. In order to meet our financing needs described above, we intend
to initiate a significantly larger offering of units comprising Common Shares
and warrants for Common Shares (the "Subsequent Offering"). The precise terms of
the Subsequent Offering will be determined by the Company and potential
investors. Assuming the Subsequent Offering is successfully consummated, it will
have a significant dilutive effect on your percentage ownership in the Company.
In November 2004 and February 2005, the Company's Board of Directors adopted and
ratified the 2004 Global Share Option Plan and the 2005 U.S. Stock Option Plan
and Incentive Plan (the "Global Plan" and "U.S. Plan" respectively and the
"Plans" together), respectively, and further approved the reservation of
9,143,462 shares of the Company's Common Stock for issuance thereunder (the
"Shares"). The Company's shareholders approved the Plans and the Shares in a
special meeting of shareholders that was held on March 28, 2005. We have made
and intend to make further option grants under the Plans or otherwise issue
warrants or shares of our Common Stock to such individuals. For example, as of
August 1, 2006:
o under our Global Plan, we have granted a total of 3,748,423 options
with various exercise prices and expiration dates, to officers,
directors, services providers, consultants and employees.
o under our U.S. Plan we have issued an additional 1,530,000 shares of
restricted stock and options for grants to Scientific Advisory Board
members, service providers, consultants and directors.
Such issuances will, if and when made (and if options or warrants are
subsequently exercised), dilute your percentage ownership in the Company.
Since October 2004 until August 10, 2006, we have issued 4,456,961 shares to
investors and consultants. When we register the shares or those underlying
convertible securities for which we have undertaken to register, they can be
sold in the public market. In addition, the shares that we will not register
will become eligible for sale into the public market subject to and in
accordance with applicable SEC rules and regulations, which provide exemptions
from registration requirements. If any of the holders of these shares or
convertible securities, or any of our existing stockholders, sell a large number
of shares of our Common Stock, or the public market perceives that existing
stockholders might sell shares of Common Stock, the market price of our Common
Stock could decline significantly.
33
Investors may face significant restrictions on the resale of our stock due to
the way in which stock trades are handled by broker-dealers. Brokers may be less
willing to execute transactions in securities subject to "penny stock" rules.
This may make it more difficult for investors to dispose of our Common Stock and
cause a decline in the market value of our stock. Because of large broker-dealer
spreads, investors may be unable to sell the stock immediately back to the
broker-dealer at the same price the broker-dealer sold the stock to the
investor. In some cases, the stock may fall quickly in value. Investors may be
unable to reap any profit from any sale of the stock, if they can sell it at
all. The market among broker-dealers may not be active. Investors in penny
stocks often are unable to sell stock back to the dealer that sold them the
stock. The mark-ups or commissions charged by the broker-dealers may be greater
than any profit a seller may make.
You may experience difficulties in attempting to enforce liabilities based upon
U.S. federal securities laws against us and our non-U.S. resident directors and
officers. Our principal operations are located through our subsidiary in Israel
and our principal assets are located outside the U.S. Our Chief Operating
Officer, Chief Financial Officer, and some of our directors are foreign citizens
and do not reside in the U.S. It may be difficult for courts in the U.S. to
obtain jurisdiction over our foreign assets or these persons and as a result, it
may be difficult or impossible for you to enforce judgments rendered against us
or our directors or executive officers in U.S. courts. Thus, should any
situation arise in the future in which you have a cause of action against these
persons or entities, you are at greater risk in investing in our company rather
than a domestic company because of greater potential difficulties in bring
lawsuits or, if successful, collecting judgments against these persons or
entities as opposed to domestic persons or entities.
Political, economic and military instability in Israel may impede our ability to
execute our plan of operations. Our principal operations and the research and
development facilities of the scientific team funded by us under the Original
Ramot Agreement are located in Israel. Accordingly, political, economic and
military conditions in Israel may affect our business. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have occurred
between Israel and its Arab neighbors, including the current conflict with
Hezbollah. Since October 2000, terrorist violence in Israel increased
significantly and until they were recently revived, negotiations between Israel
and Palestinian representatives had effectively ceased. Ongoing or revived
hostilities or other factors related to Israel could harm our operations and
research and development process and could impede on our ability to execute our
plan of operations.
Item 3. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of its Principal
Executive Officer and the Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")).
Based on this evaluation, the Principal Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective, as of the end of the period covered by this report, to
ensure that information required to be disclosed by the Company in the reports
filed by it under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that the information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company's management, including the
Principal Executive Officer and Chief Financial Officer of the Company, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
There were no changes in the Company's internal control over financial reporting
that occurred during the fourth fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
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PART II: OTHER INFORMATION
Item 6. Exhibits.
The Exhibits listed in the Exhibit index immediately preceding such Exhibits are
filed with or incorporated by reference in this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BRAINSTORM CELL THERAPEUTICS INC.
August 17, 2006 By: /s/ Yoram Drucker
-----------------------------------------
Name: Yoram Drucker
Title: Chief Operating Officer (Principal Executive
Officer)
August 17, 2006 By: /s/ David Stolick
-----------------------------------------
Name: David Stolick
Title: Chief Financial Officer (Principal Financial
and Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.