Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended June 30, 2015

 

OR

 

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

 

For the transition period from                  to                 

 

Commission file number: 001-36889

 

 

SteadyMed Ltd.

(Exact name of registrant as specified in its charter)

 

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Israel		2834		Not applicable
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

5 Oppenheimer Street
Rehovot 7670105, Israel

 925-272-4999

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files).  Yes  x   No  o

 

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

 

Large accelerated filer		o		Accelerated filer		o
Non-accelerated filer		o  (Do not check if a smaller reporting company)		Smaller reporting company		x

 

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o   No  x

 

As of August 1, 2015, there were 13,581,155 outstanding ordinary shares, par value NIS $0.01 per share, of SteadyMed Ltd.

 

 

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STEADYMED LTD.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2015

 

Item			Page
PART I. FINANCIAL INFORMATION
1.		Financial Statements:
		a. Consolidated Balance Sheets at June 30, 2015 (unaudited) and December 31, 2014	3
		b. Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2015 and 2014 (unaudited)	5
		c. Statements of Changes in Shareholders’ Equity (Deficit)	6
		d. Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)	7
		e. Notes to Consolidated Financial Statements (unaudited)	8
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
3.		Quantitative and Qualitative Disclosures About Market Risk	31
4.		Controls and Procedures	31
PART II. OTHER INFORMATION
1.		Legal Proceedings	33
1A.		Risk Factors	33
2.		Unregistered Sales of Equity Securities and Use of Proceeds	63
6.		Exhibits	64
Signatures			65

 

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

 

		June 30,			December 31,
		2015			2014
		Unaudited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	43,145		$	6,167
Restricted cash		675			1,026
Other accounts receivable and prepaid expenses		443			151
Total current assets		44,263			7,344
LONG-TERM LEASE DEPOSIT		69			46
SEVERANCE PAY FUND		118			99
DEFERRED IPO COSTS		—			1,463
PROPERTY AND EQUIPMENT, NET		1,825			1,374
Total assets		$	46,275		$	10,326

 

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

 

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CONSOLIDATED BALANCE SHEETS)

U.S. dollars in thousands (except share data)

 

		June 30,			December 31,
		2015			2014
		Unaudited
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturity of loan		$	506		$	563
Trade payables		2,848			1,991
Other accounts payable and accrued expenses		1,846			1,793
Total current liabilities		5,200			4,347
NON-CURRENT LIABILITIES:
Loan		—			219
Accrued severance pay		149			132
Warrants to purchase Convertible Preferred Shares		—			6,072
Other accounts payable		258			208
Total non-current liabilities		407			6,631
COMMITMENTS AND CONTINGENT LIABILITIES
CONVERTIBLE PREFERRED SHARES:
Series A1-E Preferred Shares of NIS 0.01 par value - Authorized: 8,060,923 and 0 at December 31, 2014 and June 30, 2015, respectively; Issued and outstanding: 5,895,657 and 0 at December 31, 2014 and June 30, 2015, respectively; Aggregate liquidation preference of $46,694 and 0 at December 31, 2014 and June 30, 2015, respectively		—			35,669
SHAREHOLDERS’ EQUITY (DEFICIT):
Ordinary Shares of NIS 0.01 par value - Authorized: 30,689,077 and 50,000,000 at December 31, 2014 and June 30, 2015, respectively; Issued and outstanding: 502,224 and 13,581,155 at December 31, 2014 and June 30, 2015, respectively		34			1
Additional paid-in capital		91,445			2,008
Accumulated deficit		(50,811		)	(38,330		)
Total shareholders’ equity (deficit)		40,668			(36,321		)
Total liabilities and shareholders’ equity (deficit)		$	46,275		$	10,326

 

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

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

U.S. dollars in thousands (except share data)

 

		Three months ended June 30,						Six months ended June 30,
		2015			2014			2015			2014
		Unaudited						Unaudited
Operating expenses:
Research and development		$	5,429		$	3,101		$	9,838		$	5,352
Marketing		285			240			507			459
General and administrative		1,111			286			2,016			649
Total operating loss		6,825			3,627			12,361			6,460
Financial expenses (income), net		92			1,674			(11		)	1,593
Loss before taxes on income		6,917			5,301			12,350			8,053
Taxes on income		8			36			131			81
Net loss		$	6,925		$	5,337		$	12,481		$	8,134
Net loss per share:
Basic and diluted net loss per Ordinary Share		$	0.51		$	12.32		$	1.78		$	19.06
Weighted-average number of Ordinary Shares used to compute basic and diluted net loss per share		13,541,155			501,828			7,555,684			501,828

 

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

 

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STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

U.S. dollars in thousands (except share data)

 

		Ordinary Shares					Additional paid-			Accumulated			Total shareholders’ equity
		Number		Amount			in capital			deficit			(deficit)
Balance as of December 31, 2014		502,224		$	2		$	2,007		$	(38,330	)	$	(36,321	)
Exercise of options into Ordinary Shares		51,716		*) —			145			—			145
Conversion of Convertible Preferred Shares into Ordinary Shares upon IPO		7,464,320		18			47,057			—			47,075
Conversion of warrants to purchase Convertible Preferred Shares into Ordinary Shares		697,443		2			5,943			—			5,945
Conversion of warrants to purchase Convertible Preferred Shares into warrants to purchase Ordinary Shares		—		—			87			—			87
Issuance of Ordinary Shares, net of issuance costs of $5,256, upon IPO		4,700,000		12			34,684			—			34,696
Issuance of Ordinary Shares, net of underwriters’ fees of $ 98		165,452		*) —			1,308			—			1,308
Stock-based compensation		—		—			214			—			214
Net loss		—		—			—			(12,481		)	(12,481		)
Balance as of June 30, 2015 (unaudited)		13,581,155		$	34		$	91,445		$	(50,811	)	$	40,668

 

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*)                                      Represent an amount lower than $1.

 

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

 

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CONSOLIDATED STATEMENT OF CASH FLOWS

U.S. dollars in thousands

 

		Six months ended June 30,
		2015			2014
Cash flows from operating activities:
Net loss		$	(12,481	)	$	(8,134	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Stock-based compensation		214			4
Depreciation		186			65
Impairment of property and equipment		153			—
Accrued severance pay, net		(2		)	7
Amortization of discount on loan		5			5
Revaluation of fair value of warrants to purchase Convertible Preferred Shares		(40		)	1,534
Increase in other accounts receivable and prepaid expenses		(294		)	(284		)
Increase in trade payables		698			751
Increase (decrease) in other accounts payable and accrued expenses		103			(28		)
Net cash used in operating activities		(11,458		)	(6,080		)
Cash flows from investing activities:
Proceeds from maturity of investment in restricted cash		352			352
Purchase of property and equipment		(632		)	(205		)
Investment in other assets		(21		)	—
Net cash (used in) provided by investing activities		(301		)	147
Cash flows from financing activities:
Proceeds from issuance of Preferred shares and warrants, net of issuance costs		11,406			19,206
Proceeds from issuance of Ordinary Shares, net of issuance costs upon IPO		36,159			—
Proceeds from issuance of Ordinary Shares, net of underwriters’ fees		1,308			—
Repayment of loan		(281		)	(281		)
Proceeds from exercise of options into Ordinary Shares		145			—
Net cash provided by financing activities		48,737			18,925
Net increase in cash and cash equivalents		36,978			12,992
Cash and cash equivalents at the beginning of the period		6,167			2,072
Cash and cash equivalents at the end of the period		$	43,145		$	15,064
Supplemental disclosure of non-cash investing and financing activities:
Purchase of property and equipment		$	159		$	—
Conversion of Convertible Preferred Shares into Ordinary Shares		$	47,075		$	—
Conversion of Warrants to purchase Convertible Preferred Shares into Ordinary Shares		$	5,945		$	—
Non-cash deferred IPO costs		$	1,463		$	—
Conversion of warrants to purchase Convertible Preferred Shares into warrants to purchase Ordinary Shares		$	87		$	—
Cash paid during the period:
Cash paid for interest		$	19		$	34
Cash paid for taxes		$	231		$	1

 

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 1: -                   GENERAL

 

a.                             SteadyMed Ltd. (the “Company”) was incorporated and is located in Israel, commenced its operations on June 15, 2005 and, together with its wholly-owned subsidiary, SteadyMed Therapeutics, Inc. (“Inc.”), and Inc.’s wholly-owned subsidiary, SteadyMed U.S. Holdings, Inc. (“Holdings”), is a specialty pharmaceutical company focused on the development and commercialization of therapeutic product candidates that address the limitations of market-leading products in certain orphan and other well-defined high-margin specialty markets. The Company’s primary focus is to obtain approval in the US for the sale of Trevyent® for the treatment of pulmonary arterial hypertension (“PAH”). The Company is also developing two products for the treatment of post-surgical and acute pain in the home setting. Its product candidates are enabled by its proprietary PatchPump®, which is a discreet, water resistant and disposable drug administration technology that is aseptically prefilled with liquid drug at the site of manufacture and pre-programmed to deliver an accurate, steady flow of drug to a patient, either subcutaneously or intravenously.

 

Inc. and Holdings are located in the United States, and commenced operations on January 1, 2012 and March 25, 2015, respectively. The principal executive officers of the Company are located in the offices of Inc. and Holdings, and Inc.’s and Holdings’ principal business activities are to provide executive management and administrative support functions to the Company.

 

b.                             The Company had a shareholders’ equity (deficit) of $40,668 and $ (36,321) as of June 30, 2015 (unaudited) and December 31, 2014, respectively. The shareholders’ deficit as of December 31, 2014, resulted from its Convertible Preferred Shares being classified as temporary equity and the warrants to purchase Convertible Preferred Shares being classified as a non-current liability. The Convertible Preferred Shares were only redeemable upon contingent events that were not probable and the warrants included down round protection provisions. During the six months ended June 30, 2015, subsequent to the Company’s completion of its Initial Public Offering (“IPO”), the Convertible Preferred Shares and majority of the warrants to purchase Convertible Preferred Shares were converted into Ordinary Shares of the Company, par value NIS 0.01 per share (“Ordinary Shares”) and therefore classified as Shareholders’ equity (See also Note 1c).

 

Management believes that the Company’s existing capital resources will be adequate to satisfy its expected liquidity requirements at least for the next 12 months.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 1: -                   GENERAL (Cont.)

 

c.                              Initial Public Offering:

 

On March 19, 2015, a registration statement covering the public sale of 4,700,000 Ordinary Shares was declared effective by the U.S. Securities and Exchange Commission (“SEC”). Commencing on March 20, 2015, the Company’s ordinary shares began trading on the NASDAQ Stock Market operated under the ticker symbol “STDY”.

 

On March 25, 2015, the Company closed its IPO at a price of $8.50 per share when the aggregate net proceeds received by the Company from the offering were $34,696, net of underwriting discounts and commissions and offering expenses payable by the Company.

 

On April 22, 2015, the Company’s underwriters exercised a portion of their overallotment option pursuant to which they purchased 165,452 Ordinary Shares of the Company for $1,308 net of underwriters’ fees and commissions.

 

Upon the closing of the IPO, all shares of the Company’s outstanding Convertible Preferred Shares were automatically converted into 7,464,320 Ordinary Shares,

 

As of December 31, 2014, there were 711,120 outstanding warrants exercisable into Convertible Preferred Shares. Prior to the IPO, all but 10,191 warrants were exercised into Ordinary Shares. Of the exercised warrants, 295,697 were exercised for cash, and 405,232 were exercised on a cashless basis, resulting in the net exercise of 401,746 warrants (and 3,486 warrants were cancelled). Upon the closing of the IPO, the 10,191 warrants outstanding were automatically converted into warrants to purchase Ordinary Shares.

 

d.                             On June 28, 2015, the Company entered into an Exclusive License and Supply Agreement (the “Agreement”) with Cardiome Pharma Corp. and Correvio International Sarl (hereinafter collectively referred to as “Cardiome”) pursuant to which an exclusive royalty bearing license to certain of the Company’s patents relating to Trevyent (“License”), was granted to Cardiome in order to commercialize Trevyent, if approved for the treatment of PAH in certain regions outside the US, specifically Europe, Canada and the Middle East (the “Regions”). The Company is obligated to perform services over the next 18 months resulting in certain deliverables to Cardiome. Cardiome is responsible for the regulatory submissions and approvals and commercialization of Trevyent in the Regions. In addition, the Company has agreed to provide supply services to Cardiome upon commercialization of Trevyent® in the Regions (“Supply Services”).

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

The Agreement provides for an upfront payment of $3 million $7.25 million in connection with the achievement of certain regulatory milestones by the Company, $2.0 million in connection with the achievement of a sales milestone by Cardiome, and a scaling royalty ranging from the low teens to mid-twenty percent on future Trevyent sales by Cardiome in the Regions.  In addition, there is a transfer price on finished goods to be supplied by the Company as part of the Supply Services.

 

NOTE 2: -                   UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, “Interim Financial Statements” and the rules and regulations for Form 10-Q of the SEC. Pursuant to those rules and regulations, the Company has condensed or omitted certain information and footnote disclosure it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). In the opinion of management, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) considered necessary for a fair presentation of the Company’s consolidated financial position as of June 30, 2015. Consolidated results of operations and consolidated cash flows for the six months ended June 30, 2015 and 2014, have been included. The results for the six months ended June 30, 2015, are not necessarily indicative of the results that may be expected for the year ended on December 31, 2015. The accompanying Consolidated Financial Statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2014 included in the Company’s prospectus filed pursuant to Rule 424(b)(4) on March 20, 2015 with the SEC.

 

NOTE 3: -                   SIGNIFICANT ACCOUNTING POLICIES

 

The significant accounting policies applied in the audited annual consolidated financial statements of the Company as disclosed in the Company’s Annual Report for the fiscal year ended December 31, 2014 included in the prospectus filed with the SEC on March 19, 2015 (“Prospectus”) pursuant to Rule 462(b) under the Securities Act of 1933, as amended (“Securities Act”), are applied consistently in these unaudited interim consolidated financial statements.

 

a.           Revenue recognition:

 

The Company generates revenue from the Agreement described in Note 1d. Pursuant to the Agreement, the Company identified the following performance deliverables at the inception of the Agreement: (i) an exclusive royalty bearing license to certain of the Company’s patents related to Trevyent, which was

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 3:-                      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

transferred immediately upon signing of the Agreement, (ii)  certain Services expected to be performed over a period until December 31, 2016 and (iii) Supply Services of Trevyent product upon commercialization.

 

The Company recognizes revenue in accordance with ASC 605-25, “Multiple-Element Arrangements” pursuant to which each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has “stand-alone value” to the customer. The arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable which is based on its vendor specific objective evidence (‘‘VSOE’’) if available, third party evidence (‘‘TPE’’) if VSOE is not available, or estimated selling price (‘‘ESP’’) if neither VSOE nor TPE is available.

 

The License and Services are determined to be one unit of accounting since the License has no value to Cardiome on a stand-alone basis. The Supply Services are also determined to be a unit of accounting.  The consideration allocated to the License and Services will be recognized on a straight-line basis over the performance period of the Services estimated to be December 31, 2016.

 

Contingent payments related to milestones will be recognized immediately upon satisfaction of the milestone and contingent payments related to royalties will be recognized in the period that the related sales have occurred.

 

Revenues from product sales will be recognized when delivery has occurred, persuasive evidence of an arrangement exists, the vendor’s fee is fixed or determinable, no future obligation exists and collectability is reasonably assumed.

 

For the six months period ended June 30, 2015, no revenues have been recognized from the Agreement as the amount would be de minimis.

 

b.                             In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to receive in exchange for those goods and services. Insurance contracts do not fall within the scope of this

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 3:-                      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

ASU. The effective date of ASU 2014-09 is for annual reporting periods beginning after December 15, 2017. In July 2015, the FASB decided to defer by one year the effective date of this ASU. The ASU has not yet been adopted and will not have a material impact on the Company’s financial position, cash flows or results of operations.

 

c.                              In April 2015, the FASB Issued ASU 2015-03, Interest-Imputation of Interest. ASU 2015-03 reduces the complexity of disclosing debt issuance costs and debt discount and premium on the balance sheet by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The effective date of ASU 2015-03 is for interim and annual reporting periods beginning after December 15, 2015. The ASU has not yet been adopted and will not have a material impact on the Company’s financial position, cash flows or results of operations.

 

NOTE 4: -                   LOAN

 

On February 20, 2013, Inc. signed a Loan and Security Agreement (“Agreement”) with a commercial bank (“Bank”) pursuant to which $1,500 (“Loan”) was provided at the closing date at a variable annual rate equal to the greater of 5.25% or the three-year constant maturity treasury rate plus 5%. From September 30, 2013, the outstanding Loan will be repaid in 32 equal installments through May 22, 2016 (“Maturity Date”). On February 15, 2015, the Agreement was amended to add Holdings as a co-borrower (collectively, Inc. and Holdings are “Borrower”).

 

Under the Agreement, the Borrower must maintain at all times through the Maturity Date a cash balance at the lending Bank of not less than 125% of the outstanding loan principal. In addition, the Borrower is permitted to transfer cash to the Company from time to time however, at all times at least 90% of the aggregate amount of cash of the consolidated entities must be held by the Borrower. As of December 31, 2014 and June 30, 2015, the Company has met all the aforementioned financial covenants.

 

As part of the Agreement, the Company issued the Bank warrants to purchase 7,332 shares of Series D Preferred Shares at an exercise price of $6.14 per Preferred D Share. The warrant has an exercise period which is the earliest of ten years after February 20, 2013, consummation of a qualified IPO as determined for such warrants or the automatic conversion of Convertible Preferred Shares into Ordinary Shares as defined in the applicable AOA. Such warrants have been exercised on a cashless basis as of June 30, 2015.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 5: -                   WARRANTS TO PURCHASE CONVERTIBLE PREFERRED SHARES

 

The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. There have been no transfers between fair value measurements levels during the six months ended June 30, 2015.

 

The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

 

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2: Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

The Company accounts for such warrants (each of which include weighted average anti-dilution protection) as a liability according to the provisions of ASC 815-40, “Derivatives and Hedging - Contracts in Entity’s Own Equity”. The Company measures the warrants at fair value by using Monte Carlo Cliquent Option Pricing Model in each reporting period until the warrants are exercised or expired, with changes in the fair values being recognized in the Company’s statement of comprehensive loss as financial income or expense, net.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 5: -                   WARRANTS TO PURCHASE CONVERTIBLE PREFERRED SHARES (Cont.)

 

The changes in Level 3 liabilities associated with warrants to purchase Convertible Preferred Shares are measured at fair value on a recurring basis. The following tabular presentation reflects the components of liability associated with warrants as of June 30, 2015 (unaudited):

 

		Fair value of warrants to purchase Convertible Preferred Shares
Balance at December 31, 2014		$	6,072
Revaluation of fair value of warrants to purchase Convertible Preferred Shares		(40		)
Classification to Equity upon conversion of warrants *)		(5,945		)
Classification to Equity upon automatic conversion into warrants to purchase Ordinary Shares **)		(87		)
Balance at June 30, 2015 (unaudited)		$	—

 

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*)                   As of December 31, 2014, there were 711,120 outstanding warrants exercisable into Convertible Preferred Shares. Prior to the IPO, all but 10,191 warrants were exercised into Ordinary Shares. Of the exercised warrants, 295,697 were exercised for cash, and 405,232 were exercised on a cashless basis, resulting in the net exercise of 401,746 warrants (and 3,486 warrants were cancelled). Upon the closing of the IPO, the 10,191 warrants outstanding were automatically converted into warrants to purchase Ordinary Shares.

 

**)            Classification of 10,191 warrants to purchase Convertible Preferred Shares converted into 10,191 warrants to purchase Ordinary Shares.

 

NOTE 6: -                   COMMITMENTS AND CONTINGENT LIABILITIES

 

a.               The Company’s lease agreement for its Israeli offices had a 3-year term ending June 30, 2015. The lease was amended to extend the term by additional 6 months, and on July 22, 2015, the Company exercised an option to extend the lease term for an additional 24 months ending, December 31, 2018. Inc.’s lease agreement for its U.S. offices had a 17-month term ending February 28, 2015 continued on a month-to-month basis through July 31, 2015. On May 1, 2015, Inc. signed a lease agreement

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 6: -                   COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

 

                        for new office space in San Ramon, California for a period of three years, which term was increased to four years in an amendment dated May 29, 2015.

 

b.               During the years 2005- 2010 the Company received grants under the royalty-bearing programs administered by the Office of the Chief Scientist (“OCS”), and from the Incubator, RAD BioMed Ltd. In May 2015, the OCS approved the Company’s request to transfer manufacturing rights outside of Israel, noting that the Company would be required to pay an increased royalty rate without providing any specifics. Therefore, if income will be generated from the funded research program, the Company will be obligated to pay royalties on such revenue at a rate between 4% and 4.5% up to between 150% to 300% of the amount received, linked to the LIBOR. As of June 30, 2015 the total amount of grants received from the OCS and the Incubator is $737 including interest. The revenue under the agreement with Cardiome will be subjected to royalties under these programs. In the event that intellectual property rights are deemed to be transferred out of Israel, the grants received from the OCS and the Incubator may become a loan to be repaid immediately at up to 600% of the grants amounts. Currently, the Company’s management believes no intellectual property has been transferred out of Israel and disclosure of the Company’s know how is made solely in connection with the transfer of manufacturing rights of the Company’s products to subcontractors Accordingly, no provision has been recorded.

 

NOTE 7: -                   SHAREHOLDERS’ EQUITY (DEFICIT)

 

a.                             On March 1, 2015, the Company effected a 7.75 for 1 forward split of its Ordinary Shares, by way of issuance and distribution of bonus shares without a change in nominal value of the Company’s outstanding Ordinary Shares.

 

For accounting purposes, this transaction was recorded as a share split and accordingly, all Shares, warrants to purchase Convertible Preferred Shares, options to purchase Ordinary Shares and loss per share amounts have been adjusted to give retroactive effect to this Share Split for all periods presented in these consolidated financial statements. Any fractional shares resulting from the Share Split will be rounded up to the nearest whole share.

 

b.                             On January 24, 2015, the Company signed an addendum to the Series E Preferred Share purchase agreement to raise additional funds of $11,406, net of fees and expenses. Under the addendum, the Company issued 1,445,966 Series E Convertible Preferred Shares to its existing and new investors for a price of $8.49 per share.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 7: -                   SHAREHOLDERS’ EQUITY (DEFICIT) (Cont.)

 

As described in Note 1c, on March 19, 2015, the Company completed its IPO by raising gross consideration of $40 million for issuance of 4,700,000 Ordinary Shares for a price of $8.50 per share. The issuance costs in respect of the IPO transaction amounted to $5.2 million.

 

c.                              On April 22, 2015 the Company’s underwriters exercised their overallotment option pursuant to which they purchased 165,452 Ordinary Shares of the Company for $1,308 net of underwriters’ fees and commissions.

 

d.                             Stock based compensation:

 

On June 18, 2009, a Stock Option Plan (the “2009 Plan”) was adopted by the Board of Directors of the Company, under which options to purchase up to 55,971 Ordinary Shares have been reserved. Such pool was increased over the years and as of December 31, 2014, options to purchase up to 978,655 Ordinary Shares were authorized. The 2009 Plan was adopted in accordance with the amended sections 102 and 3(i) of Israel’s Income Tax Ordinance. Under the 2009 Plan, options to purchase Ordinary Shares of the Company may be granted to employees, advisors, directors, consultants and service providers of the Company or any subsidiary or affiliate. The default vesting schedule is up to three years, subject to the continuation of employment or service. Each option may be exercised into Ordinary Shares during a period of seven years from the date of grant, unless a different term is provided in the option agreement. On April 30, 2013, the 2013 Stock Incentive Sub Plan (the “2013 Sub Plan”) was adopted by the Board of Directors of the Company, which set forth the terms for the grant of stock awards to Inc.’s employees or US non employees. On January 25, 2015, the Board of Directors reserved an additional 1,072,879 Ordinary Shares out of its authorized and unissued share capital for future option grants under the 2009 Plan.

 

On February 20, 2015, the Company’s Board of Directors approved the replacement of the 2009 Plan and 2013 Sub Plan by adopting the Amended and Restated 2009 Stock Incentive Plan. This action was approved the shareholders on March 1, 2015. Under the Amended and Restated 2009 Stock Incentive Plan, the options may be exercised into Ordinary Shares during a period of ten years from the date of grant unless a different term is provided in the option agreement.

 

On July 7, 2014, the Company’s Board of Directors approved to reduce the exercise price of all outstanding options which were previously granted to certain employees at an exercise price which exceeded $3.61 per share down to $3.61 per share, representing the underlying fair value of the Ordinary Share at that date. The Company accounted for the reduction of the options’ exercise price pursuant to ASC 718 as a modification. Accordingly, additional

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 7: -                   SHAREHOLDERS’ EQUITY (DEFICIT) (Cont.)

 

compensation of $49 was calculated as the fair value of the modified award in excess of the fair value of the original award measured immediately before its terms have been modified based on current circumstances and recorded incremental fair value as an immediate or future expense based on the vesting schedule of the relevant options. During the year ended December 31, 2014, the Company recorded out of the aforementioned amount compensation cost of $44 as result of the above modification. During the six months ended June 30, 2015, the Company recorded an additional $4 as result of the above modification.

 

On January 24, 2015 and June 10, 2015, the Company’s Board of Directors approved grants to employees of 248,798 and 5,813 options to purchase Ordinary Shares at an exercise price of $5.84 and $7.45 per share, respectively.

 

The weighted average grant date fair value of options granted during the six months ended June 30, 2015 was $2.91.

 

As of June 30, 2015, the Company has 876,788 Ordinary Shares available for future grant under the 2009 Plan.

 

As of June 30, 2015, the total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was $1,172, which is expected to be recognized over a weighted average period of approximately 2.5 years.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 7: -                   SHAREHOLDERS’ EQUITY (DEFICIT) (Cont.)

 

Transactions related to the grant of options to employees under the Amended and Restated 2009 Stock Incentive Plan during the six months ended June 30, 2015 (unaudited), were as follows:

 

		Number of		Weighted average exercise price		Weighted average remaining contractual life		Aggregate intrinsic value
		Options		$		(years)		$
Options outstanding at January 1, 2015		919,744		3.54		5.67		2,183
Options granted		254,611		5.88
Options exercised		(51,716	)	2.86
Options outstanding at end of the period		1,122,639		4.10		5.48		1,506
Options vested and expected to be vested at end of the period		1,106,348		4.63		5.47		1,487
Exercisable at end of the period		465,271		4.82		4.59		821

 

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the deemed fair value of the Company’s ordinary shares on the last day of the six months period ended June 30, 2015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2015. This amount is impacted by the changes in the fair market value of the Company’s shares.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 7: -                   SHAREHOLDERS’ EQUITY (DEFICIT) (Cont.)

 

The total compensation cost related to all of the Company’s equity-based awards, recognized during the three and six months ended June 30, 2015 and 2014 (unaudited) was comprised as follows:

 

		Three months ended June 30,						Six months ended June 30,
		2015			2014			2015			2014
		Unaudited
Research and development		$	26		$	—		$	50		$	1
Marketing		*)			—			4			—
General and administrative		97			2			160			3
		$	123		$	2		$	214		$	4

 

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*) Represent an amount lower than $1.

 

NOTE 8: -                   SELECTED STATEMENTS OF COMPREHENSIVE LOSS

 

a.            Financial expenses (income), net:

 

		Three months ended June 30,						Six months ended June 30,
		2015			2014			2015			2014
		Unaudited
Interest expense and bank fees		$	15		$	23		$	41		$	41
Revaluation of fair value of warrants to purchase Convertible Preferred Shares		—			1,647			(40		)	1,534
Foreign currency translation adjustments		77			4			(12		)	18
		$	92		$	1,674		$	(11	)	$	1,593

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

 

NOTE 8: -                   SELECTED STATEMENTS OF COMPREHENSIVE LOSS (Contd.)

 

b.                    The loss and the weighted average number of shares used in computing basic and diluted net loss per share is as follows:

 

		Three months ended June 30,						Six months ended June 30,
		2015			2014			2015			2014
		Unaudited
Numerator:
Net loss		$	6,925		$	5,337		$	12,481		$	8,134
Dividends accumulated for the period (*)		—			845			988			1,432
Net loss available to shareholders of Ordinary shares		$	6,925		$	6,182		$	13,469		$	9,566
Denominator:
Weighted average number of Ordinary Shares used in computing basic and diluted net loss per share		13,541,155			501,828			7,555,684			501,828

 

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(*) The net loss used for the computation of basic and diluted net loss per share include the compounded dividend of eight percent per annum which shall be distributed to shareholders in case of distributable assets determined in the applicable article of association under the liquidation preference right prior to the closing of the IPO event as mentioned in Note 1c.

 

Convertible securities such as warrants to purchase Series Preferred A2, D, E1 Shares, Series Preferred A1, A2, B, C, D, E Shares and options to grantees under the Amended and Restated 2009 Stock Incentive Plan, have not been taken into account due to their anti-dilutive effect.

 

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

 

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2014, included in our prospectus dated March 19, 2015, filed with the U.S. Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Prospectus”).

 

Special note regarding forward-looking statements

 

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Overview

 

We are a specialty pharmaceutical company focused on the development and commercialization of therapeutic product candidates that address the limitations of market-leading products in certain orphan and other well-defined, high-margin specialty markets. Our primary focus is to obtain approval for the sale of Trevyent® for the treatment of pulmonary arterial hypertension, or PAH in the United States. We are also developing two product candidates for the treatment of post-surgical and acute pain in the home setting, which we call our At Home Patient Analgesia products or AHPA. Our product candidates are enabled by our proprietary PatchPump, which is a discreet, water-resistant and disposable drug administration technology that is aseptically pre-filled with liquid drug at the site of manufacture and pre-programmed to deliver an accurate, steady flow of drug to a patient, either subcutaneously or intravenously.

 

In June 2015, we entered into an exclusive license and supply agreement with Cardiome Pharma Corp. and Correvio International Sarl (collectively, “Cardiome”), pursuant to which we granted to Cardiome an exclusive license to develop and commercialize Trevyent in Europe, Canada, and the Middle East. In consideration for the exclusive license, we received a non-refundable up-front payment of $3.0 million. Additionally, we are eligible to receive (i) future regulatory, third-party payor reimbursement and commercialization milestone payments of up to $9.25 million that do not require performance by us, (ii) scaling royalties ranging from the low teens to the mid-twenty percent on future Trevyent sales by Cardiome and (iii) a transfer price (based on a cost-plus margin) on our supply of Trevyent finished product to Cardiome.

 

Other than our arrangement with Cardiome, we own global development and commercialization rights to Trevyent. If approved by the United States Food and Drug Administration (“FDA”), we expect to commercialize Trevyent for PAH in the United States with a commercial infrastructure of approximately 25 individuals targeting the approximately 200 PAH treatment centers in the United States.

 

We have not received regulatory approvals to sell Trevyent or any of our other product candidates, and we have not generated any sales or licensing revenue through June 30, 2015. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we continue to develop and seek regulatory approval for our product candidates.

 

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Prior to our Initial Public Offering (“IPO”), we primarily financed our operations, including the development of Trevyent and the scaling up of manufacturing, through the sale of Convertible Preferred Shares. All of our Convertible Preferred Shares were automatically converted into Ordinary Shares upon the closing of our IPO on March 25, 2015.

 

First Six Months of 2015 and Other Recent Highlights

 

On January 24, 2015, the Company signed an addendum to the Series E Convertible Preferred Share purchase agreement to raise additional funds of $11.4 million, net of fees and expenses. Under the addendum, the Company issued 1,445,966 Series E Convertible Preferred Shares to its existing and new investors for a price of $8.49 per share.

 

On March 19, 2015, our Registration Statement on Form S-1 relating to our IPO of Ordinary Shares became effective. Our IPO closed on March 25, 2015 at which time we sold 4,700,000 Ordinary Shares to the underwriters in the IPO. We received cash proceeds of approximately $34.7 million from the IPO, net of underwriting discounts and commissions and expenses paid by us.  On April 22, 2015, the underwriters in the IPO exercised a portion of their over-allotment option and purchased an additional 165,462 Ordinary Shares pursuant to which we received net cash proceeds of approximately $1.3 million.

 

Financial Overview

 

Summary

 

The financial data is based on the consolidated financials of SteadyMed Ltd. (“Ltd.”), its wholly-owned subsidiary, SteadyMed Therapeutics, Inc. (“Inc.”), and Inc.’s wholly owned subsidiary, SteadyMed U.S. Holdings, Inc. (“Holdings”). Ltd. is an Israeli incorporated company with offices in Rehovot, Israel. Inc. and Holdings are Delaware corporations with offices in San Ramon, California, USA. Ltd. is predominantly engaged in research and development activities and Inc. and Holdings provide the executive management, treasury and administrative support functions.

 

We have not generated net income from operations, and, at June 30, 2015, we had an accumulated deficit of $ 50.8 million, primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments and research and development payments in connection with existing and potential future strategic partnerships, we have not yet generated any revenue through June 30, 2015. While Trevyent is a late-stage development candidate, it has not been approved by the U.S. Food and Drug Administration (“FDA”). Our two AHPA programs are at an earlier stage of development and may never be successfully developed or commercialized. Accordingly, we expect to incur significant and increasing losses from operations for the foreseeable future as we seek to obtain FDA approval of Trevyent and advance our two AHPA programs through development, and there can be no assurance that we will ever generate significant revenue or profits.

 

Revenue Recognition

 

Trevyent, our lead product candidate, has not been approved for commercialization and we have not received any revenue through June 30, 2015 in connection with the sale or license of Trevyent or our PatchPump technology platform. See also Note 3a to the consolidated financial statements for details on the Exclusive License and Supply Agreement with Cardiome signed on June 28, 2015 enclosed in this report in Part 1 Item 1.

 

Operating Expenses

 

Our current operating expenses consist of three components: research and development expenses, marketing expenses and general and administrative expenses.

 

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Research and Development Expenses

 

Our research and development expenses consist of costs incurred in connection with the development of our product candidates and technology platform, including:

 

·              Fees incurred to subcontractors, consultants and advisors in connection with research and development of our PatchPump technology, implementing infrastructure for manufacturing, pre-clinical and clinical studies and regulatory compliance;

·              Salaries and related expenses; and

·              Direct and indirect expenses required for operation and maintenance of laboratories and research and development offices, such as supplies and material, rent, utilities, depreciation and other expenses.

 

We expense research and development costs as they are incurred. The following table discloses the breakdown of research and development expenses for the three and six month periods ended June 30, 2015 and 2014.

 

		Three months ended June 30,						Six months ended June 30,
		2015			2014			2015			2014
		Unaudited
Cost of third party subcontractors and material		$	4,435		$	2,413		$	7,867		$	3,922
Salaries and related personnel		554			478			1,272			1,025
Travel		102			102			189			190
Depreciation and impairment of fixed assets		256			34			338			65
Overhead		82			74			172			150
Total		$	5,429		$	3,101		$	9,838		$	5,352

 

We expect research and development expenses to be our largest category of operating expenses and to increase as we continue our planned pre-clinical and clinical trials for our other product candidates, bupivacaine AHPA and ketorolac AHPA.

 

Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success or failure of each product candidate, as well as an ongoing assessment as to each product candidate’s commercial potential. We will need to raise additional capital, obtain additional bank or other loans or grants or receive upfront and milestone payments from corporate partners in the future in order to complete the development and commercialization of our product candidates bupivacaine AHPA and ketorolac AHPA.

 

Marketing Expenses

 

Marketing expenses consist primarily of salaries and related costs, market awareness campaigns, market research, trade shows, advertising and press releases, as well as facility costs not otherwise included in research and development and general and administrative expenses. In the future, marketing expenses are expected to increase resulting from Trevyent launch preparation.

 

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General and Administrative Expenses

 

General and administrative expenses consist principally of salaries and related costs for personnel in executive and administrative positions, facility costs not otherwise included in research and development and marketing expenses, and professional fees for finance, legal, audit and accounting services.

 

We closed our IPO on March 25, 2015 and we anticipate that as a public company we will incur greater expenses, including increased payroll, legal and compliance, accounting, insurance and investor relations costs.

 

Financial Expenses (Income), Net

 

Financial income, net consists mainly of the following:

 

·              Revaluation of fair value of warrants to purchase Convertible Preferred Shares granted to investors and others which are re-measured at each reporting period at fair value until they are exercised or expired. The majority of these warrants were voluntarily converted into Ordinary Shares during the six months ended June 30, 2015 and the remaining were automatically converted into warrants to purchase Ordinary Shares simultaneously with the closing of our IPO at March 25, 2015 (See also Note 1c and Note 5 to the consolidated financial statements enclosed in this report in Part 1 Item 1).

·              Interest on a $1.5 million loan from a commercial bank received in February 2013 which will be repaid by May 22, 2016 in monthly equal installments of principal in addition to interest on the outstanding loan balance.

·              Gains and losses from foreign currency translation adjustments.

 

For more information refer to Note 8a to the consolidated financial statements enclosed in this report in Part 1 Item 1.

 

Results of Operations

 

Comparison of the Three and Six Months periods Ended June 30, 2015 and 2014

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
		Unaudited						Unaudited
Operating expenses:
Research and development		$	5,429		$	3,101		$	9,838		$	5,352
Marketing		285			240			507			459
General and administrative		1,111			286			2,016			649
Total operating loss		6,825			3,627			12,361			6,460
Financial expenses (income), net		92			1,674			(11		)	1,593
Loss before taxes on income		6,917			5,301			12,350			8,053
Taxes on income		8			36			131			81
Net loss		$	6,925		$	5,337		$	12,481		$	8,134

 

Research and Development Expenses

 

Research and development expenses were $5.4 million during the three months ended June 30, 2015 compared to $3.1 million during the same period in 2014, which reflects an increase of $2.3 million, or 74%. This increase was principally due to a substantial increase in sub-contractor services in the Trevyent development program from $2.4 million to $4.4 million.

 

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Research and development expenses were $9.8 million during the six months ended June 30, 2015 compared to $5.4 million during the same period in 2014, which reflects an increase of $4.4 million, or 84%. This increase was principally due to a substantial increase in sub-contractor services in the Trevyent development program from $3.9 million to $7.9 million.

 

Marketing Expenses

 

Marketing expenses were $0.3 million and $0.2 million during the three months ended June 30, 2015 and 2014, respectively.

 

Marketing expenses were $0.5 million during each of the six month periods ended June 30, 2015 and 2014.

 

General and Administrative Expenses

 

General and administrative expenses were $1.1 million during the three months ended June 30, 2015, compared to $0.3 million during the same period in 2014, an increase of $0.8 million, or 288%. The increase was principally due to an increase in (i) salaries and related expenses from $0.1 million to 0.3 million (including the conversion of our CFO from a consultant to a full time employee) and (ii) finance consulting, investor relations and legal services from $0.1 million to $0.5 million in support of operating in a public company environment.

 

General and administrative expenses were $2 million during the six months ended June 30, 2015, compared to $0.65 million during the same period in 2014, an increase of $1.3 million, or 211%. The increase was principally due to an increase in (i) salaries and related expenses from $0.3 million to $0.6 million (including the conversion of our CFO from a consultant, to a full time employee) and finance consulting, investor relations and legal services from $0.3 million to $1 million in support of preparations for our IPO and operating in a public company environment.

 

Financial Expenses (Income), Net

 

Financial expenses, net, amounted to $0.092 million during the three months ended June 30, 2015 was mainly due to a $0.076 million loss from foreign currency translation adjustments and $0.010 million of interest expense on bank debt and bank fees. Financial expenses, net, amounted to $1.67 million during the three months ended June 30, 2014 was mainly due to expense from revaluation of fair value of the warrants to purchase Convertible Preferred Shares of $1.65 million and interest on bank debt and bank fees of $0.02 million.

 

Financial income, net amounted to $0.01 million during the six months ended June 30, 2015 was mainly due to $0.04 million of income from revaluation of the fair value of the warrants to purchase Convertible Preferred Shares and $0.01 million gain from foreign currency translation adjustments offset by $0.04 million of interest expense on bank debt and bank fees. Financial expenses, net, amounted to $1.6 million during the six months ended June 30, 2014 was mainly due to expense from revaluation of fair value of the warrants to purchase Convertible Preferred Shares of $1.5 million and interest expense on bank debt and bank fees of $0.1 million.

 

Taxes on Income

 

Taxes on income principally consists of the taxes incurred as a result of the implementation of the cost plus services agreement with Inc. During the three months ended June, 2015 and 2014, our tax accrual was immaterial.. For the six months ended June 30, 2015, the accrual increased from $0.08 million to $0.13 million compared to same period in 2014, resulting from an increase in Inc.’s activities in support of the operations of Ltd.

 

Loss for the Six Months Periods

 

Our net loss increased by $4.3 million or 53% to $12.3 million during the six months ended June 30, 2015 compared to $8.1 million during the six months ended June 30, 2014. The increase was principally due to a significant increase in our research and development expenses for Trevyent.

 

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Cash Flows

 

The tables below set forth our significant sources and uses of cash for the periods set forth below.

 

Comparison of the Six Months Ended June 30, 2015 and 2014

 

		Six months ended June 30,
		2015			2014
		Unaudited
Net cash provided by (used in):
Operating activities		$	(11,458	)	$	(6,080	)
Investing activities		(301		)	147
Financing activities		48,737			18,925
Net increase in cash and cash equivalents		$	36,978		$	12,992

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities of $11.5 million during the six months ended June 30, 2015 was primarily a result of a net loss of $12.5 million and increase in other accounts receivable and prepaid expenses of $0.3 million offset by increase in trade payable of $0.7 million, increase in other accounts payable and accrued expenses of $ 0.1 million, stock based compensation expenses of $0.2 million and depreciation and impairment of fixed assets of $0.3 million. Net cash used in operating activities of approximately $6 million during the six months ended June 30, 2014 was primarily a result of a net loss of $8.1 million and increase in other accounts receivable and prepaid expenses of $0.3 million, offset by a revaluation of a fair value of warrants to purchase convertible preferred shares of $1.5 million and increase in trade payables of $0.8 million.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities of approximately $0.3 million during the six months ended June 30, 2015 consisted of investment in property and equipment in the amount of $0.6 million offset by a decrease in restricted cash of $0.3 million related to a loan from a commercial bank. Net cash provided by investing activities of approximately $0.14 million during the six months ended June 30, 2014 consisted of decrease in restricted cash of $0.35 million related to a loan from a commercial bank offset by investment in property and equipment in the amount of $0.2 million.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities of approximately $48.7 million during the six months ended June 30, 2015 consisted of approximately $36.2 million net proceeds from our IPO, $1.3 million net proceeds from exercise of overallotment option by the underwriter, $11.4 million net proceeds from issuance of Series E Convertible Preferred Shares and $0.1 million proceeds from exercise of options into Ordinary Shares offset by repayment of loan from a commercial bank of $0.3 million. Net cash provided by financing activities of approximately $18.9 million during the six months ended June 30, 2014 consisted primarily of approximately $19.2 million proceeds from issuance of Series E Convertible Preferred Shares and warrants, offset by repayment of loan from a commercial bank of $0.3 million.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

At June 30, 2015, we had approximately $43.1 million in cash and cash equivalents (excluding restricted cash of $0.67 million).

 

We have incurred losses and cumulative negative cash flows from operations since our inception in June 2005 through June 30, 2015 and we had an accumulated deficit of approximately $50.8 million as of June 30, 2015. We anticipate that we will continue to incur net losses for the foreseeable future as we continue the

 

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development and potential commercialization of Trevyent and our AHPA product candidates and incur additional costs associated with being a public company.

 

Management estimates that the Company has sufficient liquidity resources to continue its planned activities for at least the next 12 months.

 

Private Placement Rounds

 

Since inception, we have financed our operations primarily through private placements of Convertible Preferred Shares (including issuance of warrants to purchase Convertible Preferred Shares), receiving aggregate net proceeds totaling $88 million as of June 30, 2015.

 

Initial Public Offering (IPO)

 

On March 25, 2015, we completed our IPO and issued 4,700,000 Ordinary Shares at an initial offering price to the public of $8.50. We received net proceeds from the IPO of approximately $34.7 million, after deducting underwriting discounts and commissions of approximately $2.8 million and expenses of approximately $2.4 million. On April 22, 2015, the Company’s underwriters exercised their overallotment option pursuant to which they purchased 165,452 Ordinary Shares of the Company for $1.3 million net of underwriters’ fees and commissions of $0.098 million.

 

Loan from a Commercial Bank

 

On February 20, 2013, we signed a Loan and Security Agreement (the “Agreement”) with a commercial bank (“Bank”) in an amount of $3.0 million (the “Loan”) pursuant to which $1.5 million was funded at the closing date. On February 15, 2015, the Agreement was amended to add Holdings as a co-borrower under the Agreement (collectively, Inc and Holdings are the “Borrower”). The Loan bears interest, on the outstanding daily balance thereof, at a variable annual rate equal to the greater of 5.25% or the three-year constant maturity treasury rate plus 5.00%. Loan interest is paid in 39 installments from March 20, 2013 through May 22, 2016 (the “Maturity Date”) and loan principal is being repaid in 32 equal installments from October 20, 2013 through the Maturity Date. The total interest that will be paid over the period until the Maturity Date is approximately $0.167 million.Under the Agreement, the Borrower must maintain at all times through the Maturity Date a cash balance at the lending Bank of not less than 125% of the outstanding loan principal. In addition, the Borrower is permitted to transfer cash to the Company from time to time however, at all times at least 90% of the aggregate amount of cash of the consolidated entities must be held by the Borrower.

 

In addition, under the Agreement, the Borrower has the right to early prepayment of the outstanding Loan amount, including the unpaid and accrued interest, for a fee of 2.5% of the outstanding balance of the Loan.

 

According to the Agreement, the Bank received a first priority security interest on all of the Company’s assets, excluding intellectual property. Furthermore, the Borrower agreed not to pledge the intellectual property to any third party.

 

As part of the Agreement, the Company issued the Bank warrants to purchase 7,332 shares of Series D Convertible Preferred Shares at an exercise price of $6.14 per Preferred D Share. On March 16, 2015, these warrants were converted through a cashless settlement basis into 3,872 Ordinary Shares.

 

Future Funding Requirements

 

Through June 30, 2015, we have not generated any revenue, although we will be recognizing licensing revenue from the Cardiome arrangement beginning in the third quarter of 2015. We do not know when, or if, we will generate any revenue from sales of our products. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of Trevyent. At the same time, we expect our expenses to increase in connection with our ongoing development activities, particularly as we proceed with preparations to launch Trevyent, and continue the development and seek regulatory approval for, our AHPA product candidates.

 

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We expect to incur additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations.

 

Based on our forecasted expenses, we believe we have enough cash to last us for at least the next 12 months. If we are unable to obtain additional capital resources during 2016, we may be unable to continue activities, absent a material alteration in our business plans and our business might fail.

 

Our future capital requirements will depend on many factors, including:

 

·              The outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals for Trevyent;

·              The clinical outcomes, cost and timelines for developing the AHPA product candidates and any other product candidates that we decide to pursue beyond Trevyent;

·              The costs associated with securing and establishing commercialization and manufacturing capabilities;

·              Market acceptance of our product candidates;

·              The costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;

·              Our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

·              Our need and ability to hire additional management and scientific and medical personnel;

·              The effect of competing technological and market developments;

·              Our need to implement additional internal systems and infrastructure, including financial and reporting systems; and

·              The economic and other terms, timing and success of any collaboration, licensing, distribution or other arrangements into which we may enter in the future.

 

Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our shareholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, commercialization, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. There can be no assurance that such additional funding, if available, can be obtained on terms acceptable to us. If we are unable to obtain additional financing, future operations would need to be scaled back or discontinued.

 

Government Grants from the Office of the Chief Scientist and Incubator

 

During the years 2005- 2010 the company received grants under the royalty-bearing programs administered by the Office of the Chief Scientist (“OCS”), and from the Incubator, RAD BioMed Ltd. In Israel. The requirements and restrictions for such grants are found in the Encouragement of Research and Development Law, 5744-1984, and related regulations or, collectively, the R&D Law.

 

In May 2015, the OCS approved the Company’s request to transfer manufacturing rights outside of Israel, noting that the Company would be requested to pay an increased royalty rate without providing any specifics. When revenues are generated from the funded research program, such as revenues from the Cardiome arrangement, the Company will be committed to pay royalties on such revenue at a rate between 3% and 5% up to between 150% to 300% of the amount received, linked to the LIBOR. As of June 30, 2015 the total amount of grants received from the OCS and the Incubator is $0.737 million including interest.

 

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In the event that intellectual property rights are deemed to be transferred out of Israel, the grants from the OCS and the Incubator may become loans to be repaid immediately at up to 600% of the grant amounts. Currently, the Company’s management believes no intellectual property has been transferred out of Israel and disclosure of the Company’s know how is made solely in connection with the transfer of manufacturing rights of the Company’s products to subcontractors. Accordingly, no provision has been recorded.

 

In addition, we must abide by other restrictions associated with receiving grants under the R&D Law that continue to apply following repayment to the OCS. These restrictions may impair our ability to outsource manufacturing, engage in change of control transactions or otherwise transfer our know-how outside of Israel by requiring us to obtain the approval of the OCS for certain actions and transactions and pay additional royalties and other amounts to the OCS. In addition, any change of control and any change of ownership of our Ordinary Shares that would make a non-Israeli citizen or resident an “interested party” as defined in the R&D Law requires prior written notice to the OCS. If we fail to comply with the R&D Law, we may be subject to criminal charges.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations at June 30, 2015 (in thousands) and the effects such obligations are expected to have on our liquidity and cash flows in future periods:

 

		Total			Less Than a Year			2 - 3 Years			4 - 5 Years			More Than Five Years
Contractual Obligations:
Operating lease obligations(1)		$	1,310		$	372		$	685		$	253		$	—
Purchase obligations(2)		6,493			6,493			—			—			—
Other long-term commitment(3)		31			—			—			—			31
Unrecognized tax benefits(4)		258			—			—			—			258
Loan from bank(5)		506			506			—			—			—
Total contractual cash obligations		$	8,598		$	7,371		$	685		$	253		$	289

 

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(1)  Represents operating lease costs, consisting of leases for office space in Rehovot, Israel and San Ramon, California.  On July 22, 2015, the Company gave a notice on exercising the option to extend the lease term by 24 month, commencing January 1, 2016. On May 1, 2015, Inc. signed a lease agreement for new office space in San Ramon, California for a period of three years, which term was increased to four years in an amendment dated May 29, 2015.

(2)  Consists of monetary obligations resulting from contracts and outstanding purchase orders from our suppliers.

(3)  Our obligation for accrued severance pay under Israel’s Severance Pay Law as of June 30, 2015 was approximately $149,000, of which approximately $118,000 was funded through deposits in severance pay funds, leaving a net obligation of approximately $31,000.

(4)  Unrecognized tax benefits under ASC 740-10, “Income Taxes,” are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement.

(5)  See note 4 to the consolidated financial statements enclosed in this report in Part 1 Item 1.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under Securities and Exchange Commission rules.

 

Critical Accounting Policies and Estimates

 

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the

 

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