UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
 
x            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended  June 30, 2011
 
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  001-31392
 
PLURISTEM THERAPEUTICS INC.
(Name of registrant as specified in its charter)

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

MATAM Advanced Technology Park,
Building No. 20, Haifa, Israel
 
 
31905
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number   011-972-74-7107171
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Common Stock, par value $0.00001
 
Name of each exchange on which registered
Nasdaq Capital Market
 
Securities registered pursuant to Section 12(g) of the Act:
 
None.
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.         
 
Yes  o     No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                  
 
Yes  o     No  x
 
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 that the registrant was required to submit and post such files).    
 
 Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” 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     
                                                                                                     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).            
 
Yes  o     No  x
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
 
$34,558,487
 
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

42,924,219 as of September 1, 2011
 
 
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TABLE OF CONTENTS
 
 
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Our financial statements are stated in thousands United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP).
 
In this annual report, unless otherwise specified, all dollar amounts are expressed in United States dollars.
 
As used in this annual report, the terms "we", "us", "our", “the Company”, and "Pluristem" mean Pluristem Therapeutics Inc. and our wholly owned subsidiary, unless otherwise indicated.
 
 
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        CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this Annual Report on Form 10-K that are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "intends," "plans" "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, and similar expressions are intended to identify forward-looking statements.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements appear in Item 1 – “Business” and Item 7 – “Management’s Discuss and Analysis of Financial Condition and Results of Operations,” as well as elsewhere in this Annual Report and include, among other statements, statements regarding the following:  the expected development and potential benefits from our products in treating various medical conditions, the exclusive license agreement we entered into with United Therapeutics Corporation, the prospects of entering into additional license agreements, or other forms of cooperation with other companies, our pre clinical and clinical trials plan, including entering Phase II clinical trials and achieving regulatory approvals, our plan to build a manufacturing facility and expand our manufacturing capacity, developing capabilities for new clinical indications of placenta expanded cells (PLX), the potential market demand for our products, our expectations regarding our short- and long-term capital requirements, our outlook for the coming months and information with respect to any other plans and strategies for our business.
 
The factors discussed herein, including those risks described in Item 1A. “Risk Factors”, and expressed from time to time in our filings with the Securities and Exchange Commission could cause actual results and developments to be materially different from those expressed in or implied by such statements. The forward-looking statements are made only as of the date of this filing, and except as required by law we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
 
 
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P A RT I
 
Item 1.      Business.
 
Our Current Business
 
We are a leading bio-therapeutic company developing standardized cell therapy products for the treatment of life threatening diseases.  We are developing a pipeline of products, stored ready-to-use, derived from human placenta, a non-controversial, non-embryonic, adult cell source. Placental-derived adherent stromal cells are grown in the Company's proprietary PluriX™ three-dimensional process that allows cells to grow in a more natural environment and enable us to produce large quantities of clinical grade cells.  We refer to the cells that are grown in the PluriX™ as our PLacental eXpanded cells, or PLX cells.  We are expanding our in-house manufacturing capacity so that we will be able to grow large scale quantities of our cells efficiently and without reliance on outside vendors.
 
We were incorporated as a Nevada corporation in 2001. We have a wholly owned research and development subsidiary in Israel called Pluristem Ltd.
 
Our strategy is to develop and manufacture cell therapy products for the treatment of multiple disorders via several routes of administration.  We plan to execute this strategy both independently, using our own personnel and via relationships with research and clinical institutions, or in collaboration with other companies, such as United Therapeutics Corporation, or United.  We plan to have in-house manufacturing capacity of clinical grade PLX cells in commercial quantities and to control all of our proprietary manufacturing processes in order to assist in executing this strategy.
 
We believe that intramuscular administration, or IM, which means that the cells are administrated locally to the muscle and not systemically, may be suited for a number of different clinical indications. Such indications include peripheral artery disease, or PAD, critical limb ischemia, or CLI, intermittent claudication, or IC, muscle injuries, thromboangiitis obliterans, or Buerger's disease, neuropathic pain, wound healing and orthopedic injuries.  In addition, we have reported pre-clinical studies utilizing successfully our proprietary PLX cells when administered systemically via the intravenous route, or IV, in treating multiple sclerosis, ischemic stroke, inflammatory bowel disease and radiation exposure.  Under our exclusive license agreement with United, we plan to participate in the development and commercialization of a PLX cell-based product for the treatment of Pulmonary Arterial Hypertension, or PAH.
 
Our first product in development, called PLX-PAD, is intended to improve the quality of life of millions of people suffering from PAD.
 
Recent Developments
 
In January 2011, we successfully completed a parallel scientific advisory process with the European Medicines Agencies (EMA) and the US Food and Drug Administration (FDA) that will allow us to pursue a comprehensive approach towards the treatment of two major components of PAD, IC and CLI, with our placenta-derived PLX cells. The comprehensive clinical plan includes a multinational Phase II study in IC and a multinational Phase II/III pivotal study in CLI.
 
In February 2011, we closed a firm commitment underwritten public offering of 11,000,000 units, with each unit consisting of one share of the Company's common stock and one warrant to purchase 0.4 of a share of common stock, at a purchase price of $3.25 per unit. The underwriters exercised in full their over-allotment option to purchase an additional 1,650,000 units.  The net proceeds from the offering were approximately $38 million.
 
On March 1, 2011, together with the Charite University Hospital of Berlin, or Charite, we announced the results of a preclinical study demonstrating significant improvement in the recovery of muscle function, when compared to controls, following the local administration of PLX cells in a muscle injury mice model. This study suggests that our PLX cells have the potential to treat muscle injuries caused by surgery or accident. Subject to regulatory approval, we intend to conduct clinical trials for muscle injury indications.
 
 
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On April 13, 2011, following completion of three and six month clinical follow-ups using our PLX cells in CLI, the end-stage of PAD, we announced that the data collected from our two open-label, dose-escalation, Phase I clinical trials conducted in the United States and Germany suggests that PLX-PAD is safe, improves quality of life, and is potentially effective in treating patients and reducing amputations.
 
On June 19, 2011, we entered into an exclusive license agreement, or the License Agreement, with United, for the use of our PLX cells to develop and commercialize a cell-based product for the treatment of PAH.  The License Agreement provides that United will receive exclusive worldwide license rights for the development and commercialization of our PLX cell-based product to treat PAH.  The License Agreement provides for the following consideration payable to us: (i) $7 million paid to us in August 2011; (ii) up to $37.5 million upon reaching certain regulatory milestones with respect to the development of a product to treat PAH; (iii) reimbursement of up to $10 million of certain of our expenses if we establish a manufacturing facility in North America upon meeting certain milestones; (iv) reimbursement of certain costs in connection with the development of the product; and (v) following commercialization of the product, royalties and the purchase of commercial supplies of the developed product from us at a specified margin over our cost.
 
On August 22, 2011 the FDA granted our PLX cells orphan status designation for the treatment of Buerger's disease. A concurrent application in Europe at the EMA’s Committee for Orphan Medicinal Products is pending.
 
Scientific Background
 
Cell therapy is an emerging and promising field within the regenerative medicine area.  The characteristics and properties of cells vary as a function of tissue source and growth conditions.  The human placenta provides a unique, renewable, uncontroversial source of non-embryonic, adult cells and represents a new approach in the cell therapy field.
 
The use of our PLX cells for human therapy does not require tissue matching prior to administration.  Thus, it allows for the development of a ready-to-use “off-the-shelf” product.
 
Our Technology
 
We develop and intend to commercialize cell therapy production technologies and products. We are expanding non-controversial, placental-derived Adherent Stromal Cells, or ASCs, via a proprietary three dimensional (3D) process, termed PluriX™, into therapeutics for a variety of degenerative, ischemic, inflammatory and autoimmune disorders.
 
PluriX™ uses a system of stromal cell cultures and substrates to create an artificial three dimensional environment where placental-derived stromal cells (obtained after birth) can grow. Our three-dimensional process enables the large scale production of reproducible, high quality cell products, and is capable of manufacturing large numbers of PLX doses originating from different placentas. Additionally, our manufacturing process has demonstrated batch-to-batch consistency, an important manufacturing component of biological products.
 
Product Candidates
 
·
PLX-PAD -  Intermittent Claudication and Critical Limb Ischemia
 
We are developing PLX-PAD cells as an allogeneic therapeutic product to treat CLI and IC which results from PAD. PLX-PAD cells are stored “ready to use” and can be shipped to hospitals and clinics for use as IM treatment to the affected limb in clinical trials for patients suffering from CLI and IC. Two Phase I studies were performed to evaluate the safety of PLX-PAD in patients with CLI.  The studies were conducted in parallel in Germany and the U.S.  The trial in Germany was performed at the Franziskus-Krankenhaus Institute of Berlin and a total of 15 patients were enrolled in this study.  The trial in the US was performed at three sites: Duke University Hospital, Stanford University Hospital and the Center for Therapeutic Angiogenesis (supported by the University of Alabama).  A total of 12 adults with the disease were included in this clinical trial in the U.S.
 
On April 13, 2011, we announced that following completion of three and six month clinical follow-ups, data from our two open-label, dose-escalation, Phase I clinical trials suggests that PLX-PAD is safe, improves quality of life, and is potentially effective in treating patients and reducing amputations in those suffering from CLI, the end-stage of PAD. Among the 27 patients treated with PLX-PAD, only one amputation was recorded at the six month follow-ups representing a 3.7% amputation rate. This represents a 75% reduction in the amputation rate compared to historical data, which varies from 20-25%.
 
 
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Intermittent Claudication and Critical Limb Ischemia
 
PAD arises when there is significant narrowing of large arteries supplying blood to all of the extremities but most commonly the legs. Narrowing of these arteries is usually caused by cholesterol build-up in the artery (atherosclerosis) but can occur from an inflammation of the arterial wall (arteritis). Patients afflicted with PAD have symptoms that range from calf pain on exercise (IC) to resting pain, skin ulceration, or gangrene in people with CLI. About 15% of people with IC eventually develop CLI 1 , particularly if they are afflicted with risk factors associated with the development and worsening of PAD and include cigarette smoking, diabetes, hypertension and obesity.
 
Analysis of data from the 2009 update on heart disease and stroke statistics 2 indicates that approximately eight million people over the age of 40 in the United States are afflicted with PAD. PAD increases significantly with age, rising to as high as approximately 20% of the population of those over the age of 70, which has resulted in a growing market for therapies intended to treat this disorder. According to The Sage Group Report of April 17, 2007 an estimated 2 million people in the U.S. have CLI. Reflecting the ageing population, this number is projected to grow to almost 2.8 million by 2020 3 . However, if the prevalence of diabetes continues to increase, there could be a significant increase of CLI by 2020.
 
Although medications such as vasodilators and anti-platelet therapies are used for treating PAD, the general consensus among physicians is that there currently exists no adequate medical therapy for PAD.  Endovascular therapies such as balloon dilation and revascularization surgery can be quite helpful for selected patients. However, it has been estimated that approximately 25% of CLI patients are not suitable for such procedures 4 .
 
·
Other product candidates
 
There have been favorable preclinical results administering PLX cells in several additional indications.
 
The table below summaries the status of the studies we have performed:
 
Indication
Status
Diabetic Foot Ulcers
Proof of concept
Adjuvant Hip Replacement Surgery
Pre-clinical
Athletic Injuries
Pre-clinical
Inflammatory Bowel Disease
Proof of concept
Multiple Sclerosis
Proof of concept
Neuropathic Pain
Pre-clinical
Ischemic Stroke
Pre-clinical
Adjuvant for UCB Transplantation
Pre-clinical
Radiation exposure
Proof of concept
 

 
1 See Intermittent claudication: a risk profile from the Framingham Heart Study. Circulation 1997;96:44–49.
2 See Circulation. 2009;119:e21-e181. Published online before print December 15, 2008.
3 See The Sage Group: The Sage Group Report of April 17, 2007 (http://thesagegroup.us/pages/news/april17_2007.php) .
4 See Histological changes after implantation of autologous bone marrow mononuclear cells for chronic critical limb ischemia. Bone Marrow Transplant. 2007 May; 39(10):647-8.

 
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In addition, we plan to commence the development of a cell-based product for the treatment of PAH using our PLX, as provided for by the Licensing Agreement.
 
Intellectual Property
 
We understand that our success will depend, in part, on maintaining our intellectual property and therefore we are committed to protecting our technology and product candidates with patents and other methods described below.

We are the sole owner of 15 issued patents and 76 patent applications in the U.S. and Europe as well as in additional countries worldwide, including in the Far East and South America.
 
Based on the well established understanding support that the characteristics and therapeutic potential of a cell product are largely determined by the source of the cells and by the methods and conditions used during their manufacturing process, our patent portfolio includes multilayered claims on the various unique aspects of ASCs.
Our patent portfolio includes claims on:
 
·
Our propriety expansion method for 3D Stromal Cells;
 
·
Composition of matter claims on the cells;
 
·
The therapeutic use of PLX cells for the treatment of a large variety of medical conditions; and
 
·
Selection criteria for determination of cells suitable for administration.

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

Except with respect to the License Agreement with United, the intellectual property we own is not subject to third party rights.  In addition, we have no obligations to pay royalties to any third party, except for royalties, to the OCS which are limited to repayment the grant amount received plus interest (see note 6D in our audited consolidated financial statements for fiscal 2011 included elsewhere in this Form 10-K).
 
The intellectual property coverage of our technology and biologic drug candidates is multi-layered and relies on the combination of multiple patents. The following table provides a description of our key patents and patent applications and is not intended to represent an assessment of claims, limitations or scope.  There is a risk that our patents will be invalidated, and that our pending patent applications will not result in issued patents or that we can be certain that we will not infringe any patents that may be issued to others.  See “Risk Factors - We must further protect and develop our technology and products in order to become a profitable company” .  The expiration dates of these patents, based on filing dates, range from 2019 to 2026. Actual expiration dates will be determined according to extensions received based on the Hatch-Waxman Act.  We believe that even upon expiration of certain of our patents we will continue to be in a good competitive position with our competitors due to several layers of patents and trade secrets.
 
 
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Pluristem’s Patent Portfolio
 
Patent
 
Jurisdiction
 
Subject Matter
 
Related Product(s)
   
Method And Apparatus For Maintenance And Expansion Of Hemopoietic Stem Cells And/Or Progenitor Cells
 
United States
Japan, Europe, Mexico, Australia, South Africa, Israel, Russia, New Zealand, India, China, Hong Kong, Canada
 
Process and methods
 
PLX
   
 
Methods for Cell Expansion and Uses of Cells and Conditioned Media Produced Thereby for Therapy
 
 
United States
Japan, Europe, Mexico, Australia, South Africa, Israel, Russia, New Zealand, India, China, Hong Kong, Canada, Brazil, Korea, Singapore
 
 
Process and methods, Composition of matter, Method of treating
 
 
PLX
   
 
Adherent Cells from Adipose or Placenta Tissues and Use Thereof in Therapy
 
 
United States
Japan, Europe, Mexico, Australia, South Africa, Israel, Russia, New Zealand, India, China, Hong Kong, Canada, Brazil, Korea, Singapore
 
 
Composition of matter, Method of treating
 
 
PLX
   
 
Research and Development
 
Our research and development expenses were $8,311,000 and $6,123,000 in fiscal year 2011 and 2010 respectively, before deducting the participation by the Office of the Chief Scientist and grants by other third parties.
 
Foundational Research . Our initial technology, the PluriX™ Bioreactor system, was developed in the Technion - Israel Institute of Technology's Rappaport Faculty of Medicine, in collaboration with researchers from the Weizmann Institute of Science. This technology was further developed by our research and development teams.
 
Ongoing Research and Development Plans
 
In July 2007, we entered into a five year collaborative research agreement with the Center for Regenerative Therapies at Charite. Pluristem and Charite are collaborating on a variety of indications utilizing PLX cells. According to the agreement, we will be the exclusive owner of the technology and any products produced as a result of the collaboration. We are currently conducting several pre-clinical trials in collaboration with Charite.
 
Over the last year we have also engaged into research and development projects with NYU Medical Center for the study of PLX cells in the treatment of diabetic foot ulcers and with Hadassah University Medical Center in Jerusalem to continue a previously conducted animal study indicating that PLX cells are potentially effective in the treatment of radiation sickness.
 
On June 19, 2011, we entered into the License Agreement, for the use of our PLX cells to develop and commercialize a cell-based product for the treatment of PAH.  The License Agreement provides that United will receive exclusive worldwide license rights for the development and commercialization of our PLX cell-based product to treat PAH.  The License Agreement provides for the following consideration payable to us: (i) $7 million paid to us in August 2011; (ii) up to $37.5 million upon reaching certain regulatory milestones with respect to the development of a product to treat PAH; (iii) reimbursement of up to $10 million of certain of our expenses if we establish a manufacturing facility in North America upon meeting certain milestones; (iv) reimbursement of certain costs in connection with the development of the product; and (v) following commercialization of the product, royalties and the purchase of commercial supplies of the developed product from us at a specified margin over our cost.
 
 
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We plan to continue to collaborate with universities and academic institutions and corporate partners worldwide to fully leverage our expertise and explore the use of our cells in other indications.
 
Our research and development facilities are in Haifa, Israel.
 
In-House Clinical Manufacturing Ability
 
We have the in-house capability to conduct clinical cell manufacturing.  The facility has been approved as a Good Manufacturing Practices (GMP) standard site for the purpose of manufacturing PLX cells by an inspector from the EMA. In addition, the FDA approved the design of our clean room.
 
In July 2011, we entered into an agreement with MTM – Scientific Industries Center Haifa Ltd., for the lease and construction of a new state-of-the-art GMP manufacturing facility. The new facility will be located near our headquarters and existing facilities in MATAM Park, Haifa, Israel.  The lease of the new facility is expected to commence in January 2012 for a period of approximately five years with an option to extend the lease for an additional 5 years.
 
The new facility is expected to be cGMP/GTP compliant for clinical cell manufacturing and designed specifically to meet both EMA and FDA regulatory requirements as well as the standards outlined by the Israeli Ministry of Health. The facility is expected to have the capacity to produce PLX cells to meet our needs for the foreseeable future.  As we widen our clinical product candidate portfolio and prepare to launch large-scale clinical trials in the U.S. and Europe, the new facility will enable us to meet increased in-house manufacturing capacity requirements and meet marketing demands upon product approval.
 
We receive the human placentas used for our research and manufacturing activities from various hospitals in Israel. Any medical waste related to the use of placentas is treated in compliance with local environmental laws and standards.
 
Government Regulation
 
The development, manufacturing, and marketing of our cell therapy product candidates are subject to the laws and regulations of governmental authorities in the U.S. and the European Union as well as other countries in which our products will be marketed in the future. Specifically, in the U.S., the FDA and in Europe, the EMA, regulate new product approvals to establish the safety and efficacy of these products among other activities.  Furthermore, various governmental statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage and record keeping related to such products and their marketing. Governments in other countries have similar requirements for testing and marketing.

The process of obtaining these approvals and the subsequent compliance with appropriate statutes and regulations require the expenditure of substantial time and money. This process takes a number of years and the expenditure of significant resources. There can be no assurance that our product candidates will ultimately receive regulatory approval.
 
Regulatory Process in the United States
 
Our product candidates are subject to regulation as biological products under the Public Health Service Act and the Food, Drug and Cosmetic Act. The FDA generally requires the following steps for pre-market approval or licensure of a new biological product:
 
·
Pre-clinical laboratory and animal tests conducted in compliance with the Good Laboratory Practice, or GLP, requirements to assess a drug's biological activity and to identify potential safety problems, and to characterize and document the product's chemistry, manufacturing controls, formulation, and stability.
 
·
Submission to the FDA of an Investigational New Drug, or IND application, which must become effective before clinical testing in humans can begin;
 
·
Obtaining approval of Institutional Review Boards, or IRBs, of research institutions or other clinical sites to introduce the biologic drug candidate into humans in clinical trials;
 
 
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·
Conducting adequate and well-controlled human clinical trials to establish the safety and efficacy of the product for its intended indication conducted in compliance with Good Clin i cal Practice, or GCP, requirements;
 
·
Compliance with current Good Manufacturing Practices, or cGMP regulations and standards;
 
·
Submission to the FDA of a Biologics License Application, or BLA, for marketing that includes adequate results of pre-clinical testing and clinical trials;
 
·
FDA reviews the marketing application in order to determine, among other things, whether the product is safe, effective and potent for its intended uses; and
 
·
Obtaining FDA approval of the BLA, including inspection and approval of the product manufacturing facility as compliant with cGMP requirements, prior to any commercial sale or shipment of the pharmaceutical agent. The FDA may also require post-marketing testing and surveillance of approved products, or place other conditions on the approvals.
 
Regulatory Process in Europe
 
The European Union (EU) has approved a regulation specific to cell and tissue products and our PLX-PAD cell therapy product candidate is regulated under this Advanced Therapy Medicinal Product (ATMP) regulation.
 
For products that are regulated as an ATMP, the EU Directive requires:
 
·
Compliance with current Good Manufacturing Practices, or cGMP regulations and standards,  pre-clinical laboratory and animal testing;
 
·
Filing a Clinical Trial Application (CTA) with the various member states or a centralized procedure; Voluntary Harmonisation Procedure (VHP), a procedure which makes it possible to obtain a coordinated assessment of an application for a clinical trial that is to take place in several European countries. Obtaining approval of affiliated Ethic Committees of research institutions or other clinical sites to introduce the biologic drug candidate into humans in clinical trials;
 
·
Adequate and well-controlled clinical trials to establish the safety and efficacy of the product for its intended use; and
 
·
Submission to EMA for a Marketing Authorization (MAA); Review and approval of the MAA (Marketing Authorization Application).
 
Clinical trials:
 
Typically, both in the U.S. and the European Union, clinical testing involves a three-phase process although the phases may overlap. In Phase I, clinical trials are conducted with a small number of healthy volunteers or patients and are designed to provide information about product safety and to evaluate the pattern of drug distribution and metabolism within the body. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In some cases, an initial trial is conducted in diseased patients to assess both preliminary efficacy and preliminary safety and patterns of drug metabolism and distribution, in which case it is referred to as a Phase I/II trial. Phase III clinical trials are generally large-scale, multi-center, comparative trials conducted with patients afflicted with a target disease in order to provide statistically valid proof of efficacy, as well as safety and potency. In some circumstances, the FDA or EMA may require Phase IV or post-marketing trials if it feels that additional information needs to be collected about the drug after it is on the market.
 
During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data and clinical trial investigators. An agency may, at its discretion, re-evaluate, alter, suspend, or terminate the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. Monitoring all aspects of the study to minimize risks is a continuing process. All adverse events must be reported to the FDA and/or EMA.
 
 
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Employees
 
We presently employ a total of 63 full-time employees and 7 part-time employees, of whom 54 full-time employees and 6 part-time employees are engaged in research and clinical manufacturing.
 
Competition
 
The cellular therapeutics industry, of which we are a part, is subject to technological changes that can be rapid and intense. We have faced, and will continue to face, intense competition from biotechnology, pharmaceutical and biopharmaceutical companies, academic and research institutions and governmental agencies engaged in cellular therapeutic and drug discovery activities or the funding of such activities, both in the United States and internationally. Some of these competitors are pursuing the development of cellular therapeutics, drugs and other therapies that target the same diseases and conditions that we target in our clinical and pre-clinical programs.
 
We are aware of many companies working in this area, including: Osiris Therapeutics, Aastrom Biosciences, Athersys, Aldagen, Cytori Therapeutics, Mesoblast and Celgene. Among other things, we expect to compete based upon our intellectual property portfolio, our in-house manufacturing efficiencies and the efficacy of our products.  Our ability to compete successfully will depend on our continued ability to attract and retain experienced and skilled executive, scientific and clinical development personnel to identify and develop viable cellular therapeutic candidates and exploit these products commercially.
 
 
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Item 1A. Risk Factors.
 
The following risk factors, among others, could affect our actual results of operations and could cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and except as required by law we assume no obligation to update this information. You should carefully consider the risks described below and elsewhere in this annual report before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Our common stock is considered speculative and the trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. The following risk factors are not the only risk factors facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.
 
Our likelihood of profitability depends on our ability to license and / or develop and commercialize products based on our stem cell production technology, which is currently in the development stage. If we are unable to complete the development and commercialization of our stem cell products successfully, our likelihood of profitability will be limited severely .
 
We are engaged in the business of developing cell therapy products. We have not realized a profit from our operations to date and there is little likelihood that we will realize any profits in the short or medium term. Any profitability in the future from our business will be dependent upon successful commercialization of our potential cell therapy products, which will require significant additional research and development as well as substantial clinical trials.
 
If we are not able to successfully license and / or develop and commercialize our cell therapy product candidates and obtain the necessary regulatory approvals, we may not generate sufficient revenues to continue our business operations.
 
So far only one of the products we are developing was tested in Phase I clinical trials.  Our early stage cell therapy product candidates may fail to perform as we expect. Moreover even if our cell therapy product candidates successfully perform as expected, in later stages of development may fail to show the desired safety and efficacy traits despite having progressed successfully through pre-clinical or initial clinical testing.  We will need to devote significant additional research and development, financial resources and personnel to develop commercially viable products and obtain the necessary regulatory approvals.
 
If our cell therapy product candidates do not prove to be safe and efficacious in clinical trials, we will not obtain the required regulatory approvals. If we fail to obtain such approvals, we may not generate sufficient revenues to continue our business operations.
 
Even if we obtain regulatory approval of a product, that approval may be subject to limitations on the indicated uses for which it may be marketed. Even after granting regulatory approval, the FDA and regulatory agencies in other countries continue to review and inspect marketed products, manufacturers and manufacturing facilities, which may create additional regulatory burdens. Later discovery of previously unknown problems with a product, manufacturer or facility, may result in restrictions on the product or manufacturer, including a withdrawal of the product from the market. Further, regulatory agencies may establish additional regulations that could prevent or delay regulatory approval of our products.
 
We cannot market and sell our cell therapy product candidates in the United States or Europe or in other countries if we fail to obtain the necessary regulatory approvals or licensure.
 
We cannot sell our cell therapy product candidates until regulatory agencies grant marketing approval, or licensure. The process of obtaining regulatory approval is lengthy, expensive and uncertain. It is likely to take several years to obtain the required regulatory approvals for our cell therapy product candidates, or we may never gain the necessary approvals. Any difficulties that we encounter in obtaining regulatory approval may have a substantial adverse impact on our operations and cause our stock price to decline significantly.
 
To obtain marketing approvals in the United States and Europe  for cell therapy product candidates we must, among other requirements, complete carefully controlled and well-designed clinical trials sufficient to demonstrate to the FDA and the EMA that the cell therapy product candidates is safe and effective for each disease for which we seek approval.  So far, we conducted Phase I clinical trials for our PLX-PAD product, which is our only product that is the subject to clinical trials.  Several factors could prevent completion or cause significant delay of these trials, including an inability to enroll the required number of patients or failure to demonstrate adequately that cell therapy product candidates are safe, effective and potent for use in humans. Negative or inconclusive results from or adverse medical events during a clinical trial could cause the clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful. The FDA or the EMA can place a clinical trial on hold if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury. If safety concerns develop, we, the FDA, or the EMA could stop our trials before completion.
 
 
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If we are not able to conduct our clinical trials properly and on schedule, marketing approval by FDA, EMA  and other regulatory authorities may be delayed or denied.
 
The completion of our clinical trials may be delayed or terminated for many reasons, including, but not limited to, if:
 
 
·
the FDA or the EMA does not grant permission to proceed and places the trial on clinical hold;
 
 
·
subjects do not enroll in our trials at the rate we expect;
 
 
·
subjects experience an unacceptable rate or severity of adverse side effects;
 
 
·
third-party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, Good Clinical Practice and regulatory requirements, or other third parties do not perform data collection and analysis in a timely or accurate manner;
 
 
·
inspections of clinical trial sites by the FDA, EMA, or Institutional Review Boards (IRBs) of research institutions participating in our clinical trials find regulatory violations that require us to undertake corrective action, suspend or terminate one or more sites, or prohibit us from using some or all of the data in support of our marketing applications; or
 
 
·
one or more IRBs suspends or terminates the trial at an investigational site, precludes enrollment of additional subjects, or withdraws its approval of the trial.
 
Our development costs will increase if we have material delays in our clinical trials, or if we are required to modify, suspend, terminate or repeat a clinical trial. If we are unable to conduct our clinical trials properly and on schedule, marketing approval may be delayed or denied by the FDA or the EMA.
 
We are in the development stage and have limited operating history, which raise doubts with respect to our ability to generate revenues in the future.
 
We have a limited operating history in our business of developing and commercializing stem cell production technology and must be considered in the development stage.  Until we entered into the License Agreement with United, we did not generated any revenues.  It is not clear when we will generate additional revenues.  Our primary source of funds has been the sale of our common stock and government grants.  We cannot give assurances that we will be able to generate any significant revenues or income in the future.  There is no assurance that we will ever be profitable.
 
We may not successfully maintain our existing exclusive out-licensing agreement with United Therapeutics Corporation, or establish new collaborative and licensing arrangements, which could adversely affect our ability to develop and commercialize our product candidates.
 
One of the elements of our business strategy is to license our technology to other companies. Our business strategy includes establishing collaborations and licensing agreements with one or more pharmaceutical or biotechnology companies. We have entered into an exclusive License Agreement with United for the use of PLX cells to develop and commercialize a cell-based product for the treatment of PAH.  However, we may not be able to establish or maintain such licensing and collaboration arrangements necessary to develop and commercialize our product candidates. Even if we are able to maintain or establish licensing or collaboration arrangements, these arrangements may not be on favorable terms and may contain provisions that will restrict our ability to develop, test and market our product candidates. Any failure to maintain or establish licensing or collaboration arrangements on favorable terms could adversely affect our business prospects, financial condition or ability to develop and commercialize our product candidates.
 
 
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Our agreements with our collaborators and licensees may have provisions that give rise to disputes regarding the rights and obligations of the parties. These and other possible disagreements could lead to termination of the agreement or delays in collaborative research, development, supply, or commercialization of certain product candidates, or could require or result in litigation or arbitration. Moreover, disagreements could arise with our collaborators over rights to intellectual property or our rights to share in any of the future revenues of products developed by our collaborators. These kinds of disagreements could result in costly and time-consuming litigation. Any such conflicts with our collaborators could reduce our ability to obtain future collaboration agreements and could have a negative impact on our relationship with existing collaborators.
 
We may not be able to secure and maintain research institutions to conduct our clinical trials.
 
We rely on research institutions to conduct our clinical trials. Specifically, the limited number of centers experienced with cell therapy products candidates heightens our dependence on such research institutions. Our reliance upon research institutions, including hospitals and clinics, provides us with less control over the timing and cost of clinical trials and the ability to recruit subjects. If we are unable to reach agreement with suitable research institutions on acceptable terms, or if any resulting agreement is terminated, we may be unable to quickly replace the research institution with another qualified institution on acceptable terms. We may not be able to secure and maintain suitable research institutions to conduct our clinical trials.  
 
If we fail to obtain and maintain required regulatory approvals for our potential cell therapy products, our ability to commercialize our potential cell therapy products will be limited severely.
 
Once our potential cell therapy products are fully developed, we intend to market our products primarily in the United States and Europe.  We must obtain FDA and EMA approval of our technology and potential cell therapy products, before commercialization of our potential cell therapy products may commence in the United States and similar agencies in Europe.  We may also be required to obtain additional approvals from foreign regulatory authorities to commence our marketing activities in those jurisdictions.  If we cannot demonstrate the safety, reliability and efficacy of our cells, including long-term sustained cell engraftment, or if one or more patients die or suffer severe complications in clinical trials, the FDA or EMA and/or other regulatory authorities could delay or withhold regulatory approval of our technology and potential products.
 
Furthermore, even if we obtain regulatory approval for our cell therapy products, that approval may be subject to limitations on the indicated uses for which they may be marketed.  Even after granting regulatory approval, the FDA, the EMA, other regulatory agencies, and governments in other countries will continue to review and inspect marketed products, manufacturers and manufacturing facilities.  Later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on the product or manufacturer, including a withdrawal of the product from the market.  Further, governmental regulatory agencies may establish additional regulations, which could prevent or delay regulatory approval of our technology and our potential cell therapy products.
 
We have limited experience in conducting and managing human trials. If we fail in the conducting of such trials, our business will be materially harmed.
 
Even though we conducted Phase I trials for our PLX-PAD product and have recruited employees who are experienced in managing and conducting clinical trials, we have limited experience in this area.  We will need to expand our experience and rely on consulting in order to obtain regulatory approvals for our therapeutic product candidates.  The failure to successfully conduct clinical trials could materially harm our business.
 
The trend towards consolidation in the pharmaceutical and biotechnology industries may adversely affect us.
 
There is a trend towards consolidation in the pharmaceutical and biotechnology industries. This consolidation trend may result in the remaining companies having greater financial resources and discovery technological capabilities, thus intensifying competition in these industries. This trend may also result in fewer potential collaborators or licensees for our therapeutic product candidates. Also, if a consolidating company is already doing business with our competitors, we may lose existing licensees or collaborators as a result of such consolidation.
 
 
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This trend may adversely affect our ability to enter into license agreements or agreements for the development and commercialization of our product candidates, and as a result may harm our business.
 
Our product development programs are based on novel technologies and are inherently risky.
 
We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of our therapeutics creates significant challenges in regards to product development and optimization, manufacturing, government regulation, third-party reimbursement and market acceptance. For example, the FDA or the EMA has relatively limited experience with stem cell therapies. None has been approved by them for commercial sale, and the pathway to regulatory approval for our cell therapy product candidates may accordingly be more complex and lengthy. As a result, the development and commercialization pathway for our therapies may be subject to increased uncertainty, as compared to the pathway for new conventional drugs.
 
There are no FDA or EMA approved treatments for some of the disease indications we are pursuing. This could complicate and delay FDA or EMA approval of our biologic drug candidates.
 
There are no drugs or therapies currently approved with for treatment of PAD using allogeneic cell therapy products. As a result, the clinical efficacy endpoints, or the criteria to measure the intended results of treatment may be difficult to determine. In addition, patients battling PAD and who, therefore, are candidates for treatment with PLX-PAD, typically suffer from complications and disorders that may bring to amputation and other complications prior to the completion of the study. This resulting reduction in the number of patients available for evaluation at the end of the study may make it more difficult for us to demonstrate efficacy, as necessary to obtain FDA or EMA approval to market our products.
 
Our cell therapy drug candidates represent new classes of therapy that the marketplace may not understand or accept.
 
Even if we successfully develop and obtain regulatory approval for our biologic drug candidates, the market may not understand or accept them. We are developing cell therapy product candidates that represent novel treatments and will compete with a number of more conventional products and therapies manufactured and marketed by others, including major pharmaceutical companies. The degree of market acceptance of any of our developed and potential products will depend on a number of factors, including:
 
• the clinical safety and effectiveness of our cell therapy drug candidates and their perceived advantage over alternative treatment methods;

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

• the cost of our products and the reimbursement policies of government and third-party payors.
 
If the health care community does not accept our potential products for any of the foregoing reasons, or for any other reason, it could affect our sales, having a material adverse effect on our business, financial condition and results of operations.
 
If our processing and storage facility or our clinical manufacturing facilities are damaged or destroyed, our business and prospects would be adversely affected.
 
If our processing and storage facility,   our clinical manufacturing facilities or the equipments in such facilities were to be damaged or destroyed, we could suffer a loss of some or all of the stored units of our cell therapy drug candidates and it would force us to delay or halt our clinical trial processes.  We have a clinical manufacturing facility located in Haifa, Israel. If this facility or the equipment in it is significantly damaged or destroyed, we may not be able to quickly or inexpensively replace our manufacturing capacity.
 
 
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The clinical manufacturing process is complex and requires meeting high regulatory standards; We have limited manufacturing experience and know-how.  Any delay or problem in the clinical manufacturing of PLX may result in adverse effect on our business.
 
Our facility has been approved as a Good Manufacturing Practices (GMP) standard site for the purpose of manufacturing PLX cells by an inspector from the EMA.  In addition, the FDA approved the design of the clean room.  We plan to obtain similar approvals for our new facilities that will enable us to conduct commercial scale clinical manufacturing of PLX.  However, the clinical manufacturing process is complex and we have limited experience and know-how in manufacturing our product candidates at a commercial level. There can be no guarantee that that we will be able to successfully develop and manufacture our product candidates in a manner that is cost-effective or commercially viable, or that development and manufacturing capabilities might not take much longer than currently anticipated to be ready for the market.  In addition, if we fail to maintain regulatory approvals to our manufacturing facilities, we may suffer delays in our ability to manufacture our product candidates.  This may result in an adverse effect on our business.
 
We are dependent upon third-party suppliers for raw materials needed to manufacture PLX; if any of these third parties fails or is unable to perform in a timely manner, our ability to manufacture and deliver will be compromised.
 
In addition to the placenta used in the clinical manufacturing process of PLX we require certain raw materials. These items must be manufactured and supplied to us in sufficient quantities and in compliance with GMP. To meet these requirements, we have entered into supply agreements with firms that manufacture these raw materials to GMP standards. Our requirements for these items are expected to increase if and when we transition to the manufacture of commercial quantities of our biologic drug candidates.
 
In addition, as we proceed with our clinical trial efforts, we must be able to continuously demonstrate to the FDA and the EMA, that we can manufacture our cell therapy product candidates with consistent characteristics. Accordingly, we are materially dependent on these suppliers for supply of GMP-grade materials of consistent quality. Our ability to complete ongoing clinical trials may be negatively affected in the event that we are forced to seek and validate a replacement source for any of these critical materials.
 
If we encounter problems or delays in the research and development of our potential cell therapy products, we may not be able to raise sufficient capital to finance our operation during the period required to resolve such problems or delays.
 
Our cell therapy products are currently in the development stage and we anticipate that we will continue to incur substantial operating expenses and incur net losses until we have successfully completed all necessary research and clinical trials.  We, and any of our potential collaborators, may encounter problems and delays relating to research and development, regulatory approval and intellectual property rights of our technology.  Our research and development programs may not be successful, and our cell culture technology may not facilitate the production of cells outside the human body with the expected result.  Our cell therapy products may not prove to be safe and efficacious in clinical trials.  If any of these events occur, we may not have adequate resources to continue operations for the period required to resolve the issue delaying commercialization and we may not be able to raise capital to finance our continued operation during the period required for resolution of that issue.  Accordingly, we may be forced to discontinue or suspend our operations.
 
We cannot guarantee continuation of government programs and tax benefits.
 
We have received certain Israeli government approval under certain programs and may in the future utilize certain tax benefits in Israel by virtue of these programs. To remain eligible for such tax benefits, we must continue to meet certain conditions. If we fail to comply with these conditions in the future, the benefits we receive could be canceled and we may pay certain taxes. We cannot guarantee that these programs and tax benefits will be continued in the future, at their current levels or at all. If these programs and tax benefits are ended, our business, financial condition and results of operations could be negatively affected.
 
 
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Because we received grants from the Israeli Office of the Chief Scientist, we are subject to ongoing restrictions.
 
We received royalty-bearing grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Chief Scientist, for research and development programs that meet specified criteria. The terms of the Chief Scientist’s grants limit our ability to transfer know-how developed under an approved research and development program outside of Israel, regardless of whether the royalties were fully paid. Any non-Israeli citizen, resident or entity that, among other things, becomes a holder of 5% or more of our share capital or voting rights, is entitled to appoint one or more of our directors or our chief executive officer, serves as a director of our company or as our chief executive officer is generally required to notify the same to the Chief Scientist and to undertake to observe the law governing the grant programs of the Chief Scientist, the principal restrictions of which are the transferability limits described above.
 
If we do not keep pace with our competitors and with technological and market changes, our technology and products may become obsolete and our business may suffer.
 
The cellular therapeutics industry, of which we are a part, is very competitive and is subject to technological changes that can be rapid and intense. We have faced, and will continue to face, intense competition from biotechnology, pharmaceutical and biopharmaceutical companies, academic and research institutions and governmental agencies engaged in cellular therapeutic and drug discovery activities or funding, both in the United States and internationally. Some of these competitors are pursuing the development of cellular therapeutics, drugs and other therapies that target the same diseases and conditions that we target in our clinical and pre-clinical programs.
 
Many of our competitors have greater resources, more product candidates and have developed product candidates and processes that directly compete with our products.  Our competitors may have developed, or could develop in the future, new products that compete with our products or even render our products obsolete.
 
We depend to a significant extent on certain key personnel, the loss of any of whom may materially and adversely affect our company.
 
Our success depends on a significant extent to the continued services of certain highly qualified scientific and management personnel, in particular, Zami Aberman, our Chief Executive Officer, and Yaky Yanay, our Chief Financial Officer.  We face competition for qualified personnel from numerous industry sources, and there can be no assurance that we will be able to attract and retain qualified personnel on acceptable terms.  The loss of service of any of our key personnel could have a material adverse effect on our operations or financial condition.  In the event of the loss of services of such personnel, no assurance can be given that we will be able to obtain the services of adequate replacement personnel.  We do not maintain key person insurance on the lives of any of our officers or employees.
 
The patent approval process is complex and we cannot be sure that our pending patent applications or future patent applications will be approved.
 
The patent approval process is complex and results are therefore highly uncertain.  No assurance can be given that any of our pending patent applications or future patent applications will be approved, that the scope of any patent protection granted will exclude competitors or provide us with competitive advantages, that any of the patents that have been or may be issued to us will be held valid if subsequently challenged, or that other parties will not claim rights to or ownership of our patents or other proprietary rights that we hold.  Furthermore, there can be no assurance that others have not developed or will not develop similar products, duplicate any of our technology or products or design around any patents that have been or may be issued to us or any future licensors.  Since patent applications in the United States and in Europe are not publicly disclosed until patents are issued, there can be no assurance that others did not first file applications for products covered by our pending patent applications, nor can we be certain that we will not infringe any patents that may be issued to others.
 
Our success depends in large part on our ability to develop and protect our technology and our cell therapy products.  If our patents and proprietary rights agreements do not provide sufficient protection for our technology and our cell therapy products, our business and competitive position will suffer.
 
Our success will also depend in part on our ability to develop our technology and commercialize cell therapy products without infringing the proprietary rights of others.  We have not conducted full freedom of use patent searches and no assurance can be given that patents do not exist or could not be filed which would have an adverse affect on our ability to develop our technology or maintain our competitive position with respect to our potential cell therapy products.  If our technology components, devices, designs, products, processes or other subject matter are claimed under other existing United States or foreign patents or are otherwise protected by third party proprietary rights, we may be subject to infringement actions.  In such event, we may challenge the validity of such patents or other proprietary rights or we may be required to obtain licenses from such companies in order to develop, manufacture or market our technology or products.  There can be no assurances that we would be able to obtain such licenses or that such licenses, if available, could be obtained on commercially reasonable terms.  Furthermore, the failure to either develop a commercially viable alternative or obtain such licenses could result in delays in marketing our proposed products or the inability to proceed with the development, manufacture or sale of products requiring such licenses, which could have a material adverse affect on our business, financial condition and results of operations.  If we are required to defend ourselves against charges of patent infringement or to protect our proprietary rights against third parties, substantial costs will be incurred regardless of whether we are successful.  Such proceedings are typically protracted with no certainty of success.  An adverse outcome could subject us to significant liabilities to third parties and force us to curtail or cease our development of our technology and the commercialization our potential cell therapy products.
 
 
 
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We have built the ability to manufacture clinical grade ASCs in-house. Through our experience with ASC-based product development, we have developed expertise and know-how in this field. To protect these expertise and know-how, our policies require confidentiality agreements with our employees, consultants, contractors, manufacturers and advisors. These agreements generally provide for protection of confidential information, restrictions on the use of materials and assignment of inventions conceived during the course of performance for us. These agreements might not effectively prevent disclosure of our confidential information.
 
We must further protect and develop our technology and products in order to become a profitable company.
 
The initial patent underlying our technology will expire in approximately 2020.  If we do not complete the development of our technology and products in development by then, or create additional sufficient layers of patents or other intellectual property right, other companies may use the technology to develop competing products.  If this happens, we may lose our competitive position and our business would likely suffer.
 
Furthermore, the scope of our patents may not be sufficiently broad to offer meaningful protection.  In addition, our patents could be successfully challenged, invalidated or circumvented so that our patent rights would not create an effective competitive barrier.  We also intend to seek patent protection for any of our potential cell therapy products once we have completed their development.
 
We also rely on trade secrets and unpatentable know-how that we seek to protect, in part, by confidentiality agreements with our employees, consultants, suppliers and licensees.  These agreements may be breached, and we might not have adequate remedies for any breach.  If this were to occur, our business and competitive position would suffer.
 
We are exposed to fluctuations in currency exchange rates.

A significant portion of our business is conducted outside the United States. Therefore, we are exposed to currency exchange fluctuations in other currencies such as the Euro and the New Israeli Shekel (NIS). Moreover, a portion of our expenses in Israel and Europe are paid in NIS and Euros, respectively, which subjects us to the risks of foreign currency fluctuations. Our primary expenses paid in NIS are employee salaries, fees for consultants and subcontractors and lease payments on our Israeli facilities.

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

Since a considerable portion of our expenses such as employees' salaries are linked to an extent to the rate of inflation in Israel, the dollar cost of our operations is influenced by the extent to which any increase in the rate of inflation in Israel is or is not offset by the devaluation of the NIS in relation to the dollar. As a result, we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the dollar. In that event, the dollar cost of our operations in Israel will increase and our dollar-measured results of operations will be adversely affected. During the past few years inflation-adjusted NIS appreciated against the dollar, which raised the dollar cost of our Israeli operations. We cannot predict whether the NIS will appreciate against the dollar or vice versa in the future. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis by a devaluation of the NIS in relation to the dollar, will increase labor and other costs, which will increase the dollar cost of our operations in Israel and harm our results of operations.
 
 
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In previous fiscal years our independent registered public accounting firm’s report stated that there was a substantial doubt that we would be able to continue as a going concern.

Our independent registered public accounting firm, Kost, Forer, Gabbay & Kassierer a Member of Ernst & Young Global, stated in their audit report attached to our audited consolidated financial statements for the fiscal years that ended June 30, 2010 and 2009 that since we were an exploration stage company, we had no established source of revenue, and were dependent on our ability to raise capital from shareholders and other sources to sustain operations, there was a substantial doubt that we would be able to continue as a going concern. While our independent registered public accounting firm’s report   attached to our audited consolidated financial statements for the fiscal year that ended June 30, 2011  does not state that there is a substantial doubt that we will be able to continue as a going concern, there can be no assurance that in the future our independent registered public accounting will not state in their report that there is a substantial doubt that we will be able to continue as a going concern, if, for instance, we are not able to secure acceptable financing to fund our ongoing operations on suitable terms, if at all. In addition, if we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. In that event, we may be forced to cease operations and our stockholders could lose their entire investment in our company.
 
Potential product liability claims could adversely affect our future earnings and financial condition.
 
We face an inherent business risk of exposure to product liability claims in the event that the use of our products results in adverse affects.  As a result, we may incur significant product liability exposure.  We may not be able to maintain adequate levels of insurance at reasonable cost and/or reasonable terms.  Excessive insurance costs or uninsured claims would add to our future operating expenses and adversely affect our financial condition.
 
Our principal research and development facilities are located in Israel and the unstable military and political conditions of Israel may cause interruption or suspension of our business operations without warning.
 
Our principal research and development facilities are located in Israel.  As a result, we are directly influenced by the political, economic and military conditions affecting Israel.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Acts of random terrorism periodically occur which could affect our operations or personnel.
 
In addition, Israeli-based companies and companies doing business with Israel, have been the subject of an economic boycott by members of the Arab League and certain other predominantly Muslim countries since Israel's establishment.  Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved. Wars and acts of terrorism have resulted in significant damage to the Israeli economy, including reducing the level of foreign and local investment.
 
Furthermore, certain of our officers and employees may be obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called up for active military duty at any time.  All Israeli male citizens who have served in the army are subject to an obligation to perform reserve duty until they are between 40 and 49 years old, depending upon the nature of their military service.
 
Our cash may be subject to a risk of loss and we may be exposed to fluctuations in the market values of our portfolio investments and in interest rates.
 
Our assets include a significant component of cash.  We adhere to an investment policy set by our investment committee which aims to preserve our financial assets, maintain adequate liquidity and maximize returns.  We believe that our cash is held in institutions whose credit risk is minimal and that the value and liquidity of our deposits are accurately reflected in our consolidated financial statements as of June 30, 2011.  Currently, we hold almost all of our current assets in bank deposits.  We may invest a small portion of our current assets in invested in bonds, government bonds and a combination of corporate bonds and relatively low risk stocks.  However, nearly all of our cash and bank deposits are not insured by the Federal Deposit Insurance Corporation, or the FDIC, or similar governmental deposit insurance outside the United States.  Therefore, our cash and any bank deposits that we now hold or may acquire in the future may be subject to risks, including the risk of loss or of reduced value or liquidity, particularly in light of the increased volatility and worldwide pressures in the financial and banking sectors. In the future, should we determine that there is a decline in value of any of our portfolio securities which is not temporary in nature, this would result in a loss being recognized in our consolidated statements of operations.
 
 
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Although our internal control over financial reporting was considered effective as of June 30, 2011, there is no assurance that our internal control over financial reporting will continue to be effective in the future, which could result in our financial statements being unreliable, government investigation or loss of investor confidence in our financial reports.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish an annual report by our management assessing the effectiveness of our internal control over financial reporting. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Management's report as of the end of fiscal year 2011 concluded that our internal control over financial reporting was effective. There is, however, no assurance that we will be able to maintain such effective internal control over financial reporting in the future. Ineffective internal control over financial reporting can result in errors or other problems in our financial statements. In addition, our internal control over financial reporting is not required to be, and has not been, audited by our independent registered public accounting firm. In the future, if we are unable to assert that our internal controls are effective, our investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline. Failure to maintain effective internal control over financial reporting could also result in investigation or sanctions by regulatory authorities.
 
Because some of our officers and directors are located in non-U.S. jurisdictions, you may have no effective recourse against the management for misconduct and may not be able to enforce judgment and civil liabilities against our officers, directors, experts and agents.
 
Most of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of their assets are located outside the United States.  As a result, it may be difficult for you to enforce within the United States any judgments obtained against our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any U.S. state.
 
Because we do not intend to pay any dividends on our common stock, investors seeking dividend income should not purchase shares of our common stock.
 
We have not declared or paid any dividends on our common stock since our inception, and we do not anticipate paying any such dividends for the foreseeable future.  Investors seeking dividend income should not invest in our common stock.
 
We have a potential conflict with a prior financing agreement that may expose us to potential litigation .
 
In our subscription agreement for our May 2007 equity financing, or the Prior Financing Agreement, there is a provision that requires us for a period of four years (subject to acceleration under certain circumstances) not to sell any of our common stock for less than $0.0125 per share. The Prior Financing Agreement provides that any sale below that number must be preceded by a consent from each purchaser in the placement. Since that date, we have effected a one-for-200 reverse stock split.
 
 
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In August 2008, we entered into securities purchase agreements pursuant to which we sold securities at a price higher than the pre-split price of $0.0125 and below the post-split price of $2.50. We decided to proceed with this offering notwithstanding this provision for the following reasons:
 
 
·
The agreement did not contain any provisions for the adjustment of the specified minimum price in the event of stock splits and the like. If such agreement were to have contained such a provision, the floor price would be $2.50, which is more than the offering price of this offering.
 
 
·
The majority of purchasers in the private placement have sold the stock purchased in the placement, and thus the number of purchasers whose consent is purportedly required has been substantially reduced. The number of shares outstanding as to which this provision currently applies according the information supplied by our transfer agent is 2,021,545 shares.
 
 
·
An agreement that prevents our Board of Directors from issuing shares that are necessary to finance our business may be unenforceable.
 
 
·
Even if the agreement were considered enforceable and the share price number were to be adjusted for our reverse stock split, we believe that there would be no damage from this offering to the holders of our shares whose consent is purportedly required.
 
In the event that a court were to hold that the issuance of shares below $2.50 per share would violate the Prior Financing Agreement, it is unclear what remedy the court might impose.  If the court were to impose a remedy that would be the equivalent of an anti-dilution provision (which is not contained in the Prior Financing Agreement), any issuance of shares would be dilutive to our shareholders, including those who purchase shares in offerings that took place since then.  In addition, since August 2008, we, on several occasions, raised funds at a price per share which is higher than the pre-split price of $0.125 and below the post-split price of $2.50.
 
In connection with the August, 2008 financing, we approved the issuance of warrants to purchase up to 161,724 shares of our common stock to each of the investors who was a party to the Prior Financing Agreement that held shares purchased pursuant to such agreement, as of August 2008, conditioned on having the investors execute a general release pursuant to which we will be released from liability including, but not limited to, any claims, demands, or causes of action arising out of, relating to, or regarding sales of certain equity securities notwithstanding the above mentioned provision.  We received a general release from some of the investors, and issued them warrants to purchase 105,583 shares of our common stock.
 
Item 1B.  Unresolved Staff Comments .
 
Not Applicable.
 
Item 2.     Properties.
 
Our principal executive and research and development offices are located at MATAM Advanced Technology Park, Building No. 20, Haifa, Israel 31905, where we occupy approximately 1,280 square meters. We lease our facilities and our lease ends on August 31, 2012. Our monthly rent payment as of July 2011 was 75,000 NIS (approximately $22,000). For the fiscal year ended June 30, 2011, we paid $244,884 for rent.  In order to meet an expected need to expand our in-house clinical manufacturing capacity, we entered into a lease agreement with respect to an additional space of 2,600 square meters that we will lease commencing January 15, 2012.  We expect to pay a monthly rent of approximately $41,200.  We believe that the space available in our new planned facilities is adequate to meet our current and near future needs.
 
Item 3.    Legal Proceedings.
 
None.
 
Item 4.    [Removed and Reserved]
 
 
22

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

Our shares trade on the NASDAQ Capital Market under the symbol PSTI, in the Tel Aviv Stock Exchange under the ticker symbol PLTR and on Europe's Frankfurt Stock Exchange, under the symbol PJT.
 
The following table reflects the high and low sale prices on the NASDAQ Capital Market obtained from Yahoo! Finance and may not necessarily represent actual transactions.
 
The high and low closing prices of our common stock for the periods indicated below are as follows:
 
Quarter Ended
High
Low
September 30, 2009
$1.81
$1.25
December 31, 2009
$1.36
$0.90
March 31, 2010
$1.27
$1.06
June 30, 2010
$1.32
$1.01
September 30, 2010
$1.62
$1.01
December 31, 2010
$1.64
$1.24
March 31, 2011
$4.20
$1.54
June 30, 2011
$3.15
$2.56
 
On September 1, 2011 the per share closing price of our common stock, as reported by Yahoo! Finance, was $2.65.  As of September 1, 2011, there were 102 holders of record of our common stock. As of such date, 42,924,219 common shares were issued and outstanding.
 
American Stock Transfer and Trust Company, LLC is the registrar and transfer agent for our common shares.  Their address is 6201 15th Avenue, 2nd Floor, Brooklyn, NY  11219, telephone: (718) 921-8261, (800) 937-5449.
 
Dividend Policy
 
We have not paid any cash dividends on our common stock and have no present intention of doing so. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our Board of Directors.
 
Recent Sales of Unregistered Securities
 
In October 2010 we issued 11,250 restricted stock units to a consultant for services rendered.
 
In May 2011 we issued 42,860 restricted stock units to a company controlled by one of our directors in connection with compensation for such director’s services to us.  In addition, in May 2011 we issued 12,000 restricted stock units to a consultant for services rendered.

The above issuances and sales were exempt under Section 4(2) of the Securities Act of 1933, as amended.
 
Item 6. Sel ect ed financial data.
 
Not Applicable.
 
 
23

 
 
Item 7.       Managemen t ’s Discussion and Analysis of Financial Condition and Results of Operations.
 
RESULTS OF OPERATIONS – YEAR ENDED JUNE 30, 2011 COMPARED TO YEAR ENDED JUNE 30, 2010.
 
Through June 30, 2011, we have not generated any revenues, and as of such date we have negative cash flow from operations of $28,893,000 and have accumulated a deficit of $50,953,000 since our inception in May 2001. This negative cash flow is mostly attributable to research and development and general and administrative expenses.
 
Research and Development net
 
Research and development net costs (costs less participation and grants by the OCS and other parties), for the year ended June 30, 2011 increased by 54% to $6,629,000 from $4,301,000 for the year ended June 30, 2010.  This increase is mainly due to the increase in our research and development activities during the fiscal year 2011, and more specifically is attributed to the increase in our stock-based compensation expenses and our salaries and lab materials expenses including hiring 11 new employees since June 2010.  This increase is partially offset by a grant from the U.S. government, which was received and recorded in the third quarter of fiscal year 2011, in the amount of $244,000.
 
General and Administrative
 
General and administrative expenses for the year ended June 30, 2011 increased by 43% to $4,485,000 from $3,138,000 for the year ended June 30, 2010.  This increase is mainly due to an increase in stock-based compensation expenses related to our employees and consultants.
 
Financial Income, net
 
Financial income increased from an expense of $14,000 for the year ended June 30, 2010 to income of $266,000 for the year ended June 30, 2011.  The increase in the financial income is due to interest income on bank deposits which increased as our cash balance materially increased over the past fiscal year.
 
Net Loss
 
Net loss for the year ended June 30, 2011 was $10,848,000 as compared to net loss of $7,453,000 for the year ended June 30, 2010. Net loss per share for the year ended June 30, 2011 was $0.35, as compared to $0.44 for the year ended June 30, 2010.  The net loss per share decreased as a result of the increase in our weighted average number of shares due to the issuance of additional shares pursuant to equity issuances since July 1, 2010 as discussed further below.
 
Liquidity and Capital Resources

As of June 30, 2011, total current assets were $43,297,000 and total current liabilities were $2,018,000. On June 30, 2011, we had a working capital surplus of $41,279,000 and an accumulated deficit of $50,953,000. We finance our operations and plan to continue doing so with issuances of securities, grants from the OCS and other parties and most recently also from licensing our technology.
 
Cash and cash equivalents as of June 30, 2011 amounted to $42,829,000.  This is an increase of $41,246,000 from the $1,583,000 reported as of June 30, 2010. Cash balances increased in the year ended June 30, 2011 for the reasons presented below:
 
 
24

 

Operating activities used cash of $5,755,000 in the year ended June 30, 2011. Cash used by operating activities in the year ended June 30, 2011 primarily consisted of payments of salaries to our employees, and payments of fees to our consultants, subcontractors and professional services providers including costs of the clinical studies, less research and development grants by the OCS and other parties.

Investing activities used cash of $36,000 in the year ended June 30, 2011. The investing activities consisted primarily of repayments of short-term deposits, offset by investments in equipment for our R&D facilities and construction of a new research lab.

Financing activities generated cash in the amount of $47,037,000 during the year ended June 30, 2011. Substantially all of such amount is attributable to offerings we closed in October 2010 and February 2011 and exercise of warrants, as follows:

On October 18, 2010, we closed an offering pursuant to which we sold 4,375,000 shares of our common stock at a price of $1.20 per share and warrants to purchase 2,625,000 shares of common stock, at an exercise price per share of $1.80.  No separate consideration was paid for the warrants.  The warrants have a term of four years and are exercisable starting six months following the issuance thereof.   The aggregate net proceeds from the sale of the shares and the warrants were approximately $5,006,000. 
 
On February 1, 2011, we closed a firm commitment underwritten public offering of 11,000,000 units, with each unit consisting of one share of our common stock and one warrant to purchase 0.4 shares of common stock, at a purchase price of $3.25 per unit. The warrants sold in the offering are exercisable for a period of five years commencing six months following issuance, at an exercise price of $4.20 per share.  Also, on February 1, 2011 we closed the exercise by the underwriters of their full overallotment option to purchase an additional 1,650,000 shares of common stock and warrants to purchase 660,000 shares of common stock.  The aggregate net proceeds to us were approximately $38 million.
 
During January-June 2011, a total of 769,391 warrants were exercised via a “cashless” manner, resulting in the issuance of 362,746 shares of common stock to our investors.  In addition 2,079,968 warrants were exercised and resulted in the issuance of 2,079,968 shares of common stock by our investors. The aggregate cash consideration received was $3,593,000.
 
During the year that ended June 30, 2011 and 2010 we received approximately $2,177,000 and $1,492,000 from the OCS towards our R&D expenses, respectively.
 
We adhere to an investment policy set by our investment committee which aims to preserve our financial assets, maintain adequate liquidity and maximize return.  Such policy further provides that we should hold the vast majority of our current assets in bank deposits and the remainder of our current assets is to be invested in government bonds and a combination of corporate bonds and relatively low risk stocks.  As of today, the currency of our financial portfolio is mainly in USD and we use forward and options contracts in order to hedge our exposures to currencies other than the USD.
 
Outlook
 
We do not expect to generate any revenues from sales of products in the next twelve months.  Our products will likely not be ready for sale for at least three years, if at all.  We expect to generate revenues, which in the short and medium terms will unlikely exceed our costs of operations, from sale of licenses to use our technology or products, as we have in the License Agreement we entered into in August 2011 with United.
 
We anticipate that our operating expenses will increase significantly during fiscal year 2012.  This is mainly attributable to the anticipated phase II and phase II/III clinical trials, constructing a clinical manufacturing facility and developing capabilities for new clinical indications of PLX cells.  We expect that our general and administrative expenses to continue in fiscal year 2012 at similar levels as they were in fiscal year 2011.
 
 
25

 
 
The OCS has supported our activity in the past five years. Our last program approved by the OCS was for the period March 2010 until February 2011.  In March 2011, we filed an application for a sixth year program. There is no assurance that the OCS will approve a grant for another year's R&D activity.  The amount of the grant is also not certain.
 
In addition the European authorities approved a research grant under the European Commission’s Seventh Framework Program (FP7) in the amount of approximately $134,000 for a period of 5 years which began on January 1, 2011.
 
We believe that giving our current business development plan, the funds we have will be sufficient for operating until approximately the end of fiscal year of 2014.  However, our management believes that it is likely that we will need to raise additional funds before we have positive cash flow from operations. We may raise funds from time to time to support our ongoing capital needs, or if we choose to expand or accelerate our clinical programs or develop new products. We look for sources of funding, including non-diluting sources such as licensing fees and OCS grants.  We have an effective shelf registration statement which we have used in recent public offerings we made and may continue to use in the future to raise additional funds, subject to certain limitations based on our size.
 
Application of Critical Accounting Policies
 
Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP.  Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies.  We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials statements.
 
Stock-based compensation

We account for stock-based compensation in accordance with ASC 718, "Compensation-Stock Compensation". ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements.
 
We recognize compensation expenses for the value of its awards, which have graded vesting based on the accelerated method over the requisite service period of each of the awards.

We estimate 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. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the grant date. The expected life of options granted is calculated using the Simplified Method, as defined in Staff Accounting Bulletin, or SAB No. 107, "Share-Based Payments", or SAB No. 107, as the average between the vesting period and the contractual life of the options. On December 21, 2007 the SEC staff issued SAB No. 110, or SAB 110, which, effective January 1, 2008, amends and replaces SAB No. 107”.

We currently use the Simplified Method, as adequate historical experience is not available to provide a reasonable estimate. We adopted SAB 110 effective January 1, 2008 and will continue to apply the Simplified Method until enough historical experience is available to provide a reasonable estimate of the expected term for stock option grants.

We have historically not paid dividends and have no foreseeable plans to distribute dividends. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term.  The expected pre-vesting forfeiture rate affects the number of exercisable options. Based on our historical experience, the pre-vesting forfeiture rate per grant is 5% for the options and shares granted to employees and 0% for the options and shares granted to directors and officers of our Company.

In accordance with ASC 718, restricted shares or restricted shares units are measured at their fair value as if they were vested and issued on the grant date. All restricted shares and restricted shares units to employees and non-employees granted in 2011 and 2010 were granted for no consideration or for a voluntary reduction in cash compensation; therefore their fair value was equal to the share price at the date of grant.
 
 
26

 

The fair value of all restricted shares and restricted shares units was determined based on the close trading price of our shares known at the grant date.

We apply ASC 718 and ASC 505 (EITF 96-18), "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services", with respect to options and warrants issued to non-employees. ASC 718 requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date.

Stock-based compensation is considered critical accounting policy due to the significant expenses of options, restricted stock and restricted stock units which were granted to our employees, directors and consultants. Stock-based compensation expenses that were recorded in fiscal year 2011 amounted to $3,325,000.

Research and Development Expenses, net
 
We expect our research and development expense to remain our primary expense in the near future as we continue to develop our product candidates. Research and development expense consists of:
 
·
internal costs associated with research and development activities;
 
·
payments made to consultants and subcontractors such as research organizations;
 
·
manufacturing development costs;
 
·
personnel-related expenses, including salaries, benefits, travel, and related costs for the personnel involved in research and development;
 
·
activities relating to the preclinical studies and clinical trials; and
 
·
facilities and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, as well as laboratory and other supplies.

The costs and expenses of our research and development activity are partially funded by grants we have received from the OCS. The grant is deducted from research and development expenses at the time we are entitled to such grant, on the basis of the cost incurred.  There can be no assurance that we will continue to receive grants from the OCS in amounts sufficient for our operations, if at all.
 
Off Balance Sheet Arrangements
 
Our company has no off balance sheet arrangements.
 
Item 7A. Quantitat ive and Qualitative Disclosures About Market Risk.
 
Not Applicable.
 
Item 8.     Financial Statements and Supplementary Data.
 
Our financial statements are stated in thousands United States dollars (US$) and are prepared in accordance with U.S. GAAP.
 
The following audited consolidated financial statements are filed as part of this annual report of Form 10-K:
 
Report of Independent Registered Public Accounting Firm, dated September 7, 2011.
 
 Consolidated Balance Sheet.
 
 Consolidated Statements of Operations.
 
 Consolidated Statements of Changes in Stockholders' Equity (Deficiency).
 
 Consolidated Statements of Cash Flows.
 
 Notes to the Consolidated Financial Statements.
 
 
27

 
 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
  (A Development Stage Company)
 
CONSOLIDATED FINANCIAL STATEMENTS

  As of June 30, 2011

 
 

 
 
                           PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2011

 U.S. DOLLARS IN THOUSANDS
 
INDEX

 
Page
   
F - 2
   
F - 3 - F - 4
   
F - 5
   
F - 6 - F - 16
   
F - 17 - F - 19
   
F - 20 - F - 48
 
 
 

 
 
    Kost Forer Gabbay & Kasierer
2 Pal-Yam Ave.
Haifa 33095, Israel
 
Tel:  972 (4)8654000
Fax: 972(3)   5633443
www.ey.com.il
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholder Of
 
PLURISTEM THERAPEUTICS INC.
(A Development Stage Company)
 
We have audited the accompanying consolidated balance sheets of Pluristem Therapeutics Inc. and its subsidiary (a development stage company) ("the Company") as of June 30, 2011 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 2011 and for the period from May 11, 2001 (inception date) through June 30, 2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2011, and the consolidated results of operations and cash flows for each of the three years in the period ended June 30, 2011 and for the period from May 11, 2001 (inception date) through June 30, 2011, in conformity with U.S. generally accepted accounting principles.
 
  /s/ Kost Forer Gabbay & Kasierer
A member of Ernst & Young Global
 
Haifa, Israel
September 7, 2011 
 
 
F - 2

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
  (A Development Stage Company)

CONSOLIDATED BALANCE SHE ETS
U.S. Dollars in thousands
 
         
June 30,
 
   
Note
   
2011
   
2010
 
ASSETS
                 
                   
CURRENT ASSETS:
                 
                   
Cash and cash equivalents
    3     $ 42,829     $ 1,583  
Short term bank deposit
            -       913  
Prepaid expenses
            314       41  
Accounts receivable from the Office of the Chief Scientist
            -       706  
Other accounts receivable
            154       362  
Total current assets
            43,297       3,605  
                         
LONG-TERM ASSETS:
                       
                         
Long-term deposits and restricted deposits
            179       168  
Severance pay fund
            452       294  
Property and equipment, net
    4       2,088       1,555  
Total long-term assets
            2,719       2,017  
                         
Total assets
          $ 46,016     $ 5,622  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 3

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
  (A Development Stage Company)

CONSOLIDATED BALANCE SHEETS
U.S. Dollars in thousands (except share and per share data)


         
June 30,
 
   
Note
   
2011
   
2010
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
                   
CURRENT LIABILITIES
                 
                   
Trade payables
        $ 1,177     $ 791  
Accrued expenses
          208       118  
Other accounts payable
    5       633       372  
Total current liabilities
            2,018       1,281  
                         
LONG-TERM LIABILITIES
                       
                         
Accrued severance pay
            576       360  
              576       360  
                         
COMMITMENTS AND CONTINGENCIES
    6                  
                         
STOCKHOLDERS’ EQUITY
    7                  
                         
Share capital:
                       
     Common stock  $0.00001 par value:
     Authorized: 100,000,000 shares.
     Issued:  42,443,185 shares as of June 30, 2011, 21,458,707 shares as of June 30, 2010.
      Outstanding:  42,443,185 shares as of June 30, 2011, 20,888,781 shares as of June 30, 2010 .
            - (*)       - (*)  
     Additional paid-in capital
            94,375       44,086  
     Accumulated deficit during the development stage
            (50,953 )     (40,105 )
              43,422       3,981  
                         
            $ 46,016     $ 5,622  

(*)
Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 4

 

PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. Dollars in thousands (except share and per share data)
 
         
 
 
 
Year ended June 30,
   
Period from May 11, 2001 (Inception) through
June 30,
 
   
Note
   
2011
   
2010
   
2009
   
2011
 
                               
Research and development expenses
        $ 8,311     $ 6,123     $ 4,792     $ 31,591  
Less participation by the Office of the Chief Scientist and other parties
          (1,682 )     (1,822 )     (1,651 )     (6,754 )
Research and development expenses, net
          6,629       4,301       3,141       24,837  
General and administrative expenses
          4,485       3,138       3,417       24,996  
Know how write-off
          -       -       -       2,474  
                                       
Operating loss
          (11,114 )     (7,439 )     (6,558 )     (52,307 )
                                       
Financial expenses (income), net
    8       (266 )     14       78       (1,354 )
                                         
Net loss for the period
          $ (10,848 )   $ (7,453 )   $ (6,636 )   $ (50,953 )
                                         
Loss per share:
                                       
Basic and diluted net loss per share
          $ (0.35 )   $ (0.44 )   $ (0.63 )        
                                         
Weighted average number of shares used  in computing basic and diluted net loss per share
                31,198,825           17,004,998           10,602,880          
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 5

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLD ER S' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)

 
 
 
 
 
Common Stock
   
Additional Paid-in
   
Receipts on Account of Common
   
Deficit Accumulated During the Development
   
Total Stockholders’ Equity
 
   
Shares
   
Amount
   
Capital
   
Stock
   
Stage
   
(Deficiency)
 
Issuance of common stock on July 9, 2001
    175,500     $ (*)     $ 3     $ -     $ -     $ 3  
Balance as of June 30, 2001
    175,500       (*)       3       -       -       3  
Net loss
    -       -       -       -       (78 )     (78 )
Balance as of June 30, 2002
    175,500       (*)       3       -       (78 )     (75 )
Issuance of common stock on October 14, 2002, net of issuance expenses of $17
    70,665       (*)       83       -       -       83  
Forgiveness of debt
    -       -       12       -       -       12  
Stock cancelled on March 19, 2003
    (136,500 )     (*)       (*)       -       -       -  
Receipts on account of stock and warrants, net of finders and legal fees of $56
    -       -       -       933       -       933  
Net loss
    -       -       -       -       (463 )     (463 )
Balance as of June 30, 2003
    109,665     $ (*)     $ 98     $ 933     $ (541 )   $ 490  
 
 (*) Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 6

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)
 
   
Common Stock
   
Additional Paid-in
   
Receipts on Account of Common
   
Deficit Accumulated During the Development
   
Total Stockholders’ Equity
 
   
Shares
   
Amount
   
Capital
   
Stock
   
Stage
   
(Deficiency)
 
Balance as of July 1, 2003
    109,665     $ (*)     $ 98     $ 933     $ (541 )   $ 490  
Issuance of common stock on July 16, 2003, net of issuance expenses of $70
    3,628       (*)       1,236       (933 )     -       303  
Issuance of common stock on January 20, 2004
    15,000       (*)       -       -       -       (*)  
Issuance of warrants on January 20, 2004 for finder’s fee
    -       -       192       -       -       192  
Common stock granted to consultants on February 11, 2004
    5,000       (*)       800       -       -       800  
Stock based compensation related to warrants granted to consultants on December 31, 2003
    -       -       358       -       -       358  
Exercise of warrants on April 19, 2004
    1,500       (*)       225       -       -       225  
Net loss for the year
    -       -       -       -       (2,011 )     (2,011 )
Balance as of June 30, 2004
    134,793     $ (*)     $ 2,909     $ -     $ (2,552 )   $ 357  
 
(*)   Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 7

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)

   
Common Stock
   
Additional Paid-in
   
Deficit Accumulated During the Development
   
Total Stockholders’ Equity
 
   
Shares
   
Amount
   
Capital
   
Stage
   
(Deficiency)
 
Balance as of July 1, 2004
    134,793     $ (*)     $ 2,909     $ (2,552 )   $ 357  
Stock-based compensation related to warrants granted to consultants on September 30, 2004
    -       -       162       -       162  
Issuance of common stock and warrants on November 30, 2004 related to  the October 2004 Agreement net of issuance costs of $29
    16,250       (*)       296       -       296  
Issuance of common stock and warrants on January 26, 2005 related to the October 2004 Agreement net of issuance costs of $5
    21,500       (*)       425       -       425  
Issuance of common stock and warrants on January 31, 2005 related to the January 31, 2005 Agreement
    35,000       (*)       -       -       (*)  
Issuance of common stock and options on February 15, 2005 to former director of the Company
    250       (*)       14       -       14  
Issuance of common stock and warrants on February 16, 2005 related to the January 31, 2005 Agreement
    25,000       (*)       -       -       (*)  
 
(*)      Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 8

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)

 
   
Common Stock
   
Additional Paid-in
   
Deficit Accumulated During the Development
   
Total Stockholders’ Equity
 
   
Shares
   
Amount
   
Capital
   
Stage
   
(Deficiency)
 
Issuance of warrants on February 16, 2005 for finder fee related to the
   January 31, 2005 Agreement
    -       -       144       -       144  
Issuance of common stock and warrants on March 3, 2005 related to the
   January 24, 2005 Agreement net of issuance costs of $24
    60,000       (*)       1,176       -       1,176  
Issuance of common stock on March 3, 2005 for finder fee related to the
   January 24, 2005 Agreement
    9,225       (*)       (*)       -       -  
Issuance of common stock and warrants on March 3, 2005 related to the
   October 2004 Agreement net of issuance costs of $6
    3,750       (*)       69       -       69  
Issuance of common stock and warrants to the Chief Executive Officer on March 23, 2005
    12,000       (*)       696       -       696  
Issuance of common stock on March 23, 2005 related to the October 2004 Agreement
    1,000       (*)       20       -       20  
 
(*)   Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 9

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)
 
   
Common Stock
   
Additional Paid-in
   
Deficit Accumulated During the Development
   
Total Stockholders’ Equity
 
   
Shares
   
Amount
   
Capital
   
Stage
   
(Deficiency)
 
Classification of a liability in respect of warrants to additional paid in capital, net of issuance costs of $ 178
    -       -       542       -       542  
Net loss for the year
    -       -       -       (2,098 )     (2,098 )
Balance as of  June 30, 2005
    318,768       (*)       6,453       (4,650 )     1,803  
Exercise of warrants on November 28, 2005 to finders related to the January 24, 2005 agreement
    400       (*)       -       -       -  
Exercise of warrants on January 25 ,2006 to finders related to the January 25, 2005 Agreement
    50       (*)       -       -       -  
Reclassification of warrants from equity to liabilities due to application of ASC 815-40
    -       -       (8 )     -       (8 )
Net loss for the year
    -       -       -       (2,439 )     (2,439 )
Balance as of  June  30, 2006
    319,218     $ (*)     $ 6,445     $ (7,089 )   $ (644 )
 
(*)   Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 10

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)

   
Common Stock
   
Additional Paid-in
   
Receipts on Account of Common
   
Accumulated Other Comprehensive
   
Deficit Accumulated During the Development
   
Total Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Stock
   
Loss
   
Stage
   
Equity
 
Balance as of  July 1, 2006
    319,218     $ (*)     $ 6,445     $ -     $ -     $ (7,089 )   $ (644 )
Conversion of convertible debenture, net of issuance costs of $440
    1,019,815       (*)       1,787       -       -       -       1,787  
Classification of a liability in respect of warrants
    -       -       360       -       -       -       360  
Classification of deferred issuance expenses
    -       -       (379 )     -       -       -       (379 )
Classification of a liability in respect of options granted to non-employees consultants
    -       -       116       -       -       -       116  
Stock based Compensation to employees, directors and
        non-employees consultants
    -       -       3,324       -       -       -       3,324  
Exercise of warrants related to the April 3, 2006 agreement net of issuance costs of $114
    75,692       (*)       1,022       -       -       -       1,022  
Cashless exercise of warrants related to the April 3, 2006 agreement
    46,674       (*)       (*)       -       -       -       -  
Issuance of common stock on May and June 2007 related
       to the May 14, 2007 agreement, net of issuance
       costs of $64
    3,126,177       (*)       7,751       -       -       -       7,751  
Receipts on account of shares
    -       -       -       368       -       -       368  
 
(*)      Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 11

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)

   
Common Stock
   
Additional Paid-in
   
Receipts on Account of Common
   
Accumulated Other Comprehensive
   
Deficit Accumulated During the Development
   
Total Stockholders’
   
Total Comprehensive
 
   
Shares
   
Amount
   
Capital
   
Stock
   
Loss
   
Stage
   
Equity
   
Loss
 
Cashless exercise of warrants related to the May 14, 2007 issuance
    366,534       (*)       (*)       -       -       -       -       -  
Issuance of warrants to investors related to the May 14, 2007 agreement
    -       -       651       -       -       -       651       -  
Unrealized loss on available for sale
        securities
    -       -       -       -       (30 )     -       (30 )   $ (30 )
Net loss for the year
    -       -       -       -       -       (8,429 )     (8,429 )     (8,429 )
Balance as of June 30, 2007
    4,954,110     $ (*)     $ 21,077     $ 368     $ (30 )   $ (15,518 )   $ 5,897       -  
Total comprehensive loss
                                                          $ (8,459 )
 
(*)    Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 12

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)
 
   
Common Stock
   
Additional Paid-in
   
Receipts on Account of Common
   
Accumulated Other Comprehensive
   
Deficit Accumulated During the Development
   
Total Stockholders’
   
Total Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Stock
   
Loss
   
Stage
   
Equity
   
Loss
 
Balance as of July 1, 2007
    4,954,110     $ (*)     $ 21,077     $ 368     $ (30 )   $ (15,518 )   $ 5,897        
Issuance of common stock related to investors relation agreements
    69,500       (*)       275       -       -       -       275        
Issuance of common stock in July 2007 - June 2008 related to the May 14, 2007 Agreement
    908,408       (*)       2,246       (368 )     -       -       1,878        
Cashless exercise of warrants related to the  May 14, 2007 Agreement
    1,009,697       (*)       (*)       -       -       -       -        
Stock based Compensation to employees, directors and non-employees consultants
    -       -       4,747       -       -       -       4,747        
Realized loss on available for sale
        securities
    -       -       -       -       30       -       30     $ 30  
Net loss for the year
    -       -       -       -       -       (10,498 )     (10,498 )     (10,498 )
Balance as of June 30, 2008
    6,941,715     $ (*)     $ 28,345     $ -     $ -     $ (26,016 )   $ 2,329          
Total comprehensive loss
                                                          $ (10,468 )
 
(*)  Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 13

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)

 
   
Common Stock
   
Additional Paid-in
   
Deficit Accumulated During the Development
   
Total Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Stage
   
Equity
 
Balance as of July 1, 2008
    6,941,715     $ (*)     $ 28,345     $ (26,016 )   $ 2,329  
Issuance of common stock related to investor relations agreements
    171,389       (*)       133       -       133  
Issuance of common stock and warrants related to the August 6, 2008 agreement, net of issuance costs of $125
    1,391,304       (*)       1,475       -       1,475  
Issuance of common stock and warrants related to the September 2008 agreement, net of issuance costs of $62
    900,000       (*)       973       -       973  
Issuance of common stock and warrants in November 2008 -January 2009, net of issuance costs of $39
    1,746,575       (*)       660       -       660  
Issuance of common stock and warrants related to the January 20, 2009 agreement, net of issuance costs of $5
    216,818       (*)       90       -       90  
Issuance of common stock and warrants related to the January 29, 2009 agreement, net of issuance costs of $90
    969,826       (*)       1,035       -       1,035  
Issuance of common stock and warrants related to the May 5, 2009 agreement, net of issuance costs of $104
    888,406       (*)       1,229       -       1,229  
Stock based Compensation to employees, directors and non-employees consultants
    450,853       (*)       2,106       -       2,106  
Net loss for the period
    -       -       -       (6,636 )     (6,636 )
Balance as of June 30, 2009
    13,676,886     $ (*)     $ 36,046     $ (32,652 )   $ 3,394  
 
(*)           Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 14

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)
 
   
Common Stock
   
Additional Paid-in
   
Deficit Accumulated During the Development
   
Total Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Stage
   
Equity
 
Balance as of July 1, 2009
    13,676,886     $ (*)     $ 36,046     $ (32,652 )   $ 3,394  
Issuance of common stock and warrants related to November 2008 through January 2009 agreements (on July 2009)
    1,058,708       (*)       794       -       794  
Issuance of common stock and warrants related to October 2009 agreements, net of issuance costs of $242
    2,702,822       (*)       2,785       -       2,785  
Issuance of common stock and warrants related to April 2010 agreements,  net of issuance costs of $54
    2,393,329       (*)       2,627       -       2,627  
Issuance of common stock related to investor relations agreements
    45,033       (*)       63       -       63  
Exercise of options by employee
    3,747       (*)       2       -       2  
Stock based Compensation to employees, directors and non-employees consultants
    1,008,256       (*)       1,769       -       1,769  
Net loss for the period
    -       -        -       (7,453 )     (7,453 )
Balance as of June 30, 2010
    20,888,781     $ (*)     $ 44,086     $ (40,105 )   $ 3,981  

 (*)           Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 15

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
U.S. Dollars in thousands (except share and per share data)
 
   
Common Stock
   
Additional Paid-in
   
Deficit Accumulated During the Development
   
Total Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Stage
   
Equity
 
Balance as of July 1, 2010
    20,888,781     $ (*)     $ 44,086     $ (40,105 )   $ 3,981  
Issuance of common stock and warrants related to October 2010 agreements,  net of issuance costs of $244
    4,375,000       (*)       5,006       -       5,006  
Issuance of common stock and warrants related to February 2011 secondary offering,  net of issuance costs of $2,970
    12,650,000       (*)       38,142       -       38,142  
Exercise of warrants by investors and finders
    2,442,714       (*)       3,593       -       3,593  
Exercise of options by employees and consultants
    103,943       (*)       68       -       68  
Issuance of common stock related to investor relations agreements
    90,000       (*)       155       -       155  
Stock based Compensation to employees, directors and non-employees consultants
    1,892,747       (*)       3,325       -       3,325  
Net loss for the period
    -       -       -       (10,848 )     (10,848 )
Balance as of June 30, 2011
    42,443,185     $ (*)     $ 94,375     $ (50,953 )   $ 43,422  
 
(*)           Less than $1.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 16

 
 
PLURISTEM THERAPEUTICS INC. AND ITS SUBSIDIARY
  (A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FL O WS
U.S. Dollars in thousands
 
   
Year ended June 30,
 
Period from May 11, 2001 (inception)
Through
June 30,
 
   
2011
   
2010
   
2009
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
                         
Net loss
  $ (10,848 )   $ (7,453 )   $ (6,636 )   $ (50,953 )
                                 
Adjustments to reconcile net loss to net cash used in operating activities: