March 31, 2012 10Q 10-Q 1 f10q033112_10q.htm MARCH 31, 2012 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)


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


For the quarterly period ended March 31, 2012


or


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


For the transition period from _______________________to___________________________


Commission File Number: 000-52545


OphthaliX Inc.

(Exact name of registrant as specified in its charter)


Delaware

88-0445167

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

1656 Reunion Avenue, Suite 250, South Jordan, UT

84095

(Address of principal executive offices)

(Zip Code)

 

 

+(972) 36133372

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X . No      .


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  X . No      .


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


Large accelerated filer

      .

Accelerated filer

      .

Non-accelerated filer

      . (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 Exchange Act). Yes      . No  X .


The number of shares outstanding of the registrant’s common stock on May 2, 2012, was 46,985,517.






TABLE OF CONTENTS

 

Page

PART I—FINANCIAL INFORMATION

3

Item 1.  Financial Statements

3

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

12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

16

Item 4.  Controls and Procedures

16

PART II—OTHER INFORMATION

16

Item 6.  Exhibits

16

SIGNATURES

17





- 2 -



PART I—FINANCIAL INFORMATION


Item 1.  Financial Statements




OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)



INTERIM CONSOLIDATED FINANCIAL STATEMENTS



AS OF MARCH 31, 2012



U.S. DOLLARS IN THOUSANDS



UNAUDITED





INDEX



 

Page

 

 

 

 

Consolidated Balance Sheets

4

 

 

Consolidated Statements of Operations

5

 

 

Statements of Changes in Shareholders' Equity

6

 

 

Consolidated Statements of Cash Flows

7

 

 

Notes to Consolidated Financial Statements

8 - 11





- - - - - - - - - - - - - - -




- 3 -



OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)


CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share and per share data


 

 

 

March 31,

2012

 

 

December 31,

2011

 

 

 

Unaudited

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,467

 

$

3,441

Investment in parent company

 

 

263

 

 

172

Other accounts receivable

 

 

546

 

 

3

 

 

 

 

 

 

 

Total current assets

 

 

3,276

 

 

3,616

 

 

 

 

 

 

 

LONG-TERM ASSETS:

 

 

 

 

 

 

Investment in parent company

 

 

1,128

 

 

1,336

 

 

 

 

 

 

 

Total long-term assets

 

 

1,128

 

 

1,336

 

 

 

 

 

 

 

Total assets

 

$

4,404

 

$

4,952

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Related company

 

$

338

 

$

140

Other accounts payables and accrued expenses

 

 

170

 

 

160

 

 

 

 

 

 

 

Total current liabilities

 

 

508

 

 

300

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

Derivative related to service agreement

 

 

3,553

 

 

1,436

 

 

 

 

 

 

 

Total non-current liabilities

 

 

3,553

 

 

1,436

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

Share capital

 

 

 

 

 

 

Preferred Shares -

Authorized: 1,000,000 shares at March 31, 2012 and December 31, 2011; Issued and Outstanding: 0 shares at March 31, 2012 and December 31, 2011

 

 

-

 

 

-

Common Shares of  $0.001 par value -

Authorized: 100,000,000 shares at March 31, 2012 and December 31, 2011; Issued and Outstanding: 46,985,517 shares at March 31, 2012 and December 31, 2011

 

 

47

 

 

47

Additional Paid-in capital

 

 

4,682

 

 

4,614

Accumulated other comprehensive loss

 

 

(161)

 

 

(44)

Accumulated deficit

 

 

(4,225)

 

 

(1,401)

 

 

 

 

 

 

 

Total shareholders' equity

 

 

343

 

 

3,216

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

4,404

 

$

4,952


The accompanying notes are an integral part of these interim unaudited consolidated financial statements.



- 4 -



OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)


CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

U.S. dollars in thousands, except share and per share data


 

 

 

Three months ended

March 31,

 

 

Period from

June 27, 2011

(inception

date) to

March 31,

 

 

 

2012

 

 

2012

 

 

 

Unaudited

 

 

 Unaudited

 

 

 


 

 


Operating expenses:

 

 


 

 


Research and development

 

$

 508

 

$

 724

General and administrative

 

 

 202

 

 

 337

 

 

 

 

 

 

 

Total operating expenses

 

 

 710

 

 

 1,061

 

 

 

 

 

 

 

Financial expenses, net

 

 

 2,114

 

 

 3,164

 

 

 

 

 

 

 

Net loss

 

$

 2,824

 

$

 4,225

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.06)

 

$

(0.10)

 

 

 

 

 

 

 

Weighted average number of Common shares used in computing basic and diluted net loss per share

 

 

 46,985,517

 

 

 41,176,629

 

 

 

 

 

 

 

Comprehensive loss

 

 

 2,941

 

 

 4,386


The accompanying notes are an integral part of these interim unaudited consolidated financial statements.



- 5 -



OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)


STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

U.S. dollars in thousands, except share and per share data


 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Common shares

 

paid-in

 

Comprehensive

 

Accumulated

 

 

shareholders'

 

 

Number

 

 

Amount

 

capital

 

Loss

 

deficit

 

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 27, 2011 (inception date)

 

36,000,000

 

 $

36

 

 $

(36)

 

 $

-

 

 $

-

 

 $

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

(21)

 

 

(21)

Shares issued with respect to reverse acquisition of OphthaliX Inc.

 

5,540,431

 

 

6

 

 

(6)

 

 

-

 

 

-

 

 

-

Issuance of Common shares and warrants, net (a)

 

5,445,086

 

 

5

 

 

4,656

 

 

-

 

 

-

 

 

4,661

Other Comprehensive Loss

 

-

 

 

-

 

 

-

 

 

(44)

 

 

-

 

 

(44)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,380)

 

 

(1,380)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2011

 

46,985,517

 

 

47

 

 

4,614

 

 

(44)

 

 

(1,401)

 

 

3,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share base payment

 

-

 

 

-

 

 

68

 

 

-

 

 

-

 

 

68

Other Comprehensive Loss

 

-

 

 

-

 

 

-

 

 

(117)

 

 

-

 

 

(117)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

(2,824)

 

 

(2,824)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2012 (unaudited)

 

46,985,517

 

 $

47

 

 $

4,682

 

 $

(161)

 

 $

(4,225)

 

 $

343


The accompanying notes are an integral part of these interim unaudited consolidated financial statements.



- 6 -



OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)


CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands, except share and per share data


 

 

 

Three months

ended

March 31,

 

 

Period from

June 27, 2011

(inception

date) to

March 31,

 

 

 

2012

 

 

2012

 

 

 

Unaudited

 

 

Unaudited

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,824)

 

$

(4,225)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Increase in other account receivables

 

 

(543)

 

 

(546)

Increase  in other payables and accrued expenses

 

 

208

 

 

508

 

 

 

 

 

 

 

Changes in fair value of the derivative related to service agreement

 

 

2,117

 

 

3,165

Share based payment

 

 

68

 

 

68

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(974)

 

 

(1,030)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of Common shares and warrants, net

 

 

-

 

 

3,497

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

-

 

 

3,497

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

(974)

 

 

2,467

Cash and cash equivalents at the beginning of the period

 

 

3,441

 

 

-

 

 

 

 

 

 

 

Cash and cash equivalents at the end of the period

 

$

2,467

 

$

2,467


The accompanying notes are an integral part of these interim unaudited consolidated financial statements.




- 7 -



OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

Notes to Unaudited Consolidated Financial Statements

March 31, 2012



NOTE 1:-

GENERAL


a.

OphthaliX Inc. (the "Company" or "OphthaliX") (formerly: "Denali Concrete Management Inc." or "Denali"), originally incorporated in the State of Nevada on December 10, 1999 under the name Bridge Capital.com Inc. Bridge Capital.com Inc., was a nominally capitalized corporation that did not commence its operations until it changed its name to Denali Concrete Management in March 2001. The Company was a concrete placement company specializing in providing concrete improvements in the road construction industry. Denali operated primarily in Anchorage, Alaska, placing curb and gutter, sidewalks and retaining walls for state, municipal and military projects.


In December 2005, the Company ceased its principal business operations and focused its efforts on seeking a business opportunity, remaining as a public shell company in the US.


Eye-Fite Ltd. ("Eye-Fite" or the "Subsidiary") was founded on June 27, 2011 in contemplation with the execution of the transaction, between Can-Fite Biopharma Ltd. (the "Parent Company" or "Can Fite") a public company in Israel and the Company, as further detailed in Note 1b below.


The Company and the Subsidiary conduct research and development activities using an exclusive worldwide license for a therapeutic drug CF101 solely for the field of ophthalmic diseases after the consummation of the following transaction. See also Note 1b2.


Following the transaction, the Company changed its name to OphthaliX Inc. and changed its domicile to the State of Delaware.


b.

Reverse recapitalization transaction and related arrangements:


1.

Recapitalization:


On November 21, 2011, (the "Closing Date") the Company acquired all the outstanding shares of Eye-Fite, in consideration for the issuance by OphthaliX to Can-Fite of 36,000,000 shares (and warrants to purchase shares) of OphthaliX representing, approximately 87% of the fully diluted issued and outstanding share capital of the Company. Immediately prior and as a condition to the closing of the transaction, OphthaliX entered into subscription agreements with new investors (the "New Investors") pursuant to which, OphthaliX received additional funds in amount of $3,330,000 (excluding $333,000 of issuance expenses paid in cash) in consideration for issuing of 2,910,456 Common shares of OphthaliX at a price per share of $1.144.


In addition, OphthaliX issued to Can-Fite, 2,097,626 Common shares of the Company, in exchange for Common shares of Can-Fite valued, at such time of grant, at $2,400,000.


Consequently, the Company holds 17,873,054 shares of Can-Fite's outstanding Common shares, (approximately 7% of Can-Fite's issued and outstanding share capital).


In accordance with the Israeli Securities Law (1968), Section 15C and related Securities Regulations, the shares issued by Can-Fite to OphthaliX, have a Resale Restriction Period, which consists of one (1) year of full restriction and a liquidation period of eight (8) consecutive quarters. Thus, OphthaliX will be able to sell 12.5% of Can-Fite's issued shares, every quarter starting from November 21, 2012.


As part of the recapitalization arrangement, Can-Fite made an additional equity investment in OphthaliX in amount of $500,000 in consideration with the issuance of an aggregate of 437,005 Common shares of OphthaliX at a price per share of $1.144.


In relation with the subscription mentioned above, the Company agreed to apply full-ratchet anti-dilution protective provision for the benefit of the investors (including Can-Fite) for their issued shares solely in the event that OphthaliX enters into another financing during the 12 months following the transaction date, at a price which is lower than $1.144 per common stock of OphthaliX.



8



OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

Notes to Unaudited Consolidated Financial Statements

March 31, 2012



NOTE 1:-

GENERAL (Cont.)


In contemplation with the recapitalization transaction, it was agreed that for each two Common shares purchased by the New Investors and Can-Fite, they will be granted by the Company one warrant to acquire one Common share of the Company. The exercise price of the warrants is $1.72 per Common share. The warrants are exercisable for a period of five years from their date of grant. The warrants do not contain non standard anti-dilution provisions.


The transaction with Eye-Fite was accounted for as a reverse recapitalization which is outside the scope ASC 805, Business Combinations. Under reverse capitalization accounting, Eye-Fite is considered the acquirer for accounting and financial reporting purposes, and acquired the assets and assumed the liabilities of the Company. Assets acquired and liabilities assumed are reported at their historical amounts. Consequently, the consolidated financial statements of the Company reflect the operations of the acquirer for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former shareholders of the legal acquirer and a recapitalization at the equity of the accounting acquirer. These consolidated financial statements include the accounts of the Company since the effective date of the reverse capitalization and the accounts of Eye-Fite since inception.


2.

License and research and development services from Can-Fite:


In connection with consummation of the transaction, the Company and Can-Fite entered into a license agreement, pursuant to which Can-Fite granted Eye-Fite a sole and exclusive worldwide license for the use of CF101, solely in the field of ophthalmic diseases ("CF101"). Eye-Fite shall be obligated to make to the USA National Institutes of Health ("NIH"), which its patents are included in the license to Eye-Fite, for as long as the PHS Agreement is in effect, a nonrefundable minimum annual royalty fees and potential future royalties of 4.0% to 5.5% on net sales.


In addition the Company will be obligated to certain milestone payments ranging from $25,000 to $500,000 upon the achievement of various development milestones for each indication. Eye-Fite will also be required to make payments of 20% of sublicensing revenues, excluding royalties and net of the required milestone payments. As of March 31, 2012 the Company has not reached any milestone or earned revenue that would trigger such payments to Can-Fite.


In addition, following the closing of the transaction, an agreement was signed between Can-Fite, OphthaliX and Eye-Fite (the "Service Agreement"). According to the Service Agreement, Can-Fite will manage the research and development activities relating to pre-clinical and clinical studies for the development of the ophthalmic indications of CF101. According to the Service Agreement, in consideration for Can-Fite's services, Eye-Fite shall pay to Can-Fite a service fee (consisting of all expenses and costs incurred by Can-Fite plus 15%). In addition, the Company is committed to future additional payments equal to 2.5% of any and all proceeds received by Eye-Fite relating to the activities regarding the drug (the "Additional Payment").


According to the Service Agreement, Can-Fite will have the right, at any time until the expiry of 5 years from the closing of the transaction, to convert the Additional Payment into an additional 2,160,102 shares of common stock of the Company (subject to adjustment in certain circumstances).


Prior to the consummation of the transaction, Can Fite incurred in its research and development activities of the above assets direct costs that amounted to approximately $ 250, $ 153 and $ 598 in the years ended December 31, 2009 and 2010 and the nine-month period ended December 31, 2011.


c.

The Company devotes all of its efforts toward research and development activities. As of March 31, 2012 the Company has no sufficient capital resources to carry its research and development activities until commercialization of the underlying products. The Company is addressing its liquidity issues by implementing initiatives to allow the coverage of its anticipated budget deficit. Such initiatives may include monetizing part of Company's assets, such as the Company's investment in Can-Fite's shares. In addition, in the event that the Company will not have sufficient liquidity resources after taking the above initiatives, Can-Fite committed not to bill the Company for research and development services, in order to overcome any potential budget deficit.


There are no assurances that the Company will be successful in obtaining an adequate level of financing needed for its long-term research and development activities. If the Company will not have sufficient liquidity resources, the Company may not be able to continue the development of all of its products or may be required to delay part of the development programs.



9



OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

Notes to Unaudited Consolidated Financial Statements

March 31, 2012



NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES


The significant accounting policies applied in the annual financial statements of the Company as of December 31, 2011, are applied consistently in these financial statements.


NOTE 3:-

UNAUDITED INTERIM FINANCIAL STATEMENTS


The accompanying unaudited interim financial statements have been prepared in accordance with the Standards of the Public Company Accounting Oversight Board (United States) for interim financial information.  Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements.  These unaudited interim financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2011.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three months period ended March 31, 2012, are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.


NOTE 4:-

FAIR VALUE MEASUREMENTS


In accordance with ASC 820, the Company measures its marketable securities and embedded derivatives at fair value. Marketable securities fair value is based on quoted prices for identical assets in active markets and other inputs (such as risk free interest and volatility) that are directly or indirectly observable in the marketplace. The assets are classified within Level 2 on the fair value hierarchy. Derivatives are classified within Level 3 because they are valued using valuation techniques. Some of the inputs to these models are unobservable in the market and are significant.


The following table provides information by value level for financial assets and liabilities that are measured at fair value, as defined by ASC 820, on a recurring basis as of March 31, 2011.


 

 

December 31, 2011

 

 

Fair value measurements

Description

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 






Investment in Parent Company

 

$               172

 

$                    -

 

$               172

 

$                   -

Derivative related to Service Agreement

 

  (1,436)

 

 -

 

 -

 

 (1,436)

 

 

 

 

 

 

 

 

 

Total Financial Assets, net

 

$         (1,264)

 

$                    -

 

$               172

 

$         (1,436)


 

 

March 31, 2012

 

 

Fair value measurements

Description

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 






Investment in Parent Company

 

$               263

 

$                    -

 

$               263

 

$                    -

Derivative related to Service Agreement

 

 (3,553)

 

 -

 

 -

 

 (3,553)

 

 

 

 

 

 

 

 

 

Total Financial Assets, net

 

$         (3,290)

 

$                    -

 

$               263

 

$         (3,553)



10



OPHTHALIX INC. AND ITS SUBSIDIARY

(A development stage company)

Notes to Unaudited Consolidated Financial Statements

March 31, 2012



NOTE 4:-

FAIR VALUE MEASUREMENTS (cont.)


The following table presents the changes in Level 3 instruments measured on a recurring basis for the three months ended March 31, 2012. The Company's Level 3 instruments consist of derivatives.


Fair value measurements using significant unobservable inputs (Level 3):


 

 

Fair value of

Derivatives

 

 

 

Balance at June 27, 2011

$

-

 

 

 

Fair value of derivatives

 

438

Change in fair value of derivatives

 

998

 

 

 

Balance at December 31, 2011

 

 

 

$

1,436

 

 

 

Change in fair value of derivatives

 

2,117

 

 

 

Balance at March 31, 2012

$

3,553


NOTE 5:-

EQUITY


On January 2012, the Company granted a Board Member, ten-year options to purchase 235,000 common shares of the Company at $2.00 per share. The options will vest as follows: 19,583 on March 31, 2012 and 19,583 on the last day of each month thereafter so long as he remains a director until fully vested. The options will be granted under the Company's 2012 Stock Incentive Plan. The agreement prohibits Dr. Kornberg from employment or connection with, or holding any office in, any business or undertaking which competes with any business of the Company or is a customer or supplier of the Company.


The Company used a Black-Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rates of 0.85%-1.03% dividend yield of 0%, volatility factors of the expected market price of the Parent Company's Common shares of 80% and expected life of the options of 5.23 years.


As of March 31, 2012, the total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was $269,000 which is expected to be recognized over a weighted average period of approximately 5.23 years.


NOTE 6:-

SUBSEQUENT EVENTS


Management has evaluated subsequent events through May 14, 2012, which represents the date the unaudited interim consolidated financial statements were issued, and has determined that there were no subsequent events as of such date.


- - - - - - - - - - - - - - -




11





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


Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of income.  This section should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, and our interim financial statements and accompanying notes to these financial statements.


Forward-Looking Statement Notice


The statements contained in this report that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information.  Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, need for financing, competitive position, potential growth opportunities, potential operating performance improvements, ability to retain and recruit personnel, the effects of competition and the effects of future legislation or regulations.  Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “intends,” “may,” “should,” “anticipates,” “expects,” “could,” “plans,” or comparable terminology or by discussions of strategy or trends.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct.  Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.


Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this report.  While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to, risks and uncertainties associated with changes in regulatory environment, timing and results of clinical trials, OphthaliX’s success in implementing its research, development, sales, marketing and manufacturing plans, protection and validity of patents and other intellectual property rights, the impact of currency exchange rates and the effect of competition by other companies, global economic and political conditions, changes in foreign currency exchange rates, competitive technology positions and operating interruptions (including, but not limited to, labor disputes, leaks, fires, explosions, unscheduled downtime, transportation interruptions, war and terrorist activities) as well as other risks..  Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those expected.  We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.


Description of Business


The Company is an advanced clinical-stage biopharmaceutical company focused on developing therapeutic products for the treatment of ophthalmic disorders.  Our drug, CF101 (known generically as IB-MECA), is being developed to treat three ophthalmic indications: dry eye syndrome; glaucoma and uveitis.  We are currently: (i) conducting a Phase III trial with respect to the development of CF101 for dry eye syndrome, under an Investigational New Drug, or IND, application with the United States Food and Drug Administration, or FDA; (ii) conducting a Phase II trial with respect to the development of CF101 for the treatment of glaucoma; and (iii) preparing for Phase II study of the development of CF101 for uveitis.


CF101 is a highly-selective, orally bioavailable small molecule synthetic drug, which targets the A3 adenosine receptor (A3AR).  We believe that CF101 has a favorable safety profile and a potent anti-inflammatory activity, mediated via its capability to inhibit the production of inflammatory cytokines, such as TNF-α, MMPs, IL-1, and IL-6.  This is mediated by activation of the A3AR, which is highly expressed in inflammatory tissues in contrast to normal tissues where expression levels of the receptor are very low.  We believe that the anti-inflammatory and neuroprotective effects of CF101 make it an attractive candidate for use in the treatment of a variety of ophthalmic diseases.


Business Developments


During the first quarter of 2012, we had the following major developments:


Chinese State Intellectual Property Office (SIPO) issued a Certificate of Patent Invention for Chinese Patent Application No. 200680047569.7 entitled “Adenosine A3 receptor agonists for the treatment of dry eye disorders.”  This patent is related to CF101 and will grant us exclusive rights for the use of CF101 for the treatment of dry eye syndrome in the People’s Republic of China until Feb 2026.



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Subsequent to the first quarter the following major developments have occurred:


We completed the change of domicile from the State of Nevada to the State of Delaware and changed our name from Denali Concrete Management Inc. to OphthaliX Inc.


In April 2012 we completed preclinical studies showing that CF101 is efficacious in treating Anterior Uveitis.  The pre-clinical study data demonstrated that CF101 is efficacious in preventing the clinical manifestations of Anterior Uveitis in a well-established animal model. Management believes that the current study data together with the previous published results showing the efficacy of CF101 in preventing Posterior Uveitis, strongly support the utilization of CF101 as a drug candidate for the treatment of patients with Anterior or Posterior Uveitis and as such address a larger market than either alone.  Because of the increase in potential patients, management believes CF101 does not fall in the FDA definition of an orphan drug for the Uveitis clinical application.


Results of Operations –Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011


For the period from June 27, 2011 (inception date of Eyefite) to March 31, 2012, we did not generate any revenues from operations.  Expenses during the quarter ended March 31, 2012, were $710,000 with finance expense of $2,114,000 for a net loss of $2,824,000.  Expenses for the period mentioned above consisted of research and development of $508,000 and of general and administrative expenses of $202,000.  These expenses were mainly due to professional, legal and accounting fees relating to our reporting requirements.  The finance expenses were mainly for a change in fair value of derivatives in the amount of $2,116,000.  There were no comparable expenses during the prior year quarter ended March 31, 2011.


Plan of Operation


We do not expect to generate any revenues over the next 12 months.  Through our subsidiary, Eyefite, which holds all the intellectual property related to our technology, we hope to develop therapeutic products for the treatment of ophthalmic disorders.  As of March 31, 2012 we had $2,467,000 in cash.  We believe that such funds will be sufficient to effectuate our business for the next 12 months.  We also had 17,873,054 common shares of Can-Fite (traded on the Tel Aviv Stock exchange) presented in the Balance Sheet as $1,391,000.  We will need to seek additional capital for the purpose of further testing our products and obtaining certifications necessary in order to market them.  We expect to incur a minimum of approximately $2.9 Million in expenses in order to effectuate our business for the next 12 months.  We estimate that this will be comprised of $2.15 Million towards the development of our product (including clinical trials), $0.25 Million towards Patents and Royalties, $0.5 Million for professional fees associated with being a public company, and the balance for general and administrative expenses.


Liquidity and Capital Resources


There can be no assurance that additional capital will be available to the Company.  The Company currently has no agreements, arrangements, or understandings with any person to obtain funds through bank loans, lines of credit, or any other sources.  Since the Company has no such arrangements or plans currently in effect, its inability to raise funds for the above purposes will have a severe negative impact on its ability to remain a viable company from 2013 onwards.


Critical Accounting Policies


Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles.  Our financial statements reflect the selection and application of accounting policies which require management to make estimates and judgments. (See Note 1 to our unaudited consolidated condensed financial statements, “Summary of Significant Accounting Policies”).  We believe that the following paragraphs reflect accounting policies that currently affect our financial condition and results of operations:  


a.

Holdings in Can-Fite:


In accordance with ASC320, an accounting for the Company’s investment in the equity securities depends on the remaining period of the tradability restriction in its respective market of the shares.



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Shares that are restricted for less than one year should be re-measured to reflect fair value each cutoff date.  These securities are classified as available-for-sale securities carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity under accumulated other comprehensive income in the consolidated balance sheet.  The rest of the restricted shares that have trade restrictions for more than one year should be accounted as a financial asset, on a cost basis (Based on the valuation of an expert as of transaction date).


For investments classified as available-for-sale securities, unrealized gains and losses are recorded in accumulated other comprehensive income, a separate component of shareholders’ equity, realized gains and losses on sales of available-for-sale securities, as determined on a specific identification basis, are included in the consolidated statement of operations.


The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities is below the cost basis of such securities is judged to be other-than-temporary.  Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company’s intent to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis.  For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized in “other than temporary impairment, net of gain on sale of marketable securities previously impaired” in the statement of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.


The Company currently holds 17,873,054 shares of Can-Fite’s outstanding Common shares that have certain resale restriction provisions.


As of December 31, 2011 the Company holds $172,000 in marketable securities classified in short term assets, designated as available-for-sale and $1,336,000 as restricted marketable securities classified in long term assets, presented at cost basis as of December 31, 2011 (Can-Fite shares).


In estimating Parent Company shares’ fair value, the Company used Black-Scholes option-pricing model with the following weighted-average assumptions for as of November 21, 2011, and December 31, 2011: risk-free interest rates ranging from 2.69% to 3.41%; dividend yields of 0%; volatility factors of 76.26%-76.3%; and a weighted-average contractual life of the options of between 0.89 and 2.75 years.


As a result the fair value of the Company’s holdings in Can-Fite’s shares on the transaction date reflects the resale restriction. The fair value of these shares based on an external expert’s evaluation as of December 31, 2011 and November 21, 2011 was $1,508 and $1,552 respectively. For accounting purposes their fair value represents a discount of the Parent Company’s shares market value of $854 and $848, respectively.


b.

Income taxes:


The Company and its subsidiary account for income taxes and uncertain tax positions in accordance with ASC 740, “Income Taxes”.  ASC 740 prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.


The Company and its subsidiary provide a full valuation allowance to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.


The Company adopted ASC 740-10. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740.  The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.  The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.  As of December 31, 2011, this standard has no effect to the Company’s financial statements.


c.

Concentrations of credit risk:


Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits, marketable securities, trade receivables and other account receivables.



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Cash and cash equivalents are deposited with major banks in Israel and major banks in the United States. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s investments are institutions with high credit standing, and accordingly, minimal credit risk exists with respect to these investments.


d.

Derivative related to Service Agreement


In connection with the recapitalization transaction described in Note 1.b, on November 21, 2011 the Company entered into a Service Agreement.


The arrangement includes compensation for the services being provided under the Service Agreement in a form of royalty of 15% to be paid to Can-Fite from all future proceeds received by OphthaliX or any of its affiliates in relation to CF101.  Can-Fite has the right (the “Exchange Right”), at any time from November 21, 2011, until the 5th year anniversary thereof, to convert its Exchange Right for royalties into a warrant (the “Warrant”) to purchase 2,160,102 shares of common stock of the Company.  The exercise price for the Warrant shall be as follows: (i) in the event that within 12 months of November 21, 2011, the Company or any of its affiliates completes any transaction which has a “bio-dollar” value of more than $100 million, then the exercise price shall be the par value of the shares of common stock, and (ii) at any other time, then the exercise price for all the shares shall be an aggregate of $2.5 Million, equal to a per share exercise price of $1.144.


The Company’s management has considered ASC 815 in order to evaluate whether the Exchange Right (contingent call option to holders) instrument is a financial instrument that has the characteristics of a derivative.  In particular, the Company’s management has also evaluated ASC 815-10-15-74(a) scope exception.


Based on the analysis above, the Company’s management concluded that the Exchange Right does not have fixed settlement provisions, and therefore, should be classified as liability at inception.  The Exchange Right will be re-measured at fair value each reporting period until the date of exercise or expiration with the change in value reported in the statement of operations (as part of financial income/expenses).


Consequently, the Company recorded as part of the recapitalization transaction a liability related to the Exchange Right in the amount of $438 based on its fair value.  Issuance expenses that were allocated to this component, which amounted to $50, were expensed immediately and are included as part of financial expenses in the consolidated statements of operations (see Note 7 of the consolidated financial statements for the remeasurement at year end).


The fair value of the derivatives was determined using the binomial option-pricing model. This option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected term.


e.

Fair value of financial instruments:


The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their generally short-term maturities.


The Company adopted ASC 820, “Fair Value Measurements and Disclosures”. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.


As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.  As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:


Level 1 -

Observable input that reflects quoted prices (unadjusted) for identical assets or liabilities in active markets.


Level 2 -

Include other inputs that are directly or indirectly observable in the marketplace.


Level 3 -

Unobservable inputs which are supported by little or no market activity.


The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.



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The Company has evaluated and implemented all new accounting pronouncements and accounting standards that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.


Off-Balance Sheet Arrangements


As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As of March 31, 2012, we are not involved in any material unconsolidated SPEs.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk


As a smaller reporting company, we have elected not to provide the disclosure required by this item.


Item 4.  Controls and Procedures


Evaluation of disclosure controls and procedures


Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.


Changes in internal control over financial reporting


There has been no change in our internal control over financial reporting, as defined in Rules 13a-15(f) of the Exchange Act, during our most recent fiscal quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II—OTHER INFORMATION


Item 6.  Exhibits


SEC Ref. No.

Title of Document

31.1

Rule 13a-14(a) Certification by Principal Executive Officer

31.2

Rule 13a-14(a) Certification by Principal Financial Officer

32.1

Section 1350 Certification of Principal Executive Officer

32.2

Section 1350 Certification of Principal Financial Officer

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document




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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


OphthaliX Inc.



Date: May 15, 2012

By /s/ Pnina Fishman                                    

      Pnina Fishman, Chief Executive Officer

      (Principal Executive Officer)



Date: May 15, 2012

By /s/ Itay Weinstein                                    

       Itay Weinstein, Chief Financial Officer

       (Principal Financial Officer)



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