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Form 10QSB for PLURISTEM LIFE SYSTEMS INC |
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25-May-2004 Quarterly Report |
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Item 2. Management's Discussion and Analysis or Plan of Operation. FORWARD LOOKING STATEMENTS This quarterly report contains forward-looking statements as that term isdefined in the Private Securities Litigation Reform Act of 1995. Thesestatements relate to future events or our future financial performance. In somecases, you can identify forward-looking statements by terminology such as "may","should", "expects", "plans", "anticipates", "believes", "estimates","predicts", "potential" or "continue" or the negative of these terms or othercomparable terminology. These statements are only predictions and involve knownand unknown risks, uncertainties and other factors, including the risks in thesection entitled "Risk Factors", that may cause our company's or our industry'sactual results, levels of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-lookingstatements are reasonable, we cannot guarantee future results, levels ofactivity, performance or achievements. Except as required by applicable law,including the securities laws of the United States, we do not intend to updateany of the forward-looking statements to conform these statements to actualresults. Our financial statements are stated in United States Dollars (US$) and areprepared in accordance with United States Generally Accepted AccountingPrinciples. In this quarterly report, unless otherwise specified, all dollar amounts areexpressed in United States dollars and all references to "common shares" referto the common shares in our capital stock. As used in this quarterly report, the terms "we", "us", "our", and "Pluristem"mean Pluristem Life Systems, Inc. and our wholly owned subsidiary, unlessotherwise indicated. Overview You should read the following discussion of our financial condition and resultsof operations together with the unaudited financial statements and the notes tounaudited financial statements included elsewhere in this filing prepared inaccordance with accounting principles generally accepted in the United States.This discussion contains forward-looking statements that reflect our plans,estimates and beliefs. Our actual results could differ materially from thoseanticipated in these forward-looking statements. From our inception on May 11, 2001 to May of 2003, we had been engaged insoftware development, premised on the use of artificial intelligence in computerprogramming technology and in many areas of the computer, Internet, robotics,and games industries. In May 2003, our board of directors conducted an in-depthanalysis of our business plan and related future prospects for softwaredevelopment companies. To better protect stockholder interests and providefuture appreciation, it was decided to concurrently pursue initiatives in thebiotech industry as an extension to our existing business. On May 5, 2003, weentered into a License Agreement with Weizmann Institute to Science and theTechnion-Israel Institution of Technology to acquire an exclusive license for astem cell expansion technology. To better develop this exclusively licensedtechnology, we purchased 100% of the issued and outstanding shares of Pluristem,Ltd. on June 10, 2003. Pluristem, Ltd. is a research and development companybased in Israel. As of July 1, 2003, we have suspended our efforts to furtherdevelop artificial intelligence in computer programming. Liquidity and Capital Resources During the nine months ended March 31, 2004, we incurred a net loss of$1,791,576, as compared to a net loss of $47,239 in the nine month period toMarch 31, 2003. For the three months ended March 31, 2004 we incurred a loss of$1,098,494 compared to a loss of $6,937 in the three months ended March 31,2003. This resulted from the change of business that we undertook in May, 2003,to become a medical product research and development company. We incurred $885,322 in general and administrative expenses for the three monthsended March 31, 2004. Of this amount, $650,000 was paid as stock basedcompensation to consultants and service providers in addition to $75,000 paid incash to investor relations providers. We obtained funds to carry on our business from a private placement we conductedin July, 2003, which raised net proceeds of $1,235,752 through the issuance of725,483 units comprising one common share and two common share purchasewarrants. On January 20, 2004, we closed a private placement for gross proceeds of$1,500,000 through the issuance of 3,000,000 units, each unit comprising onecommon share and one common share purchase warrant. The net proceeds of thisprivate placement of approximately $1,272,760 after payment of commissions andlegal costs will be used to fund our operations for the coming year. We expectthat we have sufficient funds to operate until early fall, 2004 but we will haveto raise additional funds from the market before we have any cash flow fromoperations. The approval process for our products in the United States and otherjurisdictions is protracted and we believe will take several years. In addition,any acquisitions that we may plan or product development that is beyond thescope of what is described in our plan of operations below will requireadditional capital, which must be raised through the issuance of our securities. By the end of the nine month period, on March 31, 2004, we had cash of $879,097. Results of Operations Because of the change of business undertaken by our company in May, 2003, itwould not be meaningful to compare operations for the three or nine monthperiods ended March 31, 2004 to March 31, 2003. Instead, we present a plan ofoperations for our company for the twelve month period ending March 31, 2004. Plan of Operations Our primary objective over the twelve months ending March 31, 2005 will be toconduct further development and research on our proprietary technology - PluriXBioreactor. In order to optimize the system, we will build new PluriXBioreactors for laboratory use to examine all of its parts and their differentfunctions. We will begin feasibility studies of ex vivo expanded stem cells onanimals. In addition, we intend to identify proteins that are involved with stemcell regulators. Concurrently, we will initiate contact with research centers and cord bloodbanks to establish cooperative relations for future business development. We intend to consult with an FDA advisor to assist us in determining our path inthe process toward gaining FDA regulatory approval. We have not generated any revenues and our operating activities have used cashresources of $1,096,177 for the nine months ended March 31, 2004, compared to$31,793 for the nine months ended March 31, 2003. This negative cash flow isprimarily attributable to the costs incurred in the acquisition of Pluristem,Ltd., the payment of employees and research costs. We anticipate that ouroperating expenses will increase as we intend to conduct trials and experimentswith our technology and work toward its commercialization. We estimate ourexpenses in the twelve months ending March 31, 2005 will be approximately$2,327,500, generally falling in two major categories: research and developmentcosts and business development and general and administrative expenses. Research and Development Costs For the twelve months ending March 31, 2005, we estimate that our research anddevelopment costs will be approximately $1,386,700. We intend to spend ourresearch and development costs on optimizing the 3-D bioreactor operations,implanting stem cells from cord blood into the stromal cell cultures of PluriXbioreactors for expansion and on conducting studies on mice to examine stem celldevelopment and expansion. Business Development, General and Administrative Expenses For the twelve months ending March 31, 2005, we estimate that our general andadministrative expenses will be approximately $940,800. Aside from salaries,rent, telephone, utilities and other normal general expenses, these expenseswill also include examining new business opportunities, public relations,investors relations, office and miscellaneous charges, which consist primarilyof charges incurred for purchase of office supplies and other administrativeexpenses. These expenses will also include professional fees, which consistprimarily of accounting and auditing fees for the year end audit and legal feesfor securities advice, directors liability insurance and cost of fundraising. Wealso are considering issuing shares of our common stock for certain servicesperformed by consultants on behalf of our company. We do not expect to generate any revenues in the twelve month period endingMarch 31, 2005. Our products will not be ready for sale for up to three years. In our management's opinion, we need to achieve the following events ormilestones in the next twelve months in order for us to begin generatingrevenues as planned within three years: º Raise equity or debt financing or a combination of equity and debt financing of at least $4,000,000. º Build new bioreactors for continued research into bioreactor functionality in laboratory conditions. º Optimize 3-D PluriX bioreactor operations - using the 3-D environment of the PluriX, a dense population of stromal cells (support cells) has been reached to provide the basis for stem cell expansion without differentiation. The stromal cells release a signal to prevent differentiation. Optimization of the bioreactor system is a continuous process to enable the stem cells to self-renew while remaining in their original state. º Studies to obtain an animal model. Trials will be conducted on SCID mice to examine the stem cell development and expansion process. "SCID mice" are mice without immune systems so that they can be used to simulate human immune systems. º establish relations with research centers and cord blood banks. Research and Development During the nine month period ended March 31, 2004, we continued our researchactivities in our clean rooms and laboratory. We built bioreactors to conductresearch and development in a 3-D environment and seeded stromal cells into thebioreactors to produce the stromal cell culture where the stem cells will beimplanted. Throughout the remainder of 2004, we will continue with these R&Dactivities. Purchase or Sale of Equipment With the acquisition of Pluristem Ltd., we obtained much of the specializedlaboratory equipment that we need to conduct our research. This equipmentincluded incubators, freezers, computers, hot plates, generators, microscopes,and other equipment. We expect that we now own most of the laboratory equipmentthat we will need to conduct our planned research and development for the yearending June 30, 2004. Our latest equipment purchase was a FACS (FluorescenceActivated Cell Sorter) analysis machine and we have now built a customizedincubator. Dilution The continuation of our business is dependent upon us raising additionalfinancial support. The issuance of additional equity securities by us couldresult in a significant dilution in the equity interests of our currentstockholders. Obtaining commercial loans, assuming those loans would beavailable, will increase our liabilities and future cash commitments. Recently Issued Accounting Standards In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity." This Statementestablishes standards for how an issuer classifies and measures in its statementof financial position certain financial instruments with characteristics of bothliabilities and equity. It requires that an issuer classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances) because that financial instrument embodies an obligation of theissuer. This Statement is effective for financial instruments entered into ormodified after May 31. 2003, and otherwise is effective at the beginning of thefirst interim period beginning after June 15, 2003 except for mandatoryredeemable financial instruments of nonpublic entities. The Company does notexpect that the adoption of this standard will have a material effect on itsfinancial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, Consolidation ofVariable Interest Entities ("FIN 46"). The objective of FIN 46 is to improvefinancial reporting by companies involved with variable interest entities. Avariable interest entity is a corporation, partnership, trust, or any otherlegal structure used for business purposes that either 9a) does not have equityinvestors with voting rights or (b) has equity investors that do not providesufficient financial resources for the entity to support its activities. FIN 46requires a variable interest entity to be consolidated by a company if thatcompany is subject to a majority of the risk of loss from the variable interestentity's activities or entitled to receive a majority of the entity's residualreturns or both. FIN 46 also requires disclosures about variable interestentities that the company is not required to consolidate but in which it has asignificant variable interest. The consolidation requirements of Interpretation46 apply immediately to variable interest entities created after January 31,2003. The consolidation requirements apply to older entities in the first fiscalyear or interim period beginning after June 15, 2003. Certain of the disclosurevariable interest entity were established. As of June 30, 2003, the Company doesnot expect that the adoption of this standard will have a material effect on itsfinancial position or results of operations.
Our unaudited financial statements and accompanying notes have been prepared inconformity with generally accepted accounting principles in the United States ofAmerica for interim financial statements. Preparing financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue, and expenses. These estimates andassumptions are affected by management's application of accounting policies. Webelieve that understanding the basis and nature of the estimates and assumptionsinvolved with the following aspects of our financial statements is critical toan understanding of our financials. Going Concern Our interim financial statements have been prepared on the going concern basis,which assumes the realization of assets and liquidation of liabilities in thenormal course of operations. The interim financial statements have been preparedassuming we will continue as a going concern. However, certain conditions existwhich raise doubt about our ability to continue as a going concern. We havesuffered recurring losses from operations and have accumulated losses ofapproximately $2,332,474 since inception through the period ended March 31,2004. Acquisition of Technology Rights In the acquisition of stem cell expansion technology rights through the LicenseAgreement, we considered whether these rights meet the criteria of an asset orshould have been expensed. In our opinion, the PluriX Bio-reactor System andLicense Agreement technology, which are patent protected in certainjurisdictions and can be used for other applications as explained in Item 1,meet the criteria of an "Asset". We believe this technology will be in use forseveral years. Accounting of Technology Rights See Note 2(b) of the Notes to the Financial Statements as to the accounting forstock based compensation adopted by us in respect of stock and stock optionsissued to our employees and consultants.
Readers should refer to the risk factors referred to in our Form 10-KSB filedfor the fiscal year ended June 30, 2003
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