UNITED STATES





SECURITIES AND EXCHANGE COMMISSION





WASHINGTON, DC 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: DECEMBER 31, 2010





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: 333-156252





BIOCANCELL THERAPEUTICS INC.


(Exact name of Registrant as specified in its charter)





Delaware
20-4630076(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)Beck Science Center, 8 Hartom St, Har Hotzvim, Jerusalem, Israel
97775(Address of principal executive offices)
(Zip Code)972-2- 548-6555(Registrant’s telephone number)





Securities registered pursuant to Section 12(b) of the Act: None














Securities registered pursuant to Section 12(g) of the Act:





Common Stock, $.01 par   value





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 Exchange 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


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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.


Yes  o                            No      x





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





Large accelerated Filer   o          Accelerated filer         o            Non-accelerated filer           o





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      o                       No       x





The aggregate market value of the registrant’s voting stock held by non-affiliates was approximately $7,244,776 as of June 30, 2010.





The number of shares of the registrant’s common stock, par value $.01, outstanding as of March 10, 2011 was 26,391,151.











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BIOCANCELL THERAPEUTICS INC.





FORM 10-K





TABLE OF CONTENTS





PART I
PageItem 1.
Business
5Item 2.
Properties
20Item 3.
Legal Proceedings
20PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
20Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21Item 8.
Report of Independent Registered Public Accounting Firm
34Consolidated Balance Sheets as of December 31, 2010 and 2009
36Consolidated Statements of Operations for the year ended December 31 , 2010 and 2009
38Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Loss
39Consolidated Statements of Cash Flows for the year ended December 31, 2010 and 2009
43Notes to Consolidated Financial Statements
46Item 9A.
Controls and Procedures
83Item 9B.
Other Information
83PART IIIItem 10.
Directors, Executive Officers and Corporate Governance
83Item 11.
Executive Compensation
94Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
103Item 13.
Certain Relationships and Related Transactions, and Director Independence.
105Item 14.
Principal Accountant Fees and Services.
106PART IVItem 15.
Exhibits
107Signatures

109








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This Annual Report on Form 10-K for BioCancell Therapeutics Inc. (“BioCancell” or the “Company”) may contain forward-looking statements. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information.  We believe that it is important to communicate future expectations to investors. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, which are discussed in Item 1A, “Risk Factors” and in other sections of this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission (SEC).  These risks and uncertainties could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements that we make.





Although, there may be events in the future that we are not able to accurately predict or control, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.Accordingly, to the extent that this Annual Report on Form 10-K contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that BioCancell's actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements.





In addition, many of the figures that appear in this Form 10-K are in New Israeli Shekels (NIS).  Conversion to U.S. dollars is provided where appropriate.





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PART I





Item 1.                           Our Business





Incorporated in the State of Delaware in 2004, we are a development-stage biopharmaceutical company focused on the discovery, development and commercialization of novel therapies for treating cancer-related diseases. Our research and development activities build upon the research of Professor Abraham Hochberg of the Hebrew University of Jerusalem (who is also our Chief Scientific Officer), who isolated the human H19 gene and determined that it is expressed in over forty different forms of cancer, including superficial bladder carcinoma, and pancreatic and ovarian cancer, while laying dormant and non-expressed in non-cancerous cells. Professor Hochberg’s research discovered that the H19 gene is significantly expressed in cancerous cells of adults. Research has also demonstrated that the H19 gene plays a significant role in the tumor development process by enabling tumor cells to survive under stress conditions, such as low serum and low oxygen levels, typical of the environment in which cancerous cells develop. This survival supports the growth of the tumor and the development of metastases.





Recently-conducted research has led to significant scientific breakthroughs in the understanding of cancer, in particular with respect to the contribution of stem cells to the development of the disease. Stem cells possess the ability to regenerate themselves through mitotic cell division and differentiate into a diverse range of specialized cell types. Pluripotent stem cells have the potential to differentiate into any of the three germ layers: endoderm (interior stomach lining, gastrointestinal tract, the lungs), mesoderm (muscle, bone, blood, urogenital), or ectoderm (epidermal tissues and nervous system); thus, Pluripotent stem cells can give rise to any fetal or adult cell type. Pluripotent cells soon undergo further specialization into multipotent cells, which can give rise to several other limited cell types. A hematopoietic cell, for example, can develop into several types of blood cells, but cannot develop into muscle cells or other types of cells. Leading researchers have opined that adult multipotent stem cells are also the source of adult cancer stem cells, which are present in many, and are possibly in all, cancerous tumors. This theory is consistent with a number of other theories which are currently accepted by cancer researchers.





A significant problem with each of the current methods for treatment of cancer is the return of tumors. According to the new theory described above, even the most aggressive anti-cancer drugs, such as those used in chemotherapy, destroy the tumor cells, but in fact do not treat the source of the tumor — adult cancer stem cells. As a result, the theory postulates that anti-cancer drugs should treat adult cancer stem cells which are the source of returning tumors. In addition, according to the accepted theory among cancer researchers, the disease is created as a result of a long process of accumulation of genetic mutations. The fact that cells in most body tissues continuously undergo self-renewal, however, undermines the theory regarding the accumulation of genetic mutations. Only adult cancer stem cells, which are present in each tissue for many years, are capable of accumulating genetic mutations throughout the years, thus supporting the creation and return of tumors.





The research and understanding of the origin of cancer and metastases has progressed significantly in recent years. It is currently understood that embryogenesis, which is the process by which the embryo is formed and develops, and the process of the development of cancer, possess similar characteristics. The H19 gene is expressed and has a significant role in both processes. The process of formation of metastases is similar in its characteristics to epithelial mesenchymal transition, or EMT, which is a program of development of biological cells characterized by loss of cell adhesion, repression of E-cadherin expression, and increased cell mobility. EMT is essential for numerous developmental processes including mesoderm formation and neural tube formation. Similar to EMT, the process of formation of metastasis is also characterized by loss of cell adhesion, repression of E-cadherin expression, and increased cell mobility. Studies have demonstrated the involvement of the H19 gene in EMT.





In light of recent scientific breakthroughs in cancer research demonstrating the role of the H19 gene in the disease, we believe that an anti-cancer drug based on the H19 gene has the potential to provide benefits to patients that are competitive with existing treatment methods.





We have had no sales of any of our products to date.  Our operations are conducted through a wholly-owned Israeli subsidiary, BioCancell Therapeutics Israel Ltd.





Our Prospective Drugs





We are currently focused on developing our prospective drug, BC-819. The detection of expression of the H19 gene is the biotechnological foundation of our potential therapy. Our development of BC-819 builds upon the research of Professor Hochberg who discovered that the H19 gene is a diagnostic marker for cancerous growths, through the identification of the expression of the H19 gene. Based upon these discoveries, we have developed BC-819, which is a double stranded DNA plasmid construct that incorporates the gene for diphtheria toxin (DTA) under the regulation of the H19 promoter sequence. The DTA gene is transcribed into a cell-killing DTA peptide only in cells that produce H19 RNA. The H19 regulatory gene, which is crucial to the growth of tumor cells, is utilized instead as the activator of the intra-cellular synthesis of DTA. The synthesis of this toxin peptide inhibits cellular protein synthesis, thereby causing the cancer cells to commit suicide. Once the BC-819 DNA enters an H19-positive cancer cell, the cell can offer no resistance and is marked for death. The net result of this mechanism is highly selective tumor cell destruction. The strong safety profile of the plasmid is due, in part, to the fact that it produces the “A” portion only of diphtheria toxin inside cancerous cells. This toxin lacks the ability to penetrate other cells provided by the “B” portion, and consequently only acts to destroy the cell in which it is produced. Therefore, this new therapeutic modality is specific for the H19-positive cancer cell and thus far has not been detected with known toxic effects on normal cells — a safety feature that is unique when compared to currently available cancer treatments.


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BC-819 has also demonstrated potential with respect to combination therapy. Even in cells that produce small amounts of H19 regulatory RNA, it appears that BC-819 acts to reverse the resistance of the cancer cells to chemotherapeutic agents. Moreover, as a result of our therapeutic approach, the plasmid being used to deliver the cytotoxic DTA gene does not incorporate into the genome of the host. We believe that this has significant advantages over gene therapy platforms for cancer that depend on a “genetic correction” strategy.





We are developing two BC-819-based strategies. The first therapy is for bladder cancer wherein DTA-H19 is mixed with a transfection agent (to facilitate entry of BC-819 molecules into the cancer cells) for bladder instillation. The second BC-819 approach is for advanced stage cancers such as pancreatic and ovarian carcinomas in which plasmid DNA is injected directly into the tumor or instilled into the peritoneal cavity. Different routes of administration are employed depending upon the type of tumor (intravesical administration for bladder cancer, intratumoral injection for pancreatic and hepatocellular carcinoma and intraperitoneal administration for ovarian cancer with ascites). In addition, we are developing formulations for systemic administration for use in combination with intratumoral or hepatic artery infusions and other oncotherapeutic agents.





Our primary strategic objective is to continue development of our prospective drug BC-819 for the treatment of superficial bladder carcinoma, pancreatic cancer and ovarian cancer, while considering broadening the scope of development to include additional applications.





In 2007, we completed a Phase I/IIa trial of BC-819, designed for use in patients suffering from bladder carcinoma. The Phase I/IIa trial resulted in no severe adverse side effects directly attributable to the tested therapy. In March 2008, we began the FDA-approved Phase IIb trials for this therapy. In addition, we had a pre-investigational new drug (Pre-IND) meeting with the FDA in April 2008, to discuss proposed clinical trial protocols for two additional uses of this therapy — ovarian and pancreatic cancer — which were approved and the proposed pre-clinical protocol designs (animal species and mode of administration) were accepted by the FDA, subject to the completion of additional toxicology studies (pharmacokinetics and histopathology studies). Subsequently these additional studies were successfully completed. We filed Investigational New Drug (IND) applications for final FDA approval of the ovarian and pancreatic clinical trials during December 2008.





On January 8, 2009, we were entitled to commence a Phase I/IIa clinical trial for treatment of pancreatic cancer, as the FDA had not contacted us regarding potential concerns or objections to our IND application within 30 days of its submission. In addition, on July 21, 2009, we received the approval of the Israeli Ministry of Health to commence the Phase I/IIa clinical trial for treatment of pancreatic cancer. We commenced such trial in Israel in November 2009, and completed treatment in the framework of the trial in October, 2010. In January 2009, we were entitled to commence Phase I/IIa clinical trials for treatment of ovarian cancer as the FDA had not contacted us regarding potential concerns or objections to our IND application within 30 days of its submission. We commenced the trial and began screening and treating patients in Israel in May 2009 and in the United States in June 2009.





In 2009, the United States Department of Health and Human Services informed us that it has granted orphan drug status to BC-819 for its use in treating ovarian cancer, and in 2010, BC-819 was also granted orphan drug status for its use in treating pancreatic cancer. An “orphan drug” is a drug for a disease that affects a relatively small number of people in a population, defined in the U.S. as one that treats a disease affecting less than 200,000 people each year. In order to encourage the development of drugs for such diseases, benefits and incentives are granted to the drug developers. The principal benefit for orphan drugs in the U.S. is the right to market the drug exclusively for seven years from the date it is approved. Additional benefits include tax benefits on R&D expenses, and waiver of FDA fees.





In addition to pursuing clinical trials of BC-819 for the treatment of superficial bladder carcinoma, pancreatic and ovarian cancer, we intend to continue our pre-clinical research related to the use of BC-819 for the treatment of various other forms of cancer as we seek to develop additional drugs based on various implementations of the biotechnology developed by Professor Hochberg. The following is a summary of some of our other research and development activities that are in the preliminary stage of laboratory research:





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§
BC-820.   BC-820 is a potential therapeutic product that activates both the synthesis of DTA and the protein Tumor Necrosis Factor (TNF) of the cytokine family. Like BC-819, BC-820 penetrates cancerous cells expressing the H19 gene and activates the synthesis of DTA and TNF in a targeted manner.





§
BC-821.   BC-821 is a potential therapeutic product that penetrates cancerous cells and activates the synthesis of DTA only in cells expressing either the H19 promoter or the P4 promoter of the target gene IGF2, which like the H19 target gene is expressed only in cancerous cells and not in non-cancerous cells. It thus has the potential to serve as a second-generation product to BC-819, allowing the targeted destruction of cancer cells in a larger number of patients.





§
BC-822.   This potential therapeutic product seeks to suppress the growth of cancerous cells by re-sequencing a cancer cell’s RNA by way of inserting a small interfering ribonucleic acid ("siRNA") sequence that prevents the expression of the H19 gene. Like BC-819, the potential therapy would first penetrate cells expressing the H19 gene and then covalently attach the new siRNA sequence.





Pursuant to an agreement, Yissum Research Development Company of the Hebrew University of Jerusalem (Yissum) has granted to us an exclusive, worldwide license for the use, development and commercialization of the H19 gene in consideration of which we have agreed to pay certain royalties to Yissum described elsewhere in this report.





In pursuing our objectives, we may enter into strategic collaborations with third parties who have the expertise and resources necessary for the performance of large scale clinical trials, who have well-established marketing, distribution and manufacturing infrastructures, or who have experience and expertise in preparing registrations with the FDA and other regulatory authorities for the receipt of marketing approval.





Potentially Treatable Diseases





Superficial Bladder Carcinoma.   We believe that BC-819 may be effective in treating superficial bladder carcinoma. Superficial bladder carcinoma is a specific form of bladder cancer resulting from the development and progression of cancerous tumors within the urothelium layer. The H19 gene is expressed at high levels in areas afflicted by superficial bladder carcinoma.





Pancreatic Cancer.   Cancerous cells may develop in either the exocrine cells or the endocrine cells of the pancreas and the H19 gene is expressed at high levels in these cancerous regions.





Ovarian Cancer.   Ovarian cancer is a disease in which normal ovarian cells begin to grow in an uncontrolled, abnormal manner and produce tumors in one or both ovaries. The H19 gene is expressed at high levels in areas afflicted by ovarian cancer.








Our Process of Research and Development — Target Identification and Validation.





Target validation involves proving that DNA, RNA or a protein molecule is directly involved in a disease process and can be a suitable target for development of a new therapeutic drug. Drug target validation is among the most critical challenges facing pharmaceutical companies today. Our efforts in this area have been conducted by a research team headed by our Chief Scientific Officer, Professor Hochberg at the Hebrew University in Jerusalem, and include the following milestones:





§
Diagnostics — Use of H19 as a Diagnostic and Prognostic Tool.   Professor Hochberg’s research team has discovered that the H19 gene serves as a diagnostic marker for cancerous growths, through the identification of the expression of the H19 gene. A sensitive method called In-Situ Hybridization analysis (ISH) can detect even a single malignant cell expressing the H19 gene. ISH enables the detection of the expression of H19 in the examined tissue, while providing precise anatomic information regarding the location of the H19 presence in the tissue and cell. The detection of expression of the H19 gene is the biotechnological foundation of our potential therapy. The diagnostic marker enables the diagnosis of cancerous tumors in early stages. Such diagnosis supports the prognosis of the tumor.


§
Pre-Clinical Studies.  Between the years 2000 – 2005, Professor Hochberg’s research team conducted extensive animal studies in BC-819. Plasmid was introduced into the bladders of bladder-carcinoma carrying rats (orthotropic model) and mice (heterotopic model). Significant tumor growth inhibition was observed after treatment. Non-good laboratory practices (GLP) toxicology studies were performed in mice and in rats (syngeneic and nude models). Between the years 2006 – 2007, Harlen Biotech Israel Ltd. conducted toxicology studies in rats and mice, in accordance with Good Laboratory Practices Regulations. The studies included repeated injections at increasing dosages into the abdominal cavity of mice and intravesical administration into the urinary bladder of rats. The equivalent dosage given to the animals was higher than the expected human dosage. No gross pathological findings were evident in the intravesical administration study, and mild to moderate side effects were evident in the intraperitoneal administration study. In recent experiments which were conducted in the laboratories of the University of Munich, lung cancer carrying mice were treated with BC-819. More tumor growth inhibition was observed in mice which were treated with BC-819 than in mice which did not receive treatment. We are currently reviewing the results of the study and will consider further development of this application subject to our available resources.





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§
Compassionate Use Patients.  BC-819 has been administered, under “compassionate use” provisions in Israel, to ovarian and liver cancer patients who had failed chemotherapy and were in the ultimate stages of cancer, and bladder cancer patients who had failed chemotherapy and were in the ultimate stages of cancer, and urinary bladder and renal pelvis transitional cell carcinoma (TCC) patients who had failed chemotherapy and were candidates for radical cystectomy and nephrectomy, respectively. In 2003, two patients with resistant bladder cancer were treated with BC-819. Prior to the BC-819 treatment, the patients underwent a transurethral resection, but the tumors returned. Both patients were treated by direct introduction of BC-819 into the bladder using a catheter. The BC-819 treatment resulted in a significant decrease of the superficial bladder tumor, no unwanted toxicity was demonstrated in healthy cells, no severe adverse side effects which can be related to the drug were diagnosed, and no plasmid was detected in the patients’ blood. Two additional patients with very large metastases in their livers showed shrinkage of these tumors following treatment with BC-819 in 2004 and 2006. No unwanted toxicity was demonstrated in healthy cells and no severe adverse side effects which can be related to the drug were diagnosed.A patient suffering from ovarian cancer characterized by intra-peritoneal distribution of metastases and ascites (liquid containing cancerous cells that builds up in the peritoneum as a result of the cancer) was treated with BC-819 beginning in 2007 after the failure of conventional chemotherapy treatment. In the framework of the treatments, the patient received a number of different doses of BC-819 administered by intra-peritoneal infusions via catheter. The results indicated that the drug caused no serious adverse events at any dosage, and a decrease of 50% in the ovarian cancer marker protein CA-125 in the patient’s blood was measured, as well as a significant decrease in the number of cancerous cells in the ascites. The patient survived for 18 months after the commencement of treatment. A patient suffering from TCC in his renal pelvis, who had previously undergone nephrectomy of his right kidney for this disease, and was a candidate for nephrectomy of his left kidney, was treated with BC-819 beginning at the end of 2008. The results showed that no new growths were formed in the renal pelvis, and the treatment did not cause any serious adverse effects. On July 25, 2010, the patient’s physicians confirmed that the disease had not recurred, and that the patient’s kidney had remained clear of cancerous tumors during the nineteen months following the end of treatment with BC-819.





§
Phase I/IIa Clinical Trials.   In 2006 – 2007, we conducted a Phase I/IIa, Dose-Escalation, Safety and Proof of Concept Study of BC-819 in Refractory Superficial Bladder Cancer. This study was designed to assess the safety and preliminary efficacy of BC-819 given by intravesical infusions into the bladder of 18 patients with superficial bladder cancer who had failed previous treatment. Escalating doses of 2 mg, 4 mg, 6 mg, 12mg and 20mg of BC-819 were utilized. No severe adverse side effects which can be related to the drug were diagnosed, other than in one case for which the reason was uncertain. This patient was hospitalized following complaint of urination urgency. The patient was released after two days and did not suffer additional adverse side effects during the treatment. We did not discover any dose limiting toxicity. As a result of the Phase I/IIa study, we concluded that the optimal dose to be used in Phase II trials would be 20mg.





At the beginning of the BC-819 treatment of patients in this study, all of the bladder tumors were removed, except for one (the diameter of which was 0.5 cm to 1 cm), which was left as a marker to gauge the influence of the treatment, despite the fact that the standard of care for bladder cancer patients involves removing all tumors. The parameters for examination of the initial efficacy include the reappearance of tumors, elimination or decrease in the size of the marker, and the aggravation of the disease. We examined efficacy in all patients participating in the trial, including patients who did not receive the optimal dose, although no control group was used in the trial (since it is not the accepted practice to use a control group in a Phase I trial whose primary purpose relates to the safety of the drug). Due to the small size of the trial and the absence of a control group, no p-values were calculated. Approximately 72% of the patients responded to the treatment. The initial estimation of the drug’s efficacy indicates that it has the ability to eliminate or decrease the size of tumors, and to prevent the reappearance of new tumors. Approximately 56% of the patients finished the study without tumor recurrence. We detected reappearance of tumors mainly in patients who received doses which were substantially lower than the optimal dose. Intravesical administration of BC-819 resulted in complete ablation of the marker tumor without any new tumors in four of the 18 patients for a 22% overall complete response rate. The marker was eliminated, or reduced by at least 50%, in approximately 44% of the patients in the study. We detected only one patient with aggravation of the disease, meaning aggravation of the stage or the appearance of high grade tumors.





On March 6, 2008, we filed with the FDA a pre-IND application regarding future potential Phase I/IIa clinical trials for testing BC-819 for the treatment of pancreatic, ovarian and liver cancer. The purpose of the trials  is to examine the safety and preliminary efficacy of BC-819 in a series of increased doses and various indications. At the Pre-IND meeting in April 2008, the proposed clinical trial protocols were approved, the proposed pre-clinical protocol design (animal species and mode of administration) was accepted but further toxicology studies were requested (more pharmacokinetics and histopathology studies), which studies were successfully completed. On January 8, 2009, we were entitled to commence a Phase I/IIa clinical trial for treatment of pancreatic cancer, as the FDA had not contacted us regarding potential concerns or objections to our IND application within 30 days of its submission. On July 21, 2009, we received the approval of the Israeli Ministry of Health to commence the Phase I/IIa clinical trial for treatment of pancreatic cancer. We commenced such trial in Israel in 2009, and completed treatment in October, 2010. The clinical trial was also performed at the University of Maryland, Baltimore Medical Center and was partly funded by a $950,000 grant from the Israel-U.S. Binational Industrial Research and Development Fund. On January 12, 2009, we were entitled to commence Phase I/IIa clinical trials for treatment of ovarian cancer as the FDA had not contacted us regarding potential concerns or objections to our IND application within 30 days of its submission. We commenced the trial and began screening and treating patients in Israel in May 2009 and the United States in June 2009.




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In October 2010, we completed the Phase I/IIa pancreatic cancer clinical trial and received its results. The trial included nine patients who each received four treatments over the course of two weeks. Three patients were included in a lower dosage cohort, each receiving 4 mg per treatment, while six others were included in a higher dosage cohort, each receiving 8 mg per treatment. The results show that no toxicity limited the dose, and no patient reported pain or discomfort as a result of the drug, and therefore the optimal dose was fixed as the maximum dose given in the trial.





A statistical analysis shows that the higher dosage given in the trial demonstrated greater efficacy than the lower dosage given, and that the effect was stronger after three months from commencement, than after one month only. Specifically, within a month from commencement, the local tumor had not increased in size in eight out of the nine patients, but rather remained stable in both dosage cohorts. Of eight patients examined three months after commencement of treatment, six showed a reduction in the size of the local tumor. The reduction was significant (30% or more) in three out of five patients of the higher-dose cohort. These three patients also showed no metastatic disease, despite the fact that the clinical trial was aimed at the local tumor only. In addition, three months after commencement of treatment, two additional patients displayed stable tumor size and no metastatic disease, despite the length of time that had elapsed. In total, five patients displayed stable disease or a significant response after three months from commencement of treatment.





An operation to remove pancreatic tumors (the Whipple procedure) offers most patients the best chance for survival; however, most such patients are not operable on account of the complexity, location and size of the tumor. Following treatment with BC-819, two patients in the higher dosage cohort of this trial that were non-resectable, became resectable as a result of tumor shrinkage. The first had the tumor successfully removed at the University of Maryland Medical Center, Baltimore, MD. The second was operated upon, but the surgeon halted the operation upon discovery of liver metastases, in order to prevent unnecessary risk to the patient.





Based on the results of this clinical trial, and the results of a successful pre-clinical study announced on October 12, 2010 that examined the sequential administration of BC-819 with FDA-approved drug Gemzar (Gemcitabine) in animals as a treatment for pancreatic cancer, we intend to apply to the FDA to receive approval for an international Phase IIb pancreatic cancer clinical trial.





§
Phase IIb Clinical Trial. We filed an IND application with the FDA for the performance of a Phase IIb clinical trial with patients suffering from superficial bladder cancer who had failed previous treatment. The application was approved in January 2008, and we immediately began recruiting patients. The purpose of this trial is to measure the efficacy and safety of BC-819 at a dose of 20mg, as tested in the previous Phase I/IIa clinical trial explained above. The trial is being conducted in a medical center in Arizona by BCG Oncology, PC and at seven medical centers in Israel. This two-stage trial includes 33 patients, divided into groups of 18 and 15. Each participant will receive six weekly treatments of BC-819. Patients responding to the treatment will be offered nine additional maintenance treatments. Stringent  FDA criteria have made patient recruitment a more difficult and time-consuming task than was initially expected. Notwithstanding the foregoing, clinical studies are currently ongoing and, we expect to continue gathering safety and efficacy data on larger subject populations. This study and additional data we expect to obtain from additional research and development activities may not corroborate previous findings with respect to safety and efficacy.    The FDA alone will determine whether BC-819 is both safe and effective for commercial use in the U.S. after substantial additional clinical studies.





The two efficacy criteria that need to be met in order to determine a complete response in a patient are non-recurrence and ablation of a single tumor left in each patient’s bladder solely for the purpose of the clinical trial. Of these, we believe that non-recurrence is the more significant problem facing refractory superficial bladder cancer, and that this criterion is therefore of greater importance in determining what to expect from the treatment post-marketing approval.





In April 2010, we received interim results for this clinical trial. These showed that 15 patients out of 18 (83%) responded to treatment (either non-recurrence, tumor ablation or both), 10 patients (56%) showed non-recurrence, 9 patients (50%) showed tumor ablation, and 4 patients (22%) had a complete response (both non-recurrence and tumor ablation). No Serious Adverse Events (SAEs) related to the drug candidate were recorded in this (or any other) clinical trial of BC-819.





In total, six patients showed a complete response, of whom two were discounted from the final statistics – one that was excluded from the patient count because she discontinued treatment before it was completed, and one that was included in the patient count, but was not listed as a complete response on account of a change in the criteria for patient enrollment during the course of the trial. The FDA had required five patients to show a complete response in order to continue with the trials, and, when presented with the complete interim results, approved the continuation of the trial and thecommencement of enrollment of the second treatment group (comprised of 15 patients).


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The following chart illustrates the stages to which each of our potential therapies has been developed, reflecting the relative development status of each of our potential therapies (but does not represent the relative amounts invested by us in each initiative):














Competition for Our Prospective Therapeutic Products





Our principal competitors in the field of researching and developing drugs for the treatment of cancer types including superficial bladder carcinoma, pancreatic cancer and ovarian cancer, include numerous biotechnology and multinational pharmaceutical companies. We also compete with numerous research and academic institutions around the world in the race to discover genes, techniques and other patentable assets central to the research and development of drugs for the treatment of such diseases.





Of the forms of cancer for which we are testing BC-819, the only cancer for which there is an efficacious drug on the market is bladder cancer. This market is thought to be relatively conservative. The current drugs of choice are BCG (a non-specific immunotherapeutic agent with the FDA's black box warning for side effects), as well as the chemotherapy agent, Mitomycin C (approved in Europe). Current competition in all of our applications includes chemotherapy and immunotherapy agents, both projected to be toxic with a safety profile inferior to that of BC-819.  As such there is a clear medical and market need for new agents BC-819, demonstrating improved safety profiles.





To the best of our knowledge, there are a number of treatment methods for treating these cancer types that would compete with any drug that we may develop and commercialize, including our prospective drug BC-819, which include:








§
Surgery.   Surgery is the most common treatment method for invasive cancerous growths related to bladder cancer. Transurethral resection is the surgical method that is most often utilized for the removal of superficial bladder cancer tumors.





For patients with pancreatic cancer, surgery offers the only known possibility of cure, but even this is effective in only a small number of patients (10 – 20%). Even when resection is possible,  median survival times of 13 – 25 months and five-year survival rates of 10 – 20% have been reported. Prognosis is poor because of a high rate of local recurrence and metastases despite resection.





Initial surgery is almost always necessary in the management of suspected ovarian cancer. A total abdominal hysterectomy and bilateral salpingo-oophorectomy are typically performed.





§
Radiation Therapy.   Radiation therapy involves the use of X-rays to destroy cancerous cells.





§
Chemotherapy.   Chemotherapy uses special anti-cancer drugs that destroy cancerous cells. For bladder cancer patients, chemotherapy is administered directly into the bladder using a catheter for patients who are in the early stages of superficial bladder carcinoma. Chemotherapy is otherwise administered intravenously when superficial bladder carcinoma has become invasive.


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To the best of our knowledge, some of the more commonly prescribed drugs used in intravesical chemotherapy are: Mitomycin-C, which has not been approved by the FDA for the treatment of bladder cancer and is marketed by the Bristol-Myers Squibb Company and Supergene; Epirubicin, which is marketed by Pfizer, Inc.; and Doxorubicin (marketed by Ortho Biotech), Thiotepa (marketed by Bedford Laboratories) and Valrubicin (supplied by SYNCHEM OHG), which are approved by the FDA for the treatment of superficial TCC. To the best of our knowledge, some of the more commonly prescribed drugs used in intravenous chemotherapy are Taxol, Carboplatin, Cisplatin and Gemcitabine.





The chemotherapy treatment plan in pancreatic cancer includes the downstaging of the tumor by shrinking the tumor volume to the extent that vascular involvement is lessened and resection is then rendered possible. Recently, many investigators have reported the utility of chemotherapy using gemcitabine, in which early studies showed that patients experienced an improvement in disease-related symptoms. However, the median survival time of 5.65 months and the 12-month survival rate of 18% for gemcitabine-treated patients is considered by most experts to be disappointing. The combination of gemcitabine and irradiation causes both acute and late toxicity of the gastrointestinal tract.





The majority of patients with epithelial ovarian cancer will require chemotherapy following an operation in an attempt to eradicate residual disease. Platinum-based adjuvant treatment, or immune system stimulator, can reduce the risk of relapse in patients with early-stage ovarian cancer, resulting in disease-free survival of approximately 80% of such patients. Intravenous administration of taxane- and platinum- based chemotherapy is the current standard of postoperative care for patients with advanced ovarian cancer. Platinum analogues, such as carboplatin and cisplatin, are the most active agents in this disease. In contrast, taxanes such as paclitaxel and docetaxel exert their cytotoxic effects through a unique mechanism of action involving binding to and stabilization of the tubulin polymer. Despite the improved median overall survival in patients with regimens such as paclitaxel and carboplatin, relapse still occurs in the majority of those with advanced disease, and only 10 to 30% of such patients experience long-term survival.





§
Immunotherapy.   Immunotherapy is a method that employs a patient’s immune system to fight cancerous cells. Although the precise biological mechanism of activation is unknown, the administration of Bacille Calmette Guerin (BCG) is used to treat a number of superficial bladder cancer types because BCG is believed to stimulate a patient’s immune system to thwart the growth of cancerous cells.





§
Interferon.   Interferons are human proteins that are introduced into the body in order to stimulate the host’s immune system to thwart the growth of cancerous cells. Although the precise biological mechanism of activation is unknown, it is believed that interferons impede or suspend the growth of cancerous cells, compromise the ability of cancerous cells to defend against the host’s immune system and strengthen the host’s immune system. Interferons have been administered in combination with BCG. The University of Iowa has conducted Phase III clinical trials to examine the relative effectiveness of the interferon/BCG combined therapy as compared to each as a stand-alone treatments.







In addition to the foregoing, we are aware of two products undergoing Phase III clinical testing for bladder cancer, namely Apaziquone (a bioreductive prodrug and a chemical analog of the chemotherapeutic agent Mitomycin C with antineoplastic and cytotoxic activities) and Urocidin (which is designed to inhibit cancer cell division, induce apoptosis and stimulate anticancer cytokine synthesis). We are also aware of several new treatment methods for superficial bladder carcinoma, including photodynamic treatment, which kills cancerous cells using laser, and synergo technology, which combines hypothermia with chemotherapeutical substances, although neither has been approved by the FDA.




We are also aware of several drugs for the treatment of ovarian cancer in various stages of development, including: (i) Avastin, recombinant humanized monoclonal antibody that targets vascular endothelial growth factor (VEGF), developed by Genentech; (ii) Tarceva, small molecule human epidermal growth factor type 1 or epidermal growth factor receptor (HER1/EGFR) inhibitor, developed by Roche Holdings Ltd; and (iii) epothilone B, a cytotoxic, novel tubulin polymerizing compound known as an epothilone which inhibits cancer cells with a similar mechanism as paclitaxel, developed by Novartis.





The results of our Phase I/IIa bladder carcinoma clinical study have demonstrated that the safety profile of BC-819 is excellent. The incidence and severity of adverse events in this small study population were lower than published results for BCG and chemotherapy. For instance in a typical Phase III study of BCG and epirubicin (de Reijke et al. 2005), adverse events included hematuria in 41% and 28% of patients treated with BCG or epirubicin, respectively, while only 11% of patients treated with BC-819 suffered hematuria. Severe dysuria was reported in 26% and 10% of patients treated with BCG and epirubicin, respectively, whereas there were no cases of severe dysuria reported for BC-819. No local reactions caused cessation of treatment with BC-819, whereas 26% and 9% of patients treated with BCG and epirubicin, respectively, had to have treatment stopped due to local toxicities. Using a plasmid with an expression cassette of the diphtheria toxin, no immune response is expected as happens when using an adenovirus; moreover, people born in Western countries are routinely immunized against diphtheria toxin. Further, our treatments are not affected by multi-drug resistance effects, a major problem in chemotherapy. Notwithstanding the foregoing, the FDA alone will determine whether our BC-819 product is both safe and effective for commercial use in the United States after substantial additional clinical studies.





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Expenditures on Research and Development





From the time of our inception on July 26, 2004 through December 31, 2010, we invested approximately $13,476,000 in our research and development activities. We have funded our research and development expenses from our own resources and from various non-diluting grants, including grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor (OCS).





Our aggregate research and development budgetary expenditures for our first year of OCS funding for superficial bladder carcinoma (July 2005 to June 2006) were NIS 2.734 million (approximately $850,000), of which NIS 1.225 million (approximately $380,000) was funded by the OCS. Our aggregate research and development budgetary expenditures for the second year (August 2006 to July 2007) and third year (August 2007 to July 2008) were NIS 4.127 million (approximately $1,280,000) and NIS 5.473 million (approximately $1,700,000), respectively. In the second and third years, the OCS funded 60% of the approved research and development expenditures paid in Israel and 30% of the research and development costs paid to sub-contractors and consultants outside Israel. During July 2009 the OCS approved a fourth year of funding, in an aggregate amount of NIS 2.815 million (approximately $718,000).





In March 2009, the OCS approved a grant for us to perform a Phase I/IIa clinical trial of BC-819 for ovarian cancer. The OCS will fund up to 60% of NIS 1.7 million (approximately $447,000) in local expenses and up to 30% of NIS 1.8 million (approximately $484,000) in foreign expenses. In June 2010, a second year of funding was confirmed, with OCS funding up to 60% of an additional NIS 3.4 million (approximately $950,000) in local expenses and up to 30% of an additional NIS 1.8 million (approximately $515,000) in foreign expenses.





In May 2010, we applied to the OCS for two additional research and development program grants for BC-821 for lung cancer. The OCS will fund up to 60% of NIS 2.7 million (approximately $754,000) in local expenses and up to 30% of NIS 0.3 million (approximately $91,000) in foreign expenses. We have not yet received approval for the grants.





In January 2011, we applied to the OCS for two additional research and development program grants for our completed Phase IIb clinical trial for the use of BC-819 as a treatment for pancreatic cancer. The OCS will fund up to 60% of NIS 5.6 million (approximately $1,573,000) in local expenses and up to 30% of NIS 13.1 million (approximately $3,685,000) in foreign expenses. We have not yet received approval for these grants.





According to the Israeli Regulations for the Promotion of Research and Development in Industry 1996, we must pay the OCS royalties at a rate of 3% of the sum of sales of products during the first three years from the date of commencement of sales, 4% of the sum of sales during the following three years and 5% of the sum of sales from the seventh year onward until the full repayment of the grants received by us, which are linked to the U.S. Dollar and bear annual interest at LIBOR rates. As of the date of this report, we have not began repayments.





In December 2007, the Israel-U.S. Binational Industrial Research and Development Foundation (BIRD) approved a grant in the amount of $950,000 for our collaboration with the Virginia Bioscience Commercialization Center. The grant partially funded our successfully completed Phase I/IIa clinical trial for the use of BC-819 as a treatment for pancreatic cancer, which was conducted at the University of Maryland Medical Center in Baltimore.





Under the terms of the grant agreement between BIRD, the Virginia Bioscience Commercialization Center and us, we will have to repay the grant within twelve months of the successful completion of the project. We are entitled to extend the repayment period to 2 years in return for total repayment of 113% of the grant amount, to 3 years in return for total repayment of 125%, to 4 years in return for total repayment of 138%, or to 5 years or more in return for total repayment of 150% of the grant amount. The terms of the agreement, as amended, called for the evaluation of the status of the project by November 1, 2010. During the year ended December 31, 2010, we made significant progress with respect to development of BC-819 as a treatment for pancreatic cancer, and as a result, recorded a liability to the BIRD Foundation for repayment of the grant.





Intellectual Property





As of the date of this report, our patent portfolio includes 68 patent applications in seven patent families in various stages of examination, 31 of which have been granted in the United States, Europe, Israel, China, Norway, Australia, South Korea, Russia, Singapore, Mexico, Canada and the Czech Republic. The table below details which patent groups are related to which of our product candidates.





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Patent Group

Product
Expiration DatesUse of the H19 gene as a tumor marker


BC-819

Between

03/07/2014

and

03/06/2015Methods and compositions for inducing tumor-specific cytotoxicity


BC-819

Between

10/03/2017

and

10/04/2018Nucleic acid agents for down regulating H19, and methods of using same


BC-822

—Nucleic acid constructs, pharmaceutical compositions and methods of using same for treating cancer


BC-820

—Nucleic acid constructs and methods for specific silencing of H19


BC-822

—H19 silencing nucleic acid agents for treating rheumatoid arthritis (siRNA + RA)


BC-822

—Constructs containing multiple expression cassettes for cancer therapy


BC-821

—





Pursuant to a license agreement with Yissum, which is described in more detail below, we have an exclusive, worldwide license for the development, use, manufacturing and commercialization of products arising out of patents owned by, and patent applications filed by, Yissum in connection with the H19 gene. All of our patents and patent applications were licensed to us from Yissum and are subject to the Yissum license agreement.





Government Regulation





Our operations are subject to many governmental regulations. In the event that we complete Phase III clinical trials and are in a position to manufacture and market our prospective therapeutic products, the marketing of our prospective therapeutic products would be conditioned upon obtaining the consent of health authorities in each of the countries in which our prospective therapeutic products would be marketed, including the FDA and the European Agency for the Evaluation of Medicinal Products. In order to market our products outside of the United States, we must comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in countries outside of the United States might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed below regarding FDA approval as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others.





United States Food and Drug Administration.   We must obtain the approval of the FDA to market any drugs that we may develop in the United States, as well as adhere to other U.S. and state regulations. If we seek to market new drugs, we will be required to file a new drug application and obtain FDA approval. FDA regulations govern the following activities that we may perform, or that we may have performed on our behalf, to ensure that any drugs that we may develop are safe and effective for their intended uses:





§
pre-clinical (animal) testing including toxicology studies;


§
submission of an investigational new drug application (IND);


§
human testing in clinical trials, Phases I, II and III;


§
recordkeeping and retention;


§
pre-marketing review through submission of a new drug application (NDA);


§
drug labeling and manufacturing, the latter of which must comply with current good manufacturing practice regulations;


§
drug marketing, sales and distribution; and


§
post-marketing study commitments (Phase IV), post-marketing surveillance, complaint handling, reporting of deaths or serious injuries and repair or recall of drugs.





Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:





§
warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;


§
disqualification of clinical investigator and/or sponsor from current and future studies;


§
clinical hold on clinical trials;






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§
operating restrictions, partial suspension or total shutdown of production;


§
refusal to approve an NDA;


§
post-marketing withdrawal of approval; and


§
criminal prosecution.





The FDA’s Pre-clinical and IND Requirements.   The first step to obtaining FDA approval of a new drug involves development, purification and pre-clinical testing of a pharmaceutically active agent in laboratory animals. Once sufficient pre-clinical data has been collected to demonstrate that the drug is reasonably safe for initial use in humans, an IND can be prepared and submitted to the FDA for review. In the IND review process, FDA physicians and scientists evaluate the proposed clinical trial protocol, chemistry and manufacturing control, pharmacologic mechanisms of action of the drug and toxicologic effects of the drug in animals and in vitro. Within 30 days of the IND’s submission, the drug review division of the FDA may contact us regarding potential concerns and, if necessary, implement a clinical hold until certain issues are resolved satisfactorily. If it does not take any action, we may proceed with clinical trials on the 31st day.





Clinical Trials.   Clinical trials represent the ultimate pre-market testing ground for unapproved drugs, generally taking several years to complete. Before testing can begin, an institutional review board must have reviewed and approved the use of human subjects in the clinical trial. During clinical trials, an investigational compound is administered to humans and evaluated for its safety and effectiveness in treating, preventing or diagnosing a specific disease or condition. The clinical trials consist of Phase I, Phase II, and Phase III testing. During clinical trials, the FDA and institutional review board closely monitor the studies and may suspend or terminate trials at any time for a number of reasons, such as finding that patients are being exposed to an unacceptable health risk. The results of clinical trials comprise the single most important factor in the approval or disapproval of a new drug.





NDA Review.   An NDA, requesting approval to market the drug for one or more indications, may be submitted to the FDA once sufficient data has been gathered through pre-clinical and clinical testing. An NDA includes all animal and human testing data and analyses of the data, as well as information about how the drug behaves in the human body and how it is manufactured. The NDA is reviewed by a team of FDA physicians, chemists, statisticians, microbiologists, pharmacologists and other experts, who evaluate whether the studies submitted show that the drug is safe and effective for its proposed use. The FDA reviewers may request further information from us, consult with outside experts or disagree with our findings or interpretation of the data. Each reviewer prepares a written evaluation, and the reviewing team discusses the evaluations. Accelerated approval may be given to some new drugs for serious and life-threatening illnesses that lack satisfactory treatments. At the end of its review, the FDA may approve the new drug to be marketed or decide that a new drug is “approvable” or “not approvable.” In either of the latter cases, we may meet with FDA officials to discuss and correct deficiencies.





Pervasive and Continuing Regulation in the United States.   After a drug is approved for marketing and enters the marketplace, numerous regulatory requirements continue to apply. These include, but are not limited to:





§
The FDA’s current good manufacturing practice regulations require manufacturers, including third party manufacturers, to follow stringent requirements for the methods, facilities and controls used in manufacturing, processing and packing of a drug product;


§
Labeling regulations and the FDA prohibitions against the promotion of drug for uncleared or unapproved uses (known as off-label uses), as well as requirements to provide adequate information on both risks and benefits during promotion of the drug;


§
Clearance or approval of product modifications or use of the drug for an indication other than approved in the NDA;


§
Adverse drug experience regulations, which require us to report information on rare, latent or long-term drug effects not identified during pre-market testing;


§
Post-market testing and surveillance requirements, including Phase IV trials, when necessary to protect the public health or to provide additional safety and effectiveness data for the drug; and


§
The FDA’s recall authority, whereby it can ask, or under certain conditions order, drug manufacturers to recall from the market a product that is in violation of governing laws and regulations.





After a drug receives approval, any modification in conditions of use, active ingredient(s), route of administration, dosage form, strength or bioavailability, will require a new clearance or approval. We may be able to submit a 505(b)(2) NDA referring to pre-clinical and certain clinical studies presented in the drug’s original NDA, accompanied by additional clinical data necessary to demonstrate the safety and effectiveness of the product with the proposed changes. Additional clinical studies may be required for proposed changes.





Fraud and Abuse Laws in the U.S.   A variety of U.S. federal and state laws apply to the sale, marketing and promotion of drugs that are paid for, directly or indirectly, by U.S. federal or state healthcare programs such as Medicare and Medicaid. The restrictions imposed by these laws are in addition to those imposed by the FDA, the United States Federal Trade Commission and corresponding state agencies. Some of these laws significantly restrict or prohibit certain types of sales, marketing and promotional activities by drug manufacturers. Violation of these laws may result in significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties and exclusion or debarment from U.S. federal and state healthcare and other programs. Many private health insurance companies also prohibit payment to entities that have been sanctioned, excluded or debarred by U.S. federal agencies.


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Anti-Kickback Statutes in the U.S.   The U.S. federal anti-kickback statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending of a good or service, for which payment may be made in whole or in part under a U.S. federal healthcare program such as the Medicare and Medicaid programs. The definition of “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, the furnishing of supplies or equipment, payments of cash and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that, if any one purpose of an arrangement involving remuneration is to induce referrals or otherwise generate business involving goods or services reimbursed in whole or in part under U.S. federal healthcare programs, the statute has been violated. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other U.S. federal healthcare programs. In addition, some kickback allegations have been claimed to violate the United States False Claims Act (as discussed below).





The U.S. federal anti-kickback statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the statute is broad and may technically prohibit many innocuous or beneficial arrangements, the Office of Inspector General of the Department of Health and Human Services (OIG) has issued a series of regulations, known as the “safe harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the anti-kickback statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy an applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG or the U.S. Department of Justice.





Many states have adopted laws similar to the U.S. federal anti-kickback statute. Some of these state prohibitions are broader than the U.S. federal statute, and apply to the referral of patients and recommendations for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs. Government officials have focused certain enforcement efforts on marketing of healthcare items and services, among other activities, and have brought cases against individuals or entities with sales personnel who allegedly offered unlawful inducements to potential or existing physician customers in an attempt to procure their business.





U.S. False Claims Act.   The United States False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the U.S. federal government or knowingly making, or causing to be made, a false statement in order to have a false claim paid. The U.S. federal government’s interpretation of the scope of the law has in recent years grown increasingly broad. Most states also have statutes or regulations similar to the United States False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these U.S. federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment. Several drug manufacturers have been prosecuted under the false claims laws for allegedly providing free drugs to physician customers with the expectation that the physician customers would bill U.S. federal programs for the product. In addition, several recent cases against drug manufacturers have alleged that the manufacturers improperly promoted their products for “off-label” use, outside of the scope of the FDA-approved labeling.





United States Health Insurance Portability and Accountability Act of 1996.   The United States Health Insurance Portability and Accountability Act of 1996, or HIPAA, created a new U.S. federal healthcare fraud statute that prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government-sponsored programs. Among other things, HIPAA also imposes new criminal penalties for knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services, along with theft or embezzlement in connection with a healthcare benefits program and willful obstruction of a criminal investigation involving a U.S. federal healthcare offense.





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Regulations in Europe.   In Europe, we must obtain authorization from the European Agency for the Evaluation of Medicinal Products, commonly known as the European Medicines Evaluation Agency (EMEA) before marketing medicinal products. Authorization can be obtained through either the (i) “centralized” procedure, with applications made directly to the EMEA leading to the grant of a European marketing authorization by the European Commission, or (ii) “mutual recognition” procedure, in which applications are made to one or more Member States leading to national marketing authorizations mutually recognized by other Member States. If and when we receive marketing authorization, EU law regulates our distribution, classification for supply, labeling and packaging, and advertising of medicinal products for human use. The EU also regulates the manufacture of medicinal products, requiring us to meet the Good Manufacturing Practice requirements set forth in the Quality System regulation (cGMP). EU pharmacovigilance directives and regulations require us to establish post-market surveillance systems that include individual adverse reaction case reports, periodic safety update reports, and company-sponsored post-authorization safety studies. If a medicinal product’s overall risk and benefit profile is found to have changed significantly for any reason, we may be required to vary, withdraw or suspend the use of any such EMEA-approved drug.





Regulations in Israel.   Our operations in Israel also are subject to approval by Israel’s Ministry of Health and the Helsinki Committee. All phases of clinical studies conducted in Israel must be conducted in accordance with the Public Health Regulations (Medical Experiments Involving Human Subjects, 1980, including amendments and addenda thereto) and the International Conference for Harmonization Good Clinical Practice Guidelines. The regulations stipulate that a medical trial on humans will only be approved after the Helsinki Committee at the hospital intending to perform the trial has approved the medical trial and notified the medical director at the hospital in writing. The Helsinki Committee will not approve the performance of the medical trial unless it is fully satisfied that it has advantages to the trial participants and society at large that justify the risk and inconvenience for the participants and that the medical and scientific information justifies the performance of the requested medical trial. The medical director also must be satisfied that the trial is not contrary to the Helsinki Declaration or to other regulations. The Ministry of Health also licenses and inspects pharmaceutical manufacturers, requiring manufacturers to meet internationally recognized cGMP standards.





Under the Israeli Law for the Encouragement of Industrial Research and Development, 1984 and related regulations, which we refer to as the “Research Law”, recipients of grants from the OCS are prohibited from manufacturing products developed using these grants outside of the State of Israel without special approvals, although the Research Law does enable companies to seek prior approval for conducting certain manufacturing activities outside of Israel without being subject to increased royalties. If we receive approval to manufacture the products developed with government grants outside of Israel, we will be required to pay an increased total amount of royalties to OCS, up to 300% of the grant amounts plus interest, depending on the manufacturing volume that is performed outside of Israel, as well as at a possibly increased royalty rate.





Additionally, under the Research Law, we are prohibited from transferring OCS-financed technologies and related intellectual property rights outside of the State of Israel except under limited circumstances, and only with the approval of the Research Committee of the OCS.





We may not receive the required approvals for any proposed transfer and, if received, we may be required to pay the OCS a portion of the consideration that we receive upon any sale of such technology to a non-Israeli entity. The scope of the support received, the royalties that we have already paid to the OCS, the amount of time that has elapsed between the date on which the know-how was transferred and the date on which the OCS grants were received and the sale price and the form of transaction will be taken into account in order to calculate the amount of the payment to the OCS. Approval of the transfer of technology to non-residents of the State of Israel is required, and may be granted in specific circumstances only if the recipient abides by the provisions of applicable laws, including the restrictions on the transfer of know-how and the obligation to pay royalties. No assurances can be made that approval to any such transfer, if requested, will be granted.





In March 2005, an amendment to the Research Law was enacted. One of the main modifications included in the amendment was authorization for the Research Committee to allow the transfer outside of Israel of know-how derived from an approved program and the related manufacturing rights. In general, the Research Committee may approve transfer of know-how in limited circumstances as follows:





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§
in the event of a sale of the know-how itself to a non affiliated third party, provided that upon such sale the owner of the know-how pays to the OCS an amount, in cash, as set forth in the Research Law. In addition, the amendment provides that if the purchaser of the know-how gives the selling Israeli company the right to exploit the know-how by way of an exclusive, irrevocable and unlimited license, the research committee may approve such transfer in special cases without requiring a cash payment.


§
in the event of a sale of the company which is the owner of know-how, pursuant to which the company ceases to be an Israeli company, provided that upon such sale, the owner of the know-how makes a cash payment to the OCS as set forth in the Research Law.


§
in the event of an exchange of know-how such that in exchange for the transfer of know-how outside of Israel, the recipient of the know-how transfers other know-how to the company in Israel in a manner in which the OCS is convinced that the Israeli economy realizes a greater, overall benefit from the exchange of know-how.





Another provision in the amendment concerns the transfer of manufacturing rights. The Research Committee of the OCS may, in special cases, approve the transfer of manufacture or of manufacturing rights of a product developed within the framework of the approved program or which results therefrom, outside of Israel.





The State of Israel does not own intellectual property rights in technology developed with OCS funding and there is no restriction on the export of products manufactured using technology developed with OCS funding. The technology is, however, subject to transfer of technology and manufacturing rights restrictions as described above. OCS approval is not required for the export of any products resulting from the research or development or for the licensing of any technology in the ordinary course of business.







Material Operating Arrangements





Exclusive License Agreement with Yissum.   On November 14, 2005, we entered into a license agreement with Yissum, which was subsequently amended on November 22, 2005, September 11, 2007 and January 24, 2011, pursuant to which Yissum has granted to us an exclusive, worldwide license for the development, use, manufacturing and commercialization of products arising out of patents owned by, and patent applications filed by, Yissum in connection with the H19 gene.





Under the terms of the Yissum license, Yissum retains right, title and interest in the products, technologies or other inventions arising out of our research and development of these patents and patent applications, except for intellectual property developed with funding from the OCS, which will be owned by us and transferred to Yissum only upon our dissolution or upon decision by the OCS that it no longer requires us to own the intellectual property developed with its funding. We have the right to grant sub-licenses to third parties in accordance with the terms set forth in the Yissum license.





We have agreed to provide research and development funding to Yissum in connection with the license, which we may terminate upon 90 days prior written notice to Yissum. In such event, we are required to compensate Yissum for all expenses incurred by it prior to the notification date in connection with its research efforts and all additional expenses that Yissum had assumed the obligation to cover prior to the notification date. The research and development funding was initially set for a period of two years with the possibility to extend the term by mutual agreement. We have been extending the funding period on a yearly basis, and it is currently valid until June 2011.





In addition, we have agreed to prepare, register and maintain any patent application or patent that may arise out of our research and development efforts pursuant to our license with Yissum and to bear all expenses of preparation, registration and maintenance. We agreed to keep Yissum informed of filing and prosecutions pursuant to the agreement, including submission of copies of all official actions, relevant correspondence, applications, continuations or like proceedings, and responses thereto. We agreed to consult Yissum regarding any abandonment of the prosecution of patent applications arising out of the license. In the event that we decide not to commence or continue the process of patent registration in a certain country, we must notify Yissum of this decision. Yissum may then individually prepare, register and maintain any such patent. We must inform Yissum of our desire to assume the expenses incurred by Yissum in connection with its patent registration within 90 days from the date in which Yissum notifies us of its decision to prepare, register and maintain such patent. In the event that we decide not to assume these expenses, or in the absence of our reply within the above 90 day period, the exclusive, worldwide license granted to us by Yissum will no longer be applicable in such countries in which we elected not to file or to abandon the filing, prosecution or maintenance of patents pursuant to the license. We undertook to use commercially reasonable efforts at our own expense to protect against third party infringement of the patents arising out of the license and to advise Yissum upon learning of such infringement. We also undertook to use commercially reasonable efforts at our own expense to defend any action, claim or demand made by any entity in connection with rights in the patents, and to notify Yissum immediately upon learning of any such action or claim.





We have agreed to pay Yissum 5% of all “net sales” as royalties and to pay Yissum 10% of the income that we receive from granting sub-licenses to third parties up to revenues of $30 million each year, and 6.5% of all additional income that we receive from granting sub-licenses to third parties. We are required to indemnify Yissum, the Hebrew University of Jerusalem, their employees, their executive officers, delegates and any other persons acting on their behalf under the license against any liability, including product liability, damages, losses, expenses, fees and reasonable legal expenses arising out of our actions or omissions in performing the Yissum license, including the use, development and manufacturing of patents arising out of it and the granting of sub-licenses thereunder, provided that any such loss was not caused by the intentional misconduct or gross negligence of the indemnitees.





-17-





We have agreed to maintain, and to add Yissum as an additional insured party with respect to, product liability insurance as well as an insurance policy with respect to the foregoing indemnification prior to the time when we commence clinical trials and close our first commercial sale. We also have agreed to obtain liability insurance with respect to clinical trials prior to the time when we commence clinical trials.





We have the right to terminate the Yissum license upon three months prior written notice provided that we have paid all amounts owing to Yissum under the license. Yissum has the right to terminate the license in the event that we become bankrupt or insolvent, or if our business is placed in the hands of a receiver, assignee or trustee. In addition, Yissum has the right to terminate the license for any material breach of it by us in the event that we fail to remedy such material breach within 90 days of Yissum’s notice of our material breach and its intent to terminate, provided that the material breach is curable within 90 days. In the event that the material breach cannot be remedied within 90 days, Yissum may not terminate the license if we take reasonable commercial action to cure such breach as promptly as practicable. The Israeli Contract Law (Remedies for Breach of Contract) — 1970, defines the term “material breach” as a breach, with regards to which, it may be assumed that a reasonable person would not have entered into the specific agreement had that person foreseen the breach and the outcome thereof, or a breach which is specifically defined as material in the agreement. Acts which may constitute a material breach of the license agreement by us may include, for example: the granting of sublicenses not in compliance with the provisions of the license agreement, a breach of our obligations to pay royalties and provide the necessary reports with respect thereto, a breach of our obligation to develop and commercialize the licensed technology including our obligation to fund certain research and development activities, a breach of our obligations to conduct patent prosecution and maintenance, and a breach of our obligations not to disclose or misuse certain confidential information of Yissum. The termination of the license also entails termination of all licenses granted thereunder. Any termination of the license shall not terminate any of our obligations, including our obligation to pay royalties that matured prior to the effective date of termination.





We may assign the Yissum license only in connection with the sale of all or substantially all of our assets. Otherwise, we must receive the prior written consent of Yissum to assign the license which consent shall not be unreasonably withheld.





Each license granted to us under the Yissum agreement expires upon the expiration of the underlying patent, or, if no patent has been registered, then after nine years from the date of the first commercial sale of the product of such license, provided that we may extend the license for an additional one year period in any such circumstance by continuing to pay royalties for such license.





Polyplus-transfection SA.   Polyplus-transfection SA is currently our sole supplier of the component polyethylenimine which is used to enhance our prospective drug BC-819’s ability to penetrate cancerous cells in the bladder. Polyplus-transfection SA has agreed to comply with the Good Manufacturing Practice requirements set forth in the Quality System Regulation in manufacturing component polyethylenimine for us.





Supply Agreement with Althea Technologies Inc. In January 2007, our subsidiary, BioCancell Therapeutics Israel Ltd. entered into a continuous production agreement with Althea Technologies Inc., an American manufacturer for the production of our plasmids. To date, the manufacturer has executed three production campaigns of the DTA-H19 plasmid, one for the production of non-GMP material, the second for GMP material that is used for the Phase IIb clinical study for treatment of superficial bladder cancer, and the third for the production of GMP material for Phase I/IIa clinical trials of BC-819 in the treatment of ovarian and pancreatic cancer. All campaigns were successful, resulting with sufficient material, all of it within the specifications.





Supply Agreement with VGXI USA.   In September 2008, our subsidiary BioCancell Therapeutics Israel Ltd. entered into a continuous production agreement with VGXI USA, a business entity registered in the state of Texas, a DBA of VGX International Inc. of Korea. Pursuant to the agreement, we may purchase from, and have plasmids produced by VGXI USA under cGMP conditions. We have no commitment to purchase any minimum quantity of plasmids nor shall VGXI USA have any commitment to produce and sell any minimum quantity of plasmids. We shall become obligated to purchase, and VGX International Inc. shall be obligated to produce plasmids only upon execution and delivery of a purchase order for such plasmids.





-18-


Agreements for the Performance of Clinical Trials.   Between November 2007 and December 2010, we entered into agreements with several medical centers in Israel and BCG Oncology PC in the U.S., pursuant to which Phase II clinical trials will be administered by each for the purposes of assessing the efficacy and safety of our prospective drug BC-819 on patients suffering from superficial bladder carcinoma. Between April 2009 and December 2010, we entered into agreements with several medicalcenters in Israel, pursuant to which Phase I/IIa clinical trials will be administered by each for the purposes of assessing the safety and efficacy of our prospective drug BC-819 on patients suffering from ovarian cancer. Between May 2009 and March 2010, we entered into agreements with several medical centers in Israel and University of Maryland Medical Center in the U.S., pursuant to which Phase I/IIa clinical trials will be administered by each for the purposes of assessing the safety and efficacy of our prospective drug BC-819 on patients suffering from pancreatic cancer. The Phase I/IIa pancreatic cancer clinical trial was successfully completed in November 2010. Each of these agreements was approved by the appropriate hospital authority.





Pursuant to the terms of each of these agreements, we will provide funding for the clinical trials and the hospitals will provide us with the medical personnel required by the trials, including researchers and facilities, and will supervise the trials in order to verify the trials’ compliance with trial protocols, the directives of the regulatory authorities, the terms and conditions set forth by the Helsinki Committee or applicable institutional review board for the performance of the trials and any other relevant law and regulatory directives. We have agreed to compensate each of the hospitals based upon numerical factors including the number of participants in the trials and the number of patient visits.





Each of the hospitals have ceded to us all right, title and interest in any and all intellectual property rights of any kind that may be created or developed from the trials.





We have agreed to indemnify each of the hospitals and their medical personnel who participate in the trials against any loss or damage arising out of the trials, as long as the trials are administered in accordance with the terms set forth in such hospitals’ agreement with us, and as long as such loss or damage was not caused by the negligence of the indemnitees.







Employees and Advisory Board





As of the date of this report, we have 19 employees, of whom eight work for us on a full-time basis and an additional nine work part-time for us and part-time in Prof. Hochberg’s laboratory at the Hebrew University of Jerusalem. Twelve of these employees conduct clinical development or research and development for us; the other seven are managers or administrators. The majority of our research and development work is completed by Professor Hochberg’s laboratory team at the Hebrew University of Jerusalem. The team members are qualified in the life sciences and in medicine: four of these members have doctorates in the natural sciences and one specializes in pathology.





Our Scientific Advisory Board includes world-renowned experts in the field of cancer therapy including Professor Mark L. Tykocinski, who was President of the American Society for Investigative Pathology and is currently President of the Association of Pathology Chairs, Professor Aaron Ciechanover, who was awarded the Nobel Prize in Chemistry in 2004, Professor Roger D. Kornberg, who was awarded the Nobel Prize in Chemistry in 2006, Professor Hermona Soreq, Dean of the Faculty of Mathematics and Science at the Hebrew University of Jerusalem, Professor Yechezkel Barenholz, a professor of Biochemistry at the Hebrew University-Hadassah Medical School, and Professor Yaakov Naparstek, Chairman of Medicine at Hadassah University Hospital. The members of our Scientific Advisory Board provide us with general and strategic consultation and development services and assistance with respect to our research and development activities. As compensation for their work, the members of our Scientific Advisory Board receive an advisor’s fee of $1,000 for each meeting of the Scientific Advisory Board in which they participate, plus expenses. In addition, our Board of Directors has committed to grant to each member of the Scientific Advisory Board options to purchase 30,000 shares of our common stock pursuant to our 2007 Stock Option Plan. No member of our Scientific Advisory Board is an officer, employee or director of either BioCancell Therapeutics Inc. or BioCancell Therapeutics Israel Ltd.





All of our current employees have signed personal employment agreements providing them with monthly salaries. Under these employment agreements, our employees have promised to cede to us all right, title and interest to any and all intellectual property created during their course of employment to us and they have undertaken not to make use of it, and not to compete with us for a period of 12 months after termination of their employment with us.





None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppages. We believe that our relations with our employees are good. We have adopted a Code of Ethics that applies to all of our employees, officers and members of the Board of Directors. The Code of Ethics is available on our website at www.biocancell.com, and in print to any interested party that requests it.





-19-




Item 2. Properties


Our offices are located at Har Hotzvim, Jerusalem, in a building in which we lease a total space of 213 square meters for a term expiring in September 2011. Our annual rent under the lease is approximately $48,000 plus VAT. Most of our research and development activities are conducted in the research laboratories of the Hebrew University of Jerusalem.





Item 3. Legal Proceedings





We are not currently a party to any legal proceeding.














PART II


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





Our shares of Common Stock and our Series 3 and Series 4 Warrants are not listed for trading on any US market, but are listed for trading on the Tel Aviv Stock Exchange (TASE). The information below refers to shares of our Common Stock that are currently traded on the TASE under the symbols “BICL”. Public trading of our shares of Common Stockcommenced on August 17, 2006. We have never declared any dividends on any securities.





The following tables set forth, for the periods indicated, the range of high and low per share sale prices for our Common Stock as reported on the TASE.  There is no established public trading market in the U.S. for our shares.





Common Stock








2010High


LowFirst quarter
NIS
4.003


NIS
2.453Second quarter
NIS
3.689


NIS
2.073Third quarter
NIS
3.222


NIS
2.126Fourth quarter
NIS
3.402


NIS
2.105





2009High


LowFirst quarter
NIS
1.649


NIS
0.403Second quarter
NIS
3.900


NIS
1.565Third quarter
NIS
3.555


NIS
2.555Fourth quarter
NIS
3.402


NIS
2.079





Holders of Securities





As of the date of this report, we had 15 stockholders of record.





Dividends





Holders of our common stock are entitled to equal ratable rights to dividends and distributions with respect to the common stock, as may be declared by the Board of Directors out of funds legally available. We have never declared any dividends on any of our securities, and do not intend to do so in the foreseeable future.





Equity Compensation Plans





The following table sets forth information as of the date of this report regarding our equity compensation plans, the 2004 Stock Option Plan and the 2007 Stock Option Plan, under which we grant securities exercisable for shares of our common stock to employees, directors and consultants of our company and employees, directors and consultants of our present and future subsidiaries.







-20-




Plan Category

Number of Shares

to Be Issued upon

Exercise of

Outstanding Options, Warrants and Rights

(a)

Weighted-Average

Exercise Price of

Outstanding Options, Warrants and Rights

(b)

Number of Securities

Remaining Available

for Future Issuance

under Equity

Compensation Plans

(excluding securities reflected

in Column (a))Equity Compensation Plans approved by securityholders


488,358


$
0.19



0Equity Compensation Plans not approved by securityholders


2,143,638


$
0.69



501,362Total


2,591,996


$
0.60



501,362







Use of Proceeds from Registered Securities





On June 22, 2009 (the “Effective Date”), our Registration Statement on Form S-1 (File No. 333-156252) (the “Registration Statement”), covering the resale of up to 1,872,780 shares of common stock (the “Offering”) by selling security holders, was declared effective under the Securities Act of 1933. The Offering has not yet terminated.





The Company does not receive any proceeds from the sale of shares covered by the Offering.  The Company did not incur any expenses in connection with the Offering from the Effective Date through December 31, 2010.





Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations





The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, the notes to the consolidated financial statements and the other consolidated financial information included elsewhere in this report. In addition to historical information, the following discussion and analysis includes forward-looking information that involves risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under elsewhere in this Form 10-K. See “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Form 10-K.





Overview





We were incorporated in the United States under the laws of the State of Delaware on July 26, 2004 and commenced operations on October 1, 2004. We filed a prospectus for an initial public offering on the Tel Aviv Stock Exchange, or TASE, and, since August 17, 2006, our securities have been publicly traded in Israel on the TASE. For TASE purposes, we file Hebrew-language financial statements in New Israeli Shekels in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. On June 22, 2009, our registration statement with the U.S. Securities and Exchange Commission (SEC) was deemed effective and we began reporting under the Securities Exchange Act of 1934, as amended, or the Exchange Act. For our filings in the United States, we prepare English-language financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP).





We and our wholly owned subsidiary in Israel, BioCancell Therapeutics Israel Ltd., focus our activities on the research and development of drugs for the treatment of various cancer types. The leading drug-candidate developed by us has been tested for a number of cancer types in pre-clinical animal studies, compassionate use human trials and a Phase I/IIa clinical trial. We are now performing a Phase IIb clinical trial on bladder cancer patients, a Phase I/IIa clinical trials on ovarian cancer patients and we recently completed a Phase I/IIa clinical trial in pancreatic cancer. Additionally, we are presently evaluating indications for the possible use of this drug, and others under development, to treat other types of cancer.





We are a development stage company. Therefore, there is no certainty regarding our ability to complete the development of any of our product-candidates, receive regulatory permits and succeed in our marketing efforts. Our operations since inception have been directed primarily toward developing research and development activities, conducting pre-clinical and clinical testing of our product candidates, business strategies, raising capital, exploring marketing channels and recruiting personnel.





-21-


From our inception, we have raised a cumulative amount of $21,300,000 including amounts received as a result of the exercise of options by our employees, directors and consultants. During 2005 and the first half of 2006, we raised $2,951,000 from private investors and from Yissum Research Development Company of the Hebrew University of Jerusalem Ltd., a founder of our company. We raised an additional $4,976,000 in connection with our initial public offering in August 2006 on the TASE. On May 15, 2008, we executed a private placement to Clal Biotechnology Industries Ltd., or CBI, from which we received aggregate gross proceeds of $669,000 (net proceeds of $653,000). On July 30, 2008, we carried out private placements with Tikcro Technologies Ltd., CBI and the Provident Fund of the Employees of the Hebrew University of Jerusalem Ltd., institutional investors, whereby three investors received an aggregate amount of 1,222,780 shares of our common stock at a price of about $0.60 per share, non-registered convertible notes payable, convertible into an aggregate of 5,058,002 shares of our common stock at a conversion price of about $0.72 per share and three non-registered warrants to purchase an aggregate of up to 6,280,783shares of our common stock at a price of about $0.72 per share exercisable for five years. The aggregate gross proceeds from the private placements were approximately $3,650,000 (net proceeds of $3,609,000). During May and June 2009, we sold 1,099,756 shares of treasury stock, at an average price of $0.92 per share, and total proceeds of $1,017,000. In August 2009, we sold 713,000 shares of treasury stock, at an average price of $0.79 per share, and total proceeds of $552,000. Following the sale, we no longer hold any shares of treasury stock. In March 2010, we executed private placements to institutional and individual investors of 4,157,500 shares of common stock at a price of approximately $0.78 per share, and warrants to purchase an additional 4,157,500 shares of our common stock, exercisable immediately upon their issuance with a life of four years and an exercise price of approximately $1.12. The aggregate gross proceeds were $3,285,000 at an approximate price of $0.78 per share (net proceeds of $2,694,000). On November 18, 2010, we consummated a public offering, whereby investors received an aggregate amount of 5,634,970 shares of common stock at a price of NIS 3.30 per share (approximately $0.90 per share) (the “Common Shares”), 2,817,485 non-registered warrants (the “Series 3 Warrants”) to purchase 2,817,485 shares of common stock at a price of NIS 10,397,000 (approximately $1.01 per share) exercisable immediately upon their issuance with a life of two years and 2,817,485 non-registered warrants (the “Series 4 Warrants”) to purchase 2,817,485 shares of common stock at a price of NIS 12,481,000 (approximately $1.21 per share) exercisable immediately upon their issuance with a life of four years. The aggregate gross proceeds from the offering were $5,104,000 (NIS 18,595,000). The net proceeds were $4,196,000 (NIS 15,277,000).





We have incurred operating losses since inception, have not generated any product sales revenues and have not achieved profitable operations. Our deficit, accumulated during the development stage through December 31, 2010, aggregated $19,306,000 and we expect to continue to incur substantial losses in future periods while we continue to test and prepare our product candidates for the market. We believe that we have sufficient cash to meet our planned operating needs until September 2011, based on our current cash levels.





We are highly dependent on the success of our research, development and licensing efforts and, ultimately, upon regulatory approval and market acceptance of our products under development. Our short- and long-term capital requirements depend upon a variety of factors, including market acceptance for our technologies and product-candidates and various other factors. The continuation of the stages of development and the realization of assets related to the planned activities depend on future events, including the receipt of interim financing and achieving operational profitability in the future. It is not possible to forecast accurately the results of these activities.





The biotechnology industry is characterized by strong competition, resulting from the risk of frequent technological changes. Entry into this market requires the investment of large resources and continuous development. Our future success is dependent on several factors, including the quality of the product's technology, the product's price, and the creation of an advantage over the competition.





Our research and development activities are carried out by our Israeli subsidiary primarily through a laboratory research team in the Hebrew University of Jerusalem. The laboratory is managed by our Chief Scientist. All of our assets are presently situated in Israel.





Costs and Expenses





Research and Development Expenses





Research and development costs are expensed as incurred. Research and development costs comprise costs incurred in performing research and development activities, including salaries and related costs, consultants and sub-contractors costs, clinical trials costs, patent fees, materials and depreciation costs. We are running three main research and development projects: clinical trials for each of bladder, ovarian and pancreatic cancer. Completion of the projects is subject to a number of factors unknown and/or not under our control, including, but not limited to, clinical trial expectations of the FDA, the participation of sufficient volunteers that meet inclusion criteria in clinical trials and the required granting of final market approval by the FDA. Therefore, the nature and scope of costs needed to bring each of these projects to conclusion is not estimable. If the bladder cancer trials conclude successfully, we expect to receive final FDA approval and commence sales in 2015. On account of anticipated FDA fast-track development for life-saving drugs, we expect the ovarian and pancreatic cancer trial projects to conclude by 2015, and if successful, for sales to commence shortly thereafter. Delays in completing a project on schedule would entail additional operating costs for the period of delay, and could adversely affect our liquidity in the pre-sales period.





-22-




General and Administrative Expenses
 
 General and administrative expenses consist primarily of compensation, travel and overhead costs for financial, legal and administrative personnel, insurance fees, fees for professional services, including investor relations, public relations, legal, accounting and other consulting fees and other general corporate expenses. Overhead costs consist primarily of rent, telecommunications, utilities and depreciation expenses.
 
 Stock-Based Compensation
 
 New employees typically receive stock option awards. We also grant additional stock option awards to existing employees and directors. The Company records stock-based compensation as an expense in the statement of operations.


The cost of stock-based compensation awards is measured at their fair value at the date of the award. Fair value is determined using the Black-Scholes-Merton option pricing model. We have accounted for stock-based compensation in this way from our inception.





Non-operating expenses (income), net





Non-operating expenses (income), net consists primarily of interest income, net which primarily consists of interest income earned on cash, cash equivalent and investment securities balances, gain from marketable securities, net, interest on convertible notes and discount amortization, fair value adjustments of our warrants and foreign currency exchange gains and losses.





Income Tax Expense





We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized. ASC subtopic 740-10 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.





Results of Operations





Years Ended December 31, 2010 and 2009 and the Development Stage Period (cumulative from inception to December 31, 2010)





Research and Development Expenses








For the Year Ended

December 31, 2010

For the Year

Ended

December 31, 2009

Cumulative From

Inception to December 31, 2010U.S. Dollars in ThousandsResearch and Development Expenses, Gross

$
2,207


$
2,617


$
13,476Research and Development Expenses, Net

$
1,817


$
2,013


$
11,069





Research and development expenses, gross decreased by approximately $410,000, or 15.7%, to $2,207,000 for the year ended December 31, 2010 from $2,617,000 for the year ended December 31, 2009. Research and development expenses decreased due to lower clinical trials expenses in bladder and ovarian cancer, mainly due to reduced hospital, plasmid production (expensed during the prior year) and regulatory expenses, and more efficient cost control methods, which were offset by increased expenses as a result of the successful completion of our Phase I/IIa pancreas cancer trial. Salary expenses for clinical trial and pre-clinical personnel decreased to $946,000 for the period ended December 31, 2010 from $986,000 for the period ended December 31, 2009. Research and development expenses, gross for the period ending December 31, 2010 were comprised mainly of compensation to personnel as disclosed above and clinical trial expenses of $849,000 and $1,334,000 in 2010 and 2009, respectively. It is anticipated that our level of research and development expenses will remain relatively the same as our clinical trials move forward, dependent upon the enrollment of patients and the availability of funding.





Research and development expenses, gross decreased by $538,000, or 17.1%, to $2,617,000 for the year ended December 31, 2009 from $3,155,000 for the year ended December 31, 2008. Research and development expenses decreased due to less than anticipated clinical trials expenses in bladder and pancreatic cancer due to slower than anticipated enrollment of patients, reduced pre-clinical compensation and patent expenses, which were offset by increased clinical trial expenses in ovarian cancer. Research and development expenses for the period ending December 31, 2009 amounted to approximately $2,617,000, comprised mainly of compensation to clinical trial and pre-clinical personnel of $986,000 as compared to $1,271,000, due to the reduction in personnel headcount, and clinical trial expenses of $1,334,000 as compared to $1,482,000 as of December 31, 2009 and 2008, respectively.





-23-


Research and development expenses, net decreased by approximately $196,000, or 9.7%, to $1,817,000 for the year ended December 31, 2010 from $2,013,000 for the year ended December 31, 2009. Research and development expenses decreased due to lower clinical trials expenses in bladder and ovarian cancer, mainly due to reduced hospital, plasmid production (expensed during the prior year) and regulatory expenses, and more efficient cost control methods, which were offset by increases expenses as a result of the successful completion of our Phase I/IIa pancreas cancer trial. Although we received smaller grants from the Office of the Chief Scientist in Israel or OCS ($390,000 in 2010, as compared to $490,000 in 2009), this was partially offset by the increase in expenses due to the expected repayment of the $327,000 grant from the American-Israeli BIRD (Bi-national Industrial Research and Development) Foundation, or BIRD Foundation. Research and development expenses for the period ending December 31, 2010 amounted to approximately $2,207,000, comprised mainly of compensation to personnel as disclosed above and clinical trial expenses of $849,000 as compared to $1,334,000 as of, 2010 and 2009, respectively. Salary expenses for clinical trial and pre-clinical personnel decreased to $946,000 for the period ended December 31, 2010 from $986,000 for the period ended December 31, 2009.





Research and development expenses, net decreased by $681,000, or 25.3%, to $2,013,000 for the year ended December 31, 2009 from $2,694,000 for the year ended December 31, 2008. Research and development expenses, net, decreased due to less than anticipated clinical trials expenses in bladder and pancreatic cancer due to slower than anticipated enrollment of patients, reduced pre-clinical compensation and patent expenses and increased OCS, BIRD Foundation and other grants, which were offset by increased clinical trial expenses in ovarian cancer. Research and development expenses for the period ending December 31, 2009 amounted to approximately $2,617,000, comprised mainly of compensation to clinical trial and pre-clinical personnel of $986,000 as compared to $1,271,000, due to the reduction in personnel headcount, and clinical trial expenses of $1,334,000 as compared to $1,482,000 as of December 31, 2009 and 2008, respectively. It is anticipated that our level of research and development expenses will remain relatively the same as our clinical trials move forward, dependent upon the enrollment of patients and the availability of funding.





The following table summarizes information about our research and development expenses:





For the Year Ended

December 31,2010


For the Year Ended

December 31, 2009


Cumulative From

Inception to December 31, 2010U.S. Dollars in ThousandsClinical Trials:Bladder cancer Phase I/IIa

$
—


$
—


$
897Bladder cancer Phase IIb


119



208



2,560Pancreatic cancer Phase I/IIa


526



165



983Pancreatic cancer Phase IIb


20



—



20Ovarian cancer Phase I/IIa


239



961



1,966Liver cancer


—



—



20Clinical trial compensation


530



434



1,699General expenses


15



23



741,449



1,791



8,219Pre-clinical expenses:Compensation


416



552



3,961Material


100



40



367Patents


166



107



539Depreciation


31



41



148General expenses


45



86



242758



826



5,2572,207



2,617



13,476Chief Scientist and other grants


(390
)


(526



(2,150
)BIRD Foundation grant for Pancreatic cancer Phase I/IIa


-



(78
)


(257
)(390
)


(604
)


(2,407
)Total Research and Development Expenses, Net

$
1,817


$
2,013


$
11,069


-24-




General and Administrative Expenses





For the Year Ended

December 31, 2010

For the Year Ended

December 31,

2009
Cumulative From

Inception to December 31,

2010U.S. Dollars in ThousandsGeneral and Administrative Expenses

$
1,955


$
1,457


$
8,248





General and administrative expenses increased $498,000, or 34.2%, to $1,955,000 for the year ended December 31, 2010 from $1,457,000 for the year ended December 31, 2009. General and administrative expenses were higher in 2010 than in 2009 due primarily to stock-based, non-cash compensation to employees and directors, changes to salary expenses resulting from the recording of a liability with regard to a possible payment for success in fundraising in the future, an increase equal to a decrease in research and development expenses caused by a change in an employee's job description, and an increase in consulting and auditing expenses, offset by a decrease in legal expenses. The main components of general and administrative expense were compensation costs of $1,166,000 (inclusive of $285,000 stock-based compensation to employees and directors) as compared to $715,000 (inclusive of $137,000 stock-based compensation to employees and directors), professional service and consulting fees of $521,000 as compared to $451,000 for the periods ending December 31, 2010 and 2009, respectively. The increase in consulting fees is due to an increase in public relations and investor relations expenses, accounting and management fee to Tikcro.


General and administrative expenses decreased by $456,000, or 23.8%, to $1,457,000 for the year ended December 31, 2009 from $1,913,000 for the year ended December 31, 2008. General and administrative expenses were lower in 2009 than in 2008 due primarily to decreased professional fees (legal, accounting and consulting fees) in regard to our private placement transactions and the filing of an initial S-1 registration incurred in 2008. The main components of general and administrative expense were compensation costs of $715,000 as compared to $712,000, professional services of $385,000 as compared to $693,000 and consulting fees of $66,000 as compared to $224,000 for the periods ending December 31, 2009 and 2008, respectively. The decrease in consulting fees is due to our increased internal public relations and investor relations activities in lieu of external consulting services. In 2009, the expenses related to our anticipated fundraising were recorded as a deferred stock issuance cost in the balance sheet to be offset from future proceeds as part of this registration statement. It is anticipated that our level of general and administrative expenses will remain relatively the same in the near future.




The following table summarizes information about our general and administrative expenses:





For the YearEnded

December 31,2010

For the YearEnded

December 31,2009
CumulativeFrom

Inception to

December 31,2010U.S. Dollars in ThousandsCompensation

$
1,166


$
715


$
4,363Professional services and consulting fees


521



451



2,653Rent & office related expenses


126



129



607Travel


17



11



139Insurance


34



24



93Corporate and filing fees


13



64



109Other general expenses


78



63



284Total General and Administrative Expenses

$
1,955


$
1,457


$
8,248







Non-operating expenses (income), net





Non-operating expenses (income), net, decreased by $1,737,000, to income of $1,596,000 for the period ended December 31, 2010 from $3,333,000 for the period ended December 31, 2009. The decrease in non-operating expenses (income), net, resulted primarily fromthe fair value adjustment of our warrants which are being accounted for as derivative financial instruments, as described below. The primary drivers of the adjustment of our warrants were the increase in our stock price and the implied volatility of the underlying stock. An increase in the price of our common stock among other factors increases the value of the warrants and thus results in a loss in our income statement. Conversely, a decline in the price of our common stock would decrease the value of the warrants and thus result in a gain in our statement of operations. We recorded a gain (income) of approximately ($2,070,000) as compared to a charge of $3,053,000 for the period ended December 31, 2010 and 2009, respectively, resulting from revaluation of warrants to shareholders.





Non-operating expenses (income), net, increased $4,998,000 to $3,333,000 of expense for the year ended December 31, 2009 from $1,665,000 of income for the year ended December 31, 2008. The increase in non-operating expenses (income), net, resulted primarily from the fair value adjustment which results from our outstanding warrants which are being accounted for as a derivative financial instrument, as described below. The primary drivers of the adjustment of our warrants were the increases in our stock price and the implied volatility of the underlying stock. An increase in the price of our common stock increases the value of the warrants and thus results in a loss in our statement of operations. Conversely, a decline in the price of our common stock would decrease the value of the warrants and thus result in a gain in our statement of operations. We recorded a charge of approximately $3,053,000 as compared to a gain (income) of ($1,653,000) for the periods ending December 31, 2009 and 2008, respectively, resulting from revaluation of warrants to shareholders.





-25-


The following table summarizes information about our non-operating expenses (income), net:





For the Year Ended

December 31, 2010
For the Year Ended

December 31, 2009
Cumulative From

Inception to December 31,

2010U.S. Dollars in ThousandsInterest income, net

$
(21
)

$
(3
)

$
(34
)Loss (income) from marketable securities, net


-



-



(6
)Interest on convertible notes and discount amortization


543



341



1,033Revaluation of warrants


(2,070
)


3,053



(670
)Revaluation of liability for commission to underwriters


(104
)


-



(104
)Other financing expense (income), net


56



(58
)


(230
)$
(1,596
)

$
3,333


$
93





Our warrants to noteholders are valued using the Binomial model. This model uses the variables of the price of the underlying stock, the strike price, the continuously compounded risk free interest rate, the continuously compounded annual dividend yield, the time in years until the expiration of the option, and the implied volatility of the Series 3 Warrants.





The following table shows the changes in the underlying parameters used in the valuation of the Warrants:











As of

July 31, 2008(issuance date)


As of

December 31, 2009


As of

December 31, 2010Price of underlying stock

2.08 NIS


2.435 NIS


2.441 NISStrike price

$
0.716


$
0.716


$
0.716Continuously compounded risk free interest rate for warrants


5.33%



2.68%



0.84%Continuously compounded annual dividend rate


0%



0%



0%Time in years until the expiration of the warrant

5 years


3.58 years


2.58 yearsImplied volatility for the underlying stock


55%



145.48-148.52%



55.79%





The Company’s warrants to noteholders are valued using the Binomial model. Prior to the second quarter of 2009, the Company’s warrants to noteholders were valued using the Black-Scholes-Merton model. Given the recent foreign currency fluctuation’s effect on the exercise price of the Warrants throughout the life of the Warrant, the Company’s assumptions have changed regarding the possible exercise patterns, and these possibilities can be addressed through the Binomial model in contrast to the Black–Scholes-Merton model which only allows for one exercise date. The change in the model did not have a material impact on our consolidated financial position, results of our operations or cash flows. These models use the variables of the price of the underlying stock, the strike price, the continuously compounded risk-free interest rate, the continuously compounded annual dividend yield, the time in years until the expiration of the option and the implied volatility of the Series 3 Warrants. Some of the inputs to this valuation are unobservable in the market and are significant, requiring significant judgment using the best information available (see Note 10C).





In the fourth quarter of 2010, the Company’s assumptions have changed regarding the implied volatility of the Company’s warrants and are calculated as the latent volatility of the Series 3 Warrants. The change in the model did not have a material impact on our consolidated financial position, results of our operations or cash flows.





Income Tax (Expense) Benefit





The federal tax rates applicable to us, as an entity incorporated in Delaware in the United States, are progressive corporate tax rates of up to 34%.





At December 31, 2010, we had net operating loss (NOL) carryforwards in the United States amounting to $2,549,000, which will expire beginning in 2024 through 2030. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, in accordance with Internal Revenue Code, Section 382, our initial public offering, or IPO, and other ownership changes that have transpired, may limit our ability to utilize the NOL and credit carryforwards although we have not yet determined to what extent.





Pursuant to the tax laws applicable to Israeli residents, dividends received from a company that is not an Israeli resident are subject to tax in Israel, at the rate of 20% or 25%, depending on the identity of the stockholder (individual or company) and the ownership percentage. According to the tax laws in the United States, such a dividend is subject to withholding tax at the rate of 30%, which could be reduced to the rate of 25% or 12.5% (depending on the identity of the stockholder and the ownership percentage), in accordance with the Treaty to Prevent Double Taxation between Israel and the United States. In order to enjoy the tax treaty's benefits, several procedural requirements must be met. As of December 31, 2010, we believe that we are currently a dual tax resident in both Delaware and Israel.





-26-


The tax rates applicable to our Israeli subsidiary are as follows: 2010 – 25%, 2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 –  20% and 2016 thereafter – 18%. At December 31, 2010, our wholly owned Israeli subsidiary had NOL carryforwards in Israel amounting to NIS 51,411,000 (approximately $14 million)and capital loss carryforwards of NIS 12 million (approximately $3 million), which under current tax law can be carried forward indefinitely.







Liquidity and Capital Resources





We are a development stage company and have not experienced significant revenue generating activities since our formation. We have incurred operating losses for each year since our inception in 2004. To achieve operating profits, we, alone or together with others, must successfully identify, develop and market product candidates. Our principal activities, from the beginning of our development stage, have been organizational matters, issuance of stock, product research and development, fund raising and market research. We have financed our operations from inception primarily through various private placement transactions, public offerings of our common stock, and option exercises.





We are currently operating under a material liquidity deficiency. We believe that we have sufficient cash to meet our planned operating needs until the end of September 2011, based on our current cash levels. We therefore will need to raise substantial additional capital through future equity or debt financing to finance such initiatives and are currently evaluating potential alternatives.





In the near-term, we expect to continue to incur significant and increasing operating losses as a result of the research and development expenses we expect to incur in developing our product candidates and the general and administrative expenses we expect to incur as a reporting company under the Exchange Act. We do not anticipate earning operating income over the coming years as the development process will be subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization and we may be unable to obtain regulatory approval for any of our prospective therapeutic products.





For the Year Ended

December 31, 2010

For the Year Ended

December 31, 2009

Cumulative From

Inception to

December 31, 2010U.S. Dollars in ThousandsNet cash used in operating activities

$$
(3,050
)

$
(3,477
)

$
(18,060
)Net cash provided by (used in) investing activities


(1,905
)


(19
)


135Net cash provided by financing activities

$$
7,710


$
1,390


$
21,300




As of December 31, 2010, we had $3,487,000 in cash and cash equivalents, a increase of $2,863,000 from December 31, 2009.








Operating Activities





Net cash used in operations was $3,050,000 for the year ended December 31, 2010. The net cash used in operations was mainly used for operating expenses. The difference between our net loss of $2,280,000 and our net cash used in operations was attributable mostly to $395,000 of operating expenses that were the result of non-cash, stock-based compensation to employees and directors, accrued interest and amortization of discount to notes payable, and exchange difference thereon of $484,000 and depreciation of $33,000, while recognizing a non-cash gain of $2,070,000 for fair value adjustment of the derivative instruments.





Net cash used in operations was $3,477,000 for the year ended December 31, 2009. The net cash used in operations was mainly used for operating expenses. The difference between our net loss of $6,803,000 and our net cash used in operations was attributable mostly to $240,000 of operating expenses that were the result of non-cash, stock-based compensation to employees and directors, accrued interest and amortization of discount to notes payable, and exchange difference thereon of $328,000 and depreciation of $44,000, while recognizing a non-cash loss of $3,053,000 for fair value adjustment of the derivative instruments.





Currently all of our funds are held as cash and cash equivalents and short-term deposits. As of December 31, 2010, we have no material commitments for capital expenditures. Net cash used by operations from our inception is attributable mostly to our net loss offset by non-cash items, primarily change in fair value of our warrants and stock-based compensation, as delineated in our Consolidated Statement of Cash Flows. It is anticipated that our level of net cash used in operations will increase as our clinical trials move forward. Our cash reserves are currently the sole resource of funding for our current operations. We will require substantial additional funds to complete our research and development activities and, if additional funds are not available, we may need to significantly scale back or cease our operations, and our level of activity may change based on ability to secure future funding.





Investing Activities





Net cash used in investing activities in the year ended December 31, 2010 is mainly attributable to our investment in short-term deposits as compared to the Net cash used in investing activities in the year ended December 31, 2009, which was attributable primarily to the acquisition of equipment, as delineated in our Consolidated Statement of Cash Flows.  Net cash provided by investing activities from our inception is attributable mostly to our investment in short-term deposits and to the proceeds from marketable securities less the investments in marketable securities and acquisition of equipment, as delineated in our Consolidated Statement of Cash Flows. We redeemed our marketable securities for our ongoing activities and we do not expect this to continue because currently all of our funds are held as cash and cash equivale nts.


-27-


Financing Activities





Net cash provided by financing activities was $7,710,000 for the year ended December 31, 2010 as compared to net cash provided by financing activities of $1,390,000 for the year ended December 31, 2009. This increase was mainly attributable to the proceeds from the private placements to institutional and individual investors and public offering consummated during the period ended December 31, 2010. In March 2010, we executed private placements to institutional and individual investors of 4,157,500 shares of our common stock of our stock at a price of about $0.78, and warrants to purchase an additional 4,157,500 shares of our common stock, exercisable immediately upon their issuance with a life of four years and an exercise price of about $1.12. The aggregate gross proceeds were $3,285,000 at an approximately price of $0.78 per share (net proceeds of $2,694,000), as described above.





On November 18, 2010, we consummated a public offering with investors, whereby the investors received an aggregate amount of 5,634,970 shares of common stock at a price of NIS 3.30 per share, 2,817,485 non-registered Series 3 Warrants to purchase 2,817,485 shares of common stock exercisable immediately upon their issuance with a life of two years and 2,817,485 non-registered Series 4 to purchase 2,817,485 shares of common exercisable immediately upon their issuance with a life of four years, as described above. The aggregate gross proceeds from the offering were $5,104,000 and the net proceeds were $4,196,000.





Net cash flow provided by financing activities in the year ended December 31, 2009 was $1,390,000 as compared to net cash provided by financing activities of $4,257,000 in the year ended December 31, 2008. This was attributable to the proceeds from the sale by our subsidiary of treasury stock during the period ended December 31, 2009, as compared to the proceeds from a private placement allocation of common shares and warrants to Tikcro Technologies, Ltd., Clal Biotechnology Industries Ltd. and The Provident Fund of the Hebrew University of Jerusalem, less the purchase of treasury stock during the period ended December 31, 2008. During May and June 2009, our subsidiary sold 1,099,756 shares of treasury stock, at an average price of $0.92 per share, and total proceeds of $1,016,000. In August 2009, we sold 713,000 shares of treasury stock, at an average price of $0.79 per share, and total proceeds of $552,000. Following the sale, we did not hold any shares of treasury stock.





Cash flow provided by financing activities for the development stage period (cumulative from inception to December 31, 2010) stems from the net proceeds from the private placements to institutional and individual investors and public offering in 2010, the net proceeds from the proceeds from a private placement allocation of common shares and warrants to Tikcro Technologies, Ltd., CBI and The Provident Fund of the Hebrew University of Jerusalem in 2008, the net proceeds from our initial public offering in Israel and the conversion of our series A convertible preferred stock in 2006, and the exercise of stock options less the purchase of treasury stock.





Commencing January 30, 2011, we shall be paying interest on a quarterly basis to our three July 2008 private placements institutional investors on the convertible notes payable, in an amount of approximately $90,000 per quarter, provided that the notes have not been converted.





Our financing needs may change substantially because of the results of our research and development, competition, advancing of our clinical trials and costs arising from additional regulatory approvals. We may not succeed in raising additional funds if needed. The timing of our need for additional funds will depend on a number of factors, which factors are difficult to predict or may be outside of our control, including:





••
progress in our research and development programs;••
the resources, time and costs required to initiate and complete our research and development and to initiate and complete pre-clinical and clinical studies and to obtain regulatory approvals for our prospective therapeutic products;••
the timing, receipt and amount of milestone, royalty and other payments from present and future collaborators, if any; and••
costs necessary to protect our intellectual property.





As discussed above, in March 2010 we received net amount of $2,694,000 from a private placement with the 2010 Investors and on November 18, 2010, we consummated a public offering with investors (the “November 2010 Investors”), for which we had filed a Form S-1 and a shelf prospectus with the TASE for which we received an aggregate gross proceeds from the offering of $5,104,000 and net proceeds of $4,196,000.








Future Operations


As discussed above, we believe we have sufficient cash to meet our planned operating needs until September 2011, based on our current cash levels. Furthermore, our business strategy includes growth through additional business combinations and licensing which could require use of a significant amount of our available cash and raising additional capital. We therefore will be required to raise additional capital through future debt or equity financing to finance such initiatives. However, we cannot be certain that additional financing will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution.  The audit report covering our December 31, 2010 consolidated financial statements contains an explanatory paragraph that states that our recurring losses from operations raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments to the value of our assets or the classification of our liabilities that might result if we would be unable to continue as a going concern. We have incurred operating losses since inception, have not generated any product sales revenues and have not achieved profitable operations. Our deficit, accumulated during the development stage through December 31, 2010, aggregated $19,306,000 and we expect to continue to incur substantial losses in future periods while we continue to test and prepare our product candidates for the market.







-28-






Our short and long-term capital requirements depend upon a variety of factors, including market acceptance for our technologies and product candidates and various other factors, many of which we cannot control, including:





••
continued progress of and increased spending related to our research and development activities;••
progress with clinical trials and pre-clinical experiments;••
increased general and administrative expenses related to our being a reporting company both to TASE and SEC;••
prosecuting and enforcing patent claims;••
technological and market developments;••
the ability to establish product development arrangements;••
the cost of manufacturing development;••
effective marketing activities and arrangements; and••
licensing activity.





Contractual Obligations and Commitments





As of December 31, 2010, the remaining minimum annual payments in connection with the operating lease and rental agreements and purchasing obligations are as follows (in thousands):




Total

Less than

1 year

1-3 Years

3-5 Years

More than

5 YearsContractual obligations

$
168


$
123


$
44



—



—Purchasing obligations

$
19


$
14


$
5



—



—Liability to BIRD Foundation

$
327



327


$
—



—



—Convertible notes payable


—



—


$
1,187



—



—Warrants to noteholders


—



—


$
1,453



—



—Liability for commission to underwriters


173



173


$
—



—



—





Our liability for severance pay for Israeli employees is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. After completing one full year of employment, our Israeli employees are entitled to one month's salary for each year of employment or a portion thereof. Our total liability at December 31, 2010 was $243,000 as compared to $204,000 at December 31, 2009. Timing of payment of this liability is dependent on timing of the departure of the employees.





In addition, we are required to pay royalties as percentages of the revenues derived from products incorporating know-how developed from research and development grants from the Office of the Chief Scientist. Royalty rates are 3.5% in 2004 and subsequent years.  Additionally, we received a grant from the BIRD Foundation. The grant partially funded a Phase I/IIa clinical trial in pancreatic cancer. In accordance with the terms of the agreement between us and the BIRD Foundation, we will have to repay the grant within twelve months of the successful completion of the project or can extend the repayment to five years or more, thereby accruing interest on the amount due. During the year ended December 31, 2010, the Company made significant progress with respect to development of BC-819 as a treatment for pancreatic cancer, and as a result, recorded a liability to the BIRD Foundation for repayment of the grant. In addition, we received from the Jerusalem Development Authority (JDA) a grant and anticipate an additional grant in the coming year. In accordance with the terms of the agreement between us and the JDA, we are obligated to pay royalties at a rate of 4% of revenues from sales of the product developed, up to repayment of the full amount of the obligation. As of December 31, 2010, our contingent liability to the Office of the Chief Scientist in respect of grants received was approximately $2,263,000, our contingent liability to the BIRD Foundation in respect of funding received was approximately $327,000 and our contingent liability to the Jerusalem Development Authority in respect of grants received was approximately $35,000 as discussed in Note 9A, 9B and 9J in our financial statements.  If we do not generate revenues from products incorporating know-how developed within the framework of these programs, we will not be obligated to pay royalties.





We account for the warrants to noteholders as derivative instruments, requiring us to recognize them as either assets or liabilities in the balance sheet at their respective fair values. We carry the derivatives at fair value on the balance sheet and recognize any subsequent changes to fair value in earnings.





On November 14, 2005, we entered into a license agreement with Yissum, which was subsequently amended on November 22, 2005 and September 11, 2007, pursuant to which Yissum has granted to us an exclusive, worldwide license for the development, use, manufacturing and commercialization of products arising out of patents owned by, and patent applications filed by, Yissum in connection with the H19 gene. On January 24, 2011, we amended our license amendment agreement with Yissum to encompass additional patents and patents applications investigated and developed under our research agreement with Yissum.





We have agreed to pay Yissum 5% of all “net sales” as royalties and to pay Yissum 10% of the income that we receive from granting sub-licenses to third parties up to revenues of $30,000,000 each year, and 6.5% of all additional income that we receive from granting sub-licenses to third parties. Our ability to generate such future revenues is subject to risks such as:




-29-






·•
Any prospective therapeutic products that we may develop will be required to undergo a time-consuming, costly and burdensome pre-market approval process, and we may be unable to obtain regulatory approval for any of our prospective therapeutic products;·•
If the pre-clinical and clinical studies that are required to be conducted by us to gain regulatory approval are delayed or unsuccessful, we may not be able to market our prospective therapeutic products;·•
We have no experience in conducting and managing clinical trials;·•
The difficulties of identifying and recruiting suitable patients for clinical studies may be exacerbated in the case of patients diagnosed with superficial bladder carcinoma, and further, the clinical results and data that we obtain from any clinical testing that we may conduct in the future may not be reliable, any of which factor may significantly compromise our ability to develop a drug utilizing a target gene for the treatment of superficial bladder carcinoma;·•
We may not commence additional clinical testing for any of our prospective therapeutic products and the commercial value of any clinical study that we may commence and conduct in the futurewill significantly depend upon our choice of indication and our selection of a patient population for our clinical study of an indication, and our inability to commence clinical testing or our choice of clinical strategy may significantly compromise our business prospects;·•
Our inability to address the chemistry, manufacturing and control concerns of regulatory bodies would significantly compromise our business prospects;·•
If we, or if our service providers or any third party manufacturers, fail to comply with regulatory laws and regulations, we or they could be subject to enforcement actions, which could adversely affect our ability to market and sell our prospective therapeutic products;·•
If we do not comply with laws regulating the protection of the environment and health and human safety, our business prospects could be adversely affected;·•
The pharmaceutical and biotechnology market is highly competitive. If we are unable to compete effectively with existing products, new treatment methods and new technologies, we may be unable to commercialize any therapeutic products that we may develop in the future;·•
Even if we receive regulatory approval to market our prospective therapeutic products, the market may not be receptive to our prospective therapeutic products upon their commercial introduction which will prevent us from becoming profitable; and·•
Any therapeutic products that we may develop may become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, thereby adversely affecting the profitability of our business.


As such royalties are sales revenue-based, such royalties can not be estimated at this time as any prospective therapeutic products that we may develop will be required to undergo a time-consuming, costly and burdensome pre-market approval process, and we may be unable to obtain regulatory approval for any of our prospective therapeutic products or we may be unable to compete effectively with existing products, new treatment methods and new technologies, and so be unable to commercialize any therapeutic products that we may develop in the future.







Off-Balance Sheet Arrangements





We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.






Quantitative and Qualitative Disclosures About Market Risk





Currency Risk.   Most of our expenses are denominated in U.S. dollars; however, we have expenses that are denominated in New Israeli Shekels, or NIS. We expect the same relative level of NIS expenses to continue in the near future. The value of the U.S. dollar as of December 31, 2010, compared to its value as of December 31, 2009, weakened against the value of NIS by 5.99%. The value of the U.S. dollar as of December 31, 2009, compared to its value as of December 31, 2008, weakened against the value of NIS by 0.71%. The value of the U.S. dollar as of December 31, 2008, compared to its value as of December 31, 2007, weakened against the value of NIS by 1.14%.  If the value of the U.S. dollar further weakens against the value of NIS, there will be a negative impact on our results of operations. In addition, to the extent we hold cash and cash equivalents that are denominated in currencies other than the U.S. dollar, we are subject to the risk of exchange rate fluctuations.





The following table summarizes information about the value of the U.S. dollar exchange rate fluctuation:




Net LossFor the Year Ending

December 31,  2010


Net LossFor the Year Ending

December 31, 2009


Net AssetsAs Of

December 31, 2010
Net AssetsAs Of

December 31, 2009U.S. Dollars in ThousandsAs stated in the Statements of Operations

$
2,176


$
6,803


$
6,112


$
1,565Reduction of 5% in the value of the U.S. dollar


2,032



6,689



5,864



1,514Increase of 5% in the value of the U.S. dollar

$
2,324


$
6,908


$
6,359


$
1,621





-30-


Other Market Risk.   As of December 31, 2010 and as of December 31, 2009 and as of December 31, 2008, our excess cash was primarily held in bank deposits. As of December 31, 2007, almost all of our excess cash was invested in investment securities, mostly consisting of investments in government and corporate debt instruments, marketable securities and corporate bonds with maturities under one year, are classified as trading, and were reported at fair market value, with unrealized gains and losses, net of tax, recorded in the statement of operations.







Critical Accounting Policies and Significant Estimates





While our significant accounting policies are more fully described in the notes to our audited consolidated financial statements for the years ended December 31, 2010 and 2009, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements.





Accounting for Stock-based Compensation





We record stock-based compensation as an expense in the statement of operations and this requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. Compensation cost of all stock-based compensation awards are recorded at their fair value at the date of the award over the service period for awards expected to vest. Fair value is determined using the Black-Scholes-Merton option pricing model which considers the exercise price relative to the market value of the underlying stock, the expected stock price volatility, the risk-free interest rate and the dividend yield, and the estimated period of time option grants will be outstanding before they are ultimately exercised. We also determine the fair value of stock options and warrants granted to non-employees, for accounting purposes, using the Black-Scholes-Merton valuation model. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider various factors when estimating expected forfeitures, including historical experience. Actual results may differ substantially from these estimates.





Prior to our IPO, the market value of the underlying stock was based on estimates, including volatility estimates that are inherently highly uncertain and subjective, since prior to our IPO there had been no public market for our stock. Subsequent to our IPO, we did not have sufficient history to actually predict our volatility, therefore, our assumptions about stock price volatility were based on the volatility rates of comparable publicly held companies. These rates may or may not reflect our actual stock price volatility. Our assumptions about our stock price volatility are based on a rate that we derived by taking into consideration the volatility rates of comparable publicly held companies as well as our own historical volatility rates. In future periods and as we accumulate our own volatility history over longer periods of time, we will increase the weighting of our own volatility history in calculating expected volatility. Had we made different assumptions about the market value of our stock, stock price volatility or the estimated time option and warrant grants will be outstanding before they are ultimately exercised, the related stock based compensation expense and our net loss and net loss per share amounts could have been significantly different.





The pre-IPO options were granted with a par value exercise price. Due to the par value amount of $0.01, the fair value of these options was estimated to be equal to our share price at the grant date, based on stock issuances that took place surrounding the grant date. The expenses recorded in the statement of operations on account of stock-based transactions were $395,000 and $240,000 for the year ending December 31, 2010 and 2009, respectively, and $2,036,000 for the development stage period (cumulative from inception to December 31, 2010).





The parameter used in the 2004 – 2005 valuation for valuing options for employees was the price of the share on grant date as described above. The parameters used in the valuation of grants in 2006 – 2010 were based on the Black-Scholes-Merton model for valuing options for employees:




Year

Volatility

Expected Average

Term of the Option

Risk-free Rate


Estimate Value of

the Share on

the Grant Date2006


0.6

3  years


4.07% – 5.00
%

$
0.83 – $1.452008


0.6

10 years


6.37
%

$
0.102009


0.8

10 years


4.96
%

$
0.632010


0.9

7-10 years


4.97
%

$
0.88





The fair value of options granted to non-employees has been computed and accounted for in accordance with


-31-


ASC subtopic 505-50 and 718-10. The fair value of options granted to non-employees has been measured according to the Black-Scholes-Merton option-pricing model. To the extent that there are non-employee options for which a measurement date was not yet reached, the stock option compensation is revalued at the end of each reporting period.





Share-based payment expense has not been recorded in the statement of operations with respect to the award of an additional 150,000 contingent options that are milestone based, and at this point are not expected to vest.







Accounting for Income Taxes





We are taxed under the laws of the United States. We were registered as a tax-reporting company in Israel and will be taxed in accordance with the Treaty to Prevent Double Taxation between Israel and the USA. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves management estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have almost fully offset our net deferred tax asset with a valuation allowance. Our lack of earnings history and the uncertainty surrounding our ability to generate taxable income prior to the expiration of such deferred tax assets were the primary factors considered by our management in establishing the valuation allowance.





We recognize tax benefits from tax positions only if they have at least a “more likely than not” chance of being sustained upon a challenge by the respective taxing authorities. Recognition and measurement of uncertain tax positions are also subject to management’s estimates and judgment of whether they are more likely than not to be sustained, and the amount to be recognized. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.








Valuation of Financial Instruments Issued in Private Placement Financing





On July 30, 2008 we completed private placements with institutional investors, for the purchase of: (i) shares of our common stock, (ii) debentures convertible into shares of our common stock and (iii) warrants to purchase shares of our common stock.





To account for these private placements, we estimated the fair value of the three components embodied in the agreements. We used various valuation models and techniques to determine the individual values of the three components. These models use the variables of the price of the underlying stock, the strike price, the continuously compounded risk free interest rate, the continuously compounded annual dividend yield, the time in years until the expiration of the option, the implied volatility for the underlying stock and the standard normal cumulative distribution function. While we believe we have applied appropriate judgment in the assumptions and estimates, variations in judgment in applying assumptions and estimates used in the valuations could have a material effect upon the valuation results, and thus, on our financial statements. The $3.650 million of proceeds from the private placements were first allocated to the warrants, which were classified as derivative instruments. The warrants are considered derivatives since they are not indexed solely to our own stock as they must be settled in a currency other than our functional currency, and the warrants meet all of the characteristics of a derivative instrument. The convertible notes payable are classified as long-term liabilities and have been recorded at their relative fair value adjusted for the amortized discount and interest accrual. The warrants have been recorded as a liability, with a corresponding discount to the Convertible Notes Payable, based on their fair values, and are revalued at each reporting date. This model uses the variables of the price of the underlying stock, the strike price, the continuously compounded risk free interest rate, the continuously compounded annual dividend yield, the time in years until the expiration of the option, the implied volatility of the underlying stock and the standard deviation. While we believe we have applied appropriate judgment in the assumptions and estimates, variations in judgment in applying assumptions and estimates used in the valuations could have a material effect upon the valuation results, and thus, on our financial statements. For further details regarding these estimates, see the discussion on non-operating expenses (income), net above.







-32-


Item 8. Financial Statements and Supplementary Data;






























































BioCancell Therapeutics, Inc. and Subsidiary



(Development Stage Company)



Consolidated Financial Statements

As of and for the Years Ended

December 31, 2010 and 2009

And for the

Development Stage Period

































































-33-























Report of Independent Registered Public Accounting Firm








The Board of Directors and Stockholders


BioCancell Therapeutics Inc. (Development Stage Company):





We have audited the accompanying consolidated balance sheets of BioCancell Therapeutics, Inc. (development stage company) and subsidiary (collectively, "the Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and comprehensive loss, and cash flows for each of the years in the two-year period ended December 31, 2010, and for the cumulative period from October 1, 2004 (inception of operations) to December 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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 financial position of BioCancell Therapeutics, Inc. (development stage Company) and subsidiary as of December 31, 2010 and 2009, and the results of their operations, and their cash flows for each of the years in the two-year period ended December 31, 2010, and for the cumulative period from October 1, 2004 (inception of operations) to December 31, 2010, in conformity with U.S. generally accepted accounting principles.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1B to the consolidated financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1B. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

















Somekh Chaikin


Certified Public Accountants (Israel)


A Member Firm of KPMG International





Jerusalem, Israel


March 14, 2011











-34-








BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)





Consolidated Financial Statements as of December 31, 2010











Table of contents




















PageConsolidated Balance Sheets
36-37Consolidated Statements of Operations
38Consolidated Statement of Changes in Stockholders’ Equity (Deficit) and Comprehensive Loss
39-42Consolidated Statements of Cash Flows
43-45Notes to the Consolidated Financial Statements
46-83






































-35-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Balance Sheets








December 31,


December 31,2010


2009Note


U.S. dollars in thousandsCurrent assetsCash and cash equivalents


3


$
3,487


$
624Short - term deposits






1,993



-Receivable from Chief Scientist and BIRD Foundation


9A,B



96



45Deferred stock issuance costs






-



178Prepaid expenses 1






88



228Other current assets






39



88Total current assets






5,703



1,163Long-term assetsDeposits in respect of employee severance benefits


6



288



237Other  assets






33



59Total long-term assets






321



296Property and equipment, net


4



88



106Total assets





$
6,112


$
1,565















































1The amounts recorded as of December 31, 2010 and 2009 include $0 and $28 thousand, respectively, to a related party.














The accompanying notes form an integral part of the financial statements.





-36-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Balance Sheets








December 31,


December 31,2010


2009Note


U.S. dollars in thousandsCurrent liabilitiesAccounts payable


5


$
99


$
239Accrued expenses1






319



298Accrued vacation pay






67



80Employees and related liabilities






141



66Liability to BIRD Foundation


9
B


327



-Liability for commission to underwriters


7,10
C


173



-Total current liabilities






1,126



683Long-term liabilitiesLiability for employee severance benefits


6



243



204Convertible notes payable


7,8,10
C


1,187



644Warrants to noteholders


7,10
C


1,453



3,400Total long-term liabilities






2,883



4,248Contingent liabilities and commitments


9Stockholders' equity (deficit)


10Common stock, $0.01 par value per share (65,000,000 and 50,000,000shares authorized, 26,361,083 and16,356,550 shares issued and outstanding as ofDecember 31, 2010, and 2009, respectively)






264



164Additional paid-in capital






24,243



16,692Accumulated other comprehensive income






329



335Accumulated deficit






(22,733
)


(20,557
)Total stockholders' equity (deficit)






2,103



(3,366
)Total liabilities and stockholders' equity





$
6,112


$
1,565


























1 The amounts recorded as of December 31, 2010 and 2009 include $23 thousand and $8 thousand, respectively, to a related party.








The accompanying notes form an integral part of the financial statements.





-37-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Statements of Operations








Cumulativefrom October 1,2004 (inception)For the year ended December 31,


to December 31,2010


2009


2010U.S. dollars in thousandsNote


(except share and per share data)Research and development expenses




$
2,207


$
2,617


$
13,476Less: Chief Scientist, BIRD Foundation andother grants


9A,B



(390
)


(604
)


(2,407
)Research and development expenses, net






1,817



2,013



11,069General and administrative expenses1






1,955



1,457



8,248Operating loss






3,772



3,470



19,317Interest income, net






(21
)


(3
)


(34
)Gain from marketable securities, net






-



-



(6
)Interest on convertible notes and discountamortization


7,8,10
C


543



341



1,033Loss (gain) on revaluation of warrants


7,10
C


(2,070
)


3,053



(670
)Gain on revaluation of liability for commission to underwriters






(104
)


-



(104
)Other financing expenses (income) , net






56



(58
)


(230
)Net loss






2,176



6,803



19,306Basic and diluted net loss per share





$
0.11


$
0.44


$
1.64Weighted-average common shares used

In computing basic and diluted net loss per share






20,338,863



15,453,126



11,782,684























1The amounts recorded for the years ending December 31, 2010 and 2009 and for the cumulative period include $81 thousand, $3 thousand and $155 thousand to related parties, respectively.











The accompanying notes form an integral part of the financial statements.





-38-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Loss





Amounts accumulated during development stage (October 1, 2004 to December 31, 2010):





Series A convertible preferred stock


Common stockNumber of shares


Amount


Number of shares


Amount


Additional paid-in capital


Treasury stock


Accumulated other Comprehensive Income (Loss)


Accumulated deficit


Comprehensive loss


Total Stockholders' Equity (deficit)U.S. dollars in thousands (except share data)Issuance of common stock to founders


-



-



4,282,500



43



-



-



-



(43
)


-



-Stock-based compensation to employees


-



-



-



-



44



-



-



-



-



44Stock-based compensation to non-employees


-



-



-



-



41



-



-



-



-



41Comprehensive loss:Foreign currency translation reserve


-



-



-



-



-



-



(5
)


-



(5
)


(5
)Net loss


-



-



-



-



-



-



-



(300
)


(300
)


(300
)Comprehensive loss


































(305
)Balance as of December 31, 2004


-



-



4,282,500



43



85



-



(5
)


(343
)






(220
)Issuance of Series A convertible preferred stock (at $0.83 per share)


2,854,532



28



-



-



1,795



-



-



-



-



1,823Conversion of stockholder loans


-



-



360,955



4



296



-



-



-



-



300Stock-based compensation to employees


-



-



-



-



193



-



-



-



-



193Stock-based compensation to non-employees


-



-



-



-



148



-



-



-



-



148Comprehensive loss:Foreign currency translation reserve


-



-



-



-



-



-



21



-



21



21Net loss


-



-



-



-



-



-



-



(834
)


(834
)


(834
)Comprehensive loss


































(813
)Balance as of December 31, 2005


2,854,532



28



4,643,455



47



2,517



-



16



(1,177
)






1,431





The accompanying notes form an integral part of the financial statements.





-39-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Loss





Amounts accumulated during development stage (October 1, 2004 to December 31, 2010) (cont’d):


Series A convertible preferred stock


Common stockNumber of

shares


Amount


Number of

shares


Amount


Additional

paid-in

capital


Treasury

stock


Accumulated

other

comprehensive

income (Loss)


Accumulated

deficit


Comprehensive

loss


Total

stockholders'

Equity (deficit)U.S. dollars in thousands (except share data)Issuance of Series A convertible preferred stock (at $0.83 per share)


397,057



4



-



-



291



-



-



-



-



295Payments of debtors for shares


-



-



-



-



473



-



-



-



-



473Conversion of stockholder loans


72,192



1



-



-



59



-



-



-



-



60Conversion of series A convertible preferred stock to common stock


(3,323,781
)


(33
)


3,323,781



33



-



-



-



-



-



-Issuance of  common stock to public (net of approximately $1,035,000 of issuance costs) (at $1.23 per share)


-



-



3,200,000



32



2,786



-



-



-



-



2,818Issuance of series 1 option warrants


-



-



-



-



772



-



-



-



-



772Issuance of series 2 option warrants


-



-



-



-



1,028



-



-



-



-



1,028Stock-based compensation to employees


-



-



-



-



698



-



-



-



-



698Stock-based compensation to non-employees


-



-



-



-



473



-



-



-



-



473Exercise of stock options and warrants


-



-



50,000



*



-



-



-



-



-



-Comprehensive loss:Foreign currency translation reserve


-



-



-



-



-



-



287



-



287



287Net loss


-



-



-



-



-



-



-



(2,316
)


(2,316
)


(2,316
)Comprehensive loss


































(2,029
)Balance as of December 31, 2006


-



-



11,217,236



112



9,097



-



303



(3,493
)


-



6,019
 * less than $1 thousand


The accompanying notes form an integral part of the financial statements.





-40-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Loss





Amounts accumulated during development stage (October 1, 2004 to December 31, 2010) (cont’d):
 Series A convertible preferred stock


Common stockNumber of

shares


Amount


Number of

shares


Amount


Additional

paid-in

capital


Treasury

stock


Accumulated

other

comprehensive

income (Loss)


Accumulated

deficit


Comprehensive

loss


Total

stockholders'

Equity (deficit)U.S. dollars in thousands (except share data)Stock-based compensation to employees


-



-



-



-



44



-



-



-



-



44Stock-based compensation to non-employees


-



-



-



-



78



-



-



-



-



78Exercise of stock options and warrants


-



-



1,180,790



12



2



-



-



-



-



14Comprehensive loss:Foreign currency translation reserve


-



-



-



-



-



-



334



-



334



334Net loss


-



-



-



-



-



-



-



(3,936
)


(3,936
)


(3,936
)Comprehensive loss


































(3,605
)Balance as of December 31, 2007


-



-



12,398,026



124



9,221



-



637



(7,429
)






2,553Issuance of  common stock to private investors (net ofapproximately  $57,000 of issuance costs)


-



-



1,872,780



19



2,237



-



-



-



-



2,256Repurchase and exercise of series 1 option warrants


-



-



1,812,756



18



4,923



(4,951
)


-



-



-



(10
)Stock-based compensation to employees


-



-



-



-



29



-



-



-



-



29Stock-based compensation to non-employees


-



-



-



-



11



-



-



-



-



11Exercise of stock options and warrants


-



-



209,049



2



4



-



-



-



-



6Comprehensive loss:Foreign currency translation reserve


-



-



-



-



-



-



47



-



47



47Net loss


-



-



-



-



-



-



-



(2,942
)


(2,942
)


(2,942
)Comprehensive loss


































(2,895
)Balance as at December 31, 2008


-



-



16,292,611



163



16,425



(4,951
)


684



(10,371
)


-



1,950


The accompanying notes form an integral part of the financial statements.








-41-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Loss





Amounts accumulated during development stage (October 1, 2004 to December 31, 2010) (cont’d):


Series A convertible preferred stock


Common stockNumber of

shares


Amount


Number of

shares


Amount


Additional

paid-in

capital


Treasury

stock


Accumulated

other

comprehensive

income (Loss)


Accumulated

deficit


Comprehensive

loss


Total

stockholders'

Equity (deficit)U.S. dollars in thousands (except share data)Issuance of  common stock to consultant


-



-



63,939



1



55



-



-



-



-



56Stock-based compensation to employees


-



-



-



-



139



-



-



-



-



139Stock-based compensation to non-employees


-



-



-



-



73



-



-



-



-



73Sale of treasury stock


-



-



-



-



-



4,951







(3,383
)


-



1,568Comprehensive loss:Foreign currency translation reserve


-



-



















(349
)


-



(349
)


(349
)Net loss


-



-



-



-



-



-



-



(6,803
)


(6,803
)


(6,803
)Comprehensive loss


































(7,152
)Balance as at December 31, 2009


-



-



16,356,550



164



16,692



-



335



(20,557
)






(3,366
)Issuance of  common stock to private investors (net ofapproximately  $591,000 of issuance costs)


-



-



4,157,500



42



2,652



-



-



-



-



2,694Issuance of  common stock to public investors (net ofapproximately  $908,000 of issuance costs)


-



-



5,634,970



56



4,140



-



-



-



-



4,196Stock-based compensation to employees


-



-



-



-



333



-



-



-



-



333Stock-based compensation to non-employees


-



-



-



-



364



-



-



-



-



364Exercise of stock options and warrants


-



-



212,063



2



62



-



-



-



-



64Comprehensive loss:Foreign currency translation reserve


-



-



-



-



-



-



(6
)


-



(6
)


(6
)Net loss


-



-



-



-



-



-



-



(2,176
)


(2,176
)


(2,176
)Comprehensive loss


































(2,182
)Balance as at December 31, 2010


-



-



26,361,083



264



24,243



-



329



(22,733
)






2,103


The accompanying notes form an integral part of the financial statements.








-42-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Statements of Cash Flows








Cumulativefrom October 1,For the year


For the year


2004 (inception)ended December 31,


ended December 31,


to December 31,2010


2009


2010U.S. dollars in thousandsCash flows from operating activities:Net loss

$
(2,176
)

$
(6,803
)

$
(19,306
)Adjustments to reconcile net loss to net cash flows fromoperating activities:Income and expenses not  involving cash flows:Increase in liability for employee severance benefits, net


25



57



219Fair value adjustment of marketable securities


-



-



133Depreciation


33



44



158Stock-based payment compensation


395



240



2,036Loss (gain) on revaluation of warrants


(2,070
)


3,053



(670
)Accrued interest and amortization of discount to notespayable, and exchange difference thereon


484



328



959Gain on revaluation of liability for commission to underwriters


(104
)


-



(104
)Changes in assets and liabilities:Decrease (increase) in other current assets


52



(52
)


(38
)Decrease (increase) in prepaid expenses


147



(114
)


(60
)Decrease (increase) in Chief Scientist and BIRD foundation receivable


(45
)


26



(24
)Investment in marketable securities (trading)


-



-



(7,883
)Proceeds from marketable securities (trading)


-



-



5,970Increase in severance pay deposits


(34
)


(91
)


(253
)Decrease (increase) in other assets


28



(14
)


(25
)Increase (decrease) in accounts payable


(148
)


(248
)


79Increase (decrease)  in employees and related liabilities


71



26



157Increase (decrease) in accrued vacation pay


(17
)


16



30Increase in liability to BIRD Foundation


311



-



311Increase (decrease) in accrued expenses


(2
)


55



251Net cash used in operating activities


(3,050
)


(3,477
)


(18,060
)Cash flows from investing activities:Investment in marketable securities (trading)


-



-



(921
)Proceeds from marketable securities (trading)


-



-



3,173Investment in deposits


(1,895
)


-



(1,895
)Sale of property and equipment


1



-



1Acquisition of property and equipment


(11
)


(19
)


(223
)Net cash provided by (used in) investing activities

$
(1,905
)

$
(19
)

$
135

















The accompanying notes form an integral part of the financial statements.





-43-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Statements of Cash Flows (cont’d)








For the year ended December 31, 2010


For the year ended December 31, 2009


Cumulative from October 1, 2004 (inception) to December 31, 2010U.S. dollars in thousandsCash flows from financing activities:Issuance of  common stock (net of approximately  $743 of issuance costs in 2010)

$
7,646


$
-


$
18,019Exercise of stock options and warrants


64



-



84Payment of deferred stock issuance costs


-



(178
)


(178
)Issuance of Series A convertible preferred stock


-



-



2,118Payments of debtors for shares


-



-



473Issuance of Series 1 option warrants


-



-



772Issuance of Series 2 option warrants


-



-



1,028Receipt of grant from Chief Scientist


-



-



2Repayment of stockholder loans


-



-



360Purchase of treasury stock


-



-



(4,951
)Sale of Treasury stock


-



1,568



1,568Convertible notes payable


-



-



176Warrants to noteholders


-



-



1,829Net cash provided by financing activities


7,710



1,390



21,300Effect of  currency exchange rate on cash


108



(49
)


112Increase (decrease) in cash and cash equivalents


2,863



(2,155
)


3,487Cash and cash equivalents at beginning of period


624



2,779



-Cash and cash equivalents at end of period

$
3,487


$
624


$
3,487


























The accompanying notes form an integral part of the financial statements.









































-44-





BioCancell Therapeutics Inc. and Subsidiary


(Development Stage Company)


Consolidated Statements of Cash Flows (cont’d)








For the year ended December 31, 2010


For the year ended December 31, 2009


Cumulative from October 1, 2004 (inception) to December 31, 2010U.S. dollars in thousandsConversion of stockholder loans

$
-


$
-


$
360Issuance of common stock to founders


-



-



43Issuance of option warrants to underwriters


301



-



358Exercise of stock options by Company consultants


-



-



1Conversion of series A convertible preferred stock to common stock


-



-



33Liability for commission to underwriters

$
277


$
-


$
277
















































































The accompanying notes form an integral part of the financial statements.








-45-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 1 – Business and Summary of Significant Accounting Policies





A.
BioCancell Therapeutics, Inc. (hereafter "the Parent") was incorporated in the United States as a private company under the laws of the State of Delaware on July 26, 2004 and commenced operations on October 1, 2004.





B.
The principal activities of the Parent and its subsidiary in Israel, BioCancell Therapeutics Israel Ltd. (the "Subsidiary"), (hereafter collectively referred to as “the Company”) are research and development of drug-candidates for the treatment of various cancer types.  The leading drug-candidate developed by the Company has been successfully tested for a number of cancer types in pre-clinical animal studies, compassionate use human trials and a Phase I/IIa clinical trial.  The Company is now performing an advanced Phase IIb clinical trial on bladder cancer patients, a Phase I/IIa clinical trial on ovarian cancer patients and has just successfully completed a Phase I/IIa clinical trial on pancreatic cancer patients with BC-819. The Company is in the process of planning an advanced Phase IIb clinical trial on pancreatic cancer patients. The Company is evaluating indications for the possible use of this drug, and others under development, to treat other types of cancer.





The Company is in the development stage. Therefore, there is no certainty regarding the Company’s ability to complete the product’s development, receipt of regulatory permits, alternative treatments or procedures that may be developed, and success of its marketing. The continuation of the stages of development and the realization of assets related to the planned activities depend on future events, including the receipt of interim financing and achieving operational profitability in the future. The Company has not generated any revenues since its inception and has incurred substantial losses and expects that it will operate at a loss over the coming years, as it does not expect to generate any revenue from operations in the near term. The Company is initiating activities to raise capital for ensuring future operations although there are still significant doubts as to the ability of the Company to continue operating as a “going concern”. The Company believes that it has sufficient cash to meet its planned operating needs until the end of September 2011, based on its current cash level. It is not possible to estimate the final outcome of these activities. These financial statements do not include any adjustments to the value of assets and liabilities and their classification, which may be required if the Company cannot continue operating as a “going concern”.





The biotechnology industry is characterized by strong competition, resulting from the risk of frequent technological changes.  Entry into this market requires the investment of considerable resources and continuous development. The Company's future success is dependent on several factors, including the quality of the Company's technology, the product's price, and the creation of an advantage over the competition.





C.
The Company's research and development activities are carried out by its Subsidiary primarily through a laboratory research team at the Hebrew University in Jerusalem. The Hebrew University laboratory is managed by the Chief Scientist of the Company, who is a related party. All of the Company’s net assets are located in Israel.























-46-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 1 – Business and Summary of Significant Accounting Policies (cont'd)








D.
The Company filed a prospectus for an initial public offering on the Tel Aviv Stock Exchange (“TASE”) and beginning August 17, 2006 has been publicly traded on the TASE. On June 23, 2009 the Company’s Registration Statement on Form S-1 was deemed effective by the United States Securities and Exchange Commission (SEC) and as of that date it is a reporting company to the SEC.





E.
The 2009 financial statements as previously presented by the Company in reports and SEC filings, have been modified to account for an immaterial error in the classification of deferred stock issuance costs as an operating activity as opposed to a financing activity in the Consolidated Statements of Cash Flows.








Note 2 - Reporting Principles and Accounting Policies





A.           Basis of presentation





The accompanying consolidated financial statements include the accounts of BioCancell Therapeutics, Inc. and its subsidiary and are presented in accordance with accounting principles generally accepted in the United States of America. All significant intercompany balances and transactions have been eliminated in consolidation.


The Company also files Hebrew language, New Israel Shekel-based financial statements, prepared in accordance with International Financial Reporting Standards (IFRS), with the TASE.





B.
Development stage enterprise





The Company’s principal activities to date have been the research and development of its products and the Company has not generated revenues from its planned, principal operations.  Accordingly, the Company’s financial statements are presented as those of a development stage enterprise.





-47-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 2 - Reporting Principles and Accounting Policies (cont'd)








C.
Translation into U.S.dollars





The financial records of the Parent and its Subsidiary are maintained in New Israel Shekels, which is the functional currency of the Company.  These financial statements have been prepared using the U.S. dollar as the reporting currency.





All assets and liabilities are translated at year-end exchange rates. Items in the statement of stockholders’ equity (deficit) are translated at historical rates. Statement of operations items are translated at the applicable rate on the day of the transaction. The adjustment resulting from translating the financial statements are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity (deficit).





The following table summarizes the representative rate of exchange of the U.S. dollar to the New Israel Shekel (NIS):





Average rate ofRate at


exchangeDecember 31


during the yearNIS


NIS2010


3.549



3.7322009


3.775



3.932





The average rate of exchange during the development stage period (from inception through December 31, 2010) was NIS 4.065 to $1.





The translated figures should not be construed to represent actual amounts in, or convertible into, U.S. dollars.








D.
Transactions in foreign currency





Transactions in foreign currency are recorded at the exchange rate as of the transaction date. Exchange gains or losses from the disposition of monetary assets or liabilities or from the reporting of monetary assets or liabilities according to exchange rates other than those originally recorded, or from exchange rates recorded in prior financial statements, are recognized in the statement of operations.





E.
Use of estimates





The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported results of operations during the reporting periods. Actual results may differ from such estimates.


Significant items subject to such estimates and assumptions include the valuation of derivative instruments, deferred tax assets, convertible notes payable, liability for commission to underwriters and stock options.  The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.





-48-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 2 - Reporting Principles and Accounting Policies (cont'd)











F.
Cash and cash equivalents





The Company considers all highly liquid investments, which include short-term bank deposits with an original maturity of up to three months, to be cash equivalents.








G.
Marketable securities





Historically, all of the Company's investment securities, primarily consisting of investments in government and corporate bond, mutual funds and convertible bonds, have been classified as trading securities, and are reported at fair market value, with unrealized gains and losses, net of tax, recorded in the statement of operations. As of December 31, 2010 and 2009, all funds of the Company are held in cash and cash equivalents and short - term deposits.








H.            Derivative instruments





The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. The Company carries its derivatives at fair value on the balance sheet and recognizes any subsequent changes to fair value in earnings.


The Company issued derivative instruments in the form of warrants to purchase an aggregate of up to 6,280,783 shares of common stock (at a price of 71.6 cents per share) as part of the financing described in Note 8 below. The warrants have been recorded as a liability, at fair value, and changes in the fair value of the instruments are included in the Statement of Operations under the caption “loss (gain) on revaluation of warrants”.





-49-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 2 - Reporting Principles and Accounting Policies (cont’d)








I.
Property and equipment, net





Property and equipment are stated at cost, net of accumulated depreciation.





Improvements and enhancements are added to the cost of the assets whereas maintenance and repairs are charged to expenses as incurred.





Depreciation is calculated by the straight-line method on the basis of the estimated useful lives of the assets.








Annual depreciation rates are as follows:





%Furniture


6Electronic equipment


15Computers


33











J.
Research and development expenses, net





Research and development costs are expensed as incurred. Research and development costs are comprised of costs incurred in performing research and development activities, including salaries and related costs, consultants and sub-contractors costs, clinical trials costs, patent fees, materials and depreciation costs.





Research and development costs are presented net of grants received from the Office of the Chief Scientist (OCS) in Israel, the Israel-U.S. Binational Industrial Research and Development Foundation (BIRD) and the Jerusalem Development Authority in support of the Company’s research and development activities. (see Note 9A, B and J).





K.         Stock-based compensation





The Company records stock-based compensation as an expense in the statement of operations. The cost of stock-based compensation awards is measured at their grant date fair value. Fair value is determined using the Black-Scholes-Merton option pricing model. Expense is recognized over the vesting period, generally 3-4 years. The Company issues new shares upon share option exercises.





L.         Segment and geographic information





The Company's business is currently comprised of one geographic and operating segment, focused on the discovery, development and commercialization of novel therapies for treating cancer-related diseases. The Company's development and administration operations are maintained in Israel. The Company’s chief operating decision maker uses measurements aggregated at the entity-wide level to manage the business. All of the Company’s net assets are located in Israel.





-50-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 2 - Reporting Principles and Accounting Policies (cont’d)








M.
Income taxes





The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.





The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized.





The Company recognizes the effect of an income tax position only if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. A recognized income tax position is then measured at the largest amount that is greater than 50% likely of being realized. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.








N.
Net loss per share





Basic net loss per share (EPS) is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of common shares plus dilutive potential common stock considered outstanding during the period. However, as the Company generated net losses in all periods presented, potentially dilutive securities, comprised of incremental common shares issuable upon the conversion of Series A convertible preferred stock and the exercise of warrants and stock options, are not reflected in diluted net loss per share because such shares are antidilutive.





In the calculation of the net loss per share for the cumulative period from inception, the share splits of November 2005 (1:30) and of July 2006 (1:2.855) were accounted for retroactively as if they occurred at the beginning of the first period presented.









































-51-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 2 - Reporting Principles and Accounting Policies (cont’d)








N.
Net loss per share (cont’d)





The following table summarizes the securities (including those issuable pursuant to contingent stock agreements) that could potentially dilute basic EPS in the future and were not included in the computation of basic and diluted EPS because doing so would have been antidilutive for the periods presented:





Cumulativefrom October 1,2004 (inception)For the year ended December 31


to December 31,2010


2009


2010Series 2 Warrants


-



2,500,000



-Series 3 Warrants


2,817,485



-



2,817,485Series 4 Warrants


2,817,485



-



2,817,485Warrants to underwriter


612,974



300,000



612,974Convertible notes payable


4,078,212



4,078,212



4,078,212Warrants for interest on convertiblenotes payable


979,790



597,095



979,790Warrants to private investors


10,438,283



5,898,088



10,438,283Stock options to employees,Directors and consultants underStock Option Plans


2,271,176



2,521,989



2,271,17624,015,405



15,895,384



24,015,405





O.
Impairment of long-lived assets





The Company evaluates long-lived assets whenever events or changes in circumstances indicate carrying amount may not be recoverable. The Company evaluates the realizability of its long-lived assets based on cash flow expectations for the related assets. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceed its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Any write-downs are treated as permanent reductions in the carrying amount of the assets























-52-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 2 - Reporting Principles and Accounting Policies (cont’d)








P.
Fair value measurements





The Company follows the provisions included in ASC Topic 820, Fair Value Measurements and Disclosures,for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC subtopic 820 (Statement 157) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC subtopic 820 (Statement 157) also establishes a framework for measuring fair value and expands disclosures about fair value measurements (see Note 7).








On January 1, 2009, the Company adopted the provisions of ASC subtopic 820 (Statement 157) for fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The adoption of ASC subtopic 820 did not have a material impact on the Company’s consolidated financial position and results of operations.





Q.
Liability for commission to underwriters





The liability to the underwriters is recorded at fair-value measurement at each reporting period, with changes in fair value recorded against the P&L.

















Note 3 - Cash and Cash Equivalents





December 31,


December 31,2010


2009U.S. dollars in thousandsIn US dollars:Cash

$
233


$
142Cash equivalents


600



100In New Israeli Shekels:Cash


427



278Cash equivalents


2,227



104In Euro


-*



-*$
3,487


$
624





*           Less than $1 thousand








-53-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 4 - Property and Equipment, Net





December 31,


December 31,2010


2009U.S. dollars in thousandsCostFurniture

$
22


$
22Electronic equipment


128



118Computers


110



96Total


260



236Accumulated depreciation


172



130Net book value

$
88


$
106




















Note 5 - Accounts Payable








December 31,


December 31,2010


2009U.S. dollars in thousandsSuppliers

$
90


$
232Credit card payable


9



7$
99


$
239











Note 6 - Deposits and Liability for Employee Severance Benefits





Under Israeli law, employers are required to make severance payments to dismissed employees and employees leaving employment in certain other circumstances, based on the latest monthly salary multiplied by the number of years of employment as of the balance sheet date. This liability of the Company is partially covered by payments of premiums to insurance companies under approved plans and by a provision in these financial statements. The deposits in respect of employee severance benefits as stated in the balance sheets as of December 31, 2010 and 2009 represent contributions to manager’s insurance policies and a central fund and are stated at current cash redemption values.




















-54-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 7 - Fair Value Measurements





The Company measures fair value 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, the Company utilizes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:





Level 1 - Observable inputs that reflect 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 the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.





In accordance with ASC 820-10, the Company’s cash equivalents and short-term deposits are classified within Level 1. This is because the cash equivalents and the short-term deposits are valued using quoted active market prices.





The Company’s warrants to noteholders are valued using the Binomial model. Prior to the second quarter of 2009, the Company’s warrants to noteholders were valued using the Black-Scholes-Merton model. Given the recent foreign currency fluctuation’s effect on the exercise price of the Warrants throughout the life of the Warrant, the Company’s assumptions have changed regarding the possible exercise patterns, and these possibilities can be addressed through the Binomial model in contrast to the Black–Scholes-Merton model which only allows for one exercise date. The change in the model did not have a material impact on our consolidated financial position, results of our operations or cash flows. These models use the variables of the price of the underlying stock, the strike price, the continuously compounded risk-free interest rate, the continuously compounded annual dividend yield, the time in years until the expiration of the option and the implied volatility of the Series 3 Warrants. Some of the inputs to this valuation are unobservable in the market and are significant, requiring significant judgment using the best information available (see Note 10C).





In the fourth quarter of 2010, the Company’s assumptions have changed regarding the implied volatility of the Company’s warrants and are calculated as the latent volatility of the Series 3 Warrants. The change in the model did not have a material impact on our consolidated financial position, results of our operations or cash flows.





The Company recorded financing gain of approximately $2.07 million and financing losses of $3.053 million for the years ended December 31, 2010 and 2009, respectively, and a loss of $670 thousand for the development stage period, resulting from revaluation of warrants to noteholders, which has been recorded in the statements of operations.























-55-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 7 - Fair Value Measurements (cont’d)








1.
Assets and liabilities measured at fair value on a recurring basis are summarized below:





Fair value measurement at reporting date usingQuotedPricesin Active


SignificantMarkets for Identical


Other Observable


Significant UnobservableDecember 31, 2010


Assets (Level 1)


Inputs (Level 2)


Inputs

(Level 3)Description

U.S. dollars in thousandsCash equivalents

$
2,827


$
2,827


$
-


$
-Short - term deposits

$
1,993


$
1,993


$
-


$
--Total Assets

$
4,820


$
4,820


$
-


$
-Warrants to noteholders

$
1,453


$
-


$
-


$
1,453Liability for commission to underwriters

$
173










$
173Total Liabilities

$
1,626


$
-


$
-


$
1,626








Fair value measurement at reporting date usingQuotedPricesin Active

SignificantMarkets for Identical

Other Observable

Significant UnobservableDecember 31, 2009

Assets

(Level 1)

Inputs (Level 2)

Inputs

(Level 3)Description

U.S. dollars in thousandsCash equivalents
ִ

$
204


$
204


$
-


$
-Total Assets


$
204


$
204


$
-


$
-Warrants to noteholders
ִ

$
3,400


$
-


$
-


$
3,400Total Liabilities


$
3,400


$
-


$
-


$
3,400














-56-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 7 - Fair Value Measurements (cont’d)





2.
The assumptions used in the fair value calculation for the Warrants and Convertible Notes Payable were as follows:





As of


As ofAs of July 30,


December 31,


December 31,2008


2009


2010Market price of underlying stock

2.08 NIS


2.435 NIS


2.441 NISExercise price

$
0.716


$
0.716


$
0.716Continuously compounded risk-free interest rate forthe debt feature of the Convertible Notes Payable


5.04
%


2.68
%


0.48
%Continuously compounded risk-free interest rate forWarrants


5.33
%


2.68
%


0.84
%Continuously compounded annual dividend rate


0
%


0
%


0
%Time in years until the expiration of the ConvertibleNotes Payable

4 years


2.58 years


1.58 yearsTime in years until the expiration of the Warrant

5 years


3.58 years


2.58 yearsImplied volatility for the underlying stock


55
%


145.48-148.52
%


55.79
%





3.
The following table presents the Company’s activity for liabilities measured at fair value using significant unobservable inputs (Level 3), as of December 31, 2010:





a.
Warrants to noteholders:





Level 3U.S. dollarsin thousandsBalance at December 31, 2008

$
79Loss from revaluation of warrants to shareholders,included in the statement of operations for theyear ended December 31, 2009


3,053Adjustment for foreign currency translationdifferences


268Balance at December 31, 2009


3,400Gain from revaluation of warrants to shareholders,included in the statement of operations for theyear ended December 31, 2010


( 2,070
)Adjustment for foreign currency translationdifferences


123Balance at December 31, 2010

$
1,453





b.
Liability for commission to underwriters
 
 Level 3U.S. dollarsin thousandsBalance at December 31, 2009

$
-Initial valuation of liability for commission to underwriters


277Gain on revaluation of liability for commission to underwriters


(104
)Balance at December 31, 2010

$
173





-57-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 7 - Fair Value Measurements (cont’d)





c. Convertible notes payable.





The Company has outstanding convertible notes payable, of which the fair values have been determined using the Binomial model. Carrying amounts and the related estimated fair value of the convertible notes payable are as follows:





December 31, 2010


December 31, 2009Carrying





CarryingAmount


Fair Value


Amount


Fair ValueU.S. dollars in thousandsConvertible notes payable

$
1,187


$
3,617


$
644


$
3,483








The difference between the carrying amounts as compared to the fair value of the convertible notes payable represents the unamortized portion of the beneficial conversion feature of the convertible notes payable.





Note 8 – Convertible Notes Payable





In July 2008, the Company carried out private placements with institutional investors (the “Investors”), whereby 3 investors received an aggregate amount of 1) 1,222,780 shares of common stock (at a price of 59.7 cents per share) (the “Common Shares”), 2) non-registered convertible notes payable (the “Convertible Notes Payable”) convertible into an aggregate of up to 5,058,002 common shares (at a conversion  price of 71.6 cents per share) and 3) non-registered warrants (the “Warrants”) to purchase an aggregate of up to 6,280,783 shares of common stock (at a price of 71.6 cents per share) exercisable for 5 years. The Company's gross proceeds from the private placements were approximately $3.650 million (NIS 12.662 million). As long as they are not converted, the Convertible Notes Payable bear dollar - linked interest of 10% per annum, to be added to the principal (and considered as part of the principal for the purposes of conversion) for the first nine quarters and paid quarterly thereafter, for the remaining seven quarters.





The Convertible Notes Payable were classified as long-term liabilities and were recorded at their initial relative fair value. The Convertible Notes Payable are presented net of unamortized discounts for the portions allocated to the Warrants, Common Shares and the beneficial conversion feature inherent in the instrument. The interest due on the Convertible Notes Payable is accrued to the value of the instrument, as the period for cash payment of interest, as described above, has not yet commenced.Payment for the interest will begin in 2011.





U.S. dollars inMovement during the period:

thousandsBalance at December 31, 2009

$
644Accrued interest


299Amortization of discount for the period ended December 31, 2010


244Balance of Convertible Notes Payable at December 31, 2010

$
1,187


-58-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 9 - Contingent Liabilities and Commitments





A.
Liabilities for the payment of royalties to the Chief Scientist





The Company finances part of its research and development activities through grants received from the Office of the Chief Scientist (OCS) in Israel.  In consideration for the OCS grants, the Company is obligated to pay royalties at a rate between 3% and 5% of revenues from sales of the product developed with the aid of the OCS, up to repayment of the full amount of the obligation. The grants are linked to the exchange rate of the U.S. dollar and bear an agreed-upon interest rate.





Through December 31, 2010 the Subsidiary received from the OCS $2,263,000.





The financial statements do not include a liability for these grants due to the uncertainty of successful product development. The Company at the present time believes that there is a lower than 50% likelihood of it being realized.





In June 2010, the Subsidiary received from the OCS approval of the new grants applied for in November 2009 for two additional research and development programs with a budget of $1,465 thousand (covering 60% of expenses in Israel and 30% of expenses overseas) and totaling an anticipated grant of $732 thousand. For the period ended December 31, 2010, the Subsidiary received from the Chief Scientist a total of $319 thousand (NIS 1,130 thousand). The Company has recorded income receivable of $96 thousand that is recorded in receivable from Chief Scientist and BIRD Foundation, and as a reduction to research and development expenses.





In May 2010, the Subsidiary applied to the OCS for two additional research and development program grants with a total budget of $845 thousand (covering 60% of expenses in Israel and 30% of expenses overseas) and totaling an anticipated grant of $479 thousand. As the Company has not yet received approval for the grants, no receivable has been recorded as of December 31, 2010 in respect of this program. (See Note 14).











-59-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 9 - Contingent Liabilities and Commitments (cont’d)





B.
Liabilities for the payment of grant to the Israel-US Binational Industrial Research and Development Fund (BIRD)





In December 2007, the Subsidiary and the Virginia Biosciences Commercialization Center (VBCC), received approval for a grant from the Israel-US Binational Industrial Research and Development Fund (BIRD). The grant was intended to partially fund a Phase I/IIa clinical trial in pancreatic cancer at the University of Maryland and medical centers in Israel. The grant is the lesser of up to an amount of $950,000 or 50% of the predicted expenses of the project.





In accordance with the terms of the agreements between the two companies and the BIRD Foundation, the Company will have to repay the grant within twelve months of the successful completion of the project. The Company is entitled to extend the repayment period to 2 years in return for total repayment of 113% of the grant amount, to 3 years in return for total repayment of 125%, to 4 years in return for total repayment of 138%, or to 5 years or more in return for total repayment of 150% of the grant amount.


The terms of the agreement call for the evaluation of the status of the project within 30 months of May 1, 2008.





During the year ended December 31, 2010, the Company made significant progress with respect to development of BC-819 as a treatment for pancreatic cancer, and as a result, recorded a liability to the BIRD Foundation for repayment of the grant.








C.
Licensing agreement





The Company's research and development activities are based on an exclusive license given to the Company to use technology protected by patent and/or applications filed for registration of patents. These patents were developed by one of the Company's founders, and were originally the property of Yissum, which was a related party of the Company.  According to the amended licensing agreement signed between Yissum, the Company and the Subsidiary in September 2007 ("the licensing agreement"), the Subsidiary was granted rights for exclusive use of the said patents. Under this amended agreement, the Company undertook to pay royalties to Yissum, at the following rates:





1.
5% of net sales which is defined as the gross amount invoiced by the Company to third parties, which are not sub-licensees, from sales of Licensed Products in an arm’s length transaction, less customary discounts as further detailed in the licensing agreement;





2.
10% of total proceeds that the Company will receive from any third party who will receive a sub-license to use the Company's technology for royalties of up to $30 million per year;





3.
6.5% of the total proceeds that the Company receives from any third party who will receive a sub-license to use the Company's technology for royalties above $30 million per year.











-60-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 9 - Contingent Liabilities and Commitments (cont’d)





C.
Licensing agreement (cont’d)





The licensing agreement will expire on a country-by-country basis, when the patent expires in that country, or if no patent is registered in that country, in the 9th year from the date of the first commercial sale (as defined in the licensing agreement) in that country. However, the Company is permitted to extend the licensing agreement for an additional period in each and every country, by continuing to pay royalties on the revenues from that country.  It was also agreed that if the agreement covering each country expires, as aforesaid, the Company will have a license for that country, which is not subject to its obligations pursuant to the licensing agreement, and which has no time limit. The financial statements do not include a liability for these royalties.








D.
Research and development agreement





The Company's research and development activities are carried out by the Subsidiary primarily through a laboratory research team in the Hebrew University of Jerusalem (the “University”) through its technology transfer company, Yissum. The laboratory is managed by a related party of the Company. The research is conducted under an agreement whereby the Company is obligated to pay NIS 100 thousand ($28 thousand) plus VAT per quarter on a quarterly basis, for this research service. The original agreement was for a two - year period and as of the date of these financial statements, the agreement has been extended until June 30, 2011.





The Company can terminate the agreement upon 90 days prior notice. If the agreement is terminated prior to the end of the research period, the Company shall immediately pay Yissum for the research actually performed and for personnel obligations of Yissum made before the receipt of such written notice or which arise as a result of the termination.





As of December 31, 2010, and 2009 the Company has recorded a prepaid expense of approximately NIS 202 thousand ($57 thousand), and NIS 268 thousand ($71 thousand) in respect of this agreement, respectively.








E.
Indemnification agreements





The Company has undertaken to indemnify Yissum and the Hebrew University of Jerusalem and any person acting on its behalf and any of their directors, officers, employees and representatives (herein referred to as “Indemnitees”) from and against any liability including, without limitation, product liability, damages, losses or expenses including reasonable legal fees and litigation expenses incurred by or imposed upon the Indemnitees (collectively, “Losses”) only by reason of Company’s acts and/or omissions and/or which derive from Company’s use, development, manufacture, marketing, sale and/or sublicensing of the licensed technology except to the extent such Losses are determined to have resulted from the gross negligence or willful misconduct of Indemnitees.























-61-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 9 - Contingent Liabilities and Commitments (cont’d)





E.
Indemnification agreements (cont’d)





Additionally, upon the commencement of any clinical trial, the Company is obligated to procure and maintain comprehensive clinical trial liability insurance in amounts commensurate with accepted commercial practice. All required insurance will be at the Company’s sole cost and expense. The Company acquired a clinical trial insurance policy providing Yissum as an additional named insuree. The Company is obligated to obtain comprehensive general liability insurance which shall provide contractual liability coverage for the Company’s indemnification under its agreement with Yissum (See D above). As of December 31, 2010, the Company is in compliance with the terms of the agreement.





In July 2006, the Company approved the granting of letters of indemnification to directors and officers serving at that time and in the future. In this context, the Company committed that in addition to the terms of indemnification established in its Articles of Incorporation, it would indemnify each of the Directors and Officers for debts or expenses, as detailed in the letter of indemnification, borne on account of activities performed by virtue of their position as Directors and Officers of the Company or of another company, partnership, joint venture, etc. connected directly or indirectly with one or more of the events detailed in the letter of indemnification. See also indemnification in G below.








F.
Clinical Trial Agreements between the Company and Medical Centers in the U.S. and Israel (collectively, “Hospitals”)





1.
Between November 2007 and December 2010, the Company signed clinical trial agreements with medical centers in Israel, and with BCG Oncology in the U.S., under which the Hospitals will carry out a clinical trialstudy relating to the clinical development of the Company’s developing drug therapy in patients with superficial bladder cancer and subject to compliance with the requirements set forth in the agreement. In consideration of the Hospitals’ undertaking to conduct the study and for the performance of its obligations, the Company agrees to pay the Hospitals based upon the number of patients, time enrolled and number of treatments, and shall provide, at the Company’s sole expense, the study drug required for the performance of the study as set forth in the agreement.





2.
Between April 2009 and December 2010, the Company signed clinical trial agreements with medical centers in Israel under which the Hospitals will carry out a clinical trialstudy relating to the clinical development of the Company’s developing drug therapy in patients with ovarian cancer and subject to compliance with the requirements set forth in the agreement. In consideration of the Hospitals’ undertaking to conduct the study and for the performance of its obligations, the Company agrees to pay the Hospitals based upon the number of patients, time enrolled and number of treatments, and shall provide, at the Company’s sole expense, the study drug required for the performance of the study as set forth in the agreement.

















-62-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 9 - Contingent Liabilities and Commitments (cont’d)





F.
Clinical Trial Agreements between the Company and Medical Centers in the U.S. and Israel (collectively, “Hospitals”) (cont’d)





3.
Between May 2009 and December 2010, the Company signed clinical trial agreements with medical centers in Israel and in the USA.


Under the Clinical Trial Agreements, the Hospitals will carry out a clinical trialstudy relating to the clinical development of the Company’s developing drug therapy in patients with pancreatic cancer and subject to compliance with the requirements set forth in the Agreement. In consideration of the Hospitals’ undertaking to conduct the study and for the performance of its obligations, the Company agrees to pay the Hospitals based upon the number of patients, time enrolled and number of treatments, and shall provide, at the Company’s sole expense, the study drug required for the performance of the study as set forth in the agreement.





G.
Clinical Trial Agreements between Hebrew University of Jerusalem and the Company and Medical Centers in the U.S. and Israel (collectively, “Hospitals”)





The University and the Company committed to indemnify the Hospitals, the study staff, and the employees and/or officers and/or representatives of any of the parties listed above (“Beneficiaries”) from and against all claims, demands, causes of action and suits of whatsoever kind or nature based on damages claimed to have been caused as a result of the performance of the Study and/or any procedures prescribed in the Protocol and/or pertaining to the study (“Loss”) conditional to the following conditions: (i) the Loss was not caused as a result of negligence or misconduct of the Beneficiaries; and (ii) the Beneficiaries performed the study in accordance with the Protocol and the additional requirements set in the clinical trial agreement. The Company shall obtain and maintain at all times during the term of clinical trial agreement and thereafter for a period not less than the applicable statute of limitations, a comprehensive general liability insurance policy for reasonably cognizable claims arising from the activities to be undertaken pursuant to clinical trial agreement in the minimum amount of $3 million dollars per incident. As of December 31, 2010, the Company is in compliance with the terms of the agreement and is not aware of any need for such indemnification as discussed above.





H.
Operating leases





1.
Vehicles





The Company has lease agreements for 9 vehicles for 36 months each. As required by the agreements, the Company deposited a security deposit to ensure the fulfillment of its contractual commitment. At December 31, 2010, the balance of the deposit was approximately $23 thousand (NIS 85 thousand) and represents the last three months of the lease. The deposit is linked to the Israeli CPI and does not bear interest.





The minimum annual payments in connection with the agreement are as follows:





U.S. dollarsin thousands2011

$
782012

$
27








-63-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 9 - Contingent Liabilities and Commitments (cont’d)





H.
Operating leases (cont’d)





2.            Rental Agreement





In November 2006 the Company entered into a rental agreement for its offices for a 24 month period with an option to extend. The latest extension of the rental agreement is for an additional period of 12 months until September 16, 2011. The monthly rent (including maintenance fee and parking) is $4.5 thousand + VAT. The Company presented the lessor with a bank guarantee in the amount of $16 thousand to ensure fulfillment of its contractual obligations.








The following table summarizes the Company’s rent expense for the periods presented:





Year ended December 31,


Year ended December 31,


Cumulative from inception to December 31,2010


2009


2010U.S. dollars in thousandsRent expense

$
50


$
48


$
229














The minimum future annual payments in connection with the agreement are as follows:





U.S. dollars in thousands2011

$
39





I.
Consulting Agreements





As of July 2008, the Company entered into an agreement with Tikcro Technologies Ltd., whereby in exchange for consultancy services provided by it, the Company will pay Tikcro Technologies Ltd. an annual amount of $30 thousand, 63,939 common shares and reimbursement of expenses. The Company recorded in the first year of the agreement a provision in the amount of $40 thousand in connection with the abovementioned shares as they had not been issued. The Company believes that it did not receive the consultancy services as provided for in the agreement for that year. Therefore, the Board of Directors of the Company, with the advice of its legal advisor, decided to cancel the provision. As of the date of these financial statements, the Company has not paid these fees and the companies are in discussions regarding the consulting fee.











-64-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 9 - Contingent Liabilities and Commitments (cont’d)





J.
Liabilities for the payment of royalties to the Jerusalem Development Authority (JDA)


In November 2009, the Company received from the JDA a grant of $35 thousand. In accordance with the terms of the agreement between the Company and the JDA, the Company is obligated to pay royalties at a rate of 4% of revenues from sales of the product developed, up to an amount equal to the grants received. The grant is linked to the Israeli Consumer Price Index.





The financial statements do not include a liability for these grants due to the uncertainty of successful product development.





K.
Pursuant to an agreement signed with the Company's CEO, he is entitled to receive a bonus at such time as the Company shall raise an aggregate amount of $10 million between January 30, 2010 and the termination of his employment with the Company, in any form, except for loans from financial institutions and grants under the auspices of the Israeli Ministry of Industry, Trade and Labor, such as Chief Scientist grants and bi-national funds. The amount of the bonus will be $100,000, subject to a deduction of a pro-rata portion based on the funds raised provided by investors from which the Company has received funds or assets prior to January 30, 2010. As of December 31, 2010, the Company has recorded a short-term liability of $84 thousand (approximately NIS 300 thousand) in respect of this agreement.














Note 10 - Stockholders' Equity





A.
Stock splits





1.           In November 2005, the Company's board of directors approved a 1:30 split of the Company's stock. Therefore, the number of authorized and issued shares of the Company increased from 100,000 to 3,000,000.  At the same time, the Company's board of directors approved a further increase in the number of authorized shares to 6,137,609, comprised of 5,000,000 shares of common stock, $0.01 par value and 1,137,609 shares of Series A convertible preferred stock par value of $0.01. The stock split was recorded retroactively from inception.





2.           In July 2006, the Company’s board of directors approved a 1:2.855 split of the Company’s stock. The stock split was recorded retroactively from inception.





























-65-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 - Stockholders' Equity (cont’d)








B.
Composition








As of December 31, 2010


As of December 31, 2009Number of sharesAuthorized


Issued and outstanding


Authorized


Issued and outstandingCommon stock, $0.01 par value each


65,000,000



26,361,083



50,000,000



16,356,550








On October 1, 2009, the Board of Directors of the Company resolved to increase the authorized capital of the Company to 65,000,000 common shares, subject to a future resolution of the general meeting of the stockholders and future resolution of the Board. At a General Meeting of the shareholders held on January 21, 2010, the shareholders authorized the increase of the authorized capital of the Company to 65,000,000 common shares at a par value of $0.01, subject to a future resolution of the Board. On November 3, 2010 the Board approved this increase.





C.
Common Stock





1.
In October 2004, the Company issued 4,282,500 shares of common stock to two of the Company's founders, for no consideration, as founders’ shares.





2.
In November 2005, pursuant to an agreement signed in October 2005, the Company issued 360,955 shares of common stock to Yissum, resulting from the conversion of stockholder loans totaling $300 thousand.





3.
In December 2005, the Company issued 2,854,532 shares of Series A convertible preferred stock for consideration of $2,296,000, net of expenses incurred in connection with the fund raising of $76 thousand, including $473 thousand which was in transit at the balance sheet date and is recorded in 2006.





During the first quarter of 2006, the Company issued 397,057 shares of Series A convertible preferred stock for consideration of $295 thousand, net of expenses incurred in connection with the fund raising of $35 thousand. In March 2006, the Company issued to Yissum 72,192 shares of Series A convertible preferred stock in consideration for expenses paid by Yissum on the Company’s behalf of $60 thousand.





The Series A convertible preferred stock conferred, inter alia, voting rights, preferential rights in all that relates to the distribution of the Company's assets upon liquidation and income from a merger or acquisition of all or most of the Company's shares or assets and anti-dilution rights if the Company allots shares or rights to shares at a price below that paid by the Series A convertible preferred stockholders.














-66-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 - Stockholders' Equity (cont’d)





C.
Common Stock (cont’d)





4.
In August 2006, the Company filed a prospectus for an initial public offering on the TASE offering to the public the following securities:





a.
Common stock - 3,200,000 quoted shares, $0.01 par value each.


b.
Series (1) Warrants – 2,500,000 quoted option warrants that were exercisable into 2,500,000 common shares until August 18, 2008, $0.01 par value, at an exercise price of $2.12 each. (See 10D below).





c.
Series (2) Warrants – 2,500,000 quoted option warrants that were exercisable into 2,500,000 common shares until August 11, 2010, $0.01 par value, at an exercise price of $2.65 each. These warrants expired during 2010.





d.
The marketable securities were offered to the public in 100,000 units that were composed of 32 ordinary shares, 25 Series (1) Warrants and 25 Series (2) Warrants, at a price of $55.89 per unit.





The offering was consummated on August 14, 2006 upon the issuance of 3,200,000 shares of Common Stock, 2,500,000 Series 1 Warrants and 2,500,000 Series 2 Warrants. The gross proceeds received by the Company totaled $5,653,000. The expenses incurred in connection with the public offering totaled $1,035,000, of which $358 thousand was due to warrants granted to underwriters. The net proceeds of the offering was allocated between stock and warrants based on their relative fair values.





5.
In conjunction with the Company’s initial public offering on the TASE, the 3,323,781 of Series A convertible preferred shares were converted into shares of common stock, $0.01 par value, on a 1:1 basis. The conversion was completed on August 14, 2006.





6.
In May 2008, the Company executed a private placement allocation of 650,000 common shares to Clal Biotechnology Industries Ltd. (“CBI”) at a price of NIS 3.52 per share, the average closing price of the Company’s shares on the TASE over the thirty trading days preceding the Company’s Finance Committee recommendation to approve the transaction. The gross proceeds of the allocation of $653 thousand, less $16 thousand in allocated expenses, was credited to additional paid-in capital upon the allocation of Company shares to CBI.
































-67-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 - Stockholders' Equity (cont’d)





C.
Common Stock (cont’d)








7.
In July 2008, the Company carried out private placements with institutional investors (the “Investors”), whereby 3 investors received an aggregate amount of 1) 1,222,780 shares of common stock (at a price of 59.7 cents per share) (the “Common Shares”), 2) non-registered convertible notes payable (the “Convertible Notes Payable”) convertible into an aggregate of up to 5,058,002 common shares (at a conversion  price of 71.6 cents per share) and 3) non-registered warrants (the “Warrants”) to purchase an aggregate of up to 6,280,783 shares of common stock (at a price of 71.6 cents per share) exercisable for 5 years. The Company's gross proceeds from the private placements were $3,650,000 (NIS 12,662,000). As long as they are not converted, the Convertible Notes Payable bear dollar - linked interest of 10% per annum, to be added to the principal (and considered as part of the principal for the purposes of conversion) for the first nine quarters and paid quarterly thereafter, for the remaining seven quarters.





The Convertible Notes Payable are convertible, in whole or in part at the option of the holder at any time prior to July 31, 2012, into a number of shares of the Company’s common stock equal to the principal amount of the notes payable, including capitalized interest accrued between July 31, 2008 and October 31, 2010, at a price of 71.6 cents per share.  The conversion price and terms of the Convertible Notes Payable are subject to certain adjustments.  The Convertible Notes Payable mature, and any principal amount thereunder not converted into shares of common stock becomes due and payable, on July 31, 2012. The Warrants are exercisable at any time prior to July 29, 2013 for a per share exercise price of 71.6 cents.





Pursuant to the terms of the agreements entered into by the Company in connection with the private placement, until such time as the Company has raised equity financing in excess of $15,000,000 (excluding any amounts invested by the Investors and $5,000,000 raised in equity financings consummated within three months of the closing of the transactions contemplated by these agreements), if the Company issues any securities to any party for a per share purchase price, conversion price or exercise price, as applicable, less than any of the per share purchase price, conversion price or exercise price paid or payable for the shares of our common stock, convertible debentures or warrants, respectively, issued to the Investors in the transaction, the Company will be (i) obligated to issue an additional number of shares of its common stock such that the number of shares originally issued to the Investors at the closing plus such number of additional of shares of its common stock equal the number of shares of its common stock that would have been issued at the price at which it sold its securities such subsequent issuance for the purchase price paid at the closing for shares of its common stock, and (ii) the conversion price of Convertible Notes Payable and the exercise price of the Warrants shall be reduced to equal the price at which its securities were sold in such subsequent issuance.




















-68-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 - Stockholders' Equity (cont’d)





C.
Common Stock (cont’d)








The $3,650,000 of proceeds from the private placements were first allocated to the Warrants, which were classified as derivative instruments. The Warrants are considered derivatives since they are not indexed solely to the Company’s own stock as they must be settled in a currency other than the Company’s functional currency, and the Warrants meet all of the characteristics of a derivative instrument. The allocation is based on their fair value, and the residual amount was allocated among the Common Stock and the Convertible Notes Payable based on their relative fair values (see Note 7).





The Convertible Notes Payable were classified as long-term liabilities and were recorded at their initial relative fair value. The Convertible Notes Payable are presented net of unamortized discounts for the portions allocated to the Warrants, Common Shares and the beneficial conversion feature inherent in the instrument. The interest due on the Convertible Notes Payable is accrued to the value of the instrument.During 2010, interest of approximately $299 thousand was accrued to the convertible notes payable.





The Warrants were recorded as a liability, as mentioned above, with a corresponding discount to the Convertible Notes Payable, based on their fair values, and are revalued at each reporting date. Changes in the fair value are included in the Statement of Operations. During 2010 the fair value of the Warrants decreased by $1,947,000, of which $2,070,000 is recorded in the statement of operations in revaluation of warrants income (the primary drivers of this change are described in a table further on in this note) and $123 thousand is included in other comprehensive loss representing foreign currency translation differences.





The difference between the effective conversion rate of the Convertible Notes Payable as compared to the fair market value of the Company's common stock on the date of issuance represents a beneficial conversion feature. Thus, the Company recorded an additional discount to the Convertible Notes Payable with a corresponding increase in additional paid-in capital of $1,372,000. The aforesaid discount relating to the beneficial conversion feature is amortized to interest expense, using the effective interest method, over the four year life of the Convertible Notes Payable from the date of issuance. As of December 31, 2010, approximately $312 thousand of such discount has been amortized since the issuance in July 2008.
































-69-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 - Stockholders' Equity (cont’d)





C.
Common Stock (cont’d)











U.S. dollarsin thousandsInitial recording:Gross proceeds

$
3,650Issuance of Common Stock


(12
)APIC resulting from issuance of Common stock


(262
)Discount resulting from the issuance of Warrants


(1,828
)Discount resulting from the Beneficial Conversion Feature


(1,372
)Balance of Convertible Notes Payable at July 30, 2008

$
176








U.S. dollarsin thousandsMovement subsequent to issuance:Initial valuation at July 30, 2008

$
176Accrued interest


118Amortizations of discounts from closing through December 31, 2008


9Balance of Convertible Notes Payable at December 31, 2008


303Accrued interest


282Amortizations of discounts for the year ended December 31, 2009


59Balance of Convertible Notes Payable at December 31, 2009


644Accrued interest


299Amortizations of discounts for the year ended December 31, 2010


244Balance of Convertible Notes Payable at December 31, 2010

$
1,187








If the Convertible Notes Payable are not converted before July 31, 2012, the Company will need to pay a total of $3,621,000.











8.
During 2009 63,939 common shares were issued to Tikcro Technologies Ltd. for consultancy services. Shares in respect of 2010 have yet to be issued. See Note 10I.











-70-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 – Stockholders’ equity (cont’d)





C.
Common Stock (cont'd)








9.
During March 2010, the Company received an aggregate investment of NIS 12,265,000 (approximately $3.285 million) from a number of investors. In return, the Company allocated an aggregate amount of 4,157,500 shares, at a price per share of NIS 2.95 (approximately $0.78) and 4,157,500 non-registered warrants (the “Warrants”) to purchase 4,157,500 shares of common stock. The Warrants are exercisable at a price per share of NIS 4.25 (approximately $1.12) for four years. The net proceeds, after deducting the issuance costs of $591 thousand, were recorded in the additional paid in capital in exchange for the shares issued to the investors.





Additionally, the Company entered into an agreement with underwriters in connectionwithits private offering and issued 415,750 warrants (“Series 3/10”) that are exercisable into 415,750 common shares, $0.01 par value to the underwriters. The warrants can be exercised, either in part or inwhole, for a period of four years at an exercise price ofNIS 4.25 (approximately $1.12) each. As part of the agreement, the underwriters are entitled to receive a cash commission of 3% of the future proceeds of warrants exercised.


The Company recorded $226 thousand for the warrants in issuance costs as measured according to the Black-Scholes-Merton option-pricing model and an additional amount of $122 thousand was recorded as a liability for commission to underwriters.








10.
In November 2010, the Company filed a prospectus for a public offering on the TASE, offering to the public the following securities:





a.
Common stock – 5,634,970 quoted shares, $0.01 par value each.


b.
Series (3) Warrants – 2,817,485 quoted option warrants that are exercisable into 2,817,485 common shares until November 17, 2012, $0.01 par value, at an exercise price of NIS 3.69 (approximately $1.01) each.





c.
Series (4) Warrants – 2,817,485 quoted option warrants that are exercisable into 2,817,485 common shares until November 17, 2014, $0.01 par value, at an exercise price of NIS 4.43 (approximately $1.21) each.





d.
The marketable securities were offered to the public in 563,497 units that were composed of 10 ordinary shares, 5 Series (3) Warrants and 5 Series (4) Warrants, at a price of NIS 33 (approximately $9.03) per unit.





The offering was consummated on November 18, 2010 upon the issuance of 5,634,970 shares of Common Stock, 2,817,485 Series 3 Warrants and 2,817,485 Series 4 Warrants. The gross proceeds received by the Company totaled $5,104,000 (NIS 18,595 thousand). The expenses incurred in connection with the public offering totaled $908,000, of which $75 thousand was due to warrants granted to underwriters as discussed in section K below and an additional amount of $155 thousand was recorded as a liability for commission to underwriters. In addition the Company recorded a decrease in deferred stock issuance costs in an amount of $178 thousand to additional paid in capital.











-71-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 – Stockholders’ equity (cont’d)








D.
Treasury Stock





During August 2008, the Subsidiary purchased 1,812,756 Series 1 Warrants of the Company from a third party at a price of NIS 0.02 each. The Subsidiary exercised these warrants to common stock at a strike price of NIS 9.73 per share, paid to the Company by an equity investment by the Company in the Subsidiary. During the year ending December 31, 2009, the Company sold 1,812,756 shares of treasury stock, at an average price of NIS 3.38 (approximately $0.865) per share, and total proceeds of $1,568,000. Following the sale, the Company did not hold any shares of treasury stock. The difference between the total proceeds and the initial relative cost of the treasury stock in the amount of $3,383,000 was recorded as an increase to the accumulated deficit.





E.
Stock Option Plans





1.
The Company provides for direct grants of common stock, and common stock options to employees and non-employees through the 2004 Stock Option Plan (the 2004 Plan) and the 2007 Stock Option Plan (the 2007 Plan).





The Company’s stockholders approved the 2004 Plan in November 2004, following its adoption by the Company’s board of directors. Under the 2004 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, deferred stock, other stock-related awards and performance awards to officers, directors, employees, consultants and other persons who provide services to the Company. The total number of Company shares of common stock reserved and available for grant under the 2004 Plan was set at 2,024,003 upon its adoption. As of December 31, 2010, no options are available under the 2004 Plan.





In January 2007, the Company’s Board of Directors approved the 2007 Plan. Under the 2007 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, deferred stock, other stock-related awards and performance awards to officers, directors, employees, consultants and other persons who provide services to the Company. The total number of Company shares of Common stock reserved and available for grant under the 2007 Plan was set at 2,000,000 upon its adoption and was increased during 2010 by an additional 750,000. As of December 31, 2010, there are 852,250 options available under the 2007 Plan.





All options expire ten years after grant date and may be exercised following the employee’s termination by the Company for any reason other than cause, for a period of between 3-12 months. Vesting terms are not defined in the Plans but are determined by the Company’s board of directors at the time of the grant.





2.
The stock option plans were approved in accordance with Section 102 of the Israeli Income Tax Ordinance (for the Israeli employees) as a "capital track" plan, whereby the options will be deposited with a trustee for a period of at least two years when the options were granted.  The option recipients will pay tax deriving from the benefit at the time the shares are realized, but no expense related to them will be recognized for tax purposes by the Company.  The options to the consultants, which could not be recorded under Section 102 of the Israeli Income Tax Ordinance, will be taxed to their recipients as ordinary income, when the options are exercised, under Section 3(I) of the Israeli Income Tax Ordinance.








-72-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 – Stockholders' Equity (cont'd)





F.          Allotment of stock options to employees, directors and consultants of the Company


and the Subsidiary as of December 31, 2010





The expenses recorded in the statement of operations on account of stock-based transactions were $395 thousand and $240 thousand for the years ending December 31, 2010 and 2009, respectively, and $2,036 thousand for the development stage period (cumulative from inception).





The options that were granted in 2004 were with a par value exercise price. Due to the par value amount of $0.01, the fair value of these options was estimated to be equal to the Company’s share price at the grant date, based on stock issuances that took place surrounding the grant date.





The assumptions used in the valuation of the options granted in 2006, 2008, 2009 and 2010, based on the Black–Scholes-Merton model, are as follows:





Estimate valueExpected




of the stockaverage term of




price on theYear

Volatility

the option

Risk-free rate


grant date*2006


0.6

3 years


4.07%-5.00
%

$
0.83-$1.452008


0.6

10 years


6.3705
%

$
0.102009


0.8

10 years


4.9553
%

$
0.632010


0.9

7-10 years


4.9737
%

$
0.88





*
The market price is fixed in New Israeli Shekel that are translated at exchange rate on date of grant.





The fair value of options granted to non-employees has been computed and accounted for in accordance with ASC subtopic 505-50 and 718-10, and was measured according to the Black-Scholes-Merton option-pricing model with the parameters discussed in the table below, and unvested options are revalued at the end of each reporting period.





Year

Volatility

Contractual term

of the option
Share price as of December 31,
Risk-free rate2008


0.6

10 years
NIS 0.405


6.3705
%2009


0.8

10 years
NIS 2.435


4.9553
%2010


0.9

10 years-7
NIS 2.441


4.9737
%


























-73-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 – Stockholders' Equity (cont'd)





G.
Options outstanding





1.
The following table summarizes information about stock options outstanding as of December 31, 2010, except for milestone based options (see 3 below):





Options outstanding

Options exercisableWeighted









Weightedaverage









averageremaining


Weighted






remaining


Weightedcontractual


average

Aggregate




contractual


average
AggregateNumber


term


exercise

intrinsic

Number


term


exercise
intrinsicoutstanding


(years)


price

value (in thousands)

outstanding


(years)


price
value (in thousands149,888



4.00


$
0.01




149,888



4.00


$
0.0178,426



5.55


$
0.08




78,426



5.55


$
0.08890,112



7.92


$
0.33




651,471



7.92


$
0.33180,000



7.92


$
0.60




150,000



7.92


$
0.60724,000



8.92


$
0.84




375,000



8.92


$
0.8480,000



9.17


$
0.84




30,000



9.17


$
0.84168,750



9.17


$
0.93




56,252



9.17


$
0.932,271,176



8.03


$
0.56

$459


1,491,037



7.72


$
0.48

$321











Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of the Company’s common stock as of the reporting date.





RemainingNumber of




contractualoptions granted


Exercise price

term

Fair valueConsultants


424,148


$
0.01-$0.33

4-7.92 years

$
0.06-$1.18Directors


328,750


$
0.597-$0.93

7.92-9.17 years

$
0.04-$0.88Employees


1,518,278


$
0.08-$0.84

5.42-8.92 years

$
0.06-$1.60Total


2,271,176








The stock options with exercise prices fixed in New Israeli Shekel are translated at year-end exchange rates.

















-74-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 – Stockholders' Equity (cont'd)





G.
Options outstanding (cont'd)





2.           The following table summarizes the Company’s stock option activity during 2010:





WeightedNumber of


average exercisestock options


priceBalance outstanding at January 1, 2010


2,371,989


$
0.49Granted:CEO


-


$
-Directors


248,750


$
0.99Employees


-


$
-Forfeited


(137,500
)

$
0.61Expired


-


$
-Exercised


(212,063
)


0.30Balance outstanding at December 31, 2010


2,271,176


$
0.56








During 2008, a director and consultants exercised 208 thousand options at an exercise price of $0.01 per share. During 2010, 212 thousand options were exercised at an exercise price between $0.01 and $0.597 per share. For the years ending December 31, 2010 and 2009, the Company received $64 thousand and $0 thousand, respectively from the exercise of options, and additional paid-in capital increased accordingly. The total intrinsic value of options exercised during the years ended December 31, 2010 and 2009 was $105 thousand and $0 thousand.





On March 7, 2010, following the recommendations of the Compensation and Audit Committees, the Board of Directors appointed then current director Mr. Doron Nevo as Chairman of the Board, and approved a compensation package including an allocation of 168,750 options at an exercise price of NIS 3.51(approximately $0.94)  (the 22-day average closing price of the Company's shares on the TASE)  which shall vest over twelve calendar quarters, with an acceleration such that if he is removed from the position of Chairman (except for cause) during the first year, a total of 56,250 options will be vested, and if he is removed (except for cause) thereafter, whatever is already vested shall remain so, and an additional 14,063 options shall vest.


Additionally, the Board of Directors approved an allocation of 80,000 options at an exercise price of NIS 3.17 (approximately $0.84) to three directors.





The weighted average fair value of options granted for the years 2010, 2009 and cumulatively was $0.88, $0.51 and $0.43 per option, respectively.





3.
Performance based options





An additional grant of 150,000 options is subject to market and performance based conditions. No share-based payment expense has been recorded in the statement of operations with respect to this award of 150,000 contingent options due to the milestone not having been reached.These options will expire in April 2011.





-75-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 10 – Stockholders' Equity (cont'd)





G.
Options outstanding (cont'd)








4.          As of December 31, 2010, there was $153 thousand of unrecognized compensation cost, related to nonvested stock options granted under the Company’s various stock option plans. That cost is expected to be recognized as follows (in thousands):





Year ending December 31

U.S. Dollars in thousands2011

$
1132012


372013


3$
153





H.
On December 15, 2010 the Company has developed an option offering plan that includes 852,250 warrants for its employees, directors and consultants that are exercisable into 852,250 common shares, $0.01 par value. Of this amount, the board of directors approved 350,888 options, vesting over 16 calendar quarters from the date of board approval, to be allocated to twelve employees at an exercise price of NIS 2.85. As of December 31, 2010 the Company had not yet received approval from the TASE for this allocation and therefore the grant date was not authorized and no share-based payment expense has been recorded in the statement of operations. (See Note 14 below).





I.
On August 1, 2006, the Company signed an agreement with underwriters in connection with its IPO on the Tel Aviv Stock Exchange. Upon the signing of the agreement, the Company issued 300,000 warrants to the underwriters, par value $0.01. The warrants can be exercised, either in part or in whole, for a period of four years from the time that the closing price of the Company’s shares on the stock market for a period of 30 consecutive trading days shall be at least 130% of the price of the shares at the time of the offering, such that the exercise price of the warrants shall be 30% of the share price at the offering. These options expired on August 17, 2010.





Based on the Up & Call model, the fair value of each warrant that was granted is NIS 5.20 (approximately $1.19) and the total fair value of the warrants issued to the underwriters is $358 thousand. The parameters used in the valuation were the weekly volatility of 5.15% and a risk-free interest rate of 4%.





J.
As of July 2008, the Company entered into an agreement with Tikcro Technologies Ltd., whereby in exchange for consultancy services provided by it, the Company will pay Tikcro Technologies Ltd. an annual amount of $30 thousand and 63,939 common shares. During 2010, the Company began to receive these consultancy services. These services were valued in the amount of $48 thousand for the period ended December 31, 2010. The Company recorded as general and administrative expenses approximately $24 thousand for these services and approximately $24 thousand as an increase in the additional paid in capital.





K.
On March 28, 2010, the Company entered into an agreement with underwriters in connection withits private offering. Upon the agreement, theCompany issued 415,750 warrants (series 3/10) to the underwriters, par value $0.01. The warrants can be exercised, either in part or in whole, for a period of four years at an exercise price ofNIS 4.25 (approximately $1.12) each (See Note 10C above).





-76-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010








Note 10 – Stockholders' Equity (cont'd)





L.
On October 28, 2010, the Company signed an agreement with underwriters in connection with its public offering on the Tel Aviv Stock Exchange. Upon the signing of the agreement, the Company issued 197,224 warrants (series 4) to the underwriters, par value $0.01. The warrants can be exercised, either in part or in whole, for a period of four years at an exercise price of NIS 4.43 (approximately $1.21) each. As part of the agreement the underwriters are entitled to receive a cash commission of 3% of the future proceeds of warrants exercised. (See Note 10C above).





M.
Dividend Distribution Policy





In the Company’s prospectus published on August 3, 2006, the Company stated that in light of the fact that it had incorporated in the U.S., an agreement had not yet been reached with the clearing-house of the Tel Aviv Stock Exchange (“TASE”) concerning procedures to apply when the Company distributes dividends – specifically as it regards the withholding of tax under U.S. law and required reporting. Therefore, the Company committed not to distribute dividends or any other payment to stockholders until an agreement is formalized with the TASE on this matter. The Company further committed to act to finalize such an agreement as soon as possible. As of the balance sheet date, an agreement has not been finalized.





Note 11 - Taxes on Income





A.           Tax laws applicable to the Company





The Parent is subject to taxes under the laws of the United States and Israel. The Parent was registered as tax reporting company in Israel and will be taxed in accordance with the Treaty to Prevent Double Taxation between Israel and the US.


The Subsidiary is taxed under the Israeli Income Tax Ordinance and Income Tax (Inflationary Adjustments) Law - 1985 (the " Inflationary Adjustments Law").  Under the Inflationary Adjustments Law, the Subsidiary's results for tax purposes are measured after adjustment to changes in the Israeli CPI. On February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Period of Application) – 2008 (“the Amendment”) was passed by the Knesset. According to the Amendment, the Inflationary Adjustments Law will no longer be applicable subsequent to the 2007 tax year, except for certain transitional provisions.


Further, according to the Amendment, commencing with the 2008 tax year, the adjustment of income for the effects of inflation for tax purposes will no longer be calculated. Additionally, depreciation on fixed assets and tax loss carryforwards will no longer be linked to future changes in the CPI subsequent to the 2007 tax year, and the balances that have been linked to the CPI through the end of the 2007 tax year will be used going forward.


























-77-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 11 - Taxes on Income (cont’d)





B.           Tax rates applicable to the Company





1.           The Parent


The federal tax rates applicable to the Parent, which is incorporated in the United States, are the (progressive) corporate tax rates of up to 34%, which is the main tax rate.





At December 31, 2010, the Parent had net operating loss (“NOL”) carryforwards in the US amounting to $2,445 thousand, which will expire beginning in 2024 to 2030. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, in accordance with Internal Revenue Code, Section 382, the Company’s IPO and recent financing activities, may limit the Parent’s ability to utilize its NOL and credit carryforwards although the Parent has not yet determined to what extent.


Additionally, according to the Israeli tax authorities the Parent had net operating loss (“NOL”) carryforwards in the amount of NIS 7.5 million.





2.           The Subsidiary


The Subsidiary is taxed under the Israeli Income Tax Ordinance and Income Tax (Inflationary Adjustments) Laws - 1985 (the " Inflationary Adjustments Law").  Under the Inflationary Adjustments Law, the Subsidiary's results for tax purposes are measured after adjustment to changes in the Israeli CPI. On July 14, 2009, the Israeli Parliament (the Knesset) enacted an amendment to the Income Tax Ordinance (No. 147), the Law for Economic Efficiency, which stipulates, inter alia, that the corporate tax rate will be gradually reduced to the following tax rates: 2009 – 26%; 2010 – 25%; 2011 – 24%; 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015– 20% and 2016 and thereafter – 18%.  This amendment did not have a material effect on the financial position of the Company. At December 31, 2010, the Subsidiary had NOL carryforwards in Israel amounting to NIS 51.5 million (approximately $14 million) and capital loss carryforwards of NIS 12 million (approximately $3 million), which under the current tax law can be carried forward indefinitely.





The company selected 2009 as the "election year" in accordance with the Law for the Encouragement of Capital Investments -1959 (hereafter- the Encouragement Law). Income generated by a "Beneficiary Enterprise" will be exempt from tax for 10 years. The benefits are contingent upon compliance with the terms stated in the Encouragement Law, which includes the receipt of approval to be considered a technology company.  The company is in the process of obtaining such approval.





C.
The components of loss (income) before income taxes were:





Amountsaccumulatedduringdevelopment2010

2009

stageU.S. dollars in thousandsUS

$
(740
)

$
4,202


$
3,553Non-US


2,916



2,601



15,753$
2,176


$
6,803


$
19,306








-78-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 11 – Taxes on Income (cont'd)








D.
Income tax expense (benefit)





Income tax benefit attributable to income from continuing operations consists of the following:





Current


Deferred


TotalU.S. dollars in thousandsYear ended December 31, 2010:

$
-


$
-


$
-Year ended December 31, 2009:


-



-



-Amounts accumulated during development stage

$
-


$
-


$
-











Income tax expense (benefit) for the years ended December 31, 2010 and 2009 differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income as a result of the following:





Years ended December 31AmountsAccumulatedDuringDevelopment2010


2009


StageU.S. dollars in thousandsLoss before taxes on income


2,176



6,803



19,306Tax rate


34
%


34
%


34
%Computed “expected” tax benefit

$
(740
)

$
(2,313
)

$
(6,564
)Non-deductible stock-based compensation


116



86



625Fair valuation adjustment of Warrants


(601
)


1,053



(99
)Gain on revaluation of liability for commission to underwriters


(104
)


-



(104
)Foreign tax rate differential


262



208



993Other


2



2



16Change in valuation allowance


1,065



964



5,133Actual income tax expense (benefit)

$
-


$
-


$
-
































-79-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 11 – Taxes on Income (cont'd)


E. Deferred tax assets and liabilities





The types of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are set out as follows:





Years ended December 312010


2009U.S. dollars in thousandsDeferred tax assets:Net operating and capital loss carryforwards

$
4,045


$
3,042Deferred research & development charge


325



537Liability for accrued vacation pay


12



15Total gross deferred tax assets


4,382



3,594Valuation allowance


(4,374
)


(3,584
)Total net deferred tax assets


8



10Deferred tax liabilities:Asset for employee severance benefits, net


(8
)


(10
)Total gross deferred tax liabilities


(8
)


(10
)Net deferred tax asset

$
-


$
-











Because of the Company’s lack of earnings history, management believes that it is more likely than not that the Company will not realize the benefits of these deductible temporary differences. Accordingly, its deferred tax assets have been offset by valuation allowance at December 31, 2010 and 2009. The net change in the total valuation allowance for the years ended December 31, 2010 and 2009, was an decrease of $790 thousand, $847 thousand, respectively, and $4,374 thousand for the development stage period.








F.
Accounting for uncertainty in income taxes





For the years ended December 31, 2010 and 2009 and for the development stage period, the Company did not have any unrecognized tax benefits and thus, no interest and penalties related to unrecognized tax benefits were recognized. In addition, the Company does not expect that the amount of unrecognized tax benefits will change substantially within the next 12 months.


The Parent and its Subsidiary file income tax returns in the U.S. federal jurisdictions and non-U.S. jurisdictions. The Parent’s U.S. federal income tax returns are open to examination by the Internal Revenue Service for the tax years beginning in 2004. The Subsidiary's Israeli income tax returns remain subject to examination by the Israeli income tax authorities for the tax years beginning in 2007.

















-80-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 12 – Related Party Transactions





Year ended December 31,


Year ended December 31,


Cumulative from inception to December 31,2010


2009


2010U.S. dollars in thousandsBusiness consulting fees paid torelated  companies

$
81


$
3


$
155








A.
As of December 31, 2010, of the business consulting fees that was paid to related companies, $23 thousand is recorded in accrued expenses (See Note 9I).





B.
In May 2010, the Company purchased a Directors and Officers insurance policy for the Company, limited to a liability of five million dollars ($5,000,000) per claim and in aggregate during the term of the policy ($1,500,000 for US securities claims). The term of the policy is until May 21, 2011. The annual cost of the premium for the insurance policy is $19 thousand. Officers are not required to pay a deductible, while the deductible for the Company is $7.5 thousand throughout the world except for the USA and Canada, where the deductible for the Company is $50 thousand ($150 thousand for SEC-related claims).





C.
In July 2006, the Company approved the granting of letters of indemnification to directors and officers serving at that time and in the future (see Note 9E).





D.
As described in Note 9I, the Company entered into an agreement with Tikcro Technologies Ltd., an investor in the July 2008 private placement transaction, whereby it would receive consultancy services.





E.
On May 15, 2008, the Company executed a private placement allocation of 650,000 common shares to Clal Biotechnology Industries Ltd. (“CBI”) as described in Note 10C.





F.
On July 30, 2008, the Company carried out private placements with institutional investors (the “Investors”), whereby 3 investors received common stock, non-registered Convertible Notes Payable and Warrants as described in Note 10C.





G.
On March 7, 2010, following the recommendations of the Compensation and Audit Committees, the Board of Directors appointed current director Mr. Doron Nevo as Chairman of the Board, and approved a compensation package including an allocation of 168,750 options (subject to approval of the TASE) at an exercise price of NIS 3.51 (the 22-day average closing price of the Company's shares on the TASE) (approximately $0.94) which shall vest over twelve calendar quarters, with an acceleration such that if he is removed from the position of Chairman (except for cause) in the first year, a total of 56,250 options will be vested, and if he is removed (except for cause) thereafter, whatever is already vested shall remain so, and an additional 14,063 options shall vest. Additionally, he shall receive a cash payment of NIS 31,700 (approximately $8,458) per year paid quarterly, plus NIS 2,120 (approximately $566) per day in which he participates in meetings of the Board or any committee of which he is a member. He shall also receive a per diem of $750 plus expenses for overseas travel, up to 10 days per year without coordination with the Board.








Note 13 - Financial Instruments and Risk Management





A.           Concentration of credit risk





Financial instruments that may subject the Company to significant concentrations of credit risk consist mainly of cash and cash equivalents and deposits in respect of employee severance benefits.


Cash, cash equivalents and short-term deposits are maintained with major financial institutions in Israel. Deposits in respect of employee severance benefits are maintained with major insurance companies and financial institutions in Israel.





B.           Concentrations of business risk





The Company uses materials required for our research and development activities that are currently available from a limited number of sources. The Company believes that it will not experience delays in the supply of critical components in the future. If the Company experiences such delays and there is an insufficient inventory of critical components at that time, the Company's operations and financial results would be adversely affected.





-81-
 BioCancell Therapeutics Inc. and Subsidiary
 (Development Stage Company)
 Notes to the Consolidated Financial Statements as of December 31, 2010





Note 14 – Subsequent events





A.
In January 2011, the Subsidiary applied to the OCS for two additional research and development program grants with a total budget of NIS 18,661 thousand (covering 60% of expenses in Israel and 30% of expenses overseas) and totaling an anticipated grant of NIS 10,000 thousand. The Company has not yet received approval for the grants.





B.
On March 6, 2011, the Company issued options to purchase 350,888 shares of common stock, to twelve employees and consultants, who are not affiliates of the Company.








-82-






Item 9A. Controls and Procedures





Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act)) required by paragraph (b) of Rule 13a-15 or Rule 15d-15 of the Exchange Act, as of December 31, 2010, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Principal Financial Officer also concluded that, as of December 31, 2010, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.





Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the framework in Internal Control –Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2010 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.




During the year ended December 31, 2010, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





Item 9B.                      Other Information.





N/A














PART III




Item 10.  Directors, Executive Officers and Corporate Governance











DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES





Our current directors, executive officers and key employees and those of our subsidiary are identified in the table below.





Name

Age

PositionUri Danon


44

Chief Executive OfficerIra Weinstein


55

Chief Financial and Operating OfficerAbraham Hochberg (2)


72

Chief Scientific Officer and DirectorPatricia Ohana


55

Vice President of Clinical DevelopmentDoron Amit


36

Vice President of Business DevelopmentAviv Boim (2) (3)


43

DirectorHanoch Rappaport (1) (3)


44

DirectorDavid Schlachet (1) (2)


65

DirectorOrly Yarkoni (1) (3)


55

Director





(1)
Member of the Audit Committee(2)
Member of the Executive Committee(3)
Member of the Compensation Committee

















-83-








Biographical Information Regarding Directors, Executive Officers and Key Employees as of the Date of this Report




Uri Danon


Chief Executive Officer





In November 2009, Mr. Uri Danon began serving as our Chief Executive Officer. Mr. Danon served as our President between 2005 and 2006, and prior to that, was Chief Executive Officer of Atox Bio. He previously managed international projects for Teva Pharmaceutical Industries, Ltd., including the development of the drug Copaxone in a solution in pre-filled syringes (a drug with sales of over $3 billion per year), and was CEO of Epigenesis, Ltd., a cell therapy development company. He holds an MBA in Marketing from Bar Ilan University, and a B.Sc. in Industrial Engineering and Management from Tel Aviv University.







Ira Weinstein


Chief Financial and Operating Officer





Mr. Weinstein has served as our Chief Financial Officer and as our Chief Operating Officer since May 2007. Prior to taking his position with us, Mr. Weinstein was Chief Executive Officer of Hapto Biotech (Israel) Ltd. from April 2004 to April 2007, and was Chief Executive Officer of Incure Ltd. from January 2004 to February 2005. Prior to these positions, Mr. Weinstein served as Chief Financial Officer and Chief Operating Officer of Keryx Biopharmaceuticals, Inc., a NASDAQ-listed public company. Mr. Weinstein also has served as a consultant to the New York State Department of Health and has held teaching positions at Baruch College, Touro College, St. John’s University and Coventry Polytechnic University. Mr. Weinstein holds an M.B.A. in Management and a Bachelor of Business Administration degree in Accounting from Baruch College, City University of New York.


On February 21, 2011, Mr. Weinstein notified us of his intention to resign his position, effective June 20, 2011.







Abraham Hochberg


Chief Scientific Officer and Director





Professor Hochberg has served as our Chief Scientific Officer since December 2005, and as a member of our Board of Directors since March 2006. From July 2006 to October 2009, he served as our Chairman of the Board of Directors. Professor Hochberg has been a biochemist and molecular biologist in the Department of Biological Chemistry at the Hebrew University of Jerusalem for the past 48 years. Professor Hochberg is recognized as a world-leading expert on the H19 gene and is considered to have made many seminal contributions in the fields of imprinted genes, the H19 gene, the IGF2 gene and oncology. Professor Hochberg earned a Ph.D. in Molecular Biology, summa cum laude, from the Hebrew University of Jerusalem. He also holds a B.A. in Archeology from the Hebrew University of Jerusalem. As our technology is based on over 15 years of Prof. Hochberg’s research, he is qualified to serve on our Board by virtue of his unparalleled understanding of our business.







Patricia Ohana


Vice President of Clinical Development





Dr. Ohana has served as our Vice President of Clinical Development since September 2006. Dr. Ohana also has been a biochemist and molecular biologist in the Department of Biological Chemistry at the Hebrew University of Jerusalem for the past 26 years. Dr. Ohana holds a Ph.D. in Biological Chemistry, a M.Sc. in Chemistry and a B.Sc. in Chemistry, each from the Hebrew University of Jerusalem.





-84-




Aviv Boim


Director





Mr. Boim has served as a director since August 2008. Mr. Boim previously served as Chief Executive Officer of Tikcro Technologies, Ltd., and Orckit Communications Ltd., where he held the position of Chief Financial Officer for nearly ten years. Prior to joining Orckit, Mr. Boim was a banker with BT Alex. Brown Incorporated, an investment banking firm. Mr. Boim holds a B.A. and a M.A. in economics and management from Tel Aviv University and an L.L.B. from Tel Aviv University Law School. Mr. Boim currently serves on our Board of Directors as a representative, and is an affiliate, of Tikcro Technologies, Ltd. See “Security Ownership of Certain Beneficial Owners and Management — Voting Agreement” and “Certain Relationships and Related Transactions” below. Mr. Boim is qualified to serve on our Board of Directors by virtue of his investment banking and finance knowledge and experience which are relevant to a company in our position.





Hanoch Rappaport


Director





Mr. Rappaport has served as a director since November 2004. Mr. Rappaport serves as the Chief Financial Officer of the Provident Fund of the Employees of the Hebrew University of Jerusalem Ltd. Mr. Rappaport also served as corporate credit officer at Bank Hapoalim and as Investment Manager at A. Heifetz & Co. Mr. Rappaport holds a B.A. in Economics and Political Science from Bar-Ilan University and an M.B.A. from the Tel Aviv International School of Management. Mr. Rappaport currently serves as a member of our Board of Directors and is an affiliate of the Provident Fund of the Employees of the Hebrew University of Jerusalem Ltd. See “Security Ownership of Certain Beneficial Owners and Management” and “Certain Relationships and Related Transactions” below. Mr. Rappaport is qualified to serve on our Board of Directors by virtue of his finance knowledge and experience.








Orly Yarkoni


External Director





Ms. Yarkoni has served as a director since January 2010. She has amassed over 20 years in the insurance industry, most recently as CEO of IDI (Direct Insurance), Ltd. She has served as a member of the Board of Governors of the Israeli Securities Authority, and currently serves as a director of Peninsula Finance, Ltd., Menorah Mivtachim Insurance, Ltd., Ma'ayanot Eden, Ltd., Plasto-Sac, Ltd. and Amot Investments, Ltd. Ms. Yarkoni holds a B.Sc. (cum laude) in Mathematics from the Hebrew University of Jerusalem, Israel, and is a member of the Israeli Association of Actuaries. Ms. Yarkoni is qualified to serve on our Board of Directors by virtue of her vast business knowledge and experience, especially with publicly-traded companies.








David Schlachet


External Director





Mr. Schlachet has served as a director since January 2010. He was previously CEO of Syneron Medical Ltd., Managing Partner of Biocom (a venture capital fund specializing in the life sciences area), senior VP and CFO of Strauss Elite Holdings, VP Finance & Administration of the Weizmann Institute of Science, and CEO of the Weizmann Institute's technology transfer company, Yeda R&D Co. Ltd. Mr. Schlachet holds a B.Sc. in chemical engineering from the Technion, and an MBA (Finance) from the Tel Aviv University. Mr. Schlachet is qualified to serve on our Board of Directors by virtue of his vast business, scientific and finance knowledge and experience, particularly with biotechnology start-up companies.











-85-





Section 16(A) Beneficial Ownership Reporting Compliance





Section 16(a) of the Exchange Act requires the Company’s executive officers, directors and persons who beneficially own more than 10% of a registered class of the Company’s equity securities (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Such executive officers, directors and greater than 10% beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms filed by such reporting persons.





Based solely on the Company’s review of such forms furnished to the Company and written representations from certain reporting persons, the Company believes that the Reporting Persons have complied with all applicable filing requirements during the fiscal year ended December 31, 2010, with the following exceptions:





Name

Number of Late Insider Reports


Number of Transactions Not Reported on a Timely Basis


Failure to File Required FormsOrly Yarkoni


2



1



-David Schlachet


2



1



-Hanoch Rappaport


1



1



-Doron Nevo


4



4



-Aviv Boim


1



1



-Tikcro Technologies, Ltd.


-



3



2Clal Biotechnology Industries, Ltd.


1



1



-








CORPORATE GOVERNANCE





Our Board of Directors and management are committed to responsible corporate governance to ensure that the Company is managed for the long-term benefit of its stockholders. To that end, the Board of Directors has adopted corporate governance policies and practices in accordance with SEC rules, including the requirements of the Sarbanes-Oxley Act of 2002. Our Board of Directors and management intend to periodically review and update, as appropriate.





In addition, as a result of the listing of our securities on the TASE, we are subject to certain provisions of the Israeli Securities Law — 1968. Pursuant to Section 39A of the Israeli Securities Law, rules and regulations of the Israeli Companies Law — 1999 listed in the Fourth Schedule apply to issuers incorporated in jurisdictions outside Israel which offer securities to the public in Israel. Under Articles V, VI, VII, VIII, IX, XI and XII of our Amended and Restated Certificate of Incorporation, we are subject to such provisions of the Israeli Companies Law — 1999 and the Israeli Securities Regulations to the extent permitted by Delaware law.





Number of Directors; Election; Removal; Filling Vacancies;





Our Second Amended and Restated Bylaws provide that our Board of Directors shall consist of at least two, and no more than nine, members. Pursuant to an Irrevocable Voting Agreement, certain of our stockholders have agreed to vote their shares of our common stock in favor of nominees for election to our Board of Directors appointed by such stockholders. See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Voting Agreements”.





The Board of Directors nominates for election at annual and/or special shareholder meetings individuals to serve as directors of the Company and may elect individuals to fill any vacancies on the Board.





Pursuant to Sections 95 and 121(c) of the Israeli Companies Law and Article VI of our Amended and Restated Certificate of Incorporation, we are subject to certain procedural and board composition requirements. A director that holds the office of Chairman of the Board of Directors may not also hold the office, or be granted the powers of, the Chief Executive Officer, unless authorized in accordance with Section 121(c) of the Israeli Companies Law. Section 121(c) provides that the stockholders at a general meeting of a public company may resolve that for a period of no more than three years the Chairman of the Board of Directors may be authorized to fulfill the duties of the Chief Executive Officer, provided that , in counting the votes at the meeting at least one of the following is true: (i) the majority must include at least two-thirds of the stockholders who are not holders of control in the corporation present at the vote and abstaining votes must not be taken into account in counting the votes of such stockholders; or (ii) the total of opposing votes from among the stockholders referenced in subsection (i) does not exceed 1% of all of the voting rights in the corporation.





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Director Independence Under Israeli Law
 
 Our common stock is listed on the TASE and trades under the symbol "BICL".  As a requirement of listing on the TASE and  pursuant to Sections 239 through 249A of the Israeli Companies Law, we must comply with certain director independence requirements. These requirements are addressed in Article VI of our Amended and Restated Certificate of Incorporation.





Our Board of Directors must at all times include at least two directors who are elected by stockholders where at least one of the following is true: (i) the majority of the votes represented at the stockholders’ meeting includes at least one-third of all of the votes of the stockholders who are not holders of control in the corporation and who participate in the voting (with abstentions not being included in the total votes of the foregoing stockholders); or (ii) the total of opposing votes from among the stockholders referenced in subsection (i) does not exceed 1% of all of the voting rights in the corporation. Directors elected in accordance with this provision are deemed to be “independent directors” (as long as certain other requirements are met, as described below).





For purposes of this provision, “control” is defined in the Israeli Companies Law as the ability to direct the activity of the corporation, and a person shall be presumed to control a corporation if he holds 50% or more of the means of control of the corporation such as the right to vote at a general meeting or a corresponding body of the corporation or the right to appoint directors or the general manager of the corporation. If at the time of the appointment of an independent director, all of the members of the board of directors are of one gender, the second independent director shall be of the other gender.





Any vacancy in the office of an independent director may be filled only by the stockholders and may not be filled by the remaining directors. If at any time there are fewer than two independent directors, Board of Directors must call a special stockholders’ meeting for the election of independent directors. An independent director may not be removed from office without cause. An independent director is required to be a resident of the State of Israel, provided that a public company, the shares of which have been offered to the public outside of Israel, or are listed on a stock exchange outside of Israel, may appoint an independent director who is not an Israeli resident.





An independent director must have professional qualifications or accounting and financial expertise, and at least one of the independent directors must have accounting and financial expertise.





No individual may be appointed as an independent director if, at the time of appointment or at any time during the preceding two years, he, his relative, partner, employer or a corporate body of which he is a controlling party had an interest in the corporation, in a person who was a controlling party of the corporation at the time of the appointment, or in another corporate body. For the purposes of this provision, (i) “interest” means an employment relationship, commercial or professional ties in general or control, as well as service as an officer, other than service as a director who was appointed as an independent director in a corporation that is due to offer shares to the public for the first time, and (ii) “other corporate body” means a corporate body in which the corporation or controlling member of it is a controlling member at the time of the appointment or during the two years before the time of appointment.





A director in a corporation cannot be appointed as an independent director in another corporation if at that time a director of the other corporation serves as an independent director of the first corporation. An independent director may not receive any compensation from the corporation, except as determined by applicable law and except for insurance coverage and indemnification by the corporation’s bylaws or as determined by other applicable law. An individual cannot be appointed as an independent director if he holds any other position or owns any business which might give rise to a conflict of interest with his role as a director, or if such circumstances might harm his ability to act as a director. An individual cannot be appointed as an independent director if he is a member of the Israel Securities Authority or an employee thereof, or if he is a member of the board of directors or an employee of an Israeli stock exchange.





A general meeting of our stockholders at which the appointment of an independent director is on the agenda may only be convened if the nominee has declared that he fulfills the conditions required for being appointed as an independent director.





Pursuant to these requirements, two independent directors, Orly Yarkoni and David Schlachet, serve on our Board of Directors. Other than through their current positions as independent directors on our Board of Directors, neither such director has had any employment relationship with us, has had any commercial or professional ties in general or through control or has served as one of our executive officers. We have no knowledge of the ownership by either director of any securities issued by us or owned by our wholly owned subsidiary, except for options to each of the directors to purchase 30,000 shares of our common stock, as approved by our Board of Directors and a general meeting of our stockholders.





In addition, our Amended & Restated Certificate of Incorporation requires that at least one independent director sit on each committee of our Board of Directors. David Schlachet is a member of our audit and executive committees. Orly Yarkoni is a member of our audit and compensation committees. Our other directors are not considered to be independent directors under Israeli law.





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The term of office of an independent director is three consecutive one-year terms, and we may appoint an incumbent independent director for an additional three consecutive one-year terms. If our Board of Directors learns of a suspicion that anindependent director no longer meets the condition required under the applicable law for his appointment, or that he has violated his fiduciary duty of loyalty, the board of directors shall discuss the matter at the meeting first convened after it learned of the matter. If our Board of Directors determines that the independent director no longer meets a condition required under applicable law for his appointment or that he has violated his fiduciary duty of loyalty, than the board of directors must call a special meeting of our stockholders for the removal of that independent director. The reasons of our Board of Directors must be presented at the meeting of our stockholders, and the independent director must be given a reasonable opportunity to present his position; the decision of our stockholders to terminate an independent directors’ term of office must be adopted with the same majority that was necessary for his appointment.





An Israeli court may, pursuant to the application of a director or stockholder, order the removal of an independent director if it determines that the director has ceased to fulfill one of the conditions required under the Israeli Companies Law for his appointment, or that he has committed a breach of a fiduciary duty to the corporation.





For a period of two years following the termination of an independent director, a corporation may not directly or indirectly enter into any employment, consulting or other arrangement for fees with such person, including a corporation controlled by such person, and such person may not serve as a director or officer of the corporation.





Director Independence Using an Independence Definition of a National Securities Exchange





We are not listed as an issuer, nor have we applied to be listed as an issuer, on any U.S. national securities exchange or inter-dealer quotation system. For purposes of compliance with applicable securities rules, the following describes the independence standards required by the NASDAQ Stock Market, Inc., and assesses whether our directors would be considered to be independent directors under NASDAQ’s independence standards were they so required.





An independent director is “a person other than an executive officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” Under NASDAQ Rule 5605(a)(2), an independent director may not: (i) have been employed by the company or its subsidiaries or parent company during the preceding three years; (ii) have received, or had a family member that received, compensation in excess of $120,000 from the company during any twelve month period during the preceding three years (other than for board or committee services, benefits under a retirement plan or payments to a family member who is a non-executive employee of the company); (iii) have had a family member that was an executive officer of the company during the preceding three years; (iv) have received from or given to the company during the current and three preceding years, either directly or through family members or entities under his control, any property or services totaling the greater of $200,000 or 5% of the recipient’s gross revenues for that year, unless the payments arose from investments in the company’s securities or a non-discretionary charitable contribution matching program; (v) be employed or have been employed during the last three years, or have a family member who is employed or was employed, as an executive officer of another company where any of the issuer’s executive officers sat on the compensation committee; or (vi) be or have a family member who is a partner at the company’s outside auditor or was a partner or employee of the company’s outside auditor who worked on the company’s audit at any time during the preceding three years. Share ownership in a company will not by itself disqualify a director from being independent.





Under NASDAQ rules, at least a majority of the members of a listed company’s board of directors must be independent. We have determined that each of Hanoch Rappaport, David Schlachet, Orly Yarkoni and Aviv Boim are independent under NASDAQ rules and, as a result, we currently comply with the NASDAQ independence standards for board of directors composition.





Each company listed on NASDAQ must appoint an audit committee of at least three members and adopt an audit committee charter describing the committee’s responsibilities for oversight of accounting and financial issues. All directors on the audit committee must be independent according to the definition described above. As of the date of this report, our audit committee would meet these standards, since all three members of our audit committee, Orly Yarkoni, David Schlachet and Hanoch Rappaport, would be deemed to satisfy the NASDAQ independence requirements for audit committee purposes.





Companies listed on NASDAQ are not required to maintain standing compensation or nomination committees. They may instead rely upon a majority of independent directors sitting on the board of directors to discharge the duties of such committees, such as setting the compensation of executive officers and the nomination of directors. If the board chooses to appoint a compensation or nomination committee, however, then the committee must be comprised of entirely independent directors. The compensation committee of our Board of Directors would meet NASDAQ’s standards for independence, since all three members of our compensation committee, Aviv Boim, Hanoch Rappaport and Orly Yarkoni, would be deemed to satisfy the NASDAQ independence requirements.





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Director Liability





We are subject to Sections 252 through 256 of the Israeli Companies Law, which are addressed in Article XII of our Amended and Restated Certificate of Incorporation. These sections provide that: (i) an officer owes a duty of care to the corporation as provided in Sections 35 and 36 of the Civil Wrongs Ordinance, (ii) an officer shall act with the standard of proficiency which a reasonable officer, in the same position and in the same circumstances, would act; and (iii) an officer shall owe a fiduciary duty to the corporation, and shall act in good faith and for the benefit of the corporation. We may approve, subject to the applicable provisions of the Israeli Companies Law with respect to transaction approval procedures, an act that would otherwise be deemed a violation of an officer’s fiduciary duty to the corporation if (1) the officer acted in good faith and neither the act nor the approval of the act prejudices the corporation, and (2) the officer disclosed the essence of his personal interest in the act, including any substantial fact or document, a reasonable time before the date of the discussion of the approval.







Business Combinations; Interested Transactions





Pursuant to Sections 270(4) and 275 through 282 of the Israeli Companies Law, and in accordance with Section 6.4 of our Amended and Restated Certificate of Incorporation, we may not enter into an “interested transaction” unless the transaction is approved by the following in the following order: (i) the audit committee of our Board of Directors, (ii) our Board of Directors; and (iii) the meeting of stockholders, on condition that one of the following applies: (A) the majority of the votes at the meeting of stockholders includes at least one-third of all of the votes of stockholders who do not have a personal interest in the approval of the transaction and who are participating in the vote (abstentions shall not be included in the total of the votes of such stockholders), or (B) the total of opposing votes from among such stockholders does not exceed 1% of all the voting rights in the corporation. For purposes of this provision, “personal interest” means a personal interest of a person in an action or a transaction of a corporation including a personal interest of his relative of and of another corporation in which he or his relative are interested parties, excluding personal interests deriving only from the holding of stock.





The term “interested transaction” means an extraordinary transaction of a public company with its controlling stockholder (as defined in Sections 1 and 268 of the Israeli Companies Law), or an extraordinary transaction of a public company with another person in whom the holder of control has a personal interest, including a private offering in which the holder of control has a personal interest and also a contract of a public company with its holder of control or such holder’s relative, if he also is an officer of the corporation, with respect to his service and employment conditions, and if he is an employee of the corporation but is not an officer, then with respect to his employment by the corporation.





In addition, certain procedures must be followed by any stockholder voting on an interested transaction, or who has a personal interest in the interested transaction, and by any director who has a personal interest in the interested transaction.





We are governed by the Israeli Securities Regulations (Transactions between a Company and its Controlling Shareholder) — 2001 to the full extent permitted by Delaware law. The Israeli Securities Regulations generally govern transactions between a company and a controlling stockholder and the stockholders’ meetings convened for the purpose of approving a transaction with a controlling stockholder. For purposes of these provisions, the term “controlling stockholder” is defined in the Israeli Companies Law. The regulations require that the company give notice to the stockholders of a transaction with a controlling stockholder and that the company provide a transaction report containing all relevant details of the transaction. The regulations govern the contents of the notice and the transaction report and provide that the Israel Securities Authority may deliver a directive to the company requesting that the company amend the transaction report.





In connection with the closing of a private placement of our securities in July 2008, certain of our stockholders entered into an Irrevocable Voting Agreement regarding the election of certain of our directors. Because these parties collectively hold 25% or more of the voting rights of our stockholders (and no other stockholder holds more than 50% of the voting rights), the Israeli Securities Authority regards these parties to have formed a control block under the Israeli Securities Regulations, and as a result an exceptional transaction between us and any of these parties would be regarded as an interested transaction. For more information regarding the Irrevocable Voting Agreement, see “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Voting Agreements”.







Meetings of Stockholders





Pursuant to Sections 87 and 89 of the Israeli Companies Law and Article V of our Amended and Restated Certificate of Incorporation, we must comply with certain requirements regarding meetings of our stockholders. A notice of any annual or special meeting of our stockholders must be accompanied by a form of proxy card setting forth the resolutions to be presented by our Board of Directors for a vote at such meeting. In addition, the Israeli Companies Law provides that stockholders in a public company may vote at a stockholders’ meeting by means of a voting paper in which the stockholder indicates how he votes on resolutions relating to: (i) the appointment and removal of directors; (ii) approval of acts or transactions requiring the approval of the general meeting pursuant to Sections 255 and 268 through 275 of the Israeli Companies Law; (iii) approval of a merger pursuant to Section 320 of the Israeli Companies Law; (iv) any other matter with respect to which the company’s charter provides that decisions of the general meeting also may be passed by means of a voting paper; and (v) other matters prescribed by the Israeli Minister of Justice pursuant to Section 89 of the Israeli Companies Law.


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Pursuant to Section 88 of the Israeli Companies Law which we have adopted in Article V of our Amended and Restated Certificate of Incorporation, the Board of Directors and any person at the request of whom the Board of Directors convenes a stockholders meeting, may approach the stockholders in writing through the Company, in order to convince them to vote in a certain manner on the resolutions set forth in clauses (i) to (v) above. The Company is then required to send the position notification to its stockholders. If the agenda of a stockholders meeting includes any of the resolutions set forth in clauses (i) to (v) above, a stockholder may approach the Company and request to send a position notification on his behalf to the other stockholders. The distribution of such position notifications is subject to certain technical requirements set forth in regulations enacted by virtue of Section 89 of the Companies Law.





Pursuant to Section 2.4 of our Second Amended and Restated Bylaws, each notice of a stockholders meeting shall be given, personally or by mail, not fewer than the minimum number of days required for public companies under the Israeli Companies Law and all regulations provided thereunder, provided that such number of days is not less than the minimum number of days required under Delaware law.





Each beneficial stockholder whose shares are held by a bank or a member of the TASE and are registered on the books of the company shall be permitted to participate at the meeting and to vote such stock by proxy.





Committees of the Board of Directors; Audit Committee, Compensation Committee and Executive Committee





The Board of Directors participates in establishing and reviewing corporate objectives and strategies, and evaluates and approves significant policies and proposed major commitments of corporate resources. Management keeps the directors informed of Company activity through regular written reports and presentations at Board and committee meetings.





In addition, our Board of Directors may designate committees of the Board, determine the obligations of any such committee and identify such powers as our Board of Directors may delegate to a committee.





Pursuant to Section 114 through 117 of the Israeli Companies Law and Article VII of our Amended and Restated Certificate of Incorporation, our Board of Directors must appoint an audit committee comprised of at least three directors. The members of our audit committee must include two independent directors, and may not include (i) the Chairman of our Board of Directors, (ii) any director who is either employed by, or provides services to the company on a regular basis (other than in the capacity as a director), or (iii) any director who is either a controlling stockholder of us or any relative of a controlling stockholder.





Under the Israeli Companies Law, the audit committee must have the following duties: (i) to identify deficiencies in the management of the company in consultation with its Internal Auditor and auditing auditors, and recommending corrective measures if needed; and (ii) to consider the approval of actions as set forth in Sections 255 and 268 through 275 of the Israeli Companies Law, including an interested transaction.





The charter of our audit committee provides that our audit committee will be appointed by our Board of Directors and will oversee the following subjects: internal controls and risk management; internal audit; auditors, compliance, reporting responsibilities; and approval of transactions. Our audit committee is currently composed of three members: Orly Yarkoni, David Schlachet and Hanoch Rappaport.





The audit committee is required to pre-approve the audit and non-audit services performed by the Company’s independent auditor in order to assure that the provision of such services does not impair the auditor's independence. Unless a type of service to be provided by the independent auditor has received general pre-approval by the audit committee, it will require such committee’s specific pre-approval. Any proposed services exceeding pre-approved cost levels require specific pre-approval by the audit committee.  Certain audit related services, tax services, and other services have received general pre-approval by the audit committee, as provided in the audit committee charter. Requests or applications to provide other services that require specific pre-approval by the audit committee are submitted to the audit committee by both the independent auditor and the Chief Financial Officer and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC's rules on auditor independence.





Our Board of Directors also maintains a compensation committee whose duty is to make recommendations to our Board of Directors regarding employee and director compensation issues, including the compensation of new executives and directors, material changes to the compensation of current executives and directors, and the awarding of employee stock options. Our compensation committee is currently composed of three members, Aviv Boim, Hanoch Rappaport and Orly Yarkoni.





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Upon and as a condition to the closing of the private placement of our securities to Clal Biotechnology Industries Ltd., Tikcro Technologies Ltd. and Provident Fund of the Hebrew University Ltd. in July 2008, our Board of Directors appointed an executive committee initially consisting of four members of the Board: Professor Hochberg, an external director (currently DavidSchlachet), and the members of our Board of Directors nominated by each of Clal Biotechnology Industries Ltd. (currently vacant) and Tikcro Technologies Ltd. (currently Aviv Boim). As required under the July 2008 private placement agreements, approval of our Board of Directors of the consummation of any material transaction involving us, the adoption of our annual budgets and any matters relating to our investment policies and working plan, are subject to the approval of our executive committee.





We do not maintain a standing nominating committee of our Board of Directors.





The Board of Directors as a whole, and each of the committees of the Board separately, has authority to retain and terminate such independent consultants, counselors or advisors as each shall deem necessary or appropriate.





Each of our audit, executive and compensation committees has a written charter adopted by our Board of Directors that establishes policies and procedures for such committee in accordance with applicable corporate governance rules and regulations. The charters are available on our website at www.biocancell.com, and free of charge in print to any interested party that requests them.





Audit Committee Report





In connection with the preparation and filing of our Annual Report on Form 10-K for the year ended December 31, 2010:





(1)           The audit committee reviewed and discussed the audited financial statements and related footnotes with management and the independent registered public accounting firm. Management represented to the audit committee that the Company’s financial statements were prepared in accordance with generally accepted accounting principles;





(2)           The audit committee discussed with the independent registered public accounting firm the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380),1 as adopted by the Public Company Accounting Oversight Board in Rule 3200T;





(3)           The audit committee received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm's communications with the audit committee concerning independence, and has discussed with the independent registered public accounting firm the independent registered public accounting firm's independence; and





(4)           Based on the review and discussions referred to above, the audit committee recommended to the Board of Directors that the audited financial statements be included in ourAnnual Report on Form 10-K for the year ended December 31, 2010.





Submitted by the members of the audit committeeOrly YarkoniDavid SchlachetHanoch Rappaport





Meetings of the Board of Directors and its Committees; Annual Meeting Attendance





During the fiscal year ended December 31, 2010, there were 19 formal meetings of the Board of Directors. All directors attended more than 75% of the meetings held for which they served as directors. We do not have a Board attendance policy. In 2010, the executive committee had six formal meetings, the audit committee had eleven formal meetings and the compensation committee had five formal meetings.





The Company encourages its directors to attend the annual meeting of stockholders each year.





Communications with Board of Directors





Any interested party desiring to communicate with the Board of Directors or with any director regarding the Company may write to the Board of Directors or the director, c/o Avraham Hampel, Office of the Secretary, BioCancell Therapeutics Inc., Beck Science Center, 8 Hartom St, Har Hotzvim, Jerusalem 97775 Israel. The Office of the Secretary will forward all such communications to the director(s). Interested parties may also submit an email by filling out the email form on the Company’s website at www.biocancell.com.


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Internal Auditor





We are subject to certain Israeli laws regarding our internal auditor. We must have an internal auditor appointed by our Board of Directors based upon the proposal of our audit committee. The internal auditor must be a natural person who is not (i) an interested party (as interested under applicable law), or a relative of such interested party, (ii) an officer of the company or a relative of any officer of the company, or (iii) the company’s auditing accountant or its designee.





The internal auditor must perform his duties consistent with Sections 3(a), 4(b), 8 through 10, 14(b) and 14(c) of the Israeli Internal Audit Law, 1992, subject to the provisions of the Israeli Companies Law. The Israeli Internal Auditing Law governs internal auditing in public entities such as governmental offices, governmental companies and statutory institutes. The Israeli Companies Law applies seven general sections from the Israeli Internal Auditing Law on the internal auditor of a public company, which sections relate to the Internal Auditor’s residence, experience, education and criminal record, the internal auditor’s professional standards, restrictions over the internal auditor’s additional positions and conflicts of interest, the internal auditor’s authority, the internal auditor’s report as evidence and permission to expand and/or preserve the internal auditor’s authority by the company, subject to Sections 146 through 153 of the Israeli Companies Law.





The internal auditor must submit periodic or annual audit plans to our audit committee or to our Board of Directors, as determined by our Board of Directors, for its advance approval. The Chairman of the Board of Directors or the chair of our audit committee may delegate to the internal auditor additional audit duties for urgent examination in addition to the audit plan, in which case the findings will be reported to the appointing officer. The internal auditor must, among other duties, audit our compliance with applicable laws and proper business practices. The internal auditor must report his findings to the Chairman of the Board of Directors, the chairman of our audit committee or our general manager.





The internal auditor’s term in office may not be terminated without his agreement, and he shall not be suspended from office, unless our Board of Directors determines to terminate the internal auditor based upon the recommendation of our audit committee and after the internal auditor was given a reasonable opportunity to state his case before our Board of directors and before our audit committee. Notwithstanding any other provision set forth in our Amended and Restated Certificate of Incorporation or Second Amended and Restated bylaws, the majority of our entire Board of Directors shall constitute a quorum for the termination of office of the internal auditor by our Board of Directors.







Stockholders’ Rights to Examine Books and Records





Pursuant to Sections 184 and 185 of the Israeli Companies Law, our stockholders have the right, upon written request, to receive copies of the minutes of meetings of stockholders, our stock ledger, copies of our governing documents, and a list of our stockholders. Stockholders also have the right, upon written request setting forth the purpose thereof, to receive copies of any document relating to any act or transaction requiring the consent of stockholders pursuant to Sections 255 and 268 through 275 of the Israeli Companies Law. We may refuse a stockholder’s request if we, acting through our Board of Directors, believe that such demand was not made in good faith or that the requested documents include a commercial secret or patent or that the disclosure would otherwise have an adverse effect on the corporation.







Compromises and Arrangements with Creditors and Stockholders





Pursuant to Article XI of our Amended and Restated Certificate of Incorporation, whenever a compromise or arrangement is proposed between a company and its creditors or any class of them and/or between the company and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application of the company or of any creditor or stockholder, or on the application of any receiver or receivers appointed for the company under the provisions of Section 291 of Title 8 of the Delaware Code, or on the application of trustees in dissolution or of any receiver or receivers appointed for the company under the provision of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, or of the stockholders or class of stockholders, as the case may be, to be summoned in such manner as the court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders, as the case may be, agree to any compromise or arrangement and to any reorganization of the company as a consequence of such compromise or arrangement, such compromise or arrangement and the reorganization shall, if sanctioned by the court to which the application has been made, be binding on all creditors or class of creditors, or on all of the stockholders or class of stockholders and on the company.







Corporate Action without a Stockholder Meeting





Under Section 4.2 of our Amended and Restated Certificate of Incorporation, if our stockholders take action by written consent, we will be required to give prompt notice of such action to any stockholder who did not execute such written consent.





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Special Tender Offers; Forced Sale of Shares


Sections 328 through 340 and Section 342A of the Israeli Companies Law related to special tender offers and forced sales of shares are applicable to us and are addressed in Article IX of our Amended and Restated Certificate of Incorporation. Such sections provide that, in a public company, no purchase shall be affected as a result of which a person shall become a holder of a control block (25% of the voting rights of the company), if there is no such current holder in the company, and no purchase shall be effected as a result of which the purchaser’s holding shall increase above 45% of the voting rights of the company, if there is no other person currently holding more than 45% of the voting rights in the company, other than by way of a special tender offer in accordance with the Israeli Companies Law.





Notwithstanding the foregoing, Section 328(b) of the Israeli Companies Law provides that such a transaction in which a control block is acquired may be effected if approved by a general meeting of stockholders as a transaction, the purpose of which is to create a control block of 25% or 45% of our voting rights, as applicable.





Where a special tender offer has been made, our Board of Directors must give its opinion to the offerees regarding the advisability of the special tender offer and must disclose all personal interests of each of the directors in such tender offer. Our Board of Directors need not give such an opinion, though, if it is unable to do so, provided that it gives notice of its reasons for not so doing. A special tender offer must be made to all offerees, and the offer may only be accepted by a majority of the votes of those offerees who gave notice of their position with respect to the offer. The votes of a holder of a controlling interest in the offeror, a holder of a control block in us or any person acting on their or on the offeror’s behalf, shall not be taken into account. Where a special purchase offer has been accepted, offerees who have not given notice of their position in respect of the tender offer, or who have objected to it, may consent to the offer, no more than four days after the last day for accepting the tender offer, and they shall be considered to have consented to the offer from the outset.





An officer in a target company may negotiate with an offeror for the improvement of the conditions of his offer, and may negotiate with other in order to obtain a counter offer. An officer in a target company who commits an act, other than negotiations as aforesaid, the purpose of which is to forestall an existing or anticipated special tender offer, or to harm the chances of its being accepted, shall be liable to the offeror and the offerees for any damage resulting from his acts, unless he acted in good faith and had reasonable grounds for presuming that the act done by him was for the good of the corporation.





A special tender offer may not be accepted unless shares conferring at least 5% of the voting rights in the company have been purchased.





Shares purchased in a special tender offer in contravention of these requirements of the Israeli Companies Law will not confer any right and will be “dormant” shares as defined in the Israeli Companies Law as long as the shares are owned by the purchaser.





Where a special tender offer has been accepted, the offeror, or any person controlling the offeror at the time of the offering, and any company controlled by them, shall not for a period of one year following the date of the tender offer, make another tender offer for the purchase of shares, and they shall not effect a merger of the company unless they undertook to do so in the special tender offer.





A person may not purchase shares of a public company such that after the purchase he holds more than 90% of the shares other than by way of a tender offer for all of the shares. When a stockholder owns more than 90% of all of the shares, he shall not purchase any additional shares for so long as he continues to hold at least 90% of the shares.





Where a tender offer for all shares is accepted by the offerees in such a way that the rate of holding of the offerees who did not accept the offer is less than 5% of the issued shares, all of the shares that the offeror sought to purchase shall be transferred to him. Where a tender offer for all shares is not accepted, the offeror shall not purchase shares from any offerees who have accepted the offer that will confer on him a holding of more than 90% of all of the outstanding shares.





Upon application of an offeree submitted no later than three months after the date of receipt of the tender offer for all shares, a court may rule that the consideration paid for shares in the tender offer was less than their fair value and that fair value should be paid.







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Class and Derivative Action
 
 We are subject to Sections 194 through 218 of the Israeli Companies Law. These provisions relate to class and derivative actions. Any of our stockholders or directors, which we referred to as a “Plaintiff”, may file a derivative action if the conditions set forth in the above provisions have been met. Any person wishing to file a derivative action shall address the corporation in writing, demanding that it exhaust its right by instituting an action, which we referred to as a “Demand.” The Demand must be addressed to the Chairman of the Board of Directors and must set out in detail the facts giving rise to the cause of action and the reasons for its submission. We may proceed in one of the following ways upon receipt of a Demand: (i) take any action or passany resolution resulting in the dropping of the cause of action; (ii) reject the Demand for reasons specified in its resolution; (iii) resolve to file a suit. We must inform the Plaintiff of the way in which we elect to proceed. A Plaintiff may file a derivative action with the approval of the court, if one of the following applies: (i) the action taken or the resolution made, did not, in the Plaintiff’s opinion, bring about the dropping of the cause of action; (ii) we rejected the Demand; (iii) we gave notice to the Plaintiff that it has resolved to file a suit, but no suit was filed within seventy five days of the date of such notice; or (iv) we did not respond to the Demand in accordance with Section 196 of the Israeli Companies Law. A derivative action requires the approval of the court, which shall approve it if convinced that the claim, and the conduct thereof, are prima facie in the best interests of the corporation, and that the Plaintiff is not acting with lack of good faith. A Plaintiff may not withdraw a derivative action, and may not enter into an arrangement or settlement with the defendant, other than with the consent of the court. The application for such consent shall specify all details of the arrangement or settlement, including any payment offered to the Plaintiff.





The Israeli Class Action Law provides that a person having a cause of action with respect to a security may, subject to the terms and conditions set forth in the foregoing act, and with the consent of the relevant court, sue on behalf of a group all of whose members have a cause of action that has materially similar factual and legal grounds.








Item 11.  Executive Compensation





Summary Compensation Table





The following table sets forth the aggregate cash compensation paid during the 2010 and 2009 fiscal years to our Chief Executive Officer and to our other executive officers and employees (if any) whose annual salary and bonuses exceeded $100,000 for the applicable years.








Name and Principal Position
Year

Salary

($) (1)


Bonus

($) (1)


Stock

Awards

($) (1)


Option

Awards

($) (1)


Non-Equity

Incentive

Plan

Compensation

($) (1)


Nonqualified

Deferred

Compensation

Earnings

($) (1)


All Other

Compensation

($) (1)


Total

($) (1)Uri Danon - Chief Executive Officer
2010

$
157,237


$
—


$
—


$
—





$
—


$
—


$
62,244



(3
)

$
219,6812009


21,209



—



—



229,713



(2
)


—



—



8,508







(3
)


259,430Abraham Hochberg (4) - Chief Scientific Officer and Director
2010


132,260



5,125



—



—







—



—



40,023



(5
)


177,4082009


101,866



—



—



—







—



—



48,004



(5
)


149,870Ira Weinstein - Chief Financial Officer
2010


129,363



—



—



—







—



—



46,593







(6
)


175,9562009


98,698



2,549



—



—







—



—



50,300







(6
)


151,547Avi Barak (7) - Chief Executive Officer and Director until 11/09
2009

$
133,253


$
—


$
—


$
—






$
—


$
—


$
74,284







(8
)

$
207,537








(1)
All compensation received by our executive officers is paid in NIS. For the purposes of completing this table, we converted each NIS denominated amount into U.S. dollars by multiplying the NIS amount by the representative exchange rate as it was published by the Bank of Israel on each date on which the compensation was calculated, so that no single conversion rate has been used.





(2)
On September 21, 2009, our Board of Directors approved the conditions of Mr. Danon’s employment agreement which was entered into on October 18, 2009. Pursuant to the terms of Mr. Danon’s employment agreement, Mr. Danon was granted options to purchase 450,000 shares of our common stock at an exercise price of NIS 3.18 (approximately $0.86) per share, pursuant to the 2007 Stock Option Plan, of which options to purchase 80,000 shares will vest immediately, and the remainder will vest over the course of four years, with partial acceleration in return for the achievement of pre-determined milestones by pre-set dates.





(3)
The items described as All Other Compensation to Mr. Danon for the year ended December 31, 2010 include (i) $36,090 in expenses related to the use of a company car by Mr. Danon, and (ii) $8,121 in expenses related to the use of a company cell phone by Mr. Danon, and (iii) $18,033 in contributions to executive insurance for Mr. Danon’s benefit. The items described as All Other Compensation to Mr. Danon for the year ended December 31, 2009 include (i) $2,165 in expenses related to the use of a company car by Mr. Danon, and (ii) $6,343 in contributions to executive insurance for Mr. Danon’s benefit.


-94-









(4)
Prof. Hochberg receives compensation from us solely for his services as our Chief Scientific Officer, and not in his capacity as a member of our Board of Directors.





(5)
The items described as All Other Compensation to Prof. Hochberg for the year December 31, 2010 include (i) $20,325 in expenses related to the use of a company car by Prof. Hochberg, (ii) $5,381 in expenses related to the use of a company cell phone by Prof. Hochberg, and (iii) $14,317 in contributions by our Israeli subsidiary to senior employees insurance for Prof. Hochberg’s benefit. The items described as All Other Compensation to Prof. Hochberg for the year ended December 31, 2009 include (i) $20,557 in expenses related to the use of a company car by Prof. Hochberg, (ii) $3,028 in expenses related to the use of a company cell phone by Prof. Hochberg, and (iii) $24,419 in contributions by our Israeli subsidiary to senior employees insurance for Prof. Hochberg’s benefit.





(6)
The items described as All Other Compensation to Mr. Weinstein for the year December 31, 2010 include (i) $26,083 in expenses related to the use of a company car by Mr. Weinstein, (ii) $853 in expenses related to the use of a company cell phone by Mr. Weinstein, and (iii) $19,657 in contributions by our Israeli subsidiary to senior employees insurance for Mr. Weinstein's benefit. The items described as All Other Compensation to Mr. Weinstein for the year ended December 31, 2009 include (i) $18,340 in expenses related to the use of a company car by Mr. Weinstein, (ii) $785 in expenses related to the use of a company cell phone by Mr. Weinstein, and (iii) $31,174 in contributions by our Israeli subsidiary to senior employees insurance for Mr. Weinstein’s benefit.





(7)
Mr. Barak received compensation from us solely for his services as our Chief Executive Officer, and not in his capacity as a member of our Board of Directors. In addition to the amounts described herein, Mr. Barak received additional payment for the period of his employment with us in January 2010.





(8)
The items described as All Other Compensation to Mr. Barak for the year ended December 31, 2010 include (i) $6,095 in expenses related to the use of a company car by Mr. Barak, (ii) $545 in expenses related to the use of a company cell phone by Mr. Barak, and (iii) $1,633 in contributions to executive insurance for Mr. Barak’s benefit. The items described as All Other Compensation to Mr. Barak for the year ended December 31, 2009 include (i) $29,355 in expenses related to the use of a company car by Mr. Barak, (ii) $3,312 in expenses related to the use of a company cell phone by Mr. Barak, and (iii) $41,616 in contributions to executive insurance for Mr. Barak’s benefit.





Narrative to Summary Compensation Table





Our compensation committee evaluates and sets the compensation policies and procedures for our executive officers. Except as provided for in the employment agreements described below, annual reviews generally determine future salary and bonus amounts for our executive officers, as a part of the Company’s compensation procedures.







Employment Agreements





Mr. Uri Danon





Generally.   On October 18, 2009, we entered into an employment agreement with Mr. Uri Danon, pursuant to which he has served as our Chief Executive Officer since November 1, 2009. Either we or Mr. Danon may terminate this agreement upon the provision of ninety days advance written notice to the other party expressing an intention to terminate the agreement. We also may terminate this agreement for cause, defined in the agreement as including the following on the part of Mr. Danon: (i) a material breach of any term of the agreement; (ii) any breach of Mr. Danon's fiduciary duties to us, including, without limitation, any material conflict of interest for the promotion of his benefit; (iii) fraud, felonious conduct or dishonesty; (iv) embezzlement of our funds; (v) any conduct which is materially injurious to us, monetary or otherwise; (vi) conviction of any felony; (vii) misconduct, gross negligence or willful misconduct in performance of duties and/or responsibilities assigned in the agreement; or (viii) refusal to perform the duties and/or responsibilities assigned in the agreement for any reason other than illness or incapacity, or disregard or insubordination of any lawful resolution and/or instruction of the Board of Directors with respect to Mr. Danon's duties and/or responsibilities towards us.





Salary and Other Social Benefits.   The agreement provides Mr. Danon with a monthly salary of NIS 42,000 (approximately $11,840). His salary is subject to adjustment throughout the term of the agreement due to cost-of-living increases. We will also provide Mr. Danon with other social benefits such as a company car, a laptop computer, a cellular telephone, and pension and similar payments. We will reimburse Mr. Danon for reasonable expenses incurred by him in the course of his employment with us.





Bonuses.   Mr. Danon is entitled to receive a bonus at such time as we shall raise an aggregate amount of $10 million between January 30, 2010 and the termination of his employment with us, in any form, except for loans from financial institutions and grants under the auspices of the Israeli Ministry of Industry, Trade and Labor, such as Chief Scientist grants and bi-national funds.


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The amount of the bonus will be $100,000, subject to a deduction of a pro-rata portion based on  the funds raised provided by investors from which we have received funds or assets prior to January 30, 2010. Payment will be made in cash if more than $5 million in aggregate has been raised in equity offerings, or in stock options otherwise. We recorded a short-term liability of $84 thousand (approximately NIS 300 thousand) in respect of this agreement.





Non-Competition, Non-Solicitation and Confidentiality.   Under the terms of his employment agreement, Mr. Danon must refrain from competing with us during the term of his employment and for one year from the date of termination of his employment with us. Further, during his employment and for one year after his employment terminates, Mr. Danon may not offer or solicit any of our or our subsidiary’s employees away from their dealings with us or our subsidiary. He also must grant us all rights in any products that he develops during the course of his employment with us. In addition, Mr. Danon must maintain the confidentiality of all proprietary information of ours that he receives through his employment with us.





Stock Option Grant.   Pursuant to the terms of Mr. Danon's employment agreement, we granted Mr. Danon options to purchase 450,000 shares of our common stock at an exercise price of NIS 3.18 (approximately $0.86) per share, pursuant to our 2007 Stock Option Plan, of which options to purchase 80,000 shares vested immediately, and the remainder are vesting over the course of four years, with partial acceleration in return for the achievement of pre-determined milestones by pre-set dates.





Professor Abraham Hochberg





Generally.   On December 1, 2005, we entered into an employment agreement with Professor Abraham Hochberg pursuant to which he will serve as our Chief Scientist for a term of three years ending on December 1, 2008. Under the terms of this agreement, Professor Hochberg manages our research and development activities and reports these activities to our Board of Directors. We may terminate this agreement upon the provision of six months advance written notice. Professor Hochberg may terminate this agreement upon the provision of three months notice. We also may terminate this agreement for cause, meaning any of the following: (a) a material breach of Professor Hochberg’s obligations regarding confidentiality and non-competition, as set out in the agreement; (b) conviction of any felony involving moral turpitude affecting us; (c) any material breach of his employment agreement which has not been cured by him within 15 days after his receipt of notice from us, containing a description of the breach or breaches alleged to have occurred; (d) the habitual neglect or gross failure by Professor Hochberg to adequately perform the duties of his position; (e) any act of moral turpitude or criminal action connected to his employment with us; or (f) Professor Hochberg’s refusal to comply with or his violation of lawful instructions of our CEO or Board of Directors. In addition, we may terminate this agreement in the event that Professor Hochberg is prevented from continuing his employment with us due to medical reasons for 90 consecutive days or for an aggregate of 120 days per fiscal year, but in the event of such termination, Professor Hochberg will be entitled to receive three months additional salary from us and also severance payments in accordance with the Israeli Severance Pay Law. Professor Hochberg must maintain the confidentiality of all of our proprietary information that he receives through his employment with us. On October 22, 2008 our Board of Directors approved the extension of Professor Hochberg's employment agreement for a period of three years, through November 30, 2011.





Salary and Other Social Benefits.   The agreement provides Professor Hochberg with a monthly salary of $6,000, which was raised to $8,500 in July 2007 upon the approval of our stockholders. In October 2008, our Board of Directors recommended that our stockholders restate Professor Hochberg’s salary at a fixed monthly rate of NIS 36,000 (approximately $10,100). His salary is subject to adjustment throughout the terms of the agreement due to increases in the Israeli Consumer Price Index. We also provide Professor Hochberg with other social benefits such as a company car. Professor Hochberg is entitled to participate in our advanced studies fund and senior employees insurance as well as annual leave and convalescence pay and sick leave. We reimburse Professor Hochberg for reasonable expenses incurred by him in the course of his employment with us. On December 1, 2008, Professor Hochberg announced that in view of the global economic crisis, he agrees to reduce his monthly salary by 7.5% until further notice. On December 3, 2008, our stockholders approved the extension of the employment agreement and restatement of Professor Hochberg’s salary as an interested transaction under the Israeli Companies Law with a controlling shareholder, due to Professor Hochberg’s execution of an Irreversible Voting Agreement with several of our other stockholders. See “Security Ownership of Certain Beneficial Owners and Management —  Voting Agreement” and “Corporate Governance — Business Combinations; Interested Transactions”.





Bonuses.   Under the terms of his employment agreement, Professor Hochberg is entitled to an annual bonus, determined at the discretion of our Chief Executive Officer, in consultation with our Board of Directors, and subject to applicable law. Because Professor Hochberg is one of our significant stockholders, payment of this bonus is subject to the approval of our audit committee, our Board of Directors and our stockholders.





In addition, Professor Hochberg receives a bonus of 7.5% of the amount of grants that we receive in which he is listed as the leading researcher in the research to be funded by such grants, and that are approved for our use by our Board of Directors, other than grants provided by the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of Israel.


-96-





Non-Competition and Non-Solicitation.   Under the terms of the employment agreement, Professor Hochberg may not offer or solicit any of our or our subsidiary’s employees, consultants, customers, suppliers, distributors, agents or contractors away from their dealings with us or our subsidiary during his employment and for 12 months after his employment terminates. Professor Hochberg has promised to cede to us all right, title and interest to any and all intellectual property created during his course of employment with us and has undertaken not to make use of it and not to compete with us for a period of twelve months after termination of his employment with us.





Agreement Regarding Allocation of Royalties With Yissum.  In accordance with the directives of the management of the Hebrew University of Jerusalem, any royalties that we pay pursuant to our exclusive license agreement with Yissum are allocated as follows: 40% to Professor Hochberg; 20% to Professor Hochberg's research laboratory; and 40% to Yissum and the Hebrew University of Jerusalem. For more information regarding this license agreement, see “Our Business — Material Operating Agreements”.





Stock Option Grant. On October 22, 2008, our Board of Directors approved the grant of options to purchase 120,000 shares of our common stock at an exercise price of $0.597 per share. These options will vest in twelve equal quarterly portions. On December 3, 2008, the grant of these options to Professor Hochberg was approved by our stockholders as an interested transaction under the Israeli Company Law with a controlling shareholder due to Professor Hochberg’s execution of an Irrevocable Voting Agreement with several of our stockholders and Mr. Barak, our Chief Executive Officer and a member of our Board of Directors. See “Security Ownership of Certain Beneficial Owners and Management — Voting Agreement” and “Corporate Governance — Business Combinations, Interested Transactions.”







Mr. Ira Weinstein





Generally.   On May 1, 2007, we entered into an employment agreement with Mr. Ira Weinstein, pursuant to which he serves as our Chief Financial Officer and Chief Operating Officer on a full-time basis. Either side was able to terminate this agreement upon the provision of four months advance written notice to the other party expressing an intention to terminate the agreement. We were also able to terminate this agreement for cause, defined in the agreement as including the following on the part of Mr. Weinstein: (a) conviction of any felony involving moral turpitude affecting us; (b) action taken by Mr. Weinstein intentionally to harm us; (c) embezzlement of our funds; (d) falsification of records or reports; (e) ownership, direct or indirect, of an interest in a person or entity (other than a minority interest in a publicly traded company) in competition with our products or services; (f) any breach of Mr. Weinstein’s fiduciary duties or duties of care to us (except for conduct taken in good faith) which, to the extent such breach is curable, has not been cured by him within 15 days after his receipt of notice containing a description of the breach or breaches alleged to have occurred; (g) any material breach of his employment agreement which has not been cured by him within 15 days after his receipt of notice from us, containing a description of the breach or breaches alleged to have occurred; (h) any breach by Mr. Weinstein of his proprietary information, non-competition and assignment of inventions agreement with us; and (i) any other act or omission that constitutes “cause” under the laws of any jurisdiction in which the we conduct our business and in which Mr. Weinstein is employed at the time of such act.





On February 21, 2010, Mr. Weinstein notified us that he is resigning his position as Chief Financial Officer, as of June 20, 2011.





Salary and Other Social Benefits.   The agreement provides Mr. Weinstein with a monthly salary of 32,000 NIS (approximately $9,000). His salary is subject to adjustment throughout the term of the agreement due to cost-of-living increases. We will also provide Mr. Weinstein with other social benefits such as a company car, a laptop computer, and pension and similar payments. We will reimburse Mr. Weinstein for reasonable expenses incurred by him in the course of his employment with us.





Non-Competition, Non-Solicitation and Confidentiality.   Under the terms of his employment agreement, Mr. Weinstein must refrain from competing with us during the term of his employment and for one year from the date of termination of his employment with us. Further, during his employment and for one year after his employment terminates, Mr. Weinstein may not offer or solicit any of our or our subsidiary’s employees away from their dealings with us or our subsidiary. He also must grant us all rights in any products that he develops during the course of his employment with us. In addition, Mr. Weinstein must maintain the confidentiality of all proprietary information of ours that he receives through his employment with us.





Stock Option Grant.   Pursuant to the terms of Mr. Weinstein's employment agreement, we granted Mr. Weinstein options to purchase 150,000 shares of our common stock at an exercise price of 1.27 NIS (approximately $0.35) per share, pursuant to our 2007 Stock Option Plan, vesting over the course of four years.


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Jonathan Burgin
 
 Generally.On February 21, 2011, we entered into an employment agreement with Mr. Jonathan Burgin, 49, pursuant to which he will serve as our Chief Financial Officer beginning June 1, 2011. Either we or Mr. Burgin may terminate this agreement uponthe provision of 90 days advance written notice to the other party expressing an intention to terminate the agreement. We also may terminate this agreement for cause, defined in the agreement as including the following on the part of Mr. Burgin: (i) A fundamental breach of Mr. Burgin's employment agreement on his part; (ii) Performance of any act that entitles the Company legally to dismiss him without paying him any severance pay in connection with such dismissal; (iii) A breach of Mr. Burgin's duty of good faith to the Company; or (iv) Intentional gross misconduct in the performance of Mr. Burgin's obligations in a manner that causes (or is likely to cause) material harm to the Company.





Salary and Other Social Benefits.   The agreement provides Mr. Burgin with a monthly salary of NIS 37,000 (approximately $10,200), to be increased to NIS 43,000 (approximately $11,850) upon the consummation of a public offering by the Company on a U.S. stock exchange that raises at least $10 million (an "IPO Event"). We will also provide Mr. Burgin with other social benefits such as a company car, a laptop computer, a cellular telephone, and pension and similar payments. We will reimburse Mr. Burgin for reasonable expenses incurred by him in the course of his employment with us. Until an IPO Event, we have committed to pay Mr. Burgin an annual bonus of up to one monthly salary, the exact size of which will be determined by the achievement of pre-determined milestones by Mr. Burgin.





Non-Competition, Non-Solicitation and Confidentiality.   Under the terms of his employment agreement, Mr. Burgin must refrain from competing with us during the term of his employment and for one year from the date of termination of his employment with us. Further, during his employment and for one year after his employment terminates, Mr. Burgin may not offer or solicit any of our or our subsidiary’s employees away from their dealings with us or our subsidiary. He also must grant us all rights in any products that he develops during the course of his employment with us. In addition, Mr. Burgin must maintain the confidentiality of all proprietary information of ours that he receives through his employment with us.





Stock Option Grant.   Pursuant to the terms of Mr. Burgin's employment agreement, we intend to grant Mr. Burgin options to purchase 300,000 shares of our common stock at an exercise price of 2.90 NIS (approximately $0.80) per share, pursuant to our 2007 Stock Option Plan, of which options to purchase 220,000 shares will vest over the course of four years, and options to purchase 80,000 additional shares will vest only upon an IPO Event.








Avi Barak





Generally.   On April 4, 2006, we entered into an employment agreement with Mr. Avi Barak pursuant to which he served as our Chief Executive Officer on a full-time basis. Either we or Mr. Barak could terminate this agreement upon the provision of four months advance written notice to the other party expressing an intention to terminate the agreement. We could also terminate this agreement for cause, defined in the agreement as any of the following: (a) conviction of any felony involving moral turpitude affecting us; (b) action taken by Mr. Barak intentionally to harm us; (c) embezzlement of our funds; (d) falsification of records or reports; (e) ownership, direct or indirect, of an interest in a person or entity (other than a minority interest in a publicly traded company) in competition with our products or services; (f) any breach of Mr. Barak’s fiduciary duties or duties of care to us (except for conduct taken in good faith) which, to the extent such breach is curable, has not been cured by him within 15 days after his receipt of notice containing a description of the breach or breaches alleged to have occurred; (g) any material breach of his employment agreement which has not been cured by him within 15 days after his receipt of notice from us, containing a description of the breach or breaches alleged to have occurred; (h) any breach by Mr. Barak of his proprietary information, non-competition and assignment of inventions agreement with us; and (i) any other act or omission that constitutes “cause” under the laws of any jurisdiction in which the we conduct our business and in which Mr. Barak is employed at the time of such act. In addition, we could terminate this agreement in the event that Mr. Barak was prevented from continuing his employment with us due to medical reasons for two consecutive months or for an aggregate of 120 days per fiscal year. Mr. Barak must maintain the confidentiality of all proprietary information of ours that he receives through his employment with us. On August 11, 2009, we received a letter from Mr. Barak, announcing his intention to resign his position as CEO, effective January 30, 2010. We appointed Mr. Uri Danon as CEO in Mr. Barak’s place, as of November 1, 2009.





Salary and Other Social Benefits.   The agreement provided Mr. Barak with a monthly salary of $12,000. His salary was subject to adjustment throughout the term of the agreement due to increases in the Israeli Consumer Price Index. We also provided Mr. Barak with other social benefits such as a company car, executive insurance, a laptop computer and a cellular telephone. Mr. Barak was entitled to participate in our advanced studies fund and senior employees insurance. We reimbursed Mr. Barak for reasonable expenses incurred by him in the course of his employment with us. On December 1, 2008, Mr. Barak announced that in view of the global economic crisis, he agreed to reduce his monthly salary by 7.5%.





Bonuses.   We committed to pay Mr. Barak a one-time bonus of one percent of funds received between March 1, 2009 and March 1, 2012 (in any form, except for loans from banks and grants under the auspices of the Ministry of Industry, Trade and Labor, such as Chief Scientist grants and bi-national funds), provided that at least $10 million was raised and that Mr. Barak continued to hold a position with us. For the purposes of calculating the bonus, amounts provided by known pre-existing investors (i.e. entities from which we have received funds or assets prior to March 1, 2009) would be deducted from the total amount received. In any case, the bonus was not to exceed $100,000. The criteria for the award of this bonus were not reached before Mr. Barak’s resignation took effect.


-98-





Non-Competition and Non-Solicitation.   Under the terms of his employment agreement, Mr. Barak had to refrain from competing with us during the term of his employment and was required to so refrain for one year from the date of termination of his employment with us. Further, during his employment and for one year after his employment terminates, Mr. Barak was prohibited from offering or soliciting any of our or our subsidiary’s employees, consultants, customers, suppliers, distributors, agents or contractors away from their dealings with us or our subsidiary. He also was required to grant all rights in any products that he developed during the course of his employment with us to our Israeli subsidiary, BioCancell Therapeutics Israel Ltd.





Stock Option Grant.   Pursuant to the terms of Mr. Barak’s employment agreement, we granted Mr. Barak options to purchase 500,000 shares of our common stock at an exercise price of $0.01 per share. Mr. Barak exercised these options on March 28, 2007. On October 22, 2008, our Board of Directors approved the grant to Mr. Barak of options to purchase 180,000 shares of common stock pursuant to our 2007 Stock Option Plan, at an exercise price of $0.597 per share. On December 3, 2008, the grant of these options to Mr. Barak was approved by our stockholders as an interested transaction under the Israeli Companies Law with a controlling shareholder due to Mr. Barak’s execution of an Irreversible Voting Agreement with several of our stockholders and Professor Hochberg, our Chief Scientific Officer. See “Security Ownership of Certain Beneficial Owners and Management — Voting Agreement” and “Corporate Governance — Business Combinations; Interested Transactions.” Upon his resignation, Mr. Barak forfeited unvested options to purchase 105,000 shares of common stock.








Outstanding Equity Awards at December 31, 2010





The following are all unexercised options, unvested shares of common stock and any other awards granted under our 2004 Stock Option Plan and 2007 Stock Option Plan held by any of our named executive officers as of December 31, 2010:








OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDOPTION AWARDS
STOCK AWARDSName

(a)
Number

of

Securities

Underlying

Unexercised

options

(#) Exercisable

(b)
Number of

Securities

Underlying

Unexercised

Unearned

Options

(#) Unexercisable

(c)
Equity

Incentive

Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options

(#)

(d)
Option

Exercise

Price

($)

(e)
Option

Expiration

Date

($)

(f)
Number of

Shares or

Units of

Stock That

Have Not Vested

(#)

(g)
Market

Value of

Shares of

Units of

Stock That

Have Not Vested

($)

(h)
Equity Incentive

Plan Awards:

Number of

Unearned Shares,

Units or

Other

Rights That

Have Not

Vested

(#)

(i)
Equity Incentive

Plan Awards:

Market or

Payout Value

of Unearned

Shares, Units

or other

Rights That

Have Not

Vested

($)

(j)Uri Danon
275,625
174,375

$0.84
12/31/2019
-
-
-
-Abraham Hochberg
90,000
30,000

$0.597
12/3/2018
-
-
-
-Ira Weinstein
84,375
65,625

$0.36
12/3/2018
-
-
-
-








Director Compensation





The following table sets forth information regarding the compensation paid to each of our directors and past directors who were not our employees during the year ended December 31, 2010:








Name

Fees

Earned or

Paid

in Cash

($)

Stock

Awards

($)

Option

Awards

($)

Non-Equity

Incentive

Plan

Compensation

($)

Nonqualified

Deferred

Compensation

Earnings

($)

Other

Compensation

($)

Total

($)Doron Nevo

$
24,335



—


$
130,910



—



—



—


$
155,245Orly Yarkoni


17,896



—



21,491



—



—



—



39,387David Schlachet


17,267



—



21,491



—



—



—



39,758Hanoch Rappaport


6,002



—



—



—



—



—



6,002Aviv Boim

$
6,012



—


$
15,631



—



—



—


$
21,643





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Narrative to Director Compensation Table





Members of our Board of Directors who are independent directors (as defined in our Amended and Restated Certificate of Incorporation, namely Orly Yarkoni and David Schlachet) receive the fixed compensation established under Israeli regulations, NIS 31,700 (approximately $8,685) per annum, plus NIS 2,120 (approximately $590) per meeting (60% of such amount for participation via teleconference, and 50% of such amount for approving a written resolution).





Other non-executive members of our Board of Directors (namely Hanoch Rappaport and Aviv Boim) receive compensation of NIS 1,800 (approximately $500) per meeting. Except as provided in the table above, no other compensation was provided to directors for their service on our Board of Directors.







Director and Officer Indemnification





We have undertaken to indemnify our officers and directors to the full extent permitted by Delaware law for any liabilities that they may incur for any action taken as an officer or director or in any other joint venture, partnership or enterprise. The indemnification includes any monetary liability imposed on the officer or director because of a verdict, fine, penalty, settlement agreement or any other reasonable amount or expense accrued by the officer or director in connection with any threat, activity, pending procedure, claim or civil, criminal or administrative proceeding or investigation, including any activity by or on behalf of us in which the officer or director is an interested party or is liable to an interested party, or where the officer or director has been threatened that he will become an interested party due to his being an officer or director. We will compensate an officer or director in advance for any reasonable amount that he has paid for any claim against him (including litigation costs and the costs of preparing an adequate defense) after the officer or director agrees that he will bear the detailed costs himself if it is found that the officer or director is not entitled to receive compensation under such officer or director’s indemnification agreement or our Amended and Restated Certificate of Incorporation. The conclusion of any proceeding with a judgment, order, settlement agreement, indictment or similar conclusion against an officer or director will not give rise to the assumption that the officer or director acted in a manner other than in our best interests or, in respect to a criminal charge, had no reasonable grounds for assuming that his actions were illegal.





In a number of circumstances, an officer or director will not be entitled to indemnification or advance reimbursement for expenditures if: (i) a competent court of law has made a final verdict or order that a claim or claims against an officer or director arose out of deception or bad faith or that the officer or director was misled or, that the indemnification is not permitted under prevailing law; (ii) the verdict or order by the court stemmed from a claim regarding the Exchange Act, or other federal or state laws; (iii) an act or omission occurred for which the officer or director is not entitled to receive compensation under Delaware law; (iv) the proceedings or claims were initiated by the officer or director that were not in self-defense other than proceedings brought to pay compensation or where our Board of Directors has approved of the proceedings and the decision to file them; (v) expenditures or obligations of any kind were paid directly to the officer or director by the insurance company under the directors and officers liability policy; or (vi) the claim relates to abuse of information that is not available to the public by the officer or director in all matters pertaining to the purchase and/or sale of our common stock. We will not be obligated to compensate an officer or director for every amount paid in the framework of a settlement agreement that was drawn up by the officer or director without our written consent. We will not sign any settlement agreement that would affect any proceedings against an officer or director without his written consent.





We currently maintain directors’ and officers’ liability insurance for the purpose of paying these types of claims. The insurance policy provides coverage in an amount of $5,000,000 per claim or per the aggregate loss arising from all claims for each insurance period, $1,500,000 for securities claims in the United States and an additional coverage of up to $1,000,000 for legal expenses. We may decide to cancel our indemnification agreements with our officers and directors, but we will still be obligated to compensate an officer or director for any claims resulting from actions prior to the cancellation of the indemnification agreement.


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BioCancell Therapeutics, Inc. 2004 Stock Option Plan and 2007 Stock Option Plan





General Provisions.   Our Board of Directors adopted our 2004 Stock Option Plan to allocate up to 2,024,003 shares of our common stock to our directors, employees and consultants. Our Board of Directors adopted our 2007 Stock Option Plan to allocate up to an additional 2,750,000 shares of our common stock to our directors, employees and consultants. Each plan is administered by our Board of Directors and any committee that our Board of Directors may appoint for such purpose. Our Board of Directors or its designated committee may grant options and restricted stock in addition to other compensation instruments under each of the plans. With respect to options, they may grant four types of options under either plan: Approved 102 Capital Gains Options, which are granted only to our directors and employees and qualify for capital gains tax treatments; Approved 102 Ordinary Income Options, which qualify for ordinary income tax treatment; Unapproved 102 Options; and 3(i) Options, which are non-qualified stock options which are granted mostly to our consultants. The number of shares authorized to be issued under each of the plans will be proportionately adjusted for any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, combination or reclassification of the stock or the payment of a stock dividend with respect to the common stock or any other increase or decrease in the number of issued shares of common stock effected without receipt of consideration.





The exercise price of an option granted under our 2004 Stock Option Plan or 2007 Stock Option Plan will be determined by the Board of Directors or its designated committee at the time of the option grant.





The vesting schedule of each grant is detailed in the corresponding options allocation agreement. The committee, though, may, in its absolute discretion and on such terms and conditions as it deems appropriate, accelerate or otherwise change the time at which options granted under either plan or any portion of any such option will vest. Option grants under either plan also may contain performance goals and measures and the provisions in one option grant need not be identical to any other option grant. All options granted under either plan will expire ten years from the date of grant unless terminated earlier, provided that options granted under Section 422 of the United States Internal Revenue Code of 1986 to a stockholder that holds ten percent or more of our common stock will expire five years from the date of grant unless terminated earlier. With respect to each of the plans, our Board of Directors may reallocate to other employees, directors or consultants the unvested portion of an option that expires prior to its expiration date and the vested but unexercised and unvested portions of an option that was either cancelled or repurchased by us and any such reallocation of shares must be recycled within the plan pursuant to which such option was granted. Our Board of Directors may not reallocate the vested but unexercised portions of an option that expires upon its expiration date.





In the case of our 2004 Stock Option Plan, in the event of the disability, death or the retirement of a grantee, the grantee or his legal delegates or successors, as the case may be, may only exercise that portion of the option that had vested as of the date of any such event and may exercise the vested portion within one year from the date of such event. In cases of retirement for options granted under our 2004 Stock Option Plan, if the grantee dies within one year from the date of retirement, the vested portion may be exercised by such deceased grantee’s successor within one year from the date of death so long as the option has not otherwise expired. Furthermore, for options granted under either Stock Option Plan, in the event that the grantee’s employment was terminated by us without cause (as that term is defined in the stock option plans), the grantee may exercise that portion of the option that had vested as of such date of termination and may exercise such vested portion within 90 days from such date. In the event that the grantee’s employment was terminated by us for cause or was terminated by the grantee, the grantee shall no longer have the right to exercise any option granted under our 2004 Stock Option Plan held by him irrespective of whether and to what extent his options have vested. For options granted under our 2007 Stock Option Plan, in the event that the grantee’s employment was terminated by us for cause, the grantee may exercise that portion of the option that had vested as of such date of termination and may exercise the vested portion within 30 days from such date.





Our Board of Directors or its appointed committee is entitled, at any time and from time to time, to modify the terms of either plan or to suspend or completely cancel either of the plans, and any such modification, suspension or cancellation may have retroactive effect, provided that the modification, suspension or cancellation does not adversely affect the rights of the grantees in a material way, and any such material and adverse modification, suspension or cancellation will be invalid unless it is approved by the affected grantee.




Termination of an Option.   Our Board of Directors may, from time to time, cancel all or any portion of an option granted under such plan, and our obligation with respect to options of such plan will be discharged through (i) payment to the grantee of an amount in cash equal to the excess, if any, of the fair market value of the cancelled option at the date of such cancellation over the aggregate exercise price of the option, (ii) the issuance or transfer to the grantee of common stock with a fair market value at the date of such transfer equal to any such excess, or (iii) a combination of cash and shares with a combined value equal to any such excess, as determined by the committee, in its sole discretion.


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Also, in the event of a merger or consolidation in which we are not the surviving entity, an acquisition of all of our capital stock or the sale of all or substantially all of our assets, we, in our sole and absolute discretion, may cancel all outstanding options granted under our 2004 Stock Option Plan that remain unexercised prior to the consummation of any such transaction, provided that we send a cancellation notice to each grantee of our 2004 Stock Option Plan at least twenty days prior to the consummation of any such transaction during which notification period each grantee may exercise his options. In cases of merger, our Board of Directors may exchange all outstanding options granted under our 2004 Stock Option Plan that remain unexercised prior to the consummation of the merger for the securities of the surviving corporation or to pay the fair market value of any such option. In the event that we do not send a cancellation notice, or in the event of any changes in our capital structure by reason of stock split, stock dividends, reorganization, issue of rights or convertible or capital stock or any corporate transaction or other events with an similar impact, we may make an equitable adjustment in the number of shares resulting from the exercise of options granted under our 2004 Stock Option Plan and/or the exercise price of such options in order to prevent significant dilution.





With respect to our 2007 Stock Option Plan, in the event of a merger or consolidation in which we are not the surviving entity, an acquisition of all of our capital stock or the sale of all or substantially all of our assets, the person acquiring us, in its sole and absolute discretion, either may convert or exchange options granted under our 2007 Stock Option Plan to options to purchase securities of such person or may cancel all outstanding options granted under our 2007 Stock Option Plan that remain unexercised prior to the consummation of any such transaction, provided that it sends a cancellation notice to each grantee of our 2007 Stock Option Plan at least twenty days prior to the consummation of any such transaction during which notification period each grantee may exercise his options. Other than transactions in which we are acquired, in the event of any changes in our capital structure by reason of stock split, stock dividends, reorganization, issue of rights or convertible or capital stock or any corporate transaction or other events with an similar impact, we may make an equitable adjustment in the number of shares resulting from the exercise of options granted under our 2007 Stock Option Plan and/or the exercise price of such options in order to prevent significant dilution.





Outstanding Grants.   As of December 31, 2010, we have 478,426 options outstanding under our 2004 Stock Option Plan and 1,792,750 options outstanding under our 2007 Stock Option Plan. The options under our 2004 Stock Option Plan and 2007 Stock option Plan are not registered for trading on the TASE.







Equity Compensation Plans





Information about our equity compensation plans is included in Item 5 of this report.








Compensation Committee Interlocks and Insider Participation





The current members of the Compensation Committee are Aviv Boim, Hanoch Rappaport and Orly Yarkoni. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with the Company’s executive officers or other directors.


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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.


The following table sets forth, as of the date of this report, information regarding the beneficial ownership of our common stock by (i) each person who is known to us to be the owner of more than five percent of our common stock, (ii) each of our directors, (iii) each of the named executive officers and (iv) all directors and executive officers as a group. For purposes of this table, a person or group of persons is deemed to have beneficial ownership of any shares that such person has the right to acquire within 60 days of the date of this report. Unless otherwise indicated, the address of each of the persons listed in this table is as follows: Beck Science Center, 8 Hartom St, Jerusalem 97775 Israel. Information in this Section is based on information provided to us by the individuals and entities listed below and on beneficial ownership reports filed with the SEC.








Name and Address of Beneficial Owner

Total Number of

Shares of Common

Stock Beneficially

Owned (1)

Percentage

Ownership of

Common Stock (1)Five percent or more beneficial owners:Clal Biotechnology Industries, Ltd.

45th Floor, 3 Azrieli Center, Tel Aviv 67023 Israel (2)


7,694,734



26.09
%Tikcro Technologies, Ltd.

126 Yigal Allon St, Tel Aviv 67443 Israel (3)


8,566,755



25.08
%Directors and named executive officers:Uri Danon (4)


370,125



1.39
%Abraham Hochberg (5)


2,241,254



8.46
%Aviv Boim (6)


8,586,755



25.12
%Hanoch Rappaport (7)


37,796



*David Schlachet (8)


12,500



*Orly Yarkoni (8)


12,500



*All directors and officers as a group (6 persons) (9)


11,260,930



32.53
%*
Less than 1%.





(1)
Assumes the full exercise of all options and warrants held by the holder that are exercisable within 60 days of the date of this report. Percent of class based on 26,391,151 shares of our common stock outstanding as of the date of this report.





(2)
Includes 3,106,517 shares of our common stock underlying convertible debentures and warrants which are convertible or exercisable within 60 days of the date of this report, and 1,146,692 shares of our common stock or common stock underlying warrants held by Clal Finance Ltd. for members of the public or for its own account. Clal Finance Ltd. is an indirect subsidiary of IDB Development, Ltd., of which CBI is an indirect subsidiary. The amount of shares does not include 1,085,255 shares of our common stock held for members of the public by Epsilon Mutual Funds (1991) Ltd., an indirect subsidiary of IDB Development, Ltd., of which CBI is an indirect subsidiary, as CBI has disclaimed beneficial ownership of these shares in a Schedule 13G filed with the SEC on September 13, 2010. The amount of shares underlying the convertible debenture may vary following the date of this report upon the consummation of certain M&A events as set forth in the convertible debenture, or as a result of certain anti-dilution adjustments provided for under the convertible debenture.(3)
Includes 7,766,292 shares of our common stock underlying convertible debentures and warrants which are convertible or exercisable within 60 days of the date of this report. The amount of shares underlying the convertible debenture may vary following the date of this report upon the consummation of certain M&A events as set forth in the convertible debenture, or as a result of certain anti-dilution adjustments provided for under the convertible debenture.





(4)
Includes 298,750 shares of our common stock underlying options that are exercisable within 60 days of the date of this report.





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(5)
Includes 100,000 shares of our common stock underlying options that are exercisable within 60 days of the date of this report.





(6)
Includes 7,766,292 shares of our common stock underlying convertible debentures and warrants (as detailed in Note 3 above) which are convertible or exercisable within 60 days of the date of this report. and 20,000 shares of our common stock underlying options owned by Mr. Boim, which are exercisable within 60 days of the date of this report. Mr. Boim is an employee of Tikcro Technologies, Ltd. The amount of shares underlying the convertible debenture may vary following the date of this report upon the consummation of certain M&A events as set forth in the convertible debenture, or as a result of certain anti-dilution adjustments provided for under the convertible debenture.





(7)
Includes 20,000 shares of our common stock underlying options owned by Mr. Rappaport, which are exercisable within 60 days of the date of this report.





(8)
Consists of 12,500 shares of our common stock owned by the director that are underlying options exercisable within 60 days of the date of this report.





(9)
Includes 8,560,352 shares of our common stock underlying convertible debentures, warrants and options which are convertible or exercisable within 60 days of the date of this report. The amount of shares underlying the convertible debenture may vary following the date of this report upon the consummation of certain M&A events as set forth in the convertible debenture, or as a result of certain anti-dilution adjustments provided for under the convertible debenture.







Voting Agreements





On July 30, 2008, in connection with the closing of the private placement of our securities pursuant to Subscription and Registration Rights Agreements with Clal Biotechnology Industries Ltd. (CBI), Tikcro Technologies Ltd. (Tikcro) and the Provident Fund of the Employees of the Hebrew University of Jerusalem Ltd., CBI, Tikcro, Professor Abraham Hochberg, and Mr. Avi Barak, entered into an Irrevocable Voting Agreement.





Pursuant to the Irrevocable Voting Agreement, the parties agreed, subject to applicable law, to vote or cause to be voted all shares of our common stock or other voting securities directly or indirectly owned by it or him at any general meeting of our stockholders at which members of our Board of Directors are to be elected in favor of the election of one nominee recommended by each of CBI, Tikcro and Professor Hochberg for as long as CBI, Professor Hochberg and Tikcro, respectively, hold at least seven percent of our capital stock on an as converted basis, including any type of debt securities convertible into shares of our equity but excluding warrants or options to purchase shares of our common stock. The parties further agreed not to vote to terminate the membership of any such nominee on our Board of Directors without the prior written consent of the applicable nominating party. As of the date of this report, there is no CBI-nominated director on our Board, and CBI has not nominated a candidate.





The Israel Securities Authority regards the parties to the Irrevocable Voting Agreement as mutual holders of a “control block” pursuant to the Israeli Companies Law because these parties collectively hold more than 45% of the voting rights of our stockholders. As a result, a transaction between us and any of the parties to the Irrevocable Voting Agreement would be regarded as an interested transaction under the Israeli Companies Law. For more information on the treatment of interested transactions under the Israeli Companies Law, see “Corporate Governance — Business Combinations; Interested Transactions” above.





On November 22, 2009, Clal Biotechnology Industries, Ltd. ("CBI"), Professor Abraham Hochberg and Mr. Avi Barak notified the Company that they had signed a voting agreement (the "New Voting Agreement"), according to which each party (Professor Hochberg and Mr. Barak are together considered one party) will be required to vote at general meetings for the election of one director designated by the other party. This agreement is in addition to (and does not amend) the existing voting agreement of July 30, 2008, such that, in total, the parties to the New Voting Agreement will vote together regarding two nominees of each party on the Board of Directors. The parties further agreed not to vote to terminate the membership of any such nominee on our Board of Directors without the prior written consent of the applicable nominating party. In the event that the service of a nominee as director terminates, the parties undertook to act to convene a general meeting, and to vote for the appointment of a candidate for the position of director nominated by the party that previously nominated the director whose service terminated.





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The right to nominate directors under the New Voting Agreement will be in effect as long as a party holds at least sevenpercent of the outstanding shares of the Company (including convertible bonds, on an as-converted basis, but excluding warrants), but in any case not beyond July 30, 2012. The parties to the New Voting Agreement also agreed to vote against any resolution increasing the number of directors on the Board beyond nine.





The Company is not a party to either voting agreement.





Mr. Barak has informed us that he notified the other parties to the aforementioned voting agreements that he believes he is no longer obligated to act in accordance with such agreements. In reply to our enquiries, not all remaining parties confirmed their consent to Mr. Barak's position.





Item 13. Certain Relationships and Related Transactions, and Director Independence.





Except as set forth below, since January 1, 2010, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were a party or are a party in which:





•
the amounts involved exceeded or will exceed the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years; and•
A director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.








Filing of Registration Statement





In June 2010, we agreed to file a registration statement on Form S-1, to register securities held by Clal Biotechnology Industries, Ltd. and Tikcro Technologies, Ltd. Under the terms of the agreement, the legal, accounting and registration costs of such filing will be borne by CBI and Tikcro, without these stockholders waiving any claims they may have with regard to the registration. The registration statement was first filed in July 2010, and we have received comments from the SEC regarding it.








Executive Compensation





For more information regarding transactions in which our directors and executive officers had or will have a direct or indirect material interest, see “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation” above.





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Item 14. Principal Accountant Fees and Services.








Our auditors for the year ended December 31, 2010 and 2009 were Somekh Chaikin, Certified Public Accountants (Israel), a member firm of KPMG International. We expect that Somekh Chaikin will serve as our auditors for fiscal year 2011. All of the services described in the following fee table were pre-approved by the Audit Committee.








2010


2009U.S. Dollars


U.S. DollarsAudit Fees (1)

$
174,981


$
162,963Tax Fees (2)


18,531



6,917Other (3)


24,639



-Total

$
218,151


$
169,880





(1)
This category includes fees associated with the audit of our annual financial statements, review of financial statements included in our Form 10-Q quarterly reports, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements and assistance in the preparation of our private placement fundraisings and public offerings, for those fiscal years. Includes $61,000 and $91,000 accrued as of December 31, 2010 and December 31, 2009, respectively.(2)
This category consists of services provided by Somekh Chaikin for tax compliance, tax advice and tax planning. Includes $10,000 and $7,000 accrued as of December 31, 2010 and December 31, 2009, respectively.(3)
This category consists of services provided by Somekh Chaikin for  assistance with the implementation of ICOFR in relation to the Israeli corporate governance (Goshen) report and SOX 404(a). Includes $25,000 and $0 accrued as of December 31, 2010 and December 31, 2009, respectively.







All Other Fees





No other fees were billed by Somekh Chaikin to the Company during the years ended December 31, 2010 and 2009.





Pre-Approval Policies and Procedures





Consistent with SEC policies and guidelines regarding audit independence, the Audit Committee is responsible for the pre-approval of all audit and permissible non-audit services provided by our principal independent accountants on a case-by-case basis. During fiscal year 2010, all services provided by Somekh Chaikin were pre-approved by our Audit Committee, which concluded that the provision of such services by Somekh Chaikin was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. On November 30, 2009, our Audit Committee adopted a pre-approval policy for services provided by the independent registered public accounting firm. Under that adopted pre-approval policy, our Audit Committee will provide general pre-approval for the provision by the independent registered public accounting firm of services that fall within specified categories (such as statutory audits or financial audit work for subsidiaries, services associated with SEC registration statements and consultations by management as to accounting interpretations) but only up to specified dollar amounts. Any services that exceed the pre-approved dollar limits (subject to de minimis exceptions permitted under applicable rules), or any services that fall outside of the general pre-approved categories, require specific pre-approval by the Audit Committee. If our Audit Committee delegates pre-approval authority to one or more of its members, the member would be required to report any pre-approval decisions to our Audit Committee at its next meeting. All of the audit, audit-related and tax fees incurred with respect to the fiscal year ended on December 31, 2010 were approved pursuant to our pre-approval policy.








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PART IV


Item 15.    Exhibits and Financial Statement Schedules





(a)(1) and (2) Financial Statements and Financial Statement Schedules





The following financial statements are set forth in Item 8 hereof:





- Report of Independent Registered Public Accounting Firm- Consolidated Balance Sheets as of December 31, 2010 and 2009- Consolidated Statements of Operations for the years ended December 31 , 2010 and 2009, and the cumulative period from October 1, 2004 (inception of operations), to December 31, 2010- Consolidated Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Loss- Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009, and the cumulative period from October 1, 2004 (inception of operations), to December 31, 2010- Notes to Consolidated Financial Statements




(b) Exhibits








3.1

Amended and Restated Certificate of Incorporation of BioCancell Therapeutics Inc.{3.2

Second Amended and Restated Bylaws of BioCancell Therapeutics Inc.†4.1

Specimen Common Stock Certificate†4.2

Form of Series 2 Warrant certificate†4.3

Form of Convertible Debentures issued July 30, 2008†4.4

Form of Warrants issued July 30, 2008†4.5

Form of Series 3 and Series 4 Warrant=9.1

Irrevocable Voting Agreement among Clal Biotechnology Industries Ltd., Tikcro Technologies Ltd., Abraham Hochberg and Avi Barak dated July 30, 2008†9.2

Irrevocable Voting Agreement among Clal Biotechnology Industries Ltd., Abraham Hochberg and Avi Barak dated November 22, 2009&10.1(i)

Yissum License†10.1(ii)

Amendment 1 to Yissum License†10.1(iii)

Amendment 2 to Yissum License†10.2

Supply Agreement with Althea Technologies #%10.3

Supply Agreement with VGXI USA†10.4

The BIRD Foundation Grant Agreement†10.5

Agreement for the Performance of Clinical Trials with Wolfson Medical Center†10.6

Agreement for the Performance of Clinical Trials with Meir Medical Center†10.7

Agreement for the Performance of Clinical Trials with BCG Oncology PC†10.8

Employment Agreement with Avi Barak†10.9

Employment Agreement with Ira Weinstein†10.10

Employment Agreement with Professor Abraham Hochberg†10.11

Employment Agreement with Dr. Patricia Ohana†10.12

Employment Agreement with Jonathan Burgin+10.13

Consulting Agreement with Moshe Landsberg†10.14(i)

BioCancell Therapeutics Inc. 2004 Stock Option Plan†10.14(ii)

Form of Award Agreement†10.15(i)

BioCancell Therapeutics Inc. 2006 Stock Option Plan (adopted in January 2007 and referred to herein as the BioCancell Therapeutics 2007 Stock Option Plan)†10.15(ii)

Form of Award Agreement†10.16

Translation of Lease Agreement with Beck Tech (Jerusalem) Ltd. and Appendices!10.17

Subscription and Registration Rights Agreement with Clal Biotechnology Industries Ltd. dated March 12, 2008†10.18

Subscription and Registration Rights Agreement with Clal Biotechnology Industries Ltd. dated June 22, 2008†10.19

Subscription and Registration Rights Agreement with Tikcro Technologies Ltd. dated June 22, 2008†10.20

Subscription and Registration Rights Agreement with Provident Fund of the Hebrew University Ltd. dated June 22, 2008†10.21

Agreement for the Performance of Clinical Trials with Medical Research Infrastructure and Health Services Fund by Chaim Sheba Fund*10.22

Agreement for the Performance of Clinical Trials with the Fund of Medical Research Development of Infrastructure and Health, Hillel Yafe Medical Center*10.22

Agreement for the Performance of Clinical Trials with Hadasit Medical Research Services and Development Ltd.*10.24

Agreement for the Performance of Clinical Trials with the Fund for Medical Research Development of Infrastructure and Health Services, Assaf Harofe Fund*10.25

Agreement for the Performance of Clinical Trials with Keren Mechkarim of Bnai Zion Medical Center*10.26

Employment Agreement with Uri Danon^10.27

Form of Agreement for the performance of offering coordination services with Clal Finance Batuch Investment Management, Ltd.{10.28

Agreement for the performance of Israeli distribution services with Clal Finance Underwriting, Ltd. <10.29

Agreement for the performance of U.S. distribution services with Chardan Capital Markets, LLC <  -107-
  
 10.30

Termination Letter to Chardan Capital Markets, LLC }10.31

Termination Letter to Chardan Capital Markets, LLC [21.1

Subsidiaries of BioCancell Therapeutics Inc.†23.1

Consent of Somekh Chaikin, a member firm of KPMG International **31.1

Certification of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.**31.2

Certification of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.**32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**†

Incorporated by reference to the Form S-1, filed by the Company with the Securities and Exchange Commission on December 17, 2008.*

Incorporated by reference to the Form S-1/A, filed by the Company with the Securities and Exchange Commission on February 2, 2009.#

Incorporated by reference to the Form S-1/A, filed by the Company with the Securities and Exchange Commission on April 7, 2009.^

Incorporated by reference to the Form 8-K, filed by the Company with the Securities and Exchange Commission on October 21, 2009.!

Incorporated by reference to the Form S-1/A, filed by the Company with the Securities and Exchange Commission on October 21, 2009.&

Incorporated by reference to Post-Effective Amendment to Form S-1, filed by the Company with the Securities and Exchange Commission on April 26, 2010.=

Incorporated by reference to the Form S-1/A, filed by the Company with the Securities and Exchange Commission on October 7, 2010.<

Incorporated by reference to the Form S-1/A, filed by the Company with the Securities and Exchange Commission on October 29, 2010.{

Incorporated by reference to the Form S-1/A, filed by the Company with the Securities and Exchange Commission on November 5, 2010.}

Incorporated by reference to the Form S-1/A, filed by the Company with the Securities and Exchange Commission on November 9, 2010.[

Incorporated by reference to the Form S-1/A, filed by the Company with the Securities and Exchange Commission on November 12, 2010.%

Certain confidential portions of this exhibit were omitted and provided separately to the Securities and Exchange Commission pursuant to a request for confidential treatment.+

Incorporated by reference to the Form 8-K filed by the Company with the Securities and Exchange Commission on February 22, 2011.**

Filed herewith











-108-





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.





BIOCANCELL THERAPEUTICS INC./s/ Uri Danon

Name: Uri Danon

Title: Chief Executive Officer

March 11, 2011





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.





Signature
Title
Date/s/ Uri Danon

Uri Danon
Chief Executive Officer

(Principal Executive Officer)
March 11, 2011/s/ Ira Weinstein

Ira Weinstein
Chief Financial Officer

(Principal Financial and Accounting Officer)
March 11, 2011/s/ Abraham Hochberg

Abraham Hochberg
Director
March 11, 2011Aviv Boim
Director
March 11, 2011/s/ Orly Yarkoni

Orly Yarkoni
Director
March 11, 2011/s/ Hanoch Rappaport

Hanoch Rappaport
Director
March 11, 2011/s/ David Schlachet

David Schlachet
Director
March 11, 2011

















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