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EX-32.1 - EXHIBIT 32.1 - Aevi Genomic Medicine, Inc.v421805_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Aevi Genomic Medicine, Inc.v421805_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Aevi Genomic Medicine, Inc.v421805_ex31-2.htm
EX-10.1 - EXHIBIT 10.1 - Aevi Genomic Medicine, Inc.v421805_ex10-1.htm
EX-10.2 - EXHIBIT 10.2 - Aevi Genomic Medicine, Inc.v421805_ex10-2.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the transition period from              to             

 

Commission File Number: 001-35112

 

Medgenics, Inc.

(Exact name of registrant as specified in its charter)

 

   
Delaware 98-0217544
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   

435 Devon Park Drive, Building 700

Wayne, Pennsylvania


19087
(Address of Principal Executive Offices) (Zip Code)

 

(610) 254-4201

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨

 

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

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

 

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

 

As of October 15, 2015, the registrant had 32,860,717 shares of common stock, $0.0001 par value, outstanding.

 

 

 

 

 

  

MEDGENICS, INC.

 

CONTENTS

 

    Page
     
PART I FINANCIAL INFORMATION 3
     
ITEM 1. Financial Statements 3
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 28
     
ITEM 4. Controls and Procedures 28
     
PART II OTHER INFORMATION 28
     
ITEM 1. Legal Proceedings 28
     
ITEM 1A. Risk Factors 28
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
ITEM 3. Defaults Upon Senior Securities 29
     
ITEM 4. Mine Safety Disclosures 29
     
ITEM 5. Other Information 29
     
ITEM 6. Exhibits 30
     
Signatures   31

  

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company”, “Medgenics”, “we,” “us” and “our” refer to Medgenics, Inc., a Delaware corporation organized on January 27, 2000, and its wholly-owned subsidiary, Medgenics Medical (Israel) Ltd., a company organized under the laws of the State of Israel. We use TARGTTM and TARGTEPOTM as trademarks in the United States and elsewhere. All other trademarks or trade names referred to in this document are the property of their respective owners.

 

 

 

  

PART I — FINANCIAL INFORMATION

 

ITEM 1 — Financial Statements

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2015

 

IN U.S. DOLLARS IN THOUSANDS

 

(Unaudited)

 

INDEX

 

  Page
   
Consolidated Balance Sheets 4 - 5
   
Consolidated Statements of Operations 6
   
Statements of Changes in Stockholders' Equity 7
   
Consolidated Statements of Cash Flows 8 - 9
   
Notes to the Interim Consolidated Financial Statements 10 - 18

 

3

 

  

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

   September 30,   December 31, 
   2015   2014 
   Unaudited     
ASSETS          
           
CURRENT ASSETS:          
           
Cash and cash equivalents  $17,725   $33,288 
Accounts receivable and prepaid expenses   1,095    315 
           
Total current assets   18,820    33,603 
           
LONG-TERM ASSETS:          
           
Restricted lease deposits   83    83 
Severance pay fund   -    99 
Property and equipment, net   409    495 
Deferred issuance costs   278    - 
           
Total long-term assets   770    677 
           
Total assets  $19,590   $34,280 

 

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

 

4

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

   September 30,   December 31, 
   2015   2014 
   Unaudited     
         
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
           
Trade payables  $1,431   $1,076 
Other accounts payable and accrued expenses   8,812    2,562 
           
Total current liabilities   10,243    3,638 
           
LONG-TERM LIABILITIES:          
           
Accrued severance pay   166    368 
Liability in respect of warrants   -    612 
           
Total long-term liabilities   166    980 
           
Total liabilities   10,409    4,618 
           
STOCKHOLDERS' EQUITY:          
           
Common stock - $0.0001 par value; 100,000,000 shares authorized;  25,331,197 shares issued and 25,322,697 shares outstanding at September 30, 2015; 24,851,075 shares issued and 24,818,075 shares outstanding at December 31, 2014   3    3 
Additional paid-in capital   140,845    129,797 
Accumulated deficit   (131,667)   (100,138)
           
Total stockholders' equity   9,181    29,662 
           
Total liabilities and stockholders' equity  $19,590   $34,280 

 

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

 

5

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands (except share and per share data)

 

   Nine months ended
September 30,
   Three months ended
September 30,
 
   2015   2014   2015   2014 
   Unaudited 
                 
Research and development expenses  $12,927   $6,378   $4,568   $2,281 
                     
Less:                    
Participation by the Office of the Chief Scientist   (1,797)   (1,898)   (367)   (716)
                     
Research and development expenses, net   11,130    4,480    4,201    1,565 
Non-recurring research and development expenses resulting from acquisition   8,170    -    8,170    - 
                     
General and administrative expenses   10,832    8,262    2,996    2,305 
                     
Operating loss   (30,132)   (12,742)   (15,367)   (3,870)
                     
Financial expenses   (1,431)   (92)   (1,192)   (64)
Financial income   45    605    44    896 
                     
Loss before taxes on income   (31,518)   (12,229)   (16,515)   (3,038)
                     
Taxes on income   11    8    6    2 
                     
Loss  $(31,529)  $(12,237)  $(16,521)  $(3,040)
                     
Basic loss per share  $(1.27)  $(0.65)  $(0.66)  $(0.16)
                     
Diluted loss per share  $(1.30)  $(0.68)  $(0.66)  $(0.21)
Weight average number of common     stock used in computing basic loss per share   24,911,481    18,716,109    24,982,577    18,817,557 
                     
Weight average number of common     stock used in computing diluted loss per share   24,974,128    18,863,403    24,982,577    18,938,723 

 

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

 

6

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

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

 

   Common Stock   Additional
paid-in
   Accumulated   Total
stockholders'
 
   Shares   Amount   capital   deficit   equity 
                     
Balance as of  December 31, 2013   18,497,307   $2   $100,126   $(81,705)  $18,423 
                          
Stock-based compensation related to the issuance and vesting of restricted common stock to directors and an employee   23,000    (*)    371    -    371 
Stock-based compensation related to options and warrants granted to consultants, directors and employees   -    -    4,512    -    4,512 
                          
Exercise of warrants and options   364,096    (*)    1,243    -    1,243 
Loss   -    -    -    (12,237)   (12,237)
                          
Balance as of September 30, 2014 (unaudited)   18,884,403   $2   $106,252   $(93,942)  $12,312 
                          
Balance as of December 31, 2014   24,818,075   $3   $129,797   $(100,138)  $29,662 
                          
Stock-based compensation related to vesting of restricted common stock to directors   24,500    (*)    -    -    - 
Stock-based compensation related to options and warrants granted to consultants, directors and employees   -    -    7,638    -    7,638 
Exercise of warrants and options   480,122    (*)    3,410    -    3,410 
Loss   -    -    -    (31,529)   (31,529)
                          
Balance as of  September 30, 2015 (unaudited)   25,322,697   $3   $140,845   $(131,667)  $9,181 

  

(* ) Represents an amount lower than $ 1.

 

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

 

7

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands

  

   Nine months ended 
 September 30,
 
   2015   2014 
   Unaudited 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
           
Loss  $(31,529)  $(12,237)
           
Adjustments to reconcile loss to net cash used in operating activities:          
Depreciation   181    162 
Loss from disposal of property and equipment   18    - 
Stock-based compensation related to options, warrants and restricted shares granted to employees, directors and consultants   7,638    4,883 
Change in fair value of warrants classified as a liability   1,370    (574)
Accrued severance pay, net   (103)   (439)
Exchange differences on a restricted lease deposit and on long term loan   -    (1)
Changes in operating assets and liabilities:          
Accounts receivable and prepaid expenses   (780)   (308)
Trade payables   355    (510)
Other accounts payable and accrued expenses   5,972    420 
Restricted lease deposits   -    14 
           
Net cash used in operating activities   (16,878)   (8,590)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
           
Purchase of property and equipment   (113)   (289)
           
Net cash used in investing activities  $(113)  $(289)

 

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

 

8

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands

 

    Nine months ended 
 September 30,
 
   2015   2014 
   Unaudited 
CASH FLOWS FROM FINANCING ACTIVITIES:          
           
Proceeds from exercise of options and warrants  $1,428   $1,229 
Deferred costs   -    (34)
           
Net cash provided by financing activities   1,428    1,195 
           
Decrease in cash and cash equivalents   (15,563)   (7,684)
           
Balance of cash and cash equivalents at the beginning of the period   33,288    22,390 
           
Balance of cash and cash equivalents at the end of the period  $17,725   $14,706 
           
Supplemental disclosure of cash flow information:          
           
Cash paid during the period for taxes  $11   $8 
           
Classification of liability in respect of warrants to additional paid in capital  $1,982   $- 
           
Supplemental disclosure of non-cash flow information:          
Deferred issuance costs  $278   $- 

 

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

 

9

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

 

NOTE1:- GENERAL

 

  a.

Medgenics, Inc. (the "Company") was incorporated in January 2000 in Delaware. The Company has a wholly-owned subsidiary, Medgenics Medical Israel Ltd. (the "Subsidiary"), which was incorporated in Israel in March 2000. The Company and the Subsidiary are engaged in the research and development of products in the field of biotechnology and associated medical equipment.

 

    The Company's common stock is traded on the NYSE MKT.

  

  b.

As reflected in the accompanying financial statements, the Company incurred a loss for the nine month period ended September 30, 2015 of $31,529 and had a negative cash flow from operating activities of $16,878 during the nine month period ended September 30, 2015. The accumulated deficit as of September 30, 2015 is $131,667. The Company and the Subsidiary have not yet generated revenues from product sale. Management's plans also include seeking additional investments and commercial agreements to continue the operations of the Company and the Subsidiary.

 

  c. In September 2015, the Company acquired neuroFix, LLC, a Delaware limited liability company (“neuroFix”). As a result of neuroFix lacking outputs necessary to be considered a business as that term is defined in ASC 805 - Business Combination, the acquisition was determined not to be a business since no significant processes were acquired. Therefore, the transaction was treated as an asset acquisition. We determined that the acquired assets can only be economically used for the specific and intended purpose and have no alternative future use after taking into consideration that further research and development, regulatory marketing approval efforts will be required in order to reach technological feasibility. Accordingly, the entire initial purchase consideration of $8,170 thousand was immediately expensed to non-recurring R&D expenses.

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim financial statements of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2014 ("2014 Form 10-K") as filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year as reported in the 2014 Form 10-K have been omitted.

 

10

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

 

NOTE 3:-STOCKHOLDERS' EQUITY

 

  a. Issuance of stock options, warrants and restricted shares to employees and directors:

 

  1. A summary of the Company's activity for restricted shares granted to employees and directors is as follows:

 

Restricted shares  Nine months
 ended
 September 30, 2015
 
     
Number of restricted shares as of December 31, 2014   24,500 
Vested   (24,500)
Number of restricted shares as of September 30, 2015   - 

 

  2. A summary of the Company's activity for options and warrants granted to employees and directors is as follows:

 

   Nine months ended
September 30, 2015
 
  

Number of

options and
warrants

  

Weighted

Average

exercise
price

   Weighted
average
remaining
contractual
terms (years)
   Aggregate
intrinsic value
 
                 
Outstanding at December 31, 2014   8,211,124   $5.48    6.79   $5,490 
                     
Granted   1,737,837    6.90           
                     
Forfeited   (32,550)   7.42           
Exercised   (80,250)   3.38           
                     
Outstanding at September 30, 2015   9,836,161   $5.75    6.65   $23,489 
                     
Vested and expected to vest at September 30, 2015   9,624,946   $5.74    6.61   $23,123 
                     
Exercisable at September 30, 2015   5,790,079   $5.53    5.33   $16,048 

 

Calculation of aggregate intrinsic value is based on the closing share price of the Company's common stock as reported on the NYSE MKT on September 30, 2015 ($7.82 per share).

 

11

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

 

NOTE 3:-STOCKHOLDERS' EQUITY (Cont.)

 

As of September 30, 2015, there was $9,526 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees and directors. That cost is expected to be recognized over a weighted-average period of 1.6 years.

 

  b. Issuance of shares, stock options and warrants to consultants:

 

A summary of the Company's activity for warrants and options granted to consultants is as follows:

 

   Nine months ended
 September 30, 2015
 
   Number of
 options and
 warrants
   Weighted
 average
 exercise
price
   Weighted
average
remaining
contractual
terms (years)
   Aggregate
intrinsic value
 
                 
Outstanding at December 31, 2014   473,826   $6.53    3.29   $207 
                     
 Exercised   (12,928)   3.41           
                     
 Outstanding at September 30, 2015   460,898   $6.62    2.62   $839 
                     
Exercisable at September 30, 2015   424,231   $6.71    2.34   $758 

 

Calculation of aggregate intrinsic value is based on the closing share price of the Company's common stock as reported on the NYSE MKT on September 30, 2015 ($7.82 per share).

 

As of September 30, 2015, there was $67 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to consultants. That cost is expected to be recognized over a weighted-average period of 1.5 years.

 

12

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

 

NOTE 3:-STOCKHOLDERS' EQUITY (Cont.)

 

  c. Compensation expenses:

 

Compensation expenses related to restricted shares, warrants and options granted to employees, directors and consultants was recorded in the Consolidated Statement of Operations in the following line items:

 

   Nine months ended
September 30,
   Three months ended
September 30,
 
   2015   2014   2015   2014 
   Unaudited   Unaudited 
                 
Research and development expenses  $1,506   $829   $525   $336 
General and administrative expenses   6,132    4,054    1,273    1,025 
                     
   $7,638   $4,883   $1,798   $1,361 

 

13

 

  

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

 

NOTE 3:-STOCKHOLDERS' EQUITY (Cont.)

 

  d.  Summary of shares to be issued upon exercise of options and warrants:

 

  A summary of shares to be issued upon exercise of all the options and warrants, segregated into ranges, as of September 30, 2015 is presented in the following table:

 

       As of September 30, 2015 
       Shares to be   Shares to be     
       Issued upon   Issued upon   Weighted Average 
       Exercise of   Exercise of   Remaining 
   Exercise   Options and   Options and   Contractual Terms 
   Price per   Warrants   Warrants   of Options and 
Options / Warrants  Share ($)   Outstanding   Exercisable   Warrants (in years) 
Options:                    
Granted to Employees and Directors                    
    2.66-3.14    196,000    183,000    6.2 
    3.86-4.99    3,612,429    2,493,763    7.5 
    5.13-7.25    3,752,927    1,141,596    8.3 
    8.09-10.80    1,419,615    1,116,530    3.8 
         8,980,971    4,934,889      
                     
Granted to Consultants   5.02-6.65    79,348    42,681    6.1 
                     
Total Shares to be Issued upon Exercise of Options        9,060,319    4,977,570      
                     
Warrants:                    
                     
Granted to Employees   2.49    855,190    855,190    0.5 
                     
Granted to Consultants   3.76-4.99    180,077    180,077    2.1 
    9.17-11.16    201,473    201,473    1.7 
         381,550    381,550      
                     
Granted to Investors   4.99-6.00    2,792,699    2,792,699    0.5 
    6.78-8.34    4,582,921    4,582,921    2.2 
         7,375,620    7,375,620      
                     
Total Shares to be Issued upon Exercise of Warrants        8,612,360    8,612,360      
                     
Total Shares to be Issued upon Exercise of Options and Warrants        17,672,679    13,589,930      

 

14

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

 

NOTE 4:-FAIR VALUE MEASUREMENTS

 

The Company classified certain warrants with down-round protection issued to the purchasers of convertible debentures in 2010 as a liability at their fair value according to ASC 815-40-15-7I. The liability in respect of these warrants were remeasured at each reporting period until exercised or expired. Changes in the fair value of these warrants were reported in the Consolidated Statements of Operations as financial income or expense. As this class of warrants have now all been exercised or expired, there will be no need for additional revaluation work going forward.

 

   Fair value
 of liability
 in respect
 of warrants
 
Balance as of December 31, 2013  $1,211 
      
Classification of liability in respect of warrants into equity due to the exercise of warrants   (14)
      
Change in the liability in respect of warrants   (574)
      
Balance as of September 30, 2014 (unaudited)  $623 
      
Balance as of December 31, 2014  $612 
      
Classification of liability in respect of warrants into equity due to the exercise of warrants   (1,982)
      
Change in the liability in respect of warrants   1,370 
      
Balance as of September 30, 2015 (unaudited)  $- 

 

15

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

 

NOTE 5:-COMMITMENTS AND CONTINGENCIES

 

On September 9, 2015, the Company entered into an Equity Interest Purchase Agreement (the “Purchase Agreement”) with neuroFix Therapeutics, Inc., a Delaware corporation (“Legacy Corp.), neuroFix, LLC, a Delaware limited liability company (“neuroFix”), The Children’s Hospital of Philadelphia, a Pennsylvania nonprofit corporation (“CHOP”), Philip Harper, an individual, and Hakon Hakonarson, an individual, pursuant to which the Company acquired all of the equity interests of neuroFix. Immediately prior to the execution of the Purchase Agreement, Legacy Corp. had contributed its business to neuroFix.

 

Under the terms of the Purchase Agreement, Legacy Corp., neuroFix, CHOP, Harper and Hakonarson agreed to consummate the neuroFix Acquisition in consideration for certain upfront, milestone and earnout payments related to certain product sales by the Company. The payments made or to be made by the Company are as follows:

 

·an upfront payment of $2,000 in cash paid upon the consummation of the neuroFix Acquisition;

·a payment of $6,000 payable as $2,800 in cash and $3,200 in the Company’s common stock, upon the earlier to occur of (i) the achievement of a corporate milestone and (ii) March 31, 2016. In October 2015, the cash payment was made and 459,770 shares of common shares were issued;
·additional payments of up to $450,000 upon the achievement of certain developmental, regulatory and sales milestones; and

·earnout payments equal to a percentage of certain product sales by the Company using tiered rates ranging from the mid-to-high single digits.

 

In addition to the foregoing, in the event a certain product is approved by the FDA for additional indications beyond the initial indication, additional payments of $25,000 for each such additional indication shall be paid by the Company to Legacy Corp. and CHOP.

 

In September 2015, the Company also entered into a reimbursement agreement with Legacy Corp. whereby the Company agreed to reimburse Legacy Corp. for various costs totaling $170.

 

Immediately prior to and in connection with the Acquisition, neuroFix entered into a License Agreement (the “License Agreement”) with CHOP, pursuant to which CHOP would license to neuroFix certain technology owned and controlled by CHOP related to ADHD and certain other neurological and neuropsychological indications. Pursuant to the License Agreement, CHOP licenses to neuroFix (coupled with a right to sublicense) certain patent rights and compound know-how on an exclusive, worldwide, royalty-bearing right and license basis, and certain CHOP know-how (other than compound know-how) on a non-exclusive, worldwide, royalty-bearing right and license basis. CHOP also grants to neuroFix an exclusive option during the term of the License Agreement to negotiate an exclusive license to certain CHOP intellectual property.

 

Pursuant to the License Agreement, CHOP retains rights to the licensed patent rights and know-how to conduct teaching, educational, research and patient care activities itself and to conduct collaborations with certain not-for-profit, governmental, educational or non-commercial third parties and for purposes outside of the field of the license. Under the License Agreement, neuroFix grants to CHOP a non-exclusive, worldwide, fully paid-up, royalty-free license under all intellectual property rights controlled by neuroFix to make and use certain products for education and non-commercial research purposes.

 

In addition to neuroFix having issued equity to CHOP in partial consideration for the rights granted under the License Agreement (which equity was issued immediately prior to the Acquisition described above), CHOP is eligible for certain milestone and royalty payments under the License Agreement as further described below:

 

16

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

 

NOTE 5:-COMMITMENTS AND CONTINGENCIES (Cont.)

 

·up to $1.5 million in regulatory and sales milestone payments in connection with each FDA-approved indication obtained by neuroFix utilizing intellectual property licensed under the License Agreement;
·royalty payments equal to a percentage of certain product sales by neuroFix using a fluctuating rate in the low single digits (adjusted downward to the extent third party royalty payments exceed a certain percentage in a given calendar quarter);
·annual maintenance fees of equal to or less than $100,000 depending on the year; and
·a certain percentage (ranging from mid-single digits to the mid-teens depending on if other rights of neuroFix are also licensed to the sublicensee at the same time) of all sublicensee income (except any amounts attributable to sublicensed sales by a certain party in Japan).

 

The License Agreement will terminate, with respect to each product and each territory covered by the License Agreement, upon the later of (i) the expiration of the certain CHOP patent rights and (ii) January 1, 2025, at which time the license rights granted to neuroFix become perpetual, irrevocable, fully paid-up and royalty-free. The License Agreement could also be subject to termination by CHOP if neuroFix is not achieving certain specified development plans and diligence events and is not undertaking commercially reasonable efforts to achieve such events.

 

NOTE 6:-LOSS PER SHARE

 

Details in the computation of diluted loss per share:

  

   Nine months ended September 30, 
   2015   2014 
   Weighted
average
number of
shares
   Loss   Weighted
average
number of
shares
   Loss 
   Unaudited 
                     
For the computation of basic loss   24,911,481   $31,529    18,716,109   $12,237 
                     
Effect of potential dilutive common shares issuable upon exercise of warrants classified as liability   62,647    824(**)   147,294    574(**)
                     
For the computation of diluted loss   24,974,128   $32,353    18,863,403   $12,811 

 

17

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

 

NOTE 6:-LOSS PER SHARE (Cont.)

 

   Three months ended September 30, 
   2015   2014 
   Weighted
average
number of
shares
   Loss   Weighted
average
number of
Shares
   Loss 
   Unaudited 
For the computation of basic loss   24,982,577   $16,521    18,817,557   $3,040 
                     
Effect of potential dilutive common shares issuable upon exercise of warrants classified as liability   -(*)   -(*)   121,166    880(**)
                     
For the computation of diluted loss   24,982,577   $16,521    18,938,723   $3,920 

 

(*) Anti-dilutive.  
(**) Financial income resulted from changes in fair value of warrants classified as liability.

 

The total weighted average number of shares related to the outstanding options, warrants and restricted shares excluded from the calculations of diluted loss per share due to their anti-dilutive effect was 17,897,262 and 16,341,224 as of September 30, 2015 and 2014, respectively.

 

NOTE 7:-SUBSEQUENT EVENT

 

In October 2015, the Company completed an underwritten public offering of 7,078,250 shares of common stock, including 923,250 shares sold pursuant to the full exercise of an option granted to the underwriters to purchase additional shares of common stock. The shares were offered to the public at a price of $6.50 per share.  Gross proceeds were $45,648 or approximately $42,869 in net proceeds after deducting underwriting discounts and commissions of $2,400 and other offering costs of approximately $378.

 

- - - - -

 

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ITEM 2 — 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 together with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “can,” “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “continues,” “anticipates,” “intends,” “seeks,” “targets,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to them. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, and any updates to those risk factors included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Overview

 

We are a clinical stage rare and orphan disease company developing an innovative and proprietary ex vivo gene therapy platform, offering what we believe to be a novel therapeutic approach for use in the $50 billion orphan and rare disease therapeutics markets. Our TARGTTM (Transduced Autologous Restorative Gene Therapy) platform is designed to provide sustained protein and peptide therapies to treat a range of chronic diseases and conditions. We are currently studying our lead product candidate MDGN-201, which we refer to as TARGTEPOTM, in one Phase 1/2 clinical trial and two Phase 2 clinical trials in patients with End Stage Renal Disease (ESRD). Through our acquisition of neuroFix, LLC, or neuroFix, we acquired the rights to develop a second product candidate, NFC-1, as well as the rights to certain data derived from a clinical trial and other studies of NFC-1. NFC-1 is a first-in-class, non-stimulant metabotropic glutamate receptor (mGluR) neuromodulator that is Phase 2/3 ready for the treatment of mGluR network mutation positive Attention Deficit Hyperactivity Disorder (ADHD), as well as neuropsychiatric symptoms resulting from a related rare genetic disorder, 22q11.2 Deletion Syndrome (22q11.2 DS). We intend to develop NFC-1 for the treatment of mGluR network mutation positive ADHD “mGluR+ ADHD” and certain other neurological and neuropsychological indications. A Phase 1b clinical trial of NFC-1 in adolescents with ADHD and disruptions in the mGluR gene network was recently completed showing the safety of NFC-1 as well as signaling potential efficacy in the adolescents treated.

 

We are currently studying TARGTEPO in identified sub-populations of unmet need including patients who are treated chronically with hemodialysis or peritoneal dialysis, all of whom are also renal transplant eligible patients. We are planning to further examine the impact of TARGTEPO on blood pressure and other markers of cardiovascular risk in these ESRD patients. Future studies will also examine patients whose conditions may qualify for orphan drug designation, including patients with myelodysplastic syndrome (MDS), and patients with Beta thalassemia intermedia. We have initiated in vivo proof of concept pre-clinical studies with several other orphan or rare disease candidates, and have initiated discussions with regulatory agencies for some of those programs in 2015.

 

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In June 2014, the first patient was enrolled in our Phase 1/2 clinical trial of MDGN-201 (TARGTEPO). The aim of the ongoing trial is to validate the potential of our TARGT platform using a second-generation expression cassette of the HDAd viral vector, which was developed to enhance durability of the proposed therapeutic effect. The ongoing study is evaluating the potential of the updated platform to offer sustained production and delivery of endogenous erythropoietin (eEPO) to treat anemia in dialysis patients with ESRD. This open-label trial is expected to enroll up to 18 patients with ESRD who require rHuEPO treatment for anemia. We expect that each patient will receive one or more TARGTEPO microorgans and will be followed for at least one year. The trial endpoints include plasma eEPO levels, blood counts and safety assessment.

 

We have now completed enrollment in the low-dose cohort of the Phase 1/2 clinical trial of TARGTEPO. All six patients who received TARGTEPO microorgans have shown positive initial response to therapy at approximately 100x lower Cmax than rHuEPO (e.g., EPREX). Five of six patients maintained hemoglobin levels within their targeted range due to red blood cell production stimulated by eEPO for at least five months following implantation without receiving any injections of rHuEPO or blood transfusions, and one patient continues to remain stable without receiving any injections of rHuEPO or blood transfusions for 16 months since implantation. The low-dose was well-tolerated in all six patients and there have been no treatment-related serious adverse events (SAEs). Enrollment in the mid-dose cohort of the Phase 1/2 trial began in the first quarter of 2015 and four patients have been enrolled. Implanted TARGTs produced eEPO in all four patients. One patient in this cohort was not able to maintain his hemoglobin levels within the targeted range and required injections of rHuEPO and exited the study. The other three mid-dose patients are stable and have not received any injections of rHuEPO or blood transfusions. One of these three patients had Hb above 13 (which is high according to the guidelines for erythropoietin treatment in ESRD patients) and was treated with repeated phlebotomy. Each phlebotomy resulted in a transient decrease in Hb but not in eEPO. In accordance with the protocol, the investigator excised one of the implanted TARGTs. Following excision, the patient experienced a decrease both in EPO and Hb, and Hb stabilized to the acceptable range within the guidelines.

 

We also enrolled two patients in our first trial studying TARGTEPO in patients with ESRD who are undergoing peritoneal dialysis. The first patient required injection of rHuEPO close to 5 months post implantation and exited the study. This patient had been implanted with one TARGT and although it was still secreting it was not sufficient to maintain the patient Hb within the desired range. The second patient is still stable and not requiring any injections of rHuEPO or blood transfusions. In the second quarter of 2015, we received clearance to proceed from the U.S. Food and Drug Administration, or FDA, for our investigational new drug application, and we have started a Phase 2 clinical trial in the United States studying TARGTEPO in ESRD patients who are undergoing peritoneal dialysis. The first patient in this study was enrolled at the end of the second quarter of 2015, and represents the first patient that we are studying in a clinical trial in the United States. This patient required one rHuEPO injection 2 months post implantation and remains in the study in accordance with the protocol. In June 2015, our wholly-owned subsidiary, Medgenics Medical (Israel) Ltd., which we refer to as MMI, was awarded a government grant of up to NIS 13.3 million (approximately $3.4 million) from the Israeli Office of the Chief Scientist (OCS) at the Ministry of Economy of Israel. The grant will be used to cover research and development expenses for the 13-month period from December 2014 through December 2015 to support further research and clinical development of our TARGT system with respect to the treatment of rare and orphan diseases. Under the terms of the OCS grant, MMI will be required to repay the grant in full, plus interest, through royalties on income generated by MMI. The payment of royalties is contingent on such revenues and, in the absence of such revenues, no royalty payments to the OCS will be required.

 

In September 2015, we completed the acquisition of neuroFix, LLC, the developer of NFC-1, a Phase 2/3 ready first-in-class, non-stimulant metabotropic glutamate receptor (mGluR) neuromodulator for the treatment of mGluR+ ADHD, as well as neuropsychiatric symptoms resulting from a related rare genetic disorder, 22q11.2 Deletion Syndrome (22q11.2 DS). Hakon Hakonarson, M.D., Ph.D., Professor and Director of the Center for Applied Genomics (CAG) at The Children's Hospital of Philadelphia (CHOP) founded neuroFix to pursue development of NFC-1 following a breakthrough genetic discovery. We acquired all outstanding shares of neuroFix for upfront consideration of $2 million, a series of performance-based milestone payments and sales royalties, as further described below under “Acquisition of neuroFix.”1

 

We have generated significant losses to date, and we expect to continue to generate losses as we progress towards the commercialization of our product candidates.  We incurred net losses of approximately $31.53 million for the nine month period ended September 30, 2015. As of September 30, 2015, we had stockholders’ equity of approximately $9.18 million.  We are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

20

 

 

Acquisition of neuroFix

 

On September 9, 2015, we entered into an Equity Interest Purchase Agreement (the “Purchase Agreement”) with neuroFix therapeutics, Inc., a Delaware corporation (“Legacy Corp”), neuroFix, LLC, a Delaware limited liability company (“neuroFix”), The Children’s Hospital Of Philadelphia, a Pennsylvania nonprofit corporation (“CHOP”), Philip Harper, an individual (“Harper”), and Hakon Hakonarson, an individual (“Hakonarson”), pursuant to which we acquired the equity of neuroFix (the “Acquisition”). Immediately prior to the execution of the Purchase Agreement, Legacy Corp had contributed its business to neuroFix.

 

Under the terms of the Purchase Agreement, Legacy Corp, neuroFix, CHOP, Harper and Hakonarson agreed to consummate the Acquisition in consideration for certain upfront, milestone and earnout payments related to certain product sales by us. The payments by us are as follows:

 

·an upfront payment of $2 million in cash paid upon the consummation of the Acquisition, which was paid on September 9, 2015;
·a payment of $6.0 million, payable as $1.2 million in cash to CHOP, $1.6 million in cash to Legacy Corp. and $3.2 million of our common stock to Legacy Corp., upon the earlier to occur of (i) the completion of a firm underwritten or registered direct offering of our common stock with proceeds to us, net of underwriters’ fees and expenses, of at least $35 million, which we refer to as the Early Corporate Milestone Payment, and (ii) March 31, 2016, which we refer to as the Corporate Milestone Payment. As s result of meeting the Early Corporate Milestone, as described further below in Subsequent Events, cash payments totaling $2.8 million were made and 459,770 shares, priced at $6.96 per share, were issued, in October 2015;
·additional payments of up to $450 million upon the achievement of certain developmental, regulatory and sales milestones related to an oral formulation of NFC-1 (the “Product”) and any new chemical entity developed by us covering the same indication as the Product (an “NCE”); and
·earnout payments equal to a percentage of certain product sales by us using tiered rates ranging from the mid- to high single digits depending on the Product or NCE.

 

In addition to the foregoing, in the event the Product is approved by the FDA for additional indications beyond the initial indication, additional payments of $25 million for each such additional indication shall be paid by us.

 

The price per share for all of our common stock issued in connection with the Acquisition will equal the lower of (a) the closing price of our common stock as reported by the NYSE MKT on the business day immediately prior to the issuance of the common stock, and (b) an amount equal to the volume weighted average price for our common stock as reported by the NYSE MKT for the ten (10) trading days immediately prior to the issuance of such common stock. In addition, pursuant to the Purchase Agreement, we will not issue more than 19.99% of the amount of common stock outstanding on the day we entered into the Purchase Agreement without first obtaining the approval of our stockholders and, in no case, will we issue more than 49.99% of the amount of common stock outstanding on the day we entered into the Purchase Agreement.

 

Immediately prior to and in connection with the Acquisition, neuroFix entered into a License Agreement (the “License Agreement”) with CHOP, pursuant to which CHOP would license to neuroFix certain technology owned and controlled by CHOP related to ADHD and certain other neurological and neuropsychological indications. Pursuant to the License Agreement, CHOP licenses to neuroFix (coupled with a right to sublicense) certain patent rights and compound know-how on an exclusive, worldwide, royalty-bearing right and license basis, and certain CHOP know-how (other than compound know-how) on a non-exclusive, worldwide, royalty-bearing right and license basis. CHOP also grants to neuroFix an exclusive option during the term of the License Agreement to negotiate an exclusive license to certain CHOP intellectual property.

 

21

 

  

Pursuant to the License Agreement, CHOP retains rights to the licensed patent rights and know-how to conduct teaching, educational, research and patient care activities itself and to conduct collaborations with certain not-for-profit, governmental, educational or non-commercial third parties and for purposes outside of the field of the license. Under the License Agreement, neuroFix grants to CHOP a non-exclusive, worldwide, fully paid-up, royalty-free license under all intellectual property rights controlled by neuroFix to make and use certain products for education and non-commercial research purposes.

 

In addition to neuroFix having issued equity to CHOP in partial consideration for the rights granted under the License Agreement (which equity was issued immediately prior to the Acquisition described above), CHOP is eligible for certain milestone and royalty payments under the License Agreement as further described below:

 

·up to $1.5 million in regulatory and sales milestone payments in connection with each FDA-approved indication obtained by neuroFix utilizing intellectual property licensed under the License Agreement;
·royalty payments equal to a percentage of certain product sales by neuroFix using a fluctuating rate in the low single digits (adjusted downward to the extent third party royalty payments exceed a certain percentage in a given calendar quarter);
·annual maintenance fees of equal to or less than $100,000 depending on the year; and
·a certain percentage (ranging from mid-single digits to the mid-teens depending on if other rights of neuroFix are also licensed to the sublicensee at the same time) of all sublicensee income (except any amounts attributable to sublicensed sales by a certain party in Japan).

 

The License Agreement will terminate, with respect to each product and each territory covered by the License Agreement, upon the later of (i) the expiration of the certain CHOP patent rights and (ii) January 1, 2025, at which time the license rights granted to neuroFix become perpetual, irrevocable, fully paid-up and royalty-free. The License Agreement could also be subject to termination by CHOP if neuroFix is not achieving certain specified development plans and diligence events and is not undertaking commercially reasonable efforts to achieve such events.

 

Subsequent Events

On October 1, 2015, the Company entered into a purchase agreement (the “Purchase Agreement”) with Piper Jaffray & Co., as representative of the several underwriters set forth on Schedule I thereto (the “Underwriters”) relating to an underwritten public offering of 6,155,000 shares (the “Firm Shares”) of the Company’s common stock, par value $0.0001 per share. The Company also granted to the Underwriters an option to purchase up to 923,250 additional shares within thirty days after the effective date of the Underwriting Agreement (the “Option Shares,” together with the Firm Shares, the “Shares”). All of the Shares were sold pursuant to the terms of the Purchase Agreement (the “Offering”). The Shares were offered to the public at a price of $6.50 per Share, and the Underwriters agreed to purchase the Shares from the Company pursuant to the Purchase Agreement at a price of $6.11 per Share. A copy of the Purchase Agreement was filed on a Current Report on Form 8-K on October 7, 2015 and is incorporated herein by reference. The description of the material terms of the Purchase Agreement is qualified in its entirety by reference to such exhibit.

 

The Offering was made pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333-184431) initially filed with the Securities and Exchange Commission on October 16, 2012 and declared effective on October 26, 2012. A prospectus supplement relating to the Offering has been filed with the Securities and Exchange Commission. The closing of the Offering took place on October 6, 2015, following the satisfaction of customary closing conditions.

  

The net proceeds from the Offering, after deducting the Underwriters’ discount and other Offering expenses, was approximately $42.87 million.

 

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Financial Operations Overview

 

Research and Development Expense

 

Research and development expense consists of: (i) internal costs associated with our development activities; (ii) payments we make to third party contract research organizations, contract manufacturers, clinical trial sites and consultants; (iii) technology and intellectual property license costs; (iv) manufacturing development costs; (v) personnel related expenses, including salaries and other related costs, including stock-based compensation expense, for the personnel involved in product development; (vi) activities related to regulatory filings and the advancement of our product candidates through preclinical studies and clinical trials; and (vii) facilities and other allocated expenses, which include direct and allocated expenses for rent, facility maintenance, as well as laboratory and other supplies. All research and development costs are expensed as incurred.

 

Conducting a significant amount of development is central to our business model. Product candidates in later-stage clinical development generally have higher development costs than those in earlier stages of development, primarily due to the significantly increased size and duration of the clinical trials. We plan to increase our research and development expenses for the foreseeable future in order to complete the proof of concept of our TARGTEPO microorgans with a second generation expression cassette of the HDAd viral vector and implantation protocol, and our earlier-stage research and development projects including in targeted rare and orphan disease indications.

 

The process of conducting pre-clinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among others, the quality of the product candidate’s early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of these uncertainties, together with the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. We are concurrently focusing on proceeding with the approved TARGTEPO trial to obtain proof of concept with the second generation expression cassette of the HDAd viral vector and new implantation protocol and pursuing pre-clinical research and development in targeted orphan and rare disease.

 

Research and development expenses are shown net of participation by third parties.

 

General and Administrative Expense

 

General and administrative expense consists primarily of salaries and other related costs, including stock-based compensation expense, for persons serving as our directors and in our executive, finance and accounting functions. Other general and administrative expense includes facility-related costs not otherwise included in research and development expense, costs associated with industry and trade shows, and professional fees including legal services and accounting services. We expect that our general and administrative expenses will increase as we add personnel.

 

Financial Expense and Income

 

Financial expense consists primarily of warrant valuations and foreign currency exchange differences.

 

Financial income consists primarily of warrant valuations.

 

23

 

  

Results of Operations for the Nine Months Ended September 30, 2015 and 2014

 

 Research and Development Expenses

 

Gross research and development expenses for the nine months ended September 30, 2015 were $12.93 million increasing from $6.38 million for the same period in 2014 mainly due to increased sub-contractor and consulting costs and increased stock-based compensation expenses related to options granted to research and development personnel. Net research and development expenses for the nine months ended September 30, 2015 increased to $11.13 million from $4.48 million for the same period in 2014. The increase in net research and development expenses was mainly due to the increase in gross research and development expenses as detailed above. Non-recurring research and development costs of $8.17 million for the nine months ended September 30, 2015 pertain to the neuroFix acquisition described above, including $0.17 million in reimbursed R&D expenses.

 

General and Administrative Expenses

 

General and administrative expenses for the nine months ended September 30, 2015 were $10.83 million, increasing from $8.26 million for the same period in 2014 primarily due to increased stock-based compensation expenses related to options granted to directors and general and administrative personnel and an increase in personnel, offset in part by a decrease in professional fees.

 

Financial Expenses and Income

  

Financial expenses for the nine months ended September 30, 2015 were $1.43 million, decreasing from $0.09 million for the same period in 2014. This decrease was mainly due to the change in valuation of the warrant liability.

 

Financial income for the nine months ended September 30, 2015 were $0.05 million decreasing from $0.61 million for the same period in 2014. This decrease was mainly due to the change in valuation of the warrant liability. 

 

24

 

  

Results of Operations for the Three Months Ended September 30, 2015 and 2014

 

 Research and Development Expenses

 

Gross research and development expenses for the three months ended September 30, 2015 were $4.57 million, increasing from $2.28 million for the same period in 2014 due mainly to increased sub-contractor and consulting costs. Net research and development expenses for the three months ended September 30, 2015 increased to $4.20 million from $1.57 million for the same period in 2014. The increase in net research and development expenses was due to the increase in gross research and development expenses as detailed above and a decrease of $0.35 million in the participation by the OCS.

 

Non-recurring research and development expenses for the three months ended September 30, 2015 of $8.17 million pertain to the neuroFix acquisition, described above, including $0.17 million in reimbursed R&D expenses.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended September 30, 2015 were $3.00 million, increasing from $2.31 million for the same period in 2014 primarily due to increased stock-based compensation expenses related to options granted to directors and general and administrative personnel and an increase in consulting fees and personnel.

 

Financial Expenses and Income

 

Financial expenses for the three months ended September 30, 2015 were 1.19 million, increasing from $0.06 million for the same period in 2014. This increase was mainly due to the change in valuation of the warrant liability.

 

Financial income for the three months ended September 30, 2015 was $0.04 million, decreasing from $0.90 million for the same period in 2014. This decrease was mainly due to the change in valuation of the warrant liability.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

We have financed our operations primarily through a combination of equity issues, debt issues and grants from the Israeli Office of the Chief Scientist (OCS) and other third parties.

 

We received $13.07 million from inception through September 30, 2015 from the OCS in development grants, of which $2.31 million was received during the nine months ended September 30, 2015.

 

In December 2014, we completed a registered public offering of 5,893,750 shares of common stock, including 768,750 shares sold pursuant to the full exercise of the underwriters’ over-allotment option, at a price to the public of $4.10 per share. The net proceeds from this offering to us were approximately $22.21 million, after deducting underwriting discounts and commissions and offering expenses payable by us.

 

In October 2015, the Company completed a registered public offering of 6,155,000 shares of common stock, including 923,250 shares sold pursuant to the full exercise of the underwriters’ over-allotment option, at a price to the public of $6.50 per share.  Gross proceeds were $45.65 million or approximately $42.87 million in net proceeds after deducting underwriting discounts and commissions and other offering costs of approximately $2.78 million.

 

25

 

 

Cash Flows

 

We had cash and cash equivalents of $17.73 million at September 30, 2015 and $33.29 million at December 31, 2014. The decrease in our cash balance during the nine months ended September 30, 2015 was primarily the result of operating activities during the period.

 

Net cash used in operating activities of $16.88 million for the nine months ended September 30, 2015 and $8.59 million for the nine months ended September 30, 2014 reflected an increase of $8.29 million in cash expenses for our operations, partially due to our acquisition of neuroFix.

 

Cash used in investing activities relates to our purchases of property and equipment.

 

Net cash provided by financing activities was $1.43 million for the nine months ended September 30, 2015 and $1.20 million for the nine months ended September 30, 2014. Our cash flows from financing activities during each of these periods were primarily the result of the exercise of options and warrants.

 

Funding Requirements

 

Our future capital requirements will depend on a number of factors, including our success in targeting rare and orphan disease candidates, the timing and outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims and other intellectual property rights, the acquisition of licenses to new products or compounds, the status of competitive products, the availability of financing, and our success in developing markets for our product candidates.

 

Without taking into account any revenue we may receive as a result of licensing or other commercialization agreements, we believe that cash on hand, including the net proceeds we received from our public offering of common stock in Q4 2015, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least through the middle of 2017. We have based this estimate on assumptions that may prove to be wrong and we could use our available resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.

 

We do not anticipate that we will generate revenue from the sale of products for several years or more given the uncertainty of drug development; we do, however, intend to seek licensing or other commercialization agreements for existing and new TARGT applications. In the absence of additional funding or adequate funding from commercialization agreements, we expect our continuing operating losses to result in decreases in our cash balances. Absent significant corporate collaboration and licensing arrangements, we will need to finance our future cash needs through public or private equity offerings or debt financings. We do not currently have any commitments for future external funding. We may need to raise additional funds more quickly if one or more of our assumptions prove to be incorrect or if we choose to expand our product development efforts more rapidly than we presently anticipate, and we may decide to raise additional funds even before we need them if the conditions for raising capital are favorable. We may seek to encourage holders of our warrants to exercise, sell additional equity or debt securities or obtain a bank credit facility. The sale of additional equity or debt securities, if convertible, could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that would restrict our operations.

 

Our plans include seeking additional investments and commercial agreements to continue our operations. However, there is no assurance that we will be successful in our efforts to raise the necessary capital and/or reach such commercial agreements to continue our planned research and development activities.

 

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Critical Accounting Policies

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.

 

While our significant accounting policies are more fully described in Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

 

Liability in Respect of Warrants

 

In the past, we issued warrants whose exercise price is subject to downward adjustment. In accordance with Accounting Standards Codification No. 815-40-15-7I, we classified these warrants as a liability at their fair value. The warrants liability were re-measured at each reporting period until exercised or expired. The increase in the fair value of the warrants during the nine months ended September 30, 2015 of $1.37 million, and the decrease in the fair value of the warrants during the nine months ended September 30, 2014 of $0.57 million are reported in the Statements of Operations as financial expense and income, respectively.

 

We estimated the fair value of these warrants at the respective balance sheet dates using the Binomial option pricing model. We used a number of assumptions to estimate the fair value, including the remaining contractual terms of the warrants, risk-free interest rates, expected dividend yield and expected volatility of the price of the underlying common stock. These warrants have been exercised as of September 30, 2015 thus eliminating the need for such valuations going forward.

 

Stock-Based Compensation

 

We account for stock options according to the Accounting Standards Codification No. 718 (ASC 718) “Compensation - Stock Compensation.” Under ASC 718, stock-based compensation cost is measured at grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee’s requisite service period on a straight-line basis.

 

We account for stock options granted to non-employees on a fair value basis using an option pricing method in accordance with ASC 718. The initial non-cash charge to operations for non-employee options with vesting are revalued at the end of each reporting period based upon the change in the fair value of the options and amortized to consulting expense over the related vesting period.

 

For the purpose of valuing options and warrants granted to our employees, non-employees and directors during the nine months ended September 30, 2015 and 2014, we used the Binomial options pricing model. To determine the risk-free interest rate, we utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of our awards. We estimated the expected life of the options granted based on anticipated exercises in the future periods assuming the success of our business model as currently forecast. The expected dividend yield reflects our current and expected future policy for dividends on our common stock. The expected stock price volatility for our stock options was calculated by examining historical volatilities for publicly traded industry peers as we do not have sufficient trading history for our common stock. We will continue to analyze the expected stock price volatility and expected term assumptions as more historical data for our common stock becomes available. We currently estimate that we will experience 5% to 8% forfeitures for those options currently outstanding.

 

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Off-Balance Sheet Arrangements

 

There have been no material changes to the discussion of off-balance sheet arrangements included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

ITEM 3 — Quantitative and Qualitative Disclosures about Market Risk

 

There has been no significant change in our exposure to market risk during the nine months ended September 30, 2015. For a discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

ITEM 4 — Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

As required by Exchange Act Rule 13a-15(b), in connection with the filing of this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2015, the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

ITEM 1 — Legal Proceedings

 

We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, are expected by us to have a material effect on our business, financial condition or results of operation if determined adversely to us.

 

ITEM 1A — Risk Factors

 

The Company included updated business-related risk factors as part of Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on September 30, 2015. These updated business-related risk factors, which are incorporated herein by reference, replace in their entirety the business-related risk factors included under the heading “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2014, filed with the SEC on February 13, 2015.

 

ITEM 2 — Unregistered Sales of Equity Securities and Use of Proceeds

 

Recent Sales of Unregistered Securities

 

In the three months ended September 30, 2015, the following securities were sold by us without registration under the Securities Act. The securities described below were exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act. There were no underwriters employed in connection with any of these transactions.

 

Common Stock Issued Upon Exercise of Outstanding Warrants and Options

 

In September 2015, a consultant exercised warrants to purchase 11,370 shares of common stock at an exercise price of $3.19 per share, or an exercise price of approximately $36 thousand.

 

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In September 2015, four investors exercised warrants to purchase a total of 50,893 shares of common stock at an exercise price of $4.10 per share, or an aggregate exercise price of approximately $209 thousand.

 

In September 2015, an investor exercised warrants to purchase 18,750 shares of common stock at an exercise price of $4.10 per share using the cashless exercise method. Using this cashless exercise method, the investor was issued 11,032 shares.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 3 — Defaults Upon Senior Securities

 

None.

 

ITEM 4 — Mine Safety Disclosures

 

Not applicable.

 

ITEM 5 — Other Information

 

None.

 

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ITEM 6 — Exhibits

 

Exhibit No.   Description
     
3.1   Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed November 5, 2010 (File No. 333-170425) and incorporated herein by reference).
     
3.2   Certificate of Amendment to Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed November 5, 2010 (File No. 333-170425) and incorporated herein by reference).
     
3.3   Certificate of Amendment to Amended and Restated Certificate of Incorporation dated as of February 14, 2011 (previously filed as Exhibit 4.3 to the Company’s Post-Effective Amendment No. 1 to Form S-1 on Form S-3 filed July 16, 2012 (File No. 333-170425) and incorporated herein by reference).
     
3.4   Second Amended and Restated By-Laws (previously filed as Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-35112) and incorporated herein by reference).
     
10.1*   Equity Interest Purchase Agreement, dated as of September 9, 2015, among the Company, neuroFix therapeutics, inc., neuroFix, LLC, The Children’s Hospital Of Philadelphia, Philip Harper and Hakon Hakonarson (filed herewith).
     
10.2*   License Agreement, dated as of September 9, 2015, between neuroFix, LLC and The Children’s Hospital Of Philadelphia (filed herewith).
     
10.3   Purchase Agreement dated October 1, 2015 by and among Medgenics, Inc. and Piper Jaffray & Co., as representative of the several underwriters set forth on Schedule I thereto (previously filed as Exhibit 1.1 to the Company’s Current Report on Form 8-K filed October 7, 2015 and incorporated herein by reference).
     
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
32.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
     
101   Interactive Data File (filed herewith).

 

* Portions of this exhibit have been omitted pursuant to a request for confidential treatment on file with the Securities and Exchange Commission.

 

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SIGNATURES

 

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

 

  MEDGENICS, INC.
     
Date:  October 22, 2015 By:      /s/ Michael F. Cola
    Michael F. Cola
    President and Chief Executive Officer
    (Principal Executive Officer)
     
Date:  October 22, 2015 By:      /s/ John H. Leaman
    John H. Leaman
    Chief Financial Officer
    (Principal Financial Officer)

 

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