UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x

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

 

For the quarterly period ended March 31, 2016

 

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 May 5, 2016, the registrant had 33,210,832 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	16
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	20
ITEM 4.	Controls and Procedures	21
PART II	OTHER INFORMATION	21
ITEM 1.	Legal Proceedings	21
ITEM 1A.	Risk Factors	21
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
ITEM 3.	Defaults Upon Senior Securities	21
ITEM 4.	Mine Safety Disclosures	21
ITEM 5.	Other Information	21
ITEM 6.	Exhibits	22
Signatures		23

 

 

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 subsidiaries, Medgenics Medical (Israel) Ltd. and neuroFix, LLC. We use TARGT^TM, and the Medgenics logo 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 March 31, 2016

 

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 - 15

  

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

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

 

 

		March 31,				December 31,
		2016				2015
		Unaudited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	43,892			$	53,064
Prepaid expenses and other current assets			787				747
Total current assets			44,679				53,811
LONG-TERM ASSETS:
Restricted lease deposits			24				23
Property and equipment, net			458				424
Total long-term assets			482				447
Total assets		$	45,161			$	54,258

 

 

 

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

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

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

 

 

		March 31,				December 31,
		2016				2015
		Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables		$	1,341			$	1,322
Other accounts payable and accrued expenses			2,214				2,586
Total current liabilities			3,555				3,908
Total liabilities			3,555				3,908
STOCKHOLDERS' EQUITY:
Common stock - $0.0001 par value; 100,000,000 shares authorized;  33,219,332 shares issued and 33,210,832 shares outstanding at March 31, 2016; 32,869,217 shares issued and 32,860,717 shares outstanding at December 31, 2015			4				4
Additional paid-in capital			190,876				188,476
Accumulated deficit			(149,274	)			(138,130	)
Total stockholders' equity			41,606				50,350
Total liabilities and stockholders' equity		$	45,161			$	54,258

 

 

 

 

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

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

		Three months ended March 31,
		2016				2015
		Unaudited
Research and development expenses		$	6,951			$	3,901
General and administrative expenses			4,191				3,947
Operating loss			(11,142	)			(7,848	)
Financial expenses			(4	)			(1,078	)
Financial income			2				5
Loss before taxes on income			(11,144	)			(8,921	)
Taxes on income			-				1
Loss		$	(11,144	)		$	(8,922	)
Basic and diluted loss per share		$	(0.34	)		$	(0.36	)
Weighted average number of common stock used in computing basic and diluted loss per share			32,953,542				24,843,516

 

 

 

 

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

 

 

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 capital				Accumulated deficit				Total stockholders' equity
		Shares				Amount
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			-				-				3,117				-				3,117
Exercise of  warrants and options			10,055				(*	)			42				-				42
Loss			-				-				-				(8,922	)			(8,922	)
Balance as of  March 31, 2015 (unaudited)			24,852,630			$	3			$	132,956			$	(109,060	)		$	23,899
Balance as of December 31, 2015			32,860,717			$	4			$	188,476			$	(138,130	)		$	50,350
Stock-based compensation related to options and warrants granted to consultants, directors and employees			-				-				2,400				-				2,400
Exercise of  warrants			350,115				(*	)			-				-				-
Loss			-				-				-				(11,144	)			(11,144	)
Balance as of  March 31, 2016 (unaudited)			33,210,832			$	4			$	190,876			$	(149,274	)		$	41,606

 

 

 

(* ) Represents an amount lower than $1.

 

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

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

 

		Three months ended March 31,
		2016				2015
		Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss		$	(11,144	)		$	(8,922	)
Adjustments to reconcile loss to net cash used in operating activities:
Depreciation			58				43
Stock-based compensation related to options, warrants and restricted shares granted to employees, directors and consultants			2,400				3,117
Change in fair value of warrants classified as a liability			-				1,074
Accrued severance pay, net			-				(19	)
Changes in operating assets and liabilities:
Restricted lease deposit			(1	)			-
Accounts receivable and prepaid expenses			(40	)			(1,278	)
Trade payables			19				(589	)
Other accounts payable and accrued expenses			(400	)			(1,569	)
Net cash used in operating activities			(9,108	)			(8,143	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(64	)			(18	)
Net cash used in investing activities		$	(64	)		$	(18	)

 

  

 

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

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

 

 

 

		Three months ended  March 31,
		2016				2015
		Unaudited
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants		$	-			$	32
Net cash provided by financing activities			-				32
Decrease in cash and cash equivalents			(9,172	)			(8,129	)
Balance of cash and cash equivalents at the beginning of the period			53,064				33,288
Balance of cash and cash equivalents at the end of the period		$	43,892			$	25,159
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes		$	-			$	1
Supplemental disclosure of non-cash flow information:
Receivables resulting from the exercise of options		$	-			$	10
Purchase of property and equipment		$	28			$	-

 

 

 

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

 

 

MEDGENICS, INC. AND ITS SUBSIDIARY

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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

 

NOTE 1:- 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 industry.

 

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 three month period ended March 31, 2016 of $11,144 and had a negative cash flow from operating activities of $9,108 during the three month period ended March 31, 2016. The accumulated deficit as of March 31, 2016 is $149,274. The Company and the Subsidiary have not yet generated revenues from product sale.

 

 

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, 2015 ("2015 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 2015 Form 10-K have been omitted.

 

 

NOTE 3:- SEVERANCE PAY

 

In February 2016, one of the Company’s executives was terminated. As a result, the Company recorded severance benefits in the approximate amount of $1,000 of which $483 was paid in February 2016 and the remainder, to be paid in February 2017, is included in “Other accounts payable and accrued expenses”.

 

In addition, all options granted to such executive under the Company’s stock incentive plan became fully vested and shall remain exercisable through the 24-month anniversary of the termination date. As a result of this termination, the non-cash equity compensation expense included in general and administrative expenses during the period ended March 31, 2016 is $922.

 

 

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:- STOCKHOLDERS' EQUITY

 

a.

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

  

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

 

 

		Three months ended March 31, 2016
		Number of options and warrants				Weighted average exercise price				Weighted average remaining contractual terms (years)				Aggregate intrinsic value
Outstanding at December 31, 2015			10,065,536			$	5.78				6.48			$	10,349
Granted			300,000			$	4.16
Exercised			(855,190	)		$	2.49
Forfeited			(8,375	)		$	7.39
Outstanding at March 31, 2016			9,501,971			$	6.03				6.33			$	282
Vested and expected to vest at March  31, 2016			9,273,548			$	6.02				6.27			$	278
Exercisable at March 31, 2016			6,666,107			$	5.98				5.38			$	233

  

 

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 March 31, 2016 ($4.40 per share).

 

As of March 31, 2016, there was $6,997 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 1.4 years.

 

 

 

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:- STOCKHOLDERS' EQUITY (Cont.)

 

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:

  

		Three months ended  March 31, 2016
		Number of options and warrants				Weighted average exercise price				Weighted average remaining contractual terms (years)				Aggregate intrinsic value
Outstanding at December 31, 2015			480,898			$	6.65				2.67			$	391
Forfeited			(25,000	)		$	6.29
Outstanding at March 31, 2016			455,898			$	6.67				2.14			$	43
Exercisable at  March 31, 2016			422,565			$	6.69				1.75			$	43

  

		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 March 31, 2016 ($4.40 per share).
		As of March 31, 2016, there was $66 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 2.0 years.

 

 

 

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:- 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:

 

		Three months ended March 31,
		2016				2015
		Unaudited
Research and development expenses		$	628			$	457
General and administrative expenses			1,772				2,660
		$	2,400			$	3,117

 

 

 

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:- 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 March 31, 2016 is presented in the following table:

 

				As of March 31, 2016
				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				196,000				5.7
		3.64-4.99			3,903,429				3,179,679				6.0
		5.13-7.37			4,008,677				2,131,914				7.6
		8.09-10.80			1,393,865				1,158,514				3.2
					9,501,971				6,666,107
Granted to Consultants		5.02-7.37			74,348				41,015				6.0
Total Shares to be Issued upon Exercise of Options					9,576,319				6,707,122
Warrants:
Granted to Consultants		3.76-4.99			180,077				180,077				1.6
		9.17-11.16			201,473				201,473				1.2
					381,550				381,550
Granted to Investors		4.99-6.00			2,792,699				2,792,669				0.0
		6.78-8.34			4,582,920				4,582,920				1.7
					7,375,619				7,375,619
Total Shares to be Issued upon Exercise of Warrants					7,757,169				7,757,169
Total Shares to be Issued upon Exercise of Options and Warrants					17,333,488				14,464,291

 

 

 

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:- 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 was remeasured at each reporting period until exercised or expired. Changes in the fair value of these warrants are reported in the Consolidated Statement of Operations as financial income or expense.
		The fair value of these warrants was estimated June 30, 2015 using the Binomial pricing model with the following assumptions:

 

		June 30, 2015(*)
Dividend yield			0	%
Expected volatility			73.43	%
Risk-free interest rate			0.1	%
Contractual life (in years)			0.5

  

		(*) These warrants were fully exercised in September 2015.
		The changes in level 3 liabilities measured at fair value on a recurring basis:

 

 

		Fair value  of liability  in respect  of warrants
Balance as of December 31, 2014		$	612
Change in the liability in respect of warrants			1,074
Balance as of March 31, 2015 (unaudited)		$	1,686

 

 

NOTE 6:- SUBSEQUENT EVENTS

 

(a)

Subsequent to the balance sheet date, in April 2016, the Company granted a total of 1,091,200 options to its employees. All of the options have a 10-year term, vest in three equal installments over three years and have an exercise price ranging from $4.55 to $4.83 per share. The Company granted an additional 190,000 options to several employees. The options have a 10-year term, an exercise price of $4.89 and vest based upon pre-set milestones. In addition, the Company granted a total of 200,000 options to its Directors. These options are for a term of 10 years, vest in one year from the grant date and have an exercise price of $4.83 per share. All these options were granted under the stock incentive plan.

 

In addition, in April and May 2016, the Company granted a total of 450,000 options as inducement awards to two new employees. These options have a 10-year term, vest over three years and have an exercise price of $5.07 and $5.10.

 

(b)

In April 2016, the Company’s Board of Directors approved an amendment to the stock incentive plan increasing the number of shares of common stock authorized for issuance thereunder to a total of 9,178,571 shares of common stock.

 

(c)

In April 2016, 2,763,730 warrants, with an exercise price of $6.00 per share, expired.

 

 

  

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, 2015, 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 biopharmaceutical company with an emphasis on genomic medicine. The National Human Genome Research Institute of the National Institute of Health defines “genomic medicine” as “an emerging medical discipline that involves using genomic information about an individual as part of their clinical care (e.g., for diagnostic or therapeutic decision-making) and the health outcomes and policy implications of that clinical use.” Genomic medicine is currently being studied in the fields of oncology, pharmacology, rare and undiagnosed diseases, and infectious disease.

 

We have partnered with the Center for Applied Genomics (CAG) at The Children’s Hospital of Philadelphia (CHOP) to implement a genomics-medicine driven approach to drug development. CAG’s assets include a fully automated biorepository containing specimens from more than 60,000 pediatric patients, and 150,000 of their relatives. The sample is highly enriched for rare and orphan diseases and the large majority of patients have been genotyped. Their phenotypes are recorded in a modern electronic health record. The patients have been consented for anonymized use of their data for research and follow up contact if needed.

 

CAG continues to discover important and novel genetic biomarkers by both genome-wide association studies and exome sequencing and analysis of affected individuals and their family members. Such markers not only identify patients with the disease but frequently point to the cause of the disease and suggest targets and feasible intervention strategies that include protein or peptide therapy, monoclonal antibodies, drugs or gene therapy. By working initially in a pediatric population, confounding environmental factors seen in older patients are minimized.

 

Our therapeutic strategy is to work closely with our collaborators at CAG to identify populations of need with well-characterized, novel, genetically-defined targets. We then designate an actionable therapeutic development approach based upon the target, the biology and human pathophysiology, and the clinical and regulatory pathways. The collaboration affords us with unique and proprietary insight into these diseases and allows us to better select therapeutic approaches including the appropriateness of our TARGT^TM gene therapy technology. This, in turn, allows us to rapidly identify appropriate potential therapeutics that have already been tested in patients but were not advanced due to either lack of efficacy in a different patient population or for strategic reasons. We believe there are hundreds of such potential therapeutics currently listed in proprietary databases. Many of these have remaining composition of matter patent life and many would be eligible for regulatory exclusivity based on first registration (up to 12 years for biologics), as well as orphan drug and additional pediatric exclusivity. Because these potential therapeutics have already been tested in patients and have the requisite regulatory safety data generated, the time and cost to file an investigational new drug application (in the United States) or investigational medicinal product dossier (in Europe) and initiate additional clinical trials, should be substantially reduced.

 

 

In addition, the availability of robust genetic biomarker(s) allows trial designs to focus on highly enriched patient populations that are more likely to respond to targeted therapies. This can allow smaller, more focused and less expensive trials. Likewise, highly targeted drugs, that are less likely to exhibit off-target effects, can be used when available. This further enhances the likelihood of clinical and regulatory success and potentially requires smaller, easier-to-enroll clinical trials. In some cases it may be possible to advance from discovery to the clinic in less than two years, and to achieve proof of concept in as little as three years. Furthermore, such highly targeted therapies in specifically targeted diseases should allow the creation of higher value medicines that can address critical needs in patients suffering from rare and orphan diseases. The solid genetic foundation underlying these disease targets along with highly targeted therapies may also allow rapid label expansion into adjacent populations.

 

Our initial program arising out of our genomic medicine strategy is the development candidate NFC-1. Through our acquisition of neuroFix, LLC, or neuroFix, in September 2015, we acquired the rights to develop 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 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 $11.14 million for the three month period ended March 31, 2016. As of March 31, 2016, we had stockholders’ equity of approximately $41.61 million. As of March 31, 2016, we had cash reserves of $43.89 million, which we believe will provide funding for the Company at least through the end of the third quarter of 2017. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

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 advance the development of NFC-1, and to advance our earlier-stage research and development projects.

 

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 advancing the development of NFC-1, and advancing our earlier-stage research and development projects, including a second-generation TARGT system and the application of TARGT in the central nervous system (“CNS”).

 

 

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 for 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.

 

Results of Operations for the Three Months Ended March 31, 2016 and 2015

 

Research and Development Expenses

 

Research and development expenses, both gross and net, for the three months ended March 31, 2016 were $6.95 million, increasing from $3.90 million for the same period in 2015 mainly due to increased sub-contractor costs to advance our clinical activities related to the NFC-1 program and the CHOP collaboration.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended March 31, 2016 were $4.19 million, increasing from $3.95 million for the same period in 2015 primarily due to severance benefits recorded upon the termination of an officer of the Company, offset in part by a decrease in stock-based compensation expenses related to options granted to directors.

 

Financial Income and Expenses

 

Financial expenses for the three months ended March 31, 2016 were de minimis, decreasing from $1.08 million for the same period in 2015. This decrease was mainly due to all such warrants being exercised in 2015, thus eliminating the need for such valuation in 2016.

 

Financial income for the three months ended March 31, 2016 and 2015 was de minimis.

 

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 $13.57 million from inception through March 31, 2016 from the OCS in development grants, of which nil was received during the three months ended March 31, 2016.

 

In October 2015, we completed a registered public offering of 7,078,250 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. The net proceeds from this offering to us were approximately $42.88 million, after deducting underwriting discounts and commissions and offering expenses payable by us.

 

Cash Flows

 

We had cash and cash equivalents of $43.89 million at March 31, 2016 and $53.06 million at December 31, 2015. The decrease in our cash balance during the three months ended March 31, 2016 was primarily the result of operating activities during the period.

 

Net cash used in operating activities of $9.11 million for the three months ended March 31, 2016 and $8.14 million for the three months ended March 31, 2015 primarily reflected our cash expenses for our operations.

 

Our cash used in investing activities relates mainly to our purchases of property and equipment.

 

No cash was provided by financing activities during the three months ended March 31, 2016 and $0.03 million was provided during the three months ended March 31, 2015, as a 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 the fourth quarter of 2015, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least through the end of the third quarter 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. 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. 

 

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.

 

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 and officers during the three months ended March 31, 2016 and 2015, 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 8% forfeitures for those options currently outstanding.

 

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, 2015.

 

ITEM 3 — Quantitative and Qualitative Disclosures about Market Risk

 

There has been no significant change in our exposure to market risk during the three months ended March 31, 2016. 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, 2015.

 

 

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 March 31, 2016, 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 March 31, 2016 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

 

There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

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

 

Recent Sales of Unregistered Securities

 

None

 

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

 

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	Letter Agreement, by and between the Company and Brian Piper, dated February 1, 2016 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 3, 2016 (File No. 001-35112) and incorporated herein by reference).
10.2	Agreement and Release and Waiver, by and between the Company and John Leaman, dated February 1, 2016 (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 3, 2016 (File No. 001-35112) and incorporated herein by reference).
10.3	Third Amendment to Medgenics, Inc. Stock Incentive Plan (as amended and restated March 5, 2012), dated April 12, 2016 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 13, 2016 (File No. 001-35112) 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).

 

 

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:  May 10, 2016	By:	/s/ Michael F. Cola
		Michael F. Cola
		President and Chief Executive Officer
		(Principal Executive Officer)
Date:  May 10, 2016	By:	/s/ Brian D. Piper
		Brian D. Piper
		Chief Financial Officer
		(Principal Financial Officer)